How to Invest in Real Estate with As Little As a Couple Thousand Dollars

“Beloved, I pray that you may prosper in all things and be in health, just as your soul prospers.” (3 John 1:2 World English Bible)

For years, real estate investment trusts (REITs) have been a good investment to own in a diversified portfolio. A REIT is a professionally managed company that owns or finances income-producing real estate. REITs can provide investors with regular income streams, capital appreciation, and diversification. Unlike other investments, REITs must pay out at least 90% of their taxable income as dividends to shareholders. Dividends are generally taxed at a lower rate than ordinary income. That’s a good thing. Publicly traded REITs are bought and sold on the major stock exchanges like an individual stock, making them extremely liquid and desirable. Real estate investment trusts were created by Congress (the opposite of progress) and signed into law by President Dwight D. Eisenhower in 1960. Since then, the REIT industry has grown into a trillion-dollar business.

Historically, REITs have been one of the better performing asset classes, outperforming both bonds and commodities. REITs are tied to almost all aspects of the U.S. economy, including apartments, hospitals, hotels, offices, nursing homes, shopping malls, and storage centers.

REITs exist in all 50 states and in over 30 countries. To understand the concept of how a REIT works,  let’s look at Walmart, CVS, or COSTCO as examples. Suppose one of these chain stores wants to open a new location. Instead of spending millions of their own dollars and valuable human resources, they partner with a real estate investment trust. The REIT raises money from thousands of investors like you and me. The REIT builds the store and leases it back to the retailer. It’s a win-win business transaction for everyone. CVS gets to open a new store for relatively little capital outlay (they don’t have to tie up millions of dollars in construction). The REIT makes money by collecting rent payments from CVS, and investors (us) get a monthly or quarterly dividend, combined with long-term appreciation as the share price grows. REITs have provided investors with a very attractive total return performance.

I have personally found REITs to be an efficient way to diversify my portfolio. By investing in an REIT, I can own part of a 7-Eleven in New York, a Taco Bell in Texas, and a LA Fitness Center in California, all in a single investment. Or, I can own a piece of the Empire State Building in an office REIT.

Real estate investment trusts are truly a passive investor’s dream come true—no toilets to fix, no repairs to make, and no tenants to chase for rent payments.

There is also a second class of REITs called non-listed or non-traded real estate investment trusts. They are registered with the Securities and Exchange Commission and are required to distribute the majority of their taxable income to shareholders, like publicly traded REITs. However, they are illiquid (they cannot be easily sold). Your money could be tied up for three to five years. Despite this negative feature, they are worth looking at by investors with long-term time horizons. A few years back, I invested in a non-listed REIT. I received a 7% dividend for about three to four years until it went public by issuing an IPO. During the first two trading days, the share price jumped by over 40%!

Of course, I was deliriously happy. These deals don’t always turn out this well, but some do and are worth considering. Eventually, non-listed REITs will go public; sell their real estate holdings and distribute the proceeds to its shareholders; or sell all of their holdings as a package to a large institutional investor like a pension or endowment fund.

Let’s wrap it up. REITs offer investors several benefits, including:

Diversification—Over the long term, equity REIT returns have shown little correlation to the returns of the broader stock market.

Dividends—Stock exchange-listed REITs have provided a stable stream to investors.

Liquidity—Stock exchange-listed REIT shares can be easily bought and sold.

Performance—Over the long-term (1975 – 2014) most stock exchange-listed REIT returns have outperformed the S&P 500, Dow Jones Industrials, and NASDAQ Composite.

Transparency—Stock exchange-listed REITs operate under the same rules as other public companies for securities, regulatory, and financial-reporting purposes.

Never forget, all investments have some sort of risk, including real estate investment trusts. Poor management, vacancies, business failures, and, especially, overpaying for your shares will jeopardize your long-term investment returns. Always do your homework first.

Want to know more about real estate investment trusts? Listen to the podcast on REITs on greatinvestor.org or pick up a copy of my latest book “How to Be a Great Investor” on Amazon.

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Thanks and Blessings!