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Should you invest in REITs

Posted by John Reed on

As a real estate investment writer for 39 years, I have generally ignored real estate investment trusts (REITs). They are stock market corporations that own and operate rental properties.

Rollover IRA into REIT stocks

Recently however, I write about them more because many have IRAs and those can hold REITs. If you refuse to withdraw your IRA money, then at least put an appropriate amount into REITs which are good hedges against possible high inflation. The other issue is many investors whose names are on the deed of a building are just buy-and-hold guys.

Active real estate strategies

I advocate three far more active approaches:

  1. bargain purchase (paying no more than 80% of current market value for the property)
  2. adding value (buying property that can be made more valuable by making cost-effective changes)
  3. double-digit cap rate (property is extraordinarily cheap in relation to its net income—typically only in extremely depressed markets)

I wrote four books on #1 and #2. My bargain purchase books are How To Buy Real Estate for at Least 20% Below Market Value volume 1 and volume 2. My books on adding value are Fixers and How to Increase the Value of Real Estate. #3 is a rare market condition that only lasts about six months after it appears. 

Fixers bookHow to Buy Real Estate for at Least 20% Below Market Value volume 1 bookHow to Increase the Value of Real Estate book

If you are just a buy-and-hold investor, an REIT is probably better that being a landlord

To pursue these three approaches, you need to own the property yourself, not through a REIT. You have to be the decision maker on acquisition and, in the case of adding value, during ownership. The corollary to that is if you have all that control and take all those extra risk compared to owning REIT stock, you must get the extra return on your investment and the value of your time.

But if you just buy and hold—no bargain purchase or value adding or depressed price—you are getting no compensation for the extra risk and time consumption of being a landlord. If that is the case, you are probably better off owning a REIT. With those, your risk is limited to your equity and there is zero time-consumption. Plus you can get tremendous diversification by property type and location even in a tiny dollar-amount purchase.

What I am sort of saying is don’t buy a race car if you only use it to drive to church on Sundays. I wrote about this in greater detail in my December Real Estate Investor’s Monthly newsletter.

Real Estate Investor’s Monthly newsletter

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