Trust Investing 101
- Arabella Iglesias
- May 19, 2022
- 4 min read
Updated: Mar 25, 2023
Trust investing has become a major source of passive income for savvy investors in recent years. Since they were first created in 1960, Real Estate Investment Trusts have been one of the top-performing asset classes in existence.
Real Estate Investment Trusts (REITs) are modeled after mutual funds because they pool the capital of numerous investors. This structure allows ordinary people to capitalize on the real estate market.
Trust investing adds a critical element to an investment portfolio because they can provide a strong, stable dividend every year that has the potential to appreciate significantly over time.
In this article, we're going to discuss:
The basics of Real Estate Investment Trusts
How trust investing compares to other investment products
How much money can you actually make from trust investing
Which trust investing platform to choose
Table of Contents
How Trust Investing Works
An REIT is a company that owns, operates, or finances real estate properties that produce income. These properties could include retail stores, shopping malls, condominiums, apartment buildings, office buildings, hotels, hospitals, warehouses, and infrastructure like fiber optic cables, cell phone towers, and oil pipelines.
Individual investors can buy into REITs, and if the real estate managed by the REIT earns a profit, that profit is distributed among the individual investors as dividends.
REITs are publically traded and can be bought and sold like stocks.
There are three basic types of REITs:
Equity REITs
Equity REITs are trusts that own and manage income-producing properties. In most cases, this income is earned through rentals and leases. The bulk of REITs fall into this category.
Mortgage REITs
Mortgage REITs earn money by lending to property owners either through mortgages or loans. They can also earn money through mortgage-backed securities. Mortgage REITs earn money primarily through interest payments on the loans they provide to real estate owners.
Hybrid REITS
Hybrid REITs are exactly what they sound like - a hybrid of the two previous models.
How to Invest in REITs
Investing in an REITs is as easy as signing up! We've made a list of the platforms we recommend, starting with our favorite:
EquityMultiple connects accredited individuals with high-quality, expertly screened real estate investments, starting at just $5k, through a streamlined platform.
Although they're one of the more expensive REITs in our lineup, they have a very impressive track record and they only focus on high-value properties.
Of all the REITs on our radar, Equity Multiple seems to be the safest and most lucrative option.
For direct access to individual commercial real estate investment opportunities, YieldStreet is one of the industry leaders. They also offer managed funds and advisory services for investors who prefer to let the professionals work their magic.
YieldStreet offers multiple investment options, including Funds & Vehicles, Individual Deals, and also includes Tailors Portfolios.
We like YieldStreet because it is one of the largest and most diverse real estate marketplaces.
With a massive variety of commercial and residential properties to invest in, RealtyMogul has built a healthy body of over 200 thousand investors in its first decade in the business.
The company has built a strong reputation for high-grade quality control - their experts assess every single listing in person, and stay away from inexperienced, untested real estate partners.
Most REITs simply connect brokers to properties. Instead, Diversyfund takes a much more hands-on approach. It buys, manages, and develops a selection of properties - before consolidating revenue and sending each investor their share. They also provide a great newsletter, providing easy-to-understand guides on personal finance and the world of real estate investment.
In addition, Diversyfund has a low minimum investment of only $500.
Trust investing vs. stocks
There has been a tremendous debate in financial circles about whether or not REITs are a better option than traditional stocks. The fact is that REITs have outperformed the S&P 500 over the long term.
Since 1972, trust investing has outpaced the S&P 500s total return. It's also worth noting that self-storage properties are among their highest performing assets, followed by industrial and residential properties. In fact, the only major REIT subgroup that hasn't outpaced the S&P 500 is timberland.
trust investing vs. Crypto
Trust investing is generally much safer than investing in crypto because they are far less volatile. Even major cryptocurrencies like Bitcoin have seen their fair share of ups and downs.
Sure, some lucky individuals might get lucky with crypto and make insane returns that they'll be hard-pressed to replicate, but REITs offer something else - steady returns.
If you're looking to take a gamble that might pay big (or not), go with crypto. If you want a reliable, relatively safe investment that provides a steady stream of passive income, go with trust investing.
Profit from Trust Investing
The IRS requires REITs to payout 90% of their taxable income to shareholders, and the average REIT dividends are typically much higher than the S&P 500.
For context, the average equity REIT dividend is around 5%, whereas the average dividend for stocks in the S&P 500 is only 1.9%
Pros and Cons of Trust Investing
Trust investing is a crucial element of any investment portfolio, but REITs aren't perfect. Here are some of the pros and cons of trust investing:
Pros:
Trust investing offers better liquidity than traditional investments.
REITs allow for diversification which helps insulate investors against shifts in the market or the economy.
Trust investing allows for greater transparency since you're investing in property.
Trust investing provides a steady stream of cash through dividends.
Returns from REITs are adjusted for risk
Cons:
REITs typically mature slowly.
Dividends earned from REITs are taxed as regular income.
REITs can come with high management and transactions fees
Like all investments, REITs involve risk.
Conclusion
Trust investing is a critical component of any healthy portfolio. The numbers speak for themselves. There simply is no investment product that offers the same hybrid of growth and security that REITs can deliver.
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