Want to Invest in Real Estate? Consider REITs

As we continue to mature and focus on our careers, we may start to prioritize building wealth. Many people use retirement accounts and the purchase of stocks and bonds to grow their money over time but there are other ways to build wealth. Another type of investment to look into is real estate. Although there are many different types of real estate investments, one option to consider is real estate investment trusts also known as REITs.

What are REITs? Real Estate Investment Trusts (also known as REITS) are large funds that are full of real estate investments. These investments can be single-family homes, multifamily homes, apartments, or commercial buildings. Just like you can purchase an individual stock from one company, you can also purchase an individual REIT, which is a small share of a company that owns various forms of real estate. I prefer to invest in stocks via index funds and I also prefer to invest in REITs through index funds. A REIT index fund is a large fund full of smaller REITs that are each invested in many different types of real estate. When you invest in REIT index funds you are a partial owner of several different types of real estate investments, just like when you invest in other index funds you are a partial owner of several different types of stocks or bonds.

Why are REITs a good option? REITs are another type of investment option that can help you make a profit on your money, especially the money you have in retirement accounts. Many people use their employer-sponsored 401Ks or IRAs to invest in various types of stocks and bonds. REITs give you a chance to add index funds that are full of real estate deals. Adding real estate to your investment portfolio can make your portfolio more diverse (since you’re adding another investment class), increase your profits (since they have the potential to make you even more money each year), and add increased protection for your investments (since it can shield your money from some of the day-to-day changes and volatility of the stock market).  For example, there may be times when certain stocks and industries lose some of their value, but real estate prices don’t change as often. Regardless of the economy, everyone needs a place to live.

How do REITs compare to other types of real estate? REIT index funds are very large real estate funds full of smaller real estate deals and each of those smaller deals are invested in many different types of real estate. By investing in REIT index funds, you own a small part of hundreds if not thousands of real estate deals. Unlike investing in real estate directly by purchasing homes or buildings alongside other investors or with your own money, when you invest in REITs you are much more removed from the daily operations of the properties. You are not making decisions on which properties to purchase, how to manage/renovate them, or when to sell them. Because you have less responsibility, you make less profit than more direct investors. However, you also have less risk. If one property fails to sell in a timely manner you are not out of hundreds of thousands of dollars. REITs give you a chance to get started in real estate and diversify your portfolio in a safe, less-aggressive, more “hands-off” way.

How do they compare to other types of index funds: REITs are similar to other types of index funds that are full of stocks and bonds. Because they are so similar to these other investments, you can usually add REIT index funds to your retirement accounts or purchase them the same way you purchase other index funds. In terms of investment returns, the percentage return on your profit can vary from year to year, but over a longer span of time, REITs tend to do pretty well. Over the past 5 years, investors who had REITs made over 15% profit on their money, those who invested solely in index funds with stocks made an average of 10% profit of their money. Past performance doesn’t guarantee future returns, but REITs can certainly be a good type of investment to have in your portfolio.

FYI: If you’d like to learn more about REIT index funds check out Vanguard, Fidelity, or other investment institutions. If you’d like to read about individual REIT stocks to consider, check out this article.

5 Steps To Take As You Get Started in Real Estate

1. Determine your niche or area of interest. When it comes to real estate investing there are many different types. Some people choose to buy old homes, renovate them, then resell them at a higher price. Others choose to purchase single family homes and rent them out to tenants for years. While a few others may choose to pool their money together and invest in an apartment building over a certain length of time. Whether it’s one of these 3 methods or another one, the first step to take before you actually invest in real estate is to determine which area of real estate investing would be best for you.

2. Educate yourself on the struggles and achievements of people in that industry. Once you pick a type of real estate investment to focus on, your next step is to educate yourself on the pros and cons of people in that industry. Learn about common mistakes to avoid and hurdles you may have to overcome. If you’re going to invest money into a deal you want to know as much as you can about it and be prepared for the good and bad that may occur. It’s hard to adequately fix an issue you didn’t expect or prepare for, so be proactive. Listen to podcasts, read books, skim blogs, and network with people who have experience in that area so that you can learn from their experiences and increase your chance of success when you start making your own investments.

3. Determine your goals and criteria. Despite our best intentions, not every deal within your target real estate niche will be good investment for you. In order to determine which deals you should invest in and which ones you should pass up, you need some objective investment criteria. For example, some people who focus on single family homes decide to only purchase houses in cities that are close to where they currently live so that managing tenants is a bit easier. Other people who focus on multifamily properties choose to only focus on apartments that are in a certain condition or have a minimum amount of units. Yet and still, other people may be open to different kinds of deals but choose to only invest with certain established investors. Whichever investment criteria you choose make sure you have good evaluation standards as well. Ie. You will only invest if the cap rate is “X” percent or if you have “Y” amount of dollars in cash flow or have an internal rate of return of “Z” or more on your money.  Do some research and determine you investment and evaluation criteria.

4. Write down how you’ll gather money for this investment. Just like it’s important to pick your niche and evaluate the investment correctly, it’s also imperative that you know where you’re going to get the money. Do you have enough saved on your own or will you need to pay the seller in money installments via seller financing? Do you plan to get a mortgage from the bank and pay back the loan over many years or do you plan to use private funds that require repayment much sooner? Do you have friends and family who can help you out or do you have some loan you plan to take out from something else you’ve purchased? There are plenty of options, but you need to at least think about which ones may make sense for you depending on the type of investment you want to make and the appropriate amount of risk you plan to take.

5. Start identifying potential deals and practice analyzing them. Lastly, you need to practice evaluating deals. No one wants to invest a ton of money then lose it all in a bad deal. Practice picking out good deals and evaluating smart investments with people who are more experienced. Ask questions about what made a deal good or bad so you can learn how to more efficiently evaluate deals on your own and reduce that chance that you’ll lose money in an investment. This practice will also make you a little less nervous when you finally do invest money for the first time.  

What do you think? Are you going to take these steps as you get started in real estate?

4 Things To Do Before You Start Investing In Real Estate

1. Read books to learn the basics. Real estate is a HUGE industry. Not only does it encompass a variety of different niches, but it also includes a myriad of jobs, investment roles, and moving parts. Although the industry itself can be lucrative for many people, it can also be a source of disdain and loss for others. In order to ensure that real estate is the right industry for you (and increase your chances of actually making money instead of losing it), it’s essential that you educate yourself. Learn about the different forms of real estate investing. Study the pros and cons of each type and determine which one would be best for you. If you’d like a more comprehensive guide, you can always check out podcasts and webinars on Bigger Pockets or read books like the ABCs of Real Estate Investing.

2. Start networking to meet people in the industry. Once you’ve become educated on the different types of real estate investments, you should start meeting people. Although you may be very skilled and successful in your own right, real estate is a team sport. As you start to network with others, you’ll learn from their mistakes and achievements which will help you gain more experience. As you continue to interact with people in various settings you’ll gain access lucrative deals and other investments as well. When I started going to real estate meetup groups, I learned about other areas of real estate that I never even considered and got invited to invest into deals I wouldn’t have otherwise known about. Plus, I started to meet people with different skillsets and now have a list of people I can call on for a variety of homes to purchase or sell. I can also find contractors, maintenance men, or interior decorators quicker. In other words, real estate investing is much easier because I’ve met so many different people and groups that have helped increase my chance of success.

3. Listen to podcasts to stay up to date. One of the things that has really helped me over the last few years is podcasts. Although I prefer to learn new information from books and blogs, podcasts are essential for me as well. They reinforce information I may have learned and forgotten from awhile back. They also provide new perspectives on topics and deals that I may not have considered myself. Plus, they help me stay up to date on current information and interview other successful investors which helps me learn from the experiences of others. For example, it was through a podcast that I gained some insight on different ways to invest in real estate without actually getting a mortgage from the bank. It was through podcasts that I learned how other people started investing in single family homes and were then able to scale up to apartment buildings. It was also via podcasts that I learned which type of investments would take more or less of my time and which ones provided more profit in tax-free ways.

4. Join communities to meet other like-minded people. Along with networking with others, reading books, and listening to podcasts, you must do one more thing: surround yourself with like-minded people. It can be very easy to make a goal, but oftentimes it can be difficult to consistently do the work needed to bring those goals into fruition. One of the things that have helped me is joining communities of like-minded people. Whether that’s going to real estate meet up groups or becoming active in online forums, surrounding myself with people who have similar goals and interacting with them consistently has helped create accountability in my life to keep me focused and committed. These communities have also served as a place of inspiration and encouragement to keep me on track. In fact, I’ve had several people that have been gracious enough to hear various ideas of mine and offer their feedback and guidance on what I could do to bring it into fruition, they’ve even connected me to other experts in the field.

My point? If you’re thinking about investing in real estate, it’s essential that you read books to learn the basics, start networking with people in the industry, listen to podcasts to stay up to date and join communities of like-minded people.

The Importance of Networking: Why I Starting Going to Real Estate Meetups

Last year around this time I had a lot on my plate. As a graduating medical student, I was making the finishing touches on my residency application and prepping for the mandatory hospital rotations needed to complete my degree. With all of that going on, I still made it a priority to attend real estate meetups once a month. I went to these groups for 5 main reasons:  

1. I needed to learn new skills. Unlike people who choose to focus on one job or skill for the majority of their lives, I want more. Instead of working a traditional job into my 50s I want to acquire passive income through real estate investing. Acquiring this passive income through real estate allows me to continue building wealth for my family while also providing me with the flexibility I crave, whether that means working part-time to have children or simply creating space for me to pursue less lucrative passion projects. Since I didn’t grow up around real estate investors, I needed to learn some background information and acquire a whole new skill set. Going to these real estate meetups put me in direct contact with people who had these skills that I could learn from.

2. I needed to expand my network. If I ever wanted to achieve my goal of building wealth through real estate, I had to start doing things I’d never done. This meant thinking differently and surrounding myself with people who had already achieved what I was looking to obtain. Along with learning new skills, going to these meetups gave me a way to expand my network so I could interact with real estate investors and emulate people who had already achieved these goals.

3. I needed mentors. My parents didn’t use real estate to build their retirement savings and none of my close family members had the experience needed to guide me through the process. Despite the numerous podcasts I listened to and books I read, I needed more. I still had questions that were unanswered and concepts I wanted clarification on. Going to these meetups were a great solution. They helped me find mentors who could “show me the ropes” build relationships with people who could serve as advisors. Because of these meetups, I met people who volunteered to teach me how to find, evaluate, and finance deals.

4. I needed to change my thinking. Along with mentorship, my outlook on real estate reached a whole new level when I started going to meetups. The people I met at these groups kept me inspired in the midst of doubt. They gave me insight on how to invest in real estate in ways that could increase my monthly cash flow and help me save money on taxes. They also kept me optimistic about my goals and my ability to eventually create wealth. Being around people who were constantly discussing deals and sharing advice on pitfalls to avoid helped me learn more than I ever could have imagined. These meetups changed my view of real estate investing and made me even more committed to my goals.

5. I needed access to deals. The final reason I needed to expand my network was to actually NETWORK. Some of the best real estate deals are ones that take advantage of “leverage” and involve multiple investors. Companies raise money from rich investors and fund lucrative investments as a group. Unfortunately, it’s illegal to advertise these deals to the general public due to their high risk and buy-in costs. The only way to actually find out about these deals is to meet the people who create them or invest in them. Going to meetups played a key role in allowing me to cultivate business relationships with people who could give me access to those deals.

Long story short: the meets-ups help me expand my network. I needed to expand my network to continue to meet potential mentors and surround myself with people who could keep me motivated to reach my goals, safeguard against doubt, and get me to think more like an investor. Lastly, I needed to expand my contacts and cultivate relationships with people who could be potential partners in the future. 

Have you ever gone to a real estate meetup group? If so, what was the experience like for you?