Rent or Own or REIT?
REIT (pronounced reet, rhymes with street) is an acronym for Real Estate Investment Trust.
Interest rates are low, providing an opportunity for homeowners to refinance their mortgages. Lower monthly mortgage payments, isn’t that what everyone wants?
Not if you are renting. Rents rarely go down. There is no way to refinance your rent.
And ( spoiler ) house prices do not always go up. When you have borrowed money to buy a house you have a mortgage. You make monthly mortgage payments regardless of the current value of the home.
When housing prices go down, you could owe more than the house is worth. So even if you sell the house you still owe the bank. The term for this is “underwater”.
A renter does not have this risk. Rents might go up, but a renter has an easy option out, to move. Not convenient but it is an option.
If you are renting and thinking of buying a home, lower interest rates provide the opportunity to “swap” your rent for a mortgage. Theoretically.
I say theoretically because sometimes renting can be better than buying a home.
Buying a home may be “the American dream”, but who dreams about borrowing thousands of dollars that will take years to pay off?
From an investment perspective there is one thing that renters and mortgage holders have common.
You are not paid monthly or quarterly dividends on your rent or your mortgage. The cash flow is one directional, out.
Real Estate is a separate asset class from stocks and bonds. As a separate asset class, owning real estate becomes a significant, if not the largest asset in your portfolio.
Owning a home is not a “liquid” asset. That means you cannot easily turn your house into cash, although that is exactly what happened during the housing bubble,
As the value of property increased, people borrowed against an implied price. But in the housing market your property is only worth what someone will pay for it. One of the biggest issues in this asset class is that prices can vary widely between what the owner thinks their home is worth and what the buyer is willing to pay.
A liquid asset, like stocks or bonds, can be sold at any time and you will have your cash in a few days.
When you buy or sell stocks and bonds, the price you pay to invest is not negotiable. It doesn’t take months and months to sell a stock. This is what is meant by “liquid” versus “illiquid”. Can I get money fast or do I have to wait?
But what if you are renting? is there a way to include real estate in your portfolio without buying a home?
Yes, as a renter, you can participate in the real estate market without owning a home.
The way you can add real estate to your portfolio is through a publicly traded Real Estate Investment Trust (REIT).
Publicly traded REITS own and manage property in all sectors of the real estate market.
There are REITS that focus on commercial property, apartment buildings (ah-ha, a way to earn something back) office buildings, healthcare, retail, storage, communication facilities. Just about anything that has a physical structure and a cash flow.
Publicly traded REITS trade like stocks and pay dividends. You buy shares of a REIT.
A REIT is a mutual fund or ETF. You are buying shares of a large pool of assets. You do not own any of the property the REIT holds in its portfolio.
As a shareholder of a REIT you participate in the price appreciation or depreciation of the properties in the REIT. You also participate in the cash flows.
In addition to real property REITS can own the stocks of publicly traded companies that invest in real estate.
For example, you could buy shares directly of Public Storage or you could buy a REIT that owns shares of Public Storage.
The universe of REITS is much smaller than the stock or bond market. About 225 REITS are registered with the SEC in the United States .
I might be interested in owning apartment buildings to enhance my income over the long term. The reality is, I do not have the skills to own and manage multiple properties. Instead, I can look for a REIT that owns apartment buildings.
What if I could find a REIT that owns the apartment building I live in?
That would be an ironic way of making my rent work for me.
“By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. REITs must pay out at least 90% of their taxable income to shareholders—and most pay out 100%. In turn, shareholders pay the income taxes on those dividends.”
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
