Building a top-notch investment portfolio is key to financial security. At some point in your life, you're going to need your investments to support you. The sooner that happens, the sooner you'll have financial independence and peace of mind.
When you're deciding what assets should be part of your portfolio, it's absolutely worth considering adding real estate investments to the mix. There are a few key reasons why putting some of your money into real estate is a no-brainer.
Real estate allows you to diversify
It's important to have your money spread around a mix of different assets so that you don't face outsized losses if a particular business underperforms or if a particular industry is in trouble.
Real estate is another asset class that you can put your money into along with equities, bonds, and commodities.
The diversification that real estate provides means that even if other assets don't do well under current economic conditions, you still have a chance to make a profit because your property investments may behave differently.
There are multiple ways to earn income from real estate investments
Another big benefit of real estate investing is that your investments can earn money in a few different ways.
If you buy physical properties, for example, you can make money when they appreciate in value and you sell them. But if they are rental properties, you can also get steady income from tenants.
A real estate investment trust (REIT) is another great option to earn income from multiple sources. REITs were created by Congress to democratize real estate investing and allow everyday individuals to invest in this asset class even if they couldn't buy properties outright. REITs either own or operate income-producing properties or finance real estate investments. Many are publicly traded so you can buy them like stocks but gain exposure to varying aspects of the real estate industry.
REITs are required by law to pay out 90% of annual taxable income each year in the form of dividends to shareholders. This means that you can regularly earn dividend income on an ongoing basis when you invest in them. And can also turn a profit if you can sell your shares of the REIT for more than you paid for it.
REITs can sometimes outperform traditional stocks
REITs tend to be less volatile than stocks, and equity REITs actually have a pretty good record of providing better returns for investors than stocks do.
Between 1972 and 2021, for example, the S&P 500 provided average annual returns of 13.1%. During that same time period, equity REITs provided 13.5% annual average returns. This means if you'd had real estate in your portfolio, you'd have done better than if you were invested in stocks alone.
There's a long list of specific REITs that have performed well for investors, including these 15 REITs that have been outperforming the S&P 500. As you'll notice, these REITs give you exposure to a wide variety of commercial real estate investments including office space, storage, and distribution centers. And, as the chart below shows, some of them, including W.P. Carey (WPC -1.10%)have a multi-year track record of beating the S&P 500.
Investing in real estate is easy
Many people shy away from real estate investing because they assume it's complicated and expensive. After all, buying investment properties requires a mortgage and/or lots of cash. And if you bought rental properties, you'd need to take on the task of acting as a landlord.
The reality, though, is that you don't need a lot of time, money, or knowledge to gain exposure to real estate. You can invest in a REIT with very little up-front cash and little knowledge.
Since you can pick an investment easily, get started investing with little money, and add a different asset class to your portfolio to diversify your investments and reduce your risk, investing in real estate is definitely a no-brainer -- especially when you realize you can also gain income from it in several ways. With all these benefits, there's no reason not to get started investing in real estate ASAP.