Benefits of Property Investment - REITs and Leverage

REITs

There’s nothing new about real estate investing, and it comes as no surprise that Wall Street has somehow managed to find a way to turn real estate into an instrument suited to public trading.

The real estate investment trust (REIT) is established once a corporation (trust) makes use of investors’ money to then buy and operate income properties. And, just like any other form of stock, REITs are bought and sold on any one of the major worldwide exchanges.

Corporations must pay out dividends from 90 percent of taxable profits in order to maintain the status as a REIT. By so doing, REITs avoid the payment of corporate income tax. Regular companies must pay tax on profits, after which, the company must decide to distribute, or otherwise, any after-tax profits in the form of dividends.

REITs are, just like any other dividend-paying stock, a solid investment to make for stock market investors that are looking for regular income.

Unlike traditional types of real estate investment, REITs also invite investors to gain interests in non-residential investments, for example office buildings and shopping malls. REITs are highly liquid assets, meaning that you do not need a realtor’s help if you wish to cash out your investment.

Leverage

Other than with REITs, making an investment in real estate provides an investor with a tool which is unavailable to those who invest in the stock market: leverage.

If you’re looking to buy a stock, when you place the buy order, you must pay the full value of the stock. Even when buying on margin, although you can borrow to make the investment, it’s still far less than with real estate.

The vast majority of ‘conventional’ mortgages seek a down payment of 25 percent of the value of the property. No doubt a sizable chunk of money for many. Nevertheless, depending on where you reside, there are some types of mortgage that only seek a down payment of 5 percent.

What this means is that you can control the property together with the equity that it holds, and yet, you’ve only paid a fraction of the full value. Sure, your mortgage will of course pay the full value of the property eventually, but in the meantime, you control it as soon as you sign the papers.

This type of mortgage is very attractive to both landlords and real estate flippers. If they take out a second mortgage on their current home, they can then place a down payment on a couple of other properties.

Thus, they are in control of the asset, irrespective that they’ve paid for a very small part of the total value.