Invest in a REIT – Passive Income Series

This stands for Real Estate Investment Trust and it’s just a fancy term for any company that owns and handles real estate. They usually own and/or manage commercial properties (either the physical property or the mortgage on that property). They tend to focus on a specific group of properties, like medical care or shopping centers or hotels.

An REIT is like a stock share. They’re structured so that they pay little or no income tax so long as they pass most of their earnings along to their shareholders. You buy an REIT just like any other stock on the market and earn dividends several times a year as with other high-yield dividend stocks.

Retail REITS (shopping malls and freestanding retail businesses) account for about 24% of investments in America – that’s the biggest investment by type in the country. When you’re thinking about investing in an REIT, you need to look at the whole retail industry. Is it healthy and likely to stay so – or are things looking rocky?

Remember the REIT firm is getting their income from the rent of its tenants, so if you’ve got a shopping center or business that’s got a high turnover rate, it’s probably not going to generate as much income as you’d like.

You might think about aiming at traditionally “safer” real estate investments like grocery or home improvement stores. Keep in mind, also, that a lot of shopping is shifting to online. That shopping mall may not even be in existence in ten or twenty years.

There are also residential REITs, which focus on apartment buildings and manufactured housing.

With this type of REIT, you’ll want to look at location. For example, the best apartment markets are where there are less homes available, like in large urban centers. The largest residential REITS tend to focus on areas like this.

You should also look at population and job growth. As long as the apartment supply in your market stays low and demand is increasing, your residential REIT should perform well.

Healthcare REITS invest in the real estate of hospitals, medical centers, nursing facilities and retirement homes. This is probably going to be one of the investment areas to watch as our Baby Boomers grow older and require more skilled care.

However, remember that the success of the REIT is tied to the healthcare system. So long as the healthcare funding remains questionable, so do these REITs. Look for companies with a lot of healthcare experience.

There are also office REITs who handle office rentals. There are 4 basic questions you want to ask when investing in this area:

  • How high is the unemployment rate?
  • What are their vacancy rates like?
  • What’s the economy like in the area you’ll be investing in?
  • How much capital does the REIT have?

Think of investing in “economic strongholds.” In other words, it’s better to have a bunch of average office buildings in DC than to have primo space in Detroit.

Dividends from a good REIT can even increase yearly, so you might just end up with a growing stream of dividends over time.

There’s a bit of research involved with this stream, as with any stock purchase. You want to be sure to pick the best REITs that will increase your earnings instead of dropping in value. You’ll also need that initial outlay of cash to get the ball rolling.

One way to minimize your risk is to buy into an Exchange-Traded Fund (ETF) than diversifies by investing in lots of different REITs instead of sinking everything into just one individual trust. These often have lower risk ratios so you can gain exposure to real estate trading without as much risk as investing in an individual company.

You do need to do your homework with an REIT or ETF. Even though it’s considered passive income, you can lose big if you choose the wrong ones. You’ll want to start analyzing these companies like you did for the regular stocks. It takes a bit of time and effort before you can pick out the best choices.

A tough economy can take a big bite out of your income stream as well. If your REIT doesn’t create enough income, it might reduce the dividend or cut it out entirely. That could be disastrous because a tough economy is just when you’ll need that passive income coming in.

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