REIT stands for Real Estate Investment Trust. Like mutual funds, this is a collective investment plan whereby money invested by individual investors is pooled together into a trust. The only difference is that REITs invest in real estate while mutual funds invest in stocks. The funds pooled into the investment trust are used for purchasing property shares. To understand how you can make money from REITs, read on.
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Identify the Best REITs
The first thing you need to do is proper research to choose the most reliable Real Estate Investment Trust. While you can find a lot of information out there, you should be careful not to be misled towards mutual funds by some unscrupulous financial advisors.
In your research, you need to read the financials and compare various REITs with regard to:
- Price-Earnings Ratio
- Dividend Pay-out Ratio
- Dividend History
It’s essential to evaluate the Price-Earnings (PE) Ratio, which is an indication of how costly the units are in relation to the trust company’s annual earnings. Normally, a lower PE ratio is more promising. However, too low PE ratio, under 5 or 6 would indicate that the market doesn’t expect significant growth for that company. On the other hand, a high PE Ratio over 22 is a sign of a riskier investment.
You should review the dividend pay-out ratio as well as the dividend history. A high dividend pay-out ratio not only means the dividends can’t be sustained overtime, but the company is not well-managed. For dividend history, a reputable REIT shows a steady rise in dividends over a period of time.
Finding a Good Discount Brokerage
You may think of turning to Plumfund to raise the large amounts of capital needed to invest in REITS. With a discount brokerage, you don’t have to do that. TD Ameritrade, for instance, offers a US-based discount brokerage whereby any online equity trade carries a flat rate of $9.9. This fee is not high given that you don’t intend to purchase and sell units on a daily basis. The trick is to purchase REIT units, then hold on to them for a considerable period of time, because they will pay out dividends.
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Capitalize on Dividend Reinvestment Plan (DRIP)
A DRIP is another convenient way in which you can amass wealth overtime. Dividends may be reinvested into more units monthly or quarterly, rather than being paid out in cash. With this, your units could automatically grow by several units on a monthly or quarterly basis. If your REIT company provides this option, then setting up a DRIP would be as easy as calling your discount brokerage. You can also stop the DRIP arrangement and receive your cash at any time.
Configure an Automatic Flow
Setting up an automatic transfer into your investment account every month is another prudent long-term strategy. Since most banks provide discount brokerages, such transfers may be as easy as a transaction involving two accounts in the same bank. It’s sometimes not easy to save cash left over in a current account every month end. This temptation would be reduced if the funds are automatically channeled into the investment stream. .
Historically, REITs are among the best-performing asset classes you can find. They not only promise you better return over investment (ROI), they offer better security than conventional stocks as well. This is true even during periods of recession – ideally, plummeting of share prices would boost property prices. If you are looking into owning real estate with not much risk involved, investing in REIT will be your perfect bet.