The Best Option in Real Estate Investing for Beginners

So you want to learn about real estate investing for beginners? Well, you’re in the right place. Because today, I’m going to share a much better (and much easier) alternative to going out and buying that apartment building you’ve got your eye on. They’re called real estate investment trusts, or REITs, and they’re the No. 1 place to start when you’re talking about real estate investing for beginners…

You can think of this as your personal guide to understanding why there's such a buzz around them in the investment world and why they’re hands-down WAY better for beginners. Now, let's dive deep into the world of REITs…

Real Estate Investing for Beginners: What Exactly Are REITs?

Before we get into what makes them the best exposure to real estate investing for beginners, we’ve got to answer one burning question… What in the world is a REIT, anyway?

Well, a REIT is essentially a company that owns, and in most cases, operates, income-producing real estate or assets related to real estate. So instead of you directly buying an apartment building or a shopping mall, you can buy shares in a company that does.

It's like a collective investing approach to the big world of commercial real estate.

These companies aren't just any old corporations, though. To qualify as a REIT, they have to meet certain criteria…

A big one is that they generally invest in real assets and get the majority of their income from real estate activities, like collecting rent or earning interest from mortgages.

Another key feature that makes REITs attractive to investors is their tax structure…

They're set up as corporations but typically aren't taxed at the entity level. The catch? They usually have to pay out a significant portion, often 90% or more, of their annual income as dividends to their shareholders.

This is a major reason why REITs tend to have higher dividend yields compared with many other types of investments. Just remember, though, that these dividends are generally taxed as regular income.

There are different flavors of REITs out there. Mortgage REITs and equity REITs are the two main types to focus on when learning about real estate investing for beginners.

Mortgage REITs focus on investing in mortgages and earn their income from the interest payments.

Equity REITs, on the other hand, are the ones that actually own and manage properties, collecting rent from tenants.

And within the equity REIT world, there's even more specialization…

You've got health care REITs that own things like hospitals and nursing facilities, commercial REITs that deal with shopping malls and office buildings, and residential REITs that own apartment buildings and single-family homes, just to name a few.

So no matter what kind of real estate market you're interested in getting started with, there's likely a REIT that focuses on it.

Real Estate Investing for Beginners: REITs vs. Rentals

Now, let's get to the juicy part in our discussion of real estate investing for beginners: Why might investing in REITs be a better path for the average investor than buying physical rental properties?

Well, one big hurdle with rental properties is the initial capital and the ongoing management…

Unlike directly owning property, REITs offer accessibility and liquidity. You can buy and sell shares of publicly traded REITs on major stock exchanges just like any other stock.

This means you don't have to tie up a huge chunk of money in a single property, and if you need to access your funds, it's generally much easier and faster to sell REIT shares than it is to sell a physical property.

That’s a big bonus REITs add to real estate investing for beginners.

And while REITs do have management costs, their large scale often leads to far lower management costs compared with what an individual rental property owner might incur.

Think about the economies of scale when managing hundreds or thousands of units versus just one or two. 🤔

Tax efficiency is another area where perceptions differ…

While rental property owners often cite depreciation as a major tax benefit, the tax benefits of REITs are often underestimated. You see, REITs retain a significant portion of their cash flow for growth, and that cash is tax-deferred.

Plus, a portion of REIT dividends can be classified as a "return of capital," which is also tax-deferred, and the taxed portion often enjoys a 20% deduction.

Moreover, any appreciation in the value of the REIT shares is also tax-deferred until you sell.

And let's not forget the flexibility of holding REITs within tax-advantaged retirement accounts.

Another significant advantage of REITs that makes them a great entry point into real estate investing for beginners is diversification…

When you buy a single rental property, your investment is concentrated in one asset in one location. REITs, however, typically own a portfolio of numerous properties across different types and locations, which can help to spread risk.

Furthermore, REITs can act as an inflation hedge, as many commercial REITs have lease agreements that allow them to raise rents along with inflation.

Finally, consider the time and effort involved in managing rental properties — finding tenants, dealing with repairs, handling legal issues, not to mention collecting those rents…

REITs are professionally managed, freeing you from these burdens. This hands-off approach allows you to focus on your career and other aspects of your life, potentially leading to greater overall financial success.

Real Estate Investing for Beginners: Investing in REITs

So you're still interested in real estate investing for beginners, but now you’re also intrigued by the idea of REITs? Great! Because getting started with REITs can be as easy as buying a stock online…

You see, one of the most straightforward (and most common) ways to start is by purchasing shares of REIT stocks directly through a brokerage account. It works just like buying shares of any other publicly traded company.

However, if you're looking for even broader diversification, you can also invest in REIT mutual funds or exchange-traded funds (ETFs) like the Vanguard Real Estate Index Fund (VNQ) or SPDR Dow Jones Global Real Estate ETF (RWO).

These funds pool money from multiple investors to invest in a basket of different REITs, giving you instant exposure to a wider segment of the market (and sometimes the whole world).

Interestingly, REITs are also becoming increasingly common in retirement investment plans.

Many 401(k) plans and individual retirement accounts (IRAs) allow you to invest in REITs, which provide income, capital appreciation, diversification, and a hedge against inflation within your retirement portfolio.

It's worth checking with your company's benefits department to see if your 401(k) offers REIT investment options. And even if your specific 401(k) doesn't, you can certainly invest in REITs through a traditional or Roth IRA by opening a brokerage account within those plans.

And I’m not the only one who says that REITs make real estate investing for beginners easier…

According to a 2024 study, a significant majority of financial advisers recommend REITs to their clients, recognizing their value in a well-rounded investment portfolio.

And while most REITs are publicly traded on major exchanges, it's also worth noting that public non-listed REITs and private REITs exist, although these tend to be less liquid and more complex.

Real Estate Investing for Beginners: Unlock Income and Growth With REITs

When it comes to real estate investing for beginners, real estate investment trusts offer a compelling alternative to direct rental property ownership for many investors.

They provide liquidity, diversification, professional management, potential for strong returns, and a unique tax structure, often with lower management costs and fewer headaches than managing physical properties.

While direct real estate can be rewarding, REITs offer a more accessible and often less risky entry point into the real estate market, particularly when considering the time, effort, and potential liabilities associated with being a landlord.

That’s really what makes them the best option in real estate investing for beginners. That and the profits, of course.

Now, are you ready to explore the world of income-generating real estate without the hassles of property management?

If so, click here to join our income-focused investment community, The Wealth Advisory, where you’ll learn about far more than just real estate investing for beginners.

And you can start cashing your own steady real estate "paychecks" today!