Real Estate Investing Without the Property Pitfalls
Hey Clever Dudes! Today we have a guest post for you from fellow blogger and investor, Joseph Hogue. Enjoy!
Use this real estate investing process to benefit from the upside on real estate without the hassles of property management
Real estate investing can be a great addition to your nest egg but the management headaches that come with direct investment in property can be too much for most investors. Investing in real estate investment trusts (REITs) offer a stress-free alternative to direct investment.
James posted an interesting alternative to real estate investing earlier this year, digging into the world of real estate crowdfunding to get access to the investment without the headaches involved with owning your own properties.
I can relate to the downside of trying to manage your own properties. I bought several houses as rentals in 2001. I was just out of the Marine Corps and the housing market was beginning to take off. The rents would cover the mortgages on the houses plus extra for maintenance so I didnâ€™t see what could go wrong.
What I didnâ€™t expect was the constant headache of managing the properties from finding tenants to repairs and collecting rents.
I ended up selling the houses in 2006 but still wanted a way to invest in real estate.
Thatâ€™s when I heard about REITs, a special type of company that owns and manages real estate. These companies benefit from a tax loophole. They pay no corporate income taxes as long as they pay out the majority of income to investors.
Real Estate Investing the Easy Way
As you can imagine, not paying corporate taxes makes for a great tax break for the company and high cash return for investors.
REITs trade like stocks and generally pay dividends four times a year, though there are a few that pay on a monthly basis. The companies hold multi-billion dollar portfolios of properties, some focused on a single type of real estate and some holding different types of properties.
That huge scale means the companies can afford to hire professional property managers, something individual investors would never be able to do.
REITs have provided a 10.8% average annual return over the last 20 years, well above the 7.5% return on stocks. You get strong real estate investing returns and diversification across a range of properties but without the hassle of managing them yourself.
My Favorite Tool for Building a Real Estate Investing Portfolio
Many REITs hold only one type of real estate like retail malls or office buildings. Some may only hold properties in a certain region of the U.S. while others invest more broadly. For this reason, itâ€™s usually best to invest in several REITs to spread your investment across different property types and locations.
With more than a thousand REITs available for investment, it isnâ€™t always easy to find the right ones for your portfolio. Find the REITs in which you want to invest and youâ€™re still looking at hundreds in trading fees to buy several different companies individually.
Enter Motif Investing and its new model of stock investing. Motif is like other online investing sites in that you can buy stocks, exchange traded funds (ETFs) and other investments. What sets Motif Investing apart is that you can group up to 30 stocks and ETFs together and then buy them all with just one purchase.
Buying 30 stocks on another site would cost upwards of $300 in trading fees. On Motif, youâ€™ll pay just $10 to buy the group. Besides the benefit of saving money on trading fees, you also get instant diversification by investing in a group of stocks.
Motif is also a great tool for showing you how to invest and finding ideas for your portfolio.
Investors have created more than 12,000 funds, called motifs, on the website. You can search through these funds in 10+ categories to get ideas on the stocks you might want to buy.
Finding the Best REITs for your Portfolio
Itâ€™s easy to put together a group of REITs on Motif Investing. After signing up for an account, you can explore the motifs built by other investors in the real estate category. There are more than 700 funds on the site specifically investing in real estate companies so thereâ€™s no lack of ideas.
One motif just called â€˜Real Estateâ€™ holds five REITs that own commercial and residential property across the United States. The group of stocks pays a 6% dividend yield and has increased by an average of 23% over the last year.
After youâ€™ve gotten ideas for your own real estate REIT portfolio, check out some of the other categories and motifs on the site. I love real estate investing but you should always hold stocks in other sectors as well to diversify your portfolio. Check out this infographic on finding ideas on Motif Investing.
I usually recommend investors pick up to 25 individual stocks for a fund and then invest in five ETFs to give broader exposure to the market. However many stocks and ETFs you put in your fund, youâ€™ll still just pay one trading fee to buy the group.
I also like crowdfunding as a way to get into real estate investing and Jamesâ€™ previous post is a good primer on the investment. Participating in a crowdfunded property may earn higher returns because there are fewer investors. Youâ€™re also closer to the individual investment property compared to REIT investing where you are investing in a huge portfolio of real estate investments. Iâ€™ve invested on Money360 which is a crowdfunded p2p lending site that allows accredited investors access to deals. Other popular crowdfunding real estate sites include Realtyshares and RealtyMogul.
Few assets have created as much family wealth as real estate investing. Unfortunately, the constant headache of direct property investment is more than most investors can handle. Investing in REITs offers the upside returns of real estate but without the hassle of managing the properties yourself. Combine this idea for a REIT portfolio with Motif Investing, a great tool to find investing ideas and to help save money on trading fees.
Joseph Hogue, CFA is an investment analyst and blogger. He runs six websites on topics including personal finance, investing, crowdfunding and making money from home. A veteran of the Marine Corps, he holds the Chartered Financial Analyst (CFA) designation and lives with his family in Medellin, Colombia.