Investing Tools: The REIT

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A couple of years ago, I first discovered a REIT (Real Estate Investment Trust) as an investment. I discovered this type of investment by reading "Become a Lazy Landlord - with REITs." by Mr. Money Mustache. His article was very intriguing and got me excited about the option of investing in a REIT.

What is a REIT?

A REIT is a type of security that invests in real estate thru property or mortgages. A REIT can be traded and purchased just like a stock. A REIT can be a solid income option in retirement, because it offers high dividend yields. They offer high dividend yields, because they are required by law to payout a 90% dividend payout ratio.

What is a dividend payout ratio?

A dividend payout ratio is calculated based on taking the dividends payout per share divided by the earnings per share. For example, let's say a company makes $2 per share in a given year. The REIT would be required to payout at least $1.80 per share. Let's assume you have 50 shares, The shareholder in this scenario would receive $90 for owning shares in this REIT.

This may not seem like a lot of money. However, as you continue to invest, your dividend will continue to increase. I currently own 25 shares of a REIT and their recent dividend payout was $5.88. This company paid out a $0.24 dividend (quarterly) per share. This will give me about $23.52 of income in one year from this investment.

I don't have a lot invested in this REIT currently, because I am trying to keep my investment income and dividend income low. This helps to keep my taxes lower at this stage of my life. However, let's use this REIT as an example of how it could be a good retirement investment in the future.

As Mr. Money Mustache (MMM) suggested in his article, you can invest around $400,000 in a REIT and earn enough in dividends each year. Let's take his example and look at my current REIT investment (Medical Properties Trust). 

  • $400,000 purchase of Medical Properties Trust (MPW)
    • 29,850.7463 shares of this REIT (Too much for an individual stock).
    • Current quarterly dividend payout of $0.24 per share 
    • 29,850.7463 times $0.24 = $7,164.18
    • Approx. $2,388.06 to live off each month
    • Approx. $28,656.72 income in one year

Most of you are probably thinking, $28 grand is not enough to live on. I can see your point, because $28K would not be enough for our family currently. However, MMM and his family live on around $25K-$27K a year. So it's possible! He has many strategies and life hacks that he uses to keep his expenses low.

We can all find ways to cut our expenses, but the REIT doesn't have to be your only option in your portfolio and it shouldn't be! I just want to give you another option to add to your portfolio, because the dividends that can be earned are great ways to earn income in retirement.

I understand that $28K is not enough for everybody, but there is a huge advantage to using dividends in retirement. By using a dividend, you don't decrease any of the shares that you own. Therefore, you investments are the same and will either grow or fall with the market. 

When people plan and prepare for retirement, they plan to use a withdraw rate to pull money out of their investments. By having investments that pay a dividend, you can withdraw less because you have those dividends coming in as a retirement income.

Should you invest in REAL ESTATE or a REIT?

Both a REIT and Real Estate are great options. They both have pros and cons and it depends on what you want for your portfolio.

  • REIT
    • Less Hassle (Don't have to deal with tenants or repairing a property)
    • Less Risk (Invested in multiple properties)
    • Less Reward (Don't earn as much as owning your own investment property)
    • More Hassle (Have to deal with tenants and fix any problems that arise on the property)
    • More Risk 
      • If your property losses a tenant -  no income...until you replace the tenant.
      • If your property has damage, you need to fix it.
      • Repairs to the property could cost you months of income.
    • More Reward (Earnings and growth of a property are more lucrative than owning a REIT)

Basically, a REIT is great for somebody looking to invest in real estate, but doesn't want the hassle of dealing with tenants. The hassle of dealing with tenants comes with the big reward of bigger returns. By owning an investment property, the rent you earn each month and the growth in value of the property will be greater than the returns that you can get from a REIT.

How does the summit of coin family invest?

Currently, we only invest in REITs. With the REIT, I like the earnings that can be found from the dividends that are received each quarter. At the moment, we have not invested in a rental property or even farm land. At some point, I would like to add this type of investment to our portfolio, but we want to wait until we have the cash built up to purchase this type of investment.

What does this mean for you?

When it comes to personal finance, your investment decisions are ultimately up to you. You have to decide on the type of investments that are right for your family. For some people, rental properties are the perfect investment. For others, rental properties would be a nightmare. 

What are your thoughts? Would you invest in a REIT?

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