Lots of people think that they'd love being a real estate investor, buying and renting out properties. It can seem like easy money, with all those rent checks rolling in. But you generally need to have a fair amount of money in order to buy property in the first place -- a down payment, at least. And there are downsides to being a property owner, too: You can't just sell half the building when you need money. You might lose money when the unit is empty between tenants. You'll still be on the hook for taxes, insurance, maintenance, and repairs, too.
Fortunately, there's a much easier way to invest in real estate: Via real estate investment trusts (REITs). You don't even have to find and invest in the perfect REIT, because you can invest in many via a REIT-focused exchange-traded fund (ETF). Here's a look at what REITs and ETFs are, along with a few exemplary ETFs to consider.
Image source: Getty Images.
What's a REIT?
A REIT is a company that invests in real estate. So, by investing in one, you can be a real estate investor -- without any headaches related to owning properties on your own. A REIT will typically own many, many properties, leasing them out (often with long-term contracts) and collecting rental payments.
REITs will typically focus on a particular segment of the real estate market -- such as apartments, medical properties, warehouses, retail outlets, storage facilities, industrial buildings, and so on. REITs trade like regular stocks, and by law, they're required to pay out at least 90% of their income to shareholders. Thus, many of them sport attractive dividend yields.
Sounds good, right?
What's an ETF?
You can definitely read up on REITs and select the most promising ones in which to invest your money. But that takes time, energy, and some stock evaluation skills. So consider this alternative: Invest in REITs via one or more ETFs.
An ETF is essentially a mutual fund-like investment that trades like a stock. As with stocks, you can buy or sell as little as a single share at a time. An ETF's value is based on the values of its holdings, and it will fluctuate throughout a trading day. An ETF will contain a range of securities, such as stocks and/or bonds. Many ETFs are broad-market index funds, tracking, for example, the S&P 500 index. Many others have narrower focuses, such as a particular region in the world, companies of a certain size, or companies within a certain industry -- such as real estate.
Solid REIT ETFs to consider
Below, for your consideration, are a few solid ETFs that are focused on REITs. There are many others out there, of course. Whether you give some thought to these or others, be sure to pay attention to their "expense ratio," which is essentially the annual fee.
You might also compare these funds' five-year average annual gain to that of the FTSE NAREIT All Equity REITs Index, a good benchmark index for the industry. Over the past five years, the index has averaged annual gains of 2.2%.
That's not an exciting return, but few industries will post terrific returns in every five-year period. The Vanguard ETF below, for example, averaged annual gains of 10.75% over the past 15 years. It's worth checking out the longer-term performance of any ETF of interest -- and not counting on any representative return to be very predictive of future returns.
|
ETF |
Expense Ratio |
Recent Dividend Yield |
5-year Average Annual Gain |
|---|---|---|---|
|
Invesco S&P 500 Equal Weight Real Estate ETF (RSPR) |
0.40% |
3.91% |
3.87% |
|
iShares Core US REIT ETF (USRT) |
0.08% |
3.69% |
2.24% |
|
Real Estate Select Sector SPDR (XLRE) |
0.10% |
3.95% |
3.91% |
|
Vanguard Real Estate ETF (VNQ) |
0.12% |
2.91%* |
2.21% |
|
Shares U.S. Real Estate ETF (IYR) |
0.40% |
3.51% |
3.20% |
|
JPMorgan Realty Income ETF (JPRE) |
0.50% |
3.63% |
3.31% |
Source: Morningstar.com.
*Vanguard has listed this recent adjusted effective yield instead of a more typical 30-day SEC yield.
As an example of what you'll find when you peek under an ETF's hood, know that the Vanguard Real Estate ETF encompasses more than 150 different holdings. Its top 10 make up 47% of its total assets, and its top three holdings are Prologis (focused on logistics properties such as warehouses, with a 7.5% weighting), American Tower (focused on communications properties, 5.55%), and Equinix (focused on digital infrastructure, 4.9%). Other REIT ETFs will be somewhat similar, typically with dozens or even hundreds of different holdings.
Remember, too, that each REIT will generally own gobs of properties. Here's how American Tower describes itself, for example: "Our global portfolio includes nearly 225,000 communications sites, including nearly 43,000 properties in the United States and Canada and nearly 182,000 properties internationally."
Think about your overall portfolio and about how much of your assets you want to have in real estate. You might spread that sum across a few different REIT ETFs -- and then let those underlying REITs do all the investing in properties and the collecting of rents, sharing most of their wealth with you.
