If you have an extra $500 or $1,000 and you want to invest in it, you can invest it in real estate! Prior to about ten years ago, there would have been no opportunity for individual investors to invest that amount in real estate.
However, today there is a multitude of opportunities for beginning and small individual investors to invest in real estate, by accessing Real Estate Investment Trusts (REITs) through online platforms that are easy to use.
How Much Should I Invest?
First, let’s talk about what money you should invest in. The rule of thumb is, only invest money that you can leave in the investment for at least five years.
Why? Because due to market variables, your investment will fluctuate in value, and if you needed to access this money during a down market you could lose money.
Moreover, it can take several days or even weeks to get your money after you ask for it. That is not much help to you if you have an emergency car repair, or you lost your job and need that money for groceries.
Create an Emergency Fund Before You Invest “Extra” Money
If you do not yet have an emergency fund, instead of investing your $500 or $1,000 in real estate, and put that money in a savings account. Granted, it will only earn modest gains but that is not the point – the point is to have ready access to your emergency fund if you need it.
Conventional wisdom suggests saving 6-8 months’ worth of expenses as your emergency fund. What if you don’t have an emergency fund and an emergency arises? Most everyone in that position is forced to use a credit card. Attorney Stephen V. Bottiglieri, a busy bankruptcy lawyer in Woodbury, NJ, says this is often the path to bankruptcy.
The Pitfalls of Financing Emergencies with a Credit Card
Here’s an example: let’s say you needed a major car repair, like, the engine seized. Your car is out of commission for at least a couple of weeks, so you need a rental car to get to work. The car repair comes to $4500, and the rental car bill for two weeks at $60/day comes to $840 plus some other charges, totaling $960.
You’ve just charged $5960 on your credit card, which charges 19% interest. You think that the interest rate is pretty low – and you are right! Credit card interest can go up to 29.9%! But 19% is still exorbitant.
Let’s also say that the minimum payment on this credit card is $160. Again, you think, that’s not too bad… until you see that it will take you 57 months (almost 5 years!) to pay the balance off, and you will have paid $3,116 in interest. Yes, you will have paid more than half again what the car repair and car rental cost you to the credit card company in interest.
You don’t need to do that. Let’s say instead that you put the $1,000 you were thinking of investing in your emergency savings account and had been saving $160 per pay period into that account. It would only take you about 2-½ years to save that $5960, and during that whole time, your savings were growing and working for you.
The moral of the story is… save for your emergency fund before you invest “extra” money. Get your money to work for you, don’t slave to pay interest to the credit card company. You will be glad you did.
What is a REIT?
A Reals Estate Investment Trust (REIT) owns or manages income-producing real estate, either the property itself or mortgages on the property. Most generate dividends as well as appreciate in value. An individual can invest in a single REIT, in an exchange-traded fund, or with a mutual fund.
Investing in a REIT allows an individual to make a relatively small investment in real estate and mitigate the risk of loss because a REIT’s holdings will be inherently diverse.
Types of REITs
Retail REITs
Retail REITs invest in freestanding retail buildings, such as shopping malls and shopping centers. Retail REITs make money from the rent paid by their commercial tenants, so prior to investing in a retail REIT be sure to research whether the market is supporting that REIT’s tenants. If the tenants aren’t paying rent or the buildings are empty, that REIT will not make money for you.
Residential REITs
Residential REITs own and manage multi-family apartment buildings. Prior to investing, research the vacancy rate, because if that is high that is a sign that that location does not have the job growth and population to support residential rentals.
Healthcare REITs
Healthcare REITs own and manage hospitals, nursing facilities, rehabilitation facilities, and retirement homes. Look for diversity in a healthcare REIT’s holdings, with a significant amount of assets being those that serve the aged population as Medicare and Medicaid help fund those facilities and is a stable source of funding.
Office REITs
Office REITs own and manage office buildings, making money by collecting rent from tenants and through appreciation of the property. Again, prior to investing look at the vacancy rates, and look for holdings in or near major metropolitan centers because those offices will command more rent.
Mortgage REITs
These REITs are inherently diverse, but the value can fluctuate according to interest rates. If interest rates rise, that will cause a decrease in a mortgage REIT’s book value, and stock prices will take a hit.
If you google REITs you will find a wealth of information on the REITs website about what the REIT invests in, the minimum investment (usually $500 or $1,000), and the REIT’s history of dividend yields and capital appreciation. If you are concerned about choosing the right REITs, consider buying a mutual fund that invests in REITs and let the professionals choose for you.
