Investing in rental property seems like a good way to make money. All of the gurus say so. The income just flows in. You just sit back and cash the checks. Maybe buying some more properties. Oh…and unclog the toilets, harang the tenent to actually send the checks, get eviction notices when the checks never come, repair the trashed properties, get called at 3am when the hot water heater bursts, etc.
Yeah, sounds like a lot of easy money! Ever see the movie Pacific Heights? Ouch!
But there is an easier way of investing in rental properties! It is called a REIT! A REIT (short for real estate investment trust) is a compnay that owns rental property. They manage the properties, buy more properties, etc. Their investments might include appartment buildings shopping centers, and maybe even self-storage units. But you can buy shares in the REIT just like buying stock. But another thing about REITs is that they have to pass 90% of profits straight back to the investors as dividends. The other 10% stays in the REIT coffers for investment in more rental property. So REITs have a good yield. It’s is almost liek hiring a property manager, having him use your money to buy rental properties, run them for you, and then give you most of the money, keeping only enough to pay his salary, run the properties, and buy some more properties for you.
One thing to be aware of, is that dividends from REITs, unlike dividends from stocks, are taxed as regular income. So taxes might take a bigger chunk your money than stocks. Though income from a rental property would also likely be taxed as income. But if you own the REIT inside a taxed-defered vehicle like a Roth IRA, then it doesn’t matter.
Owning an individual REIT might be a little risky, because their particular investments may drop. For instance, a REIT that specializes in retail shopping malls. So instead of owning individual REITs, you might consider owning a REIT index fund such as iShares’ IYR.