Making the Move From REITs to a More Active Investor Role

05/27/2015 01:10 pm ET | Updated May 26, 2016


I don't want to make this an article about becoming a super fix & flip guru or even managing your own rental properties. What I want to help investors to do is to look at how they can exit REITs but stay in real estate as an investment asset class.

Why Investors Like REITs

REITs have some really attractive attributes:

• They trade like stocks: Investors can buy into a REIT and enjoy the benefits without a big chunk of capital. They can get out just about as easily and move their money elsewhere.
• REITs pay great dividends: This is true if things are going well. In almost all cases, REIT dividends are higher than bonds, and retired investors want and need the steady income.

Why Care in REIT Investment is Required

REITs can lose big too: When mortgage rates are low and investors see paltry returns from their bond investments, many move their money to REITs for those higher dividends. Unfortunately, if rates rise, those same investors easily and quickly move their money back into other investments. Depending on when an investor bought in, they could lose their gains quickly.

REITs trade like stocks: Yes, I'm repeating what I said in the benefits section. It is easy for investors to buy in and sell out of a REIT, so they can be pretty volatile.

What if You Don't want to be Really Active?

OK, you want to leave REITs but stay in real estate. However, you really don't want to manage rentals, and you definitely do not want to get involved in fix & flip. You want to get a nice double-digit ROI from an almost passive role.

Try seeking out successful rental property investors or people who are doing fix & flip at a profit. They often are seeking investors to fund deals. Be careful, check references and track record, and be sure you cover your assets.

You can team up in a partnership with an active fix & flip investor to fund their short term deals of a few months, and you can bank some nice profits. You want to get help in structuring the deal, and you want a note against the property to cover your investment.

From a longer term perspective, you can enter into partnerships to buy and own rental homes or multi-family properties. You want to team up with someone who does want to take on the management tasks and has the expertise to do so. Or, you structure the financial side to afford hiring long term professional management.

The Great Long Term Outlook for Rentals

This is a great time to get involved in rental property investment. Rents are rising with increased demand. The younger generations are not buying homes at anything like the rates they have historically. They are renting.

Baby boomers are hitting 65 at a rate of 10,000 every day. Many will want to rent and get rid of the tasks of maintaining a home. Locating homes in areas where they will have convenient access to shopping, cultural activities and entertainment will help you to keep your units occupied with stable tenants.

The key for those who want a real estate alternative to REITs is to assess their risk tolerance and either jump in completely or partner with expertise and experience.