Real estate can be an excellent way to build wealth and create income for you and your family, but there are a lot of risks involved with simply buying a property with the intention of renting it out. You could have trouble finding tenants, have unforeseen maintenance issues, or any number of other problems. When it comes to your retirement savings, it may not make sense to take the chance on a single investment property.
Fortunately, there is another way to go. Real estate investment trusts, or REITs, offer the income and growth of real estate, but allow you the opportunity to spread your money out over a portfolio of properties. In particular, commercial REITs span a wide range of properties and, subsequently, offer a wide number of options for investors. Office building REITs such as Boston Properties (NYSE:BXP) provide highly valued real estate and good diversification, retail trusts such as National Retail Properties (NYSE:NNN) focus on long leases and stability of national tenants, and apartment REITs like Equity Residential (NYSE:EQR) offer exposure to the rising rents and low vacancy rates currently seen in the rental housing market.
Office buildings are generally not a type of real estate purchased by individual investors. Although office tenants generally pay higher rents, there will usually be just a few major tenants occupying the property. Therefore, if even one vacates, a large chunk of income vanishes.
Fortunately, there are some very good REITs that specialize in office buildings, so your investment is spread out across a portfolio of properties. One good choice here is Boston Properties, which owns office buildings in several major cities such as New York and San Francisco. The trust currently owns about 160 properties with approximately 45 million rentable square feet. So although individual offices themselves can be risky investments, Boston Properties' diverse portfolio helps spread out and mitigate the risks.
This is a broad category, as some REITs invest in shopping malls, some invest in freestanding retail buildings, and some invest in shopping centers. All are good options, and retail buildings generally don't depend on any one tenant for too much of their income. Additionally, they tend to have pretty strong occupancy rates.
One of my favorites here is National Retail Properties, which specializes in freestanding retail properties. There are two main advantages to take note of here. First, the trust's tenants are mostly major retailers, very established and stable. Second, the properties owned by the trust are leased for long periods of time (15 to 20 years) on a triple-net basis, which means that the tenant pays for taxes, insurance, and maintenance on the building. The average active lease on National Retail's properties still has 12 years left on the term. Further adding to the diversification here is the fact that the trust owns more than 1,600 properties in 47 states.
The trust currently pays a very nice yield of 4.8%, and has an excellent record of steadily increasing the dividend over time. When investing in equity REITs, the current dividend is not nearly as important as the potential for that income stream to grow over time, and National Retail Properties has certainly done this for its shareholders.
Apartments are a unique profit opportunity right now as vacancy rates are extremely low, and rents are forecast to rise significantly over the next year and beyond. There are several economic reasons for the prediction of rising rents, such as the trend away from homeownership and the improving employment situation, but what we care about most is that rising rents mean a growing stream of income and higher property values over time.
To get started here, check out Equity Residential, which is one of the largest REITs in the market, investing in a diverse mix of apartment properties totaling almost 110,000 individual rental units spread out across the United States, mainly in strong and stable markets such as New York and Washington DC. There are a bunch of other great choices in the apartment category, but none offer as much diversity in the portfolio as Equity.
Which is right for you?
Whichever REIT route you decide to go, the important thing is that you create a stream of income that will grow for years to come. Reinvesting dividends, when combined with growing equity, is one of the most certain paths to wealth.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.