Some people who are risk averse tend to shy away from investing in real estate. The reason? They're nervous to take on the many risks that come with owning physical properties.
When you own a rental property, for example, you take on risks such as:
- Not being able to find tenants
- Having tenants who don't pay or cause damage to your property
- Having your property taxes rise
- Having to spend a lot of money on maintenance and repairs
Now some real estate investors don't buy rental properties. Instead, they buy homes to fix and flip. But going this route involves risk, too, such as:
- Not being able to find a buyer quickly
- Spending more money than expected on renovations
If these risks make you want to steer clear of investing in real estate, I'm here to tell you that there's a much easier, less stressful way to go about it. And if you're willing to give one specific investment a chance, you may find that real estate becomes your ticket to growing long-term wealth.
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Less risk, lots of reward
You could invest in real estate by owning physical properties. Or, you could simply invest in companies that own properties and let them take on the risks involved. If that sounds good to you, consider putting money into REITs, or real estate investment trusts.
REITs are companies that operate portfolios of income-generating properties. Industrial REITs, for example, make money by filling up warehousing space, while healthcare REITs operate facilities such as hospitals and urgent-care centers.
The upside of owning REITs is twofold. First, you can make money if the value of your shares increases over time. Secondly, REITs are required to pay 90% of their taxable income to shareholders as dividends. That's steady income you can sit back and collect without having to lift a finger.
Just as important, REITs can be a lower-risk means of investing in real estate than owning physical properties. This isn't to say that REITs are risk free. You might invest in a company that struggles with cash flow and grapples with ongoing vacancies.
Just take a look at retail REITs. The pandemic resulted in a record number of store closures in 2020, and as such, some malls and shopping centers are having a hard time filling the spaces left behind by bankrupt tenants.
But while you might end up buying REITs that see their share of financial struggles, that's a very different scenario than buying a rental property whose operating costs become too expensive for you. And it's also very different from buying a fix-and-flip whose renovations end up putting you $30,000 over budget.
A much easier route to take
Plenty of people make lots of money by owning rental properties. And you may do quite well for yourself buying houses, fixing them up, and selling them at a profit.
But if all of that sounds too risky (and, frankly, too complicated), REITs may be an ideal solution for you. Chances are, they'll not only serve as an income source, but also, lend to more diversity within your portfolio. And that's reason enough to start buying them.
