Houses.com Blog » Uncategorized » REITs: Enjoy the Rewards of Real Estate Investing without the Hassle

Imagine picking up the phone and buying one of Manhattan’s hottest new office high rises.

Except you don’t have to buy the whole thing …

You don’t have to break the bank or find international investors. You don’t have to secure millions in credit from superbanks or add tremendous amounts of new liabilities to your balance sheet.

Instead, you invest just a few hundred dollars—then proceed to go on about your day while you passively collect rent on your own little chunk of the New York City skyline.

That’s it. No new mortgages, no marketing properties or conducting open houses or managing old properties. Just one small, simple purchase and you’re officially the biggest real estate kingpin in your hometown …

Sound too good to be true?

‘Outsourcing’ your way to Real Estate Riches

Investing in any asset has its rewards but also its risks. Real Estate Investment is no different …

New Real Estate Investors especially can face some massive headwinds. When they go out and embark on their very first deal, they’ll be competing with large players who have been involved in dozens, if not hundreds of deals, and have substantially better knowledge of local markets than they could ever dream of.

Many get into real estate with simple dreams of monthly rent checks coming in but often end up frustrated due to the oft-unexpected work involved. Some enjoy working with tenants. Others are willing to call it quits the first time they get a panicked call at 2AM because of a burst water main.

Rather than take the plunge into investing in rental properties, many new investors should first be considering some of the market’s fascinating alternatives …

For those looking to start investing in real estate, particularly investors with small amounts of capital to work with, Real Estate Investment Trusts (REITs) come highly recommended.

These profitable niche investments trade like stocks on major exchanges like the NYSE. Theres a daily market of buyers and sellers exchanging shares. And at their core, REITS are something like an Exchange Traded Fund (ETF), where the individuals in charge of the fund own and manage properties so that their shareholders dont have to.

So rather than bloat your personal finance take on the risk of an individual property, investing in a REIT offers a pool of properties instead. One property thats facing low occupancy may be offset by higher occupancy rates in other properties. This diversification lowers risk of being blown out by a single bad investment.

Individual investors getting into real estate can often only start by buying residential properties or small apartment complexes to rent out. A REIT, by contrast, can invest in anything from industrial properties, commercial properties, and even paper assets like mortgages in addition to residential holdings.

Cash Flow Matters

Financing is also a major impediment to smaller investors. Securing a new mortgage for an investment property can be difficult—if not downright risky—when one still owes a few hundred thousand dollars on their home. But REITs can obtain lines of credit from a bank, take on debt, and issue new shares to acquire new properties.

When its all said and done, REITs deliver cash flow.

Rather than monthly rent checks, however, investors in REITS enjoy dividends. A REIT is legally required to pay out 90 percent of its earnings to investors in the form of dividends to avoid corporate taxes.

That means REIT dividends wont always qualify for the lowest rates, but compared to receiving rent checks, once again youll find theres less hassle. Rather than have to deal with perpetually-late rent checks from troublesome tenants, dividend checks come in like clockwork, depositing themselves directly into your brokerage account.

But REITs arent completely hassle free.

Like any investment asset, there can be periods of poor performance. Investing in a REIT looking for a quick capital gain may not work out well. Thats no different than any other stock speculation.

REITs can also be sensitive to changes in interest rates. When interest rates started rising in 2013, many REITs sold off as investors expected higher borrowing costs to weigh on profits. While many REITs are either fairly valued or overvalued based on their historical dividend yields, changes in the interest rate environment this year could lead to a new wave of buying opportunities.

That said, three REITs in particular stand out as best in breed investments. Theyre the best companies in terms of the composition of their portfolio, their conservative balance sheets, and potential returns without the hassle of ownership.

The Top Three REITs for Non-Landlords:

#1: Realty Income (O). This company owns over 4,200 commercial properties in 48 states. They work in the “triple net” space, where the tenant deals with insurance, taxes, and maintenance fees. Realty Income only picks up the rent net of that, most of which then goes to shareholders.

Realty Income pays dividends monthly. In fact, they trademarked the phrase “the monthly dividend company.” That’s the bottom line, and what appeals to shareholders who want the landlord experience without having to deal with unexpected events.

Currently, the yield is about 4.4 percent. That’s a bit below the historical average for the company. It’s also a bit below the returns you could get in a leveraged real estate investment net of debt, but remember that you also haven’t taken on hundreds of thousands in new debts just for access to these dividends; so there’s less reward but also substantially less risk.

Nevertheless, shares of REITS can and often do pull back, particularly on interest rate fears.

#2: Health Care REIT (HCN). This REIT owns and operates over 1,200 properties in three countries in the long term care and hospice space.

That’s a growing demographic among Western nations. Admittedly, it also means that this is a play on growing medical care needs, and not just on a physical location. That gives HCN a potential boost to its earnings power, which in turn should lead to higher dividend payouts down the road.

Health Care REIT currently pays a 4 percent yield. Like Realty Income, that’s a bit below the historical average, but not too bad in the current marketplace.

#3: Annaly Mortgage (NLY). This one is a bit more speculative—but the payoff could be quite worth it. As the name implies, Annaly Mortgage holds a basket of mortgages. They use leverage, allowing them to pay out a staggering 11.1 percent dividend!

This REIT is the most sensitive to changes in interest rates. But, interestingly, because Annaly focuses on government-guaranteed 30-year, fixed rate mortgages, the overall default rate in the portfolio is quite low. While other mortgage REITs went bankrupt during the housing crisis, Annaly took a beating with all the other stocks but fared quite well, maintaining its dividend along the way.

Due to the lingering fear and uncertainty in the mortgage market, Annaly trades for 0.84 book value. In other words, it trades at a 16% discount to the value of all the mortgages that it owns. That could offer some capital gains, or at least cushion against changing interest rates.

If You Can’t Beat ‘Em…

Real estate isn’t a quick road to wealth.

It isn’t an easy one either. It takes considerable work to be a landlord, and that isn’t for everyone. With REITs, you can get ownership and income from a broad pool of properties managed by professionals. And you don’t need as much capital to get started.

It’s truly the one area to consider before getting into real estate. Who knows, you just may enjoy the income without having to work for it or risk a fortune …