Real estate investment trusts
Investing in a real estate investment trust (REIT) is a way to profit from the real estate market without having to buy a house or worry about screening tenants, fixing damages, chasing down late payments or even facing intruders.
REITs are publicly traded companies that own income-producing real estate like apartment buildings, shopping centers and office towers. They collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.
Essentially, REITs are giant landlords. To qualify as an REIT, a company must pay out at least 90% of its taxable income to shareholders as dividends each year, in addition to other requirements. In exchange, they pay little to no income tax at the corporate level.
Of course, not all REITs are made equal. In recent months, experts have raised concerns about the state of commercial real estate in the U.S. — especially office towers, which are struggling in the post-pandemic remote work era — but sectors like residential real estate seem to be pulling through.
Generally, REITs are described as high-return investments that provide solid dividends and the potential for moderate, long-term capital appreciation.
Also, as REITs are publicly traded, you can buy or sell shares any time and your investment can be as little or as large as you want — unlike buying a house, which usually requires a hefty down payment followed by a mortgage.
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Real estate ETFs
If you’re looking for an easy way to invest in real estate without having to pick and choose which stocks to buy and sell, consider exchange-traded funds (ETFs). You can think of an ETF as a diversified portfolio of stocks.
As the name suggests, ETFs trade on major exchanges, making them convenient to buy and sell. Some ETFs passively track an index, while others are actively managed. They all charge a fee — referred to as the management expense ratio — in exchange for managing the fund.
The Vanguard Real Estate ETF (VNQ), for example, provides investors with broad exposure to U.S. REITs. The fund held 165 stocks with total net assets of $62.8 billion, as of April 30. Over the past 10 years, VNQ’s net asset value (NAV) has grown 5.78%. Its management expense ratio is 0.12%.
You can also check out the Real Estate Select Sector SPDR Fund (XLRE), which aims to replicate the real estate sector of the S&P 500 Index. It had 30 holdings and an expense ratio of 0.10%, as of March 31. Since the fund’s inception in October 2015, XLRE’s NAV had grown 6.61%.
Both of these ETFs pay quarterly distributions.
Crowdfunding refers to the practice of funding a project by raising small amounts of money from a large number of people. This can include real estate.
Through a crowdfunding platform, you can buy a percentage of physical real estate — from rental properties to commercial properties. You can even buy a stake in digital real estate.
Some options are targeted at accredited investors, sometimes with higher minimum investments that can reach tens of thousands of dollars.
If you are not an accredited investor, many platforms let you invest small sums, even as low as $100.
Such platforms make real estate investing more accessible to the general public by simplifying the process and lowering the barrier to entry.
Sponsors of crowdfunded real estate deals usually charge fees to investors — typically in the range of 0.5% to 2.5% of whatever you’ve invested.
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