If you’re looking for a secure investment with relatively good dividends but potential for long-term growth, then commercial real estate is a good bet. But actually buying and managing properties is a big commitment, especially if you have a regular full-time job and just want to make investments on the side. That means you may be better off investing in a REIT, or a real estate investment trust. Why invest in REITs? Well, these are essentially companies that invest either in properties or property loans, meaning that knowledgeable real estate partners can call the shots while you just sit back and monitor your investment. But how should you actually go about this investment route?
To get you started, here are some beginner tips on how to invest in a REIT:
- Beware Overly High Valuations
Very high prices simply aren’t sustainable, so make sure the yield on a REIT is comparable to its valuation. It’s also good to keep in mind that because REITs generally rely on borrowed money to make acquisitions, their value may go down when interest rates go up. Borrowing rates have been kept very low in recent years because of the financial crisis, but they’re expected to go up in the relatively near future.
- Look for a Record of Transparency
Some REITs are far more transparent than others, and it’s worth doing a little extra research to find one that is. There’s some debate over whether it’s important to buy shares in a publicly traded REIT (since that tends to lead to greater transparency, as well as greater liquidity), but you should know that if you buy an untraded REIT, a little extra scrutiny is deserved.
- Don’t Overload Your Portfolio
REITs are a great investment, especially since they tend to pay out very good dividends early on. But, especially if you don’t have much experience with them, you probably don’t want to load your portfolio up too heavily right away. Start out with maybe 5% or 10% of your overall portfolio in a REIT that you take a lot of time to research, and then go from there.
Do you have any other advice on how to invest in a REIT? Join the discussion in the comments.