REITs: Real Estate Without the Headaches

Key Takeaways

• What is a REIT?: A company that owns income-producing real estate. You buy shares just like a stock.
• Yield: REITs are required by law to pay out 90% of their taxable income as dividends, leading to high yields.
• Liquidity: Unlike a house, you can sell a REIT in one second on your phone.
• Diversification: Own a slice of 1,000 buildings, not just one.

Introduction

Real estate creates wealth. But being a landlord is a job. It involves tenants, trash, and broken heating systems on Christmas Eve. What if you could own the real estate without the job? Enter the REIT (Real Estate Investment Trust).

Deep Dive: The Stock Market of Buildings

How it Works

When you buy a share of a REIT (like Vanguard Real Estate ETF - VNQ), you are buying a tiny piece of:

• Shopping Malls.
• Office Buildings.
• Apartment Complexes.
• Data Centers.
• Cell Towers.

The tenants pay rent to the REIT. The REIT pays expenses. The profit is sent directly to you as a dividend.

Pros vs Cons

Pros:

1. Passive: Truly passive. No phone calls.
2. Low Barrier: Start with $100. (Buying a building requires $100k).
3. Liquidity: You can cash out instantly.

Cons:

1. No Leverage: You can't use a cheap mortgage to amplify returns (like House Hacking).
2. Tax Efficiency: REIT dividends are often taxed as "ordinary income," meaning you pay a higher tax rate than regular stock dividends.
   • Tip: Hold REITs in a tax-advantaged account like an IRA to avoid this.

Summary

REITs are the perfect way to add real estate exposure to your portfolio without taking on a second job.