Should You Invest in Real Estate Now? Quick and Easy Ways to Invest in Real Estate-Part 2
Part 1 of this Real Estate Investing Series–Should You Invest in Real Estate Now? detailed 25 Steps to Buying and Managing Rental Real Estate.
Part 2, Quick and Easy Ways to Invest in Real Estate is for those of you who want exposure to real estate investing but don’t have tens of thousands of investment capital available to take the plunge. Or, you may have the capital but not the time or energy to devote to this “not passive” investment opportunity.
A Brief Lesson in Diversification
Long before Modern Portfolio Theory proved the benefit of diversification, “Don’t put all your eggs in one basket” was practiced. Intuitively, it makes sense to spread your income and investing risk around. The rationale behind diversification and asset allocation is that when one asset goes down in value, another may go up. Spread your investments and risk around and you’ll decrease the volatility of your returns.
For example, invest only in one stock market mutual fund and when the stock market falls 20% in a bad year, so do your investment returns. Add a bond mutual fund to the stock fund and even if the returns on the stock fund fall, the bond fund’s returns might go up 15% and make your total portfolio value more stable.
Add real estate to the mix and the added diversification, and lower correlation with the other asset classes increases returns and lowers overall risk of your portfolio.
image credit; Marketwatch dot com-lazy portfolio-Yale U Portfolio
Take a look at this five asset portfolio with a U.S. stock fund, 2 International stock funds, 2 bond funds, and a Real Estate Investment Trust (REIT) Index fund. The last row in the chart shows the investment returns of the S & P 500 (Standard and Poor’s 500 Stock Index Fund), a proxy for the U.S. stock market.
Examine these 3 returns from the last column: 10 year annual returns
- 9.99% annual return-Vanguard Specialized Portfolio REIT Index
- 7.37% annual return-Total Portfolio
- 4.75% annual return-S & P 500 Benchmark Index
The takeaway from this diversified portfolio of 5 index funds is that by adding various asset classes to your investment portfolio your portfolio risk declines and return improves. The total portfolio returned over 7 percent annually over the last 10 years. The S & P 500 return was only 4.75 percent while the real estate portion of the portfolio averaged an almost 10% annual return. The diversified portfolio return bested the stock market unmanaged return (S & P 500) by almost 3 percent. How does real estate investing fit in?
Investing in Real Estate with REIT’s
Most of my recent real estate investing is through Real Estate Investment Trusts.
“A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.” REIT definition by, Investopedia
Buy a diversified portfolio of apartment buildings, shopping centers, commercial real estate, or international real estate by investing in REITs. You can invest with a small amount of money through a discount brokerage account. Even one REIT investment offers broad diversification. As opposed to owning actual real estate, a REIT is easy to buy and sell and offers regular dividend payments.
If you want added diversification, dividend income, and exposure to real estate without the management stressors, REIT investing may be for you.
REIT Index Mutual Funds and Exchange Traded Funds (ETF)
Here’s a list of several national and international REIT funds for your information.
- VGSIX-Vanguard U.S. REIT Index Mutual Fund
- VNQ-Vanguard U.S. REIT Index ETF
- RWR-SPDR Dow Jones Index REIT ETF
- VNQI-Vanguard Global ex-U.S. Global Real Estate ETF
- FGL-iShares Developed Real Estate (ex-U.S.) ETF International Fund.
- RWX- SPDR Dow Jones International Real Estate exchange-traded fund.
Don’t miss part 1 of this Real Estate Investing Series–Should You Invest in Real Estate Now? outlining 25 Steps to Buying and Managing Rental Real Estate.
Can’t Get Enough Real Estate?
- Why Rental Property is a Powerful Asset Class; Financial Samurai
- What is a Real Estate Investment Trust; Money Crashers
- Real Estate; Invest with Passion
- Our 4-Plex Investment; Retire by 40
- Investing in a Rental Property; Investor Junkie
- What is a REIT and Should You Invest in REITs?; Moolanomy
Caveat; The mutual funds and ETFs are offered for informational purposes only.
Although REIT investments have performed exceptionally well over the past 10 years, there is no guarantee that their outperformance will continue in the future. This article is not a recommendation to buy or sell any specific securities.
disclosure; I own shares in RWX and VNQ
Do you diversify your investments? Where does real estate fit in with your plan?