Are REITs right for us?

[Lentils4Lunch]

I'm sure this has been covered elsewhere, so feel free to link me to other discussions.

Lately, I've been thinking about generating some passive income and my attention keeps getting drawn to real estate. I like the fact that it can be like another source of income, generally more stable than the market (if you choose your property well), and a lot of people have built up quite a bit of wealth from real estate investing, so why not me?

However, I don't have confidence that I would do a very good job picking a good property, finding good contractors to improve it or get it up to code. My husband is pretty handy, but we are both not crazy about the risks.

We go back and forth on the idea of looking for rental properties and then getting nervous about jumping in. Are REITs a better way to go? Do you invest in REITs? What do you think?

[specialkayme]

REITs are right for some people, but they aren't for everyone.

Pros of REITs compared to owning real estate:
- Low price entry point usually.
- Lower Risk.
- More downside protection (you can only lose what you invest, nothing more).
- Less work (no repairs).
- More predictable (hopefully) cash flow (no vacancies).
- Significantly more liquid than real estate.

Cons of REITs compared to owning real estate:
- Higher taxes paid on earnings (usually), and no "tax shelters" (such as depreciation).
- Lower upside cap.
- Weaker cash flow (usually).

Personally, I think real estate is worthwhile to have as a part of your portfolio. You decide how much. I like around 20%, but I'm a fairly aggressive person. I like the concept of saving with REITs until the amount you've saved equals 30% or so of the value of a rental property (or the down payment), then compare the returns you got with the REITs and decide if you think that's good enough (keep it) or you want to roll the dice for more (cash it out and buy a piece of property).

I've had several clients that got rich off rental properties. But I've seen plenty that went bankrupt over rental properties. Usually those were bad deals, but you get the idea. Higher risk, higher reward. You decide how much risk you want.

[saijoe]

I feel pretty good about REITs.  They represent about 12% of my portfolio and I am thinking about bumping that up a little bit. 

Before I make my next point, understand that, cumulatively, I would bet I haven't watched 1 hour's worth of Jim Cramer in the last 2 years.  But in flipping around last week, I heard him talking about a specific REIT that was involved in retail stores.  The point was with Sears, Macy's, etc. announcing closings and having a hard time competing with the online world, it may not be the right time to invest in a REIT that focuses on the retail market.  It sounded like good counsel. 

[specialkayme]

One thing to know is that REITs pay dividends monthly. 

Some do. Some pay quarterly. AGNC is monthly. NLY is quarterly. SNH (recommended on the blog a while back) is quarterly.

[ChpBstrd]

I feel pretty good about REITs.  They represent about 12% of my portfolio and I am thinking about bumping that up a little bit. 

Before I make my next point, understand that, cumulatively, I would bet I haven't watched 1 hour's worth of Jim Cramer in the last 2 years.  But in flipping around last week, I heard him talking about a specific REIT that was involved in retail stores.  The point was with Sears, Macy's, etc. announcing closings and having a hard time competing with the online world, it may not be the right time to invest in a REIT that focuses on the retail market.  It sounded like good counsel.

I was about to make this point. Physical retail is dying, and there is about to be a glut of empty storefronts thanks to Amazon. Nope to that.

I'm also wary of office REITs. With tools like Salesforce, I think  WFH and virtual offices about to become a lot more common. Also, a lot of that obsolete retail space will become offices.

I like healthcare and industrial/storage REITs. OHI and CCP for example yield around 8-9% when they're on sale. STAG yields 5.5%.

Just make sure the REIT you select can pay its dividend from free cash flow. Shopping by yield will leave you with a bunch of companies that are about to cut their dividends. Also note that FFO is different than earnings - know the difference before you invest.

Also, I prefer to hold my REITs in tax-advantaged accounts.