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An Income Investor’s Guide to Real Estate Investing

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Last week, I wrote an article about the resurging housing market. After five years, recent data indicates that we're in the midst of a recovery. Many individuals are buying homes for their own housing needs, but a large number of investors are jumping into the market as well.

There are several ways investors looking for income can get into the market without taking on ownership of physical property. But before we discuss some real estate plays for investors, let's take a deeper look at who's buying real estate these days.

Profile of today's homebuyer
Not surprisingly, many people who walked away from their homes in the mid-2000s have waited the requisite three to seven years until their credit has cleaned up and are now getting back into the housing market. And those individuals who hunkered down, sat out the mid-2000s, and saved their pennies for a more prudent down payment are also getting in.

But many individuals have circumstances -- such as subpar credit or insufficient savings for a down payment -- that simply don't allow them to buy a home. Meanwhile, others have chosen to completely forgo the dream of homeownership. Renting is these folks' only option, leaving a different breed of homebuyer to scoop up the limited inventory of single-family homes: investors. But, unlike 2005, when your brother-in-law bought a handful of homes with the intention of flipping them for a quick buck, these days it's institutional investors buying droves of them as rentals.

As The Wall Street Journal reported last week, such large private equity firms as Blackstone Group (NYSE: BX  ) have spent billions of dollars during the past year scooping up single-family homes. Blackstone is buying in excess of $100 million worth of homes each week and has forked over roughly $3.5 billion since early last year. Cash buyers -- largely these types of investors -- currently make up one-third of sales nationally. In fact, in Orange County, California, fewer than 10% of foreclosures went to investors at courthouse auctions in 2008. Last year, however, investors bought half of foreclosures at such fire sales in that county. 

An easier way
Instead of trying to beat these big-fish investors, how about getting into real estate a different way? REITs, or real estate investment trusts, are a way to invest in real estate minus the headaches that come with being a landlord. Not only do investors buy REITs for the potential share-price appreciation but they do so also for their current income.

REITs come in different flavors -- mortgage and equity. Mortgage REITs carry inherent risks that long-term individual investors need to carefully consider before diving in. During the past five years, many mortgage REITs have cut their dividends many times and have issued substantial numbers of new shares to fund their business activities. They also borrow more to fund their operations than equity REITs, making mortgage REITs relatively vulnerable to rising interest rates. Understand the difference between these two before jumping into the world of REIT investing.

More on equity REITs
Equity REITs typically focus on commercial properties such as shopping centers, industrial parks, and senior living real estate. For example, Kimco Realty (NYSE: KIM  ) has become the largest REIT focused on shopping centers. Some of its largest tenants include big-box retailers such as Wal-Mart and Home Depot. The company pays a 3.8% dividend, and its portfolio includes properties in 44 U.S. states, Canada, Mexico, and South America.

Similar in its focus on commercial properties, National Retail Properties (NYSE: NNN  ) has interests within the U.S. only but in nearly every state. Properties are leased to several hundred different retail tenants. The Florida-based REIT pays a 4.5% dividend.

Unlike the abovementioned REITs, Realty Income (NYSE: O  ) pays its 4.8% annual dividend on a monthly basis, as opposed to semiannually. The California-based REIT owns and leases several thousand freestanding, single-tenant properties in nearly every U.S. state.

Meanwhile, Health Care REIT (NYSE: HCN  ) focuses on the development, ownership, and management of health-care real estate. Health-Care REIT has ownership interests in roughly 1,000 health-care properties located in the U.S., Canada, and the U.K. It pay a 4.6% dividend yield.

Foolish bottom line
If you're an investor looking for income, don't limit yourself to thinking your only real estate option involves owning a physical piece of property. Many investors favor REITs due to their passive nature (think not having to deal with a water pipe rupture at 2 a.m.), capital appreciation potential, and generous dividend income. Consider REITs for your portfolio today.

Looking for more long-term income investing ideas? You've come to the right place. Check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

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