How to Invest in Real Estate Without Buying Property

REITs are a choice for real estate.

For many investors, stocks and bonds don’t offer the diversity they prefer in their portfolios. Everyone’s priorities and risk tolerance are different, but if you’re looking for a way to add exposure to different assets in your portfolio, real estate is one popular choice. But what if you don’t have the capital — or the inclination — to buy property? Many people are not interested in buying property. Not everyone’s cut out for developing rental income or other types of real estate investing. So, how does someone like that add real estate exposure to an investment portfolio? Well, you can do it with real estate investment trusts.

What are REITs?

A real estate investment trust, or REIT, is basically a company that owns (and can even operate) income-producing real estate. You can buy shares in the REIT, which allows you exposure to the trust’s portfolio without having to actually buy or manage the property. REITs also pay dividends in order to obtain tax breaks.

There are two basic types of REITs.

Investors will most often look at equity and mortgage REITs. For an equity REIT, revenues are generated from a portfolio of income-producing real estate. The REIT owns and manages properties, collecting rents. In the case of mortgage REITs, rather than owning the properties, these REITs lend money to owners and operators, generating returns on the net interest earned. There are also hybrid REITs that include equity and mortgage strategies.

An opportunity to focus.

REITs often focus on different types of real estate as well. Some can have a health care focus, owning medical office buildings and assisted living facilities. Other REITs might focus on retail and other commercial property, while there are mortgage REITs that include a mix of multi-unit housing and single-family residential. There are even timberland REITs.

Pros of investing in REITs.

One of the biggest advantages of REITs is that they allow you real estate exposure without the need to manage that real estate yourself. On top of that, some of the other advantages include:

— Low correlation with stocks and bonds, so you can add a layer of diversity to your portfolio.

— They pay 90 percent of income back to investors in the form of dividends.

— REITs are subject to SEC regulation and have to make audited financial reports, so you can do your due diligence.

Cons of investing in REITs.

On the downside to investing in REITs, the dividend requirements that these trusts must meet to comply with federal law mean that only a small portion of the income it generates can be reinvested into the REIT for growth. Additionally, the dividends you receive from REITs are taxed as regular income. And, as with all investments, you run the risk of losing your capital.

How to add REITs to your portfolio.

There are private REITs and non-traded REITs, but many beginners are likely to have more luck with publicly traded REITs, since they are more liquid and can be traded on well-known exchanges. In fact, there’s a good chance your online broker offers access to REITs, which trade similarly to stocks and exchange-traded funds. If your broker doesn’t offer REITs, you can check to see if they offer REIT ETFs that are easy to add to your portfolio. REITs and REIT ETFs have ticker symbols you can search, and that are included in many broker stock screeners.

An option for your IRA.

REITs are good options for Roth individual retirement accounts and taxable investment accounts. A good rule of thumb is to limit REIT exposure to about 10 to 15 percent of your overall portfolio. When adding REITs to your portfolio, carefully consider where they fit with the rest of your investments. Additionally, as you evaluate REITs, check their stability, and make sure you understand how they generate revenue.

An easy addition to your portfolio.

If you don’t want the hassle of managing a real estate investment portfolio, or if you just don’t have the capital to invest in real estate right now, a REIT can be one way to easily add real estate exposure to your investments — as long as it fits in with the rest of your investing plan.

Why to use REITs in your portfolio.

To recap, here are five reasons to use REITs in your portfolio:

— An easy way to add real estate to your portfolio.

— There are two main types, equity and mortgage.

— REITs focus on many areas of real estate.

— REITs pay dividends.

— REITs work in an IRA.

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