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This is a header image for the Fiology lesson REITs: Should You Invest in Real Estate Investment Trusts? It depicts a hammock hanging from a palm tree on a beach to represent the possibility of passive income from REITS supporting a preferred lifestyle.

REITs: Should You Invest in Real Estate Investment Trusts?

What are REITs?

REITs or real estate investment trusts are companies that own and operate real estate. The real estate held can include a variety of asset types including commercial, residential, resorts, and even the the actual mortgages and loans. Shares of these companies can be purchased from brokerage firms just as you would any other stock or fund.

Why might you consider investing in real estate investment trusts?

In the FI community, there is no shortage of advocates for owning rental real estate and there is no shortage of members who steer clear of rental real estate. A few reasons people invest in real estate are monthly cash flow and to have assets that do not perform lockstep with the stock market, thereby reducing overall portfolio risk.

Few argue against the idea that if rental properties were bought and managed according to strict criteria, the returns would likely beat the returns of most REITs. But, to many, the increase in returns isn’t worth the trade-off of assuming the responsibilities of owning and managing rental properties.

I’ve focused on building my rental real estate portfolio since 2011 and have experienced decent rental real estate returns. These results come with additional work not experienced with investing in index funds. An example of this additional work is that at the time of this writing, two of my six properties sit vacant, one of which is due to repairs of minor damage by the previous tenants’ pet and the other due to a simple move out without having a tenant lined up to immediately move in.

So, the question becomes, is there an investment that provides the benefit of owning real estate without the challenges of landlording? This is where the discussion of real estate investment trusts come into the picture.

Note: Investing in Rental Real Estate or Investing in REITs is not necessary to achieve Financial Independence. There are many paths to take that will get you there. Rental Real Estate is “a way” to add diversification and potential stability and REITs are “a way” to incorporate the potential benefits of owning real estate into your portfolio without the responsibilities of landlording.

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Take Action:

  • Now that you know what a REIT is along with some advantages and disadvantages of holding (or not holding) them as part of your investment portfolio, consider the following questions to determine if investing in them is a worthwhile option.
    • Do you think you may want to invest in REITs?
    • If yes, how will they support your financial goals?
    • How will adding REITs to your portfolio likely affect your long-term returns and risk profile?
    • What is the likely overall difference of choosing to include a REIT over simply continuing to to contribute to a low-cost broad market index fund?

Additional Resources:

Quote:

“There is no decision that we can make that doesn’t come with some sort of balance or sacrifice.” – Simon Sinek

Fiology.com is an educational resource designed to teach Financial Independence (FI). We scoured the internet to find content from the best and brightest of the FI community and created lessons covering the critical concepts.

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