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Should You Invest in Real Estate Now? Quick and Easy Ways to Invest in Real Estate-Part 2

By in Advanced Investing, Asset Allocation, Mutual Funds, Real Estate | 16 comments

Part 1 of this Real Estate Investing SeriesShould 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 SeriesShould You Invest in Real Estate Now?  outlining  25 Steps to Buying and Managing Rental Real Estate.

Can’t Get Enough Real Estate?

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?

 

    16 Comments

  1. The best part of investing in a REIT is no tenant phone calls or any other bothersome stuff. You may not get rich owning a REIT, but you do not have the same risk either.

    krantcents

    June 14, 2012

  2. @Krantcents-Obviously I agree!!! After all you can’t work all the time:)

    Barb

    June 14, 2012

  3. Great time for REIT as the chance for higher inflation rates are on the horizon.

    Brent Pittman

    June 14, 2012

  4. Hi Brent,

    Let’s hope they continue to prosper. Unfortunately, along with inflation comes higher interest rates which impacts lending. There’s nothing certain about investing.

    Barb

    June 14, 2012

  5. I’m a HUGE fan of REITs (the publicly traded type). Non-traded REITs can be a boon, but only for investors who really know what they’re jumping into. It’s difficult to get out.

    Like Larry said above, no mess, no fuss, just a big fat dividend check. Awesome.

    AverageJoe

    June 15, 2012

  6. @Joe, AGreed. I’m leery of anything that is not under the SEC umbrella.

    Barb

    June 15, 2012

  7. REIT is one of the best investments I have heard. Good dividends without much risk and fuss; hence, we decided to put part of our next month’s earnings for our initial investment on REIT.

  8. @Cherleen-Good luck with REIT investment. Realize that as in all financial investments, over time the value goes up and down.
    @Fahad-The environment is certainly positive for Real estate investing.

    Barb

    June 16, 2012

  9. For sure the environment is very good to invest in Real Estate right now, especially with the inflation rates being on the horizon.

    Melanie Reed

    June 16, 2012

  10. Nicely written. Personally I feel, keeping the current market situation in mind, it is high time to invest on real estate. I am sure it’s going to be beneficial for all of us. Inflation consistency would make it easier for the seekers as well.
    Marie

    Marie Lewis

    June 19, 2012

  11. Interesting. I never even knew that modern portfolio theory and real estate investing could work together like that. It seems like a great idea. I’ve been eyeing some real estate in Utah just because I think now is a good time to invest. The idea of diversifying real-estate risk with a REIT sounds like an amazing idea. I’ll have to look into that some more.

    Jessie

    June 27, 2012

  12. @Melanie, Marie, and Jessie, As with all investments, it’s a good idea to make sure the investment fits in with your overall portfolio. Check out my free 20 Minute Guide to Investing for a quick overview; http://forms.aweber.com/form/45/111691045.htm

    You’ll also get a free subscription to my “Wealth Tips” newsletter.

    Barb

    July 3, 2012

  13. REIT is one of the best investments I have heard. No doubt Investment Advisers like Ed Butowsky will introduce this also.Considering the risk not that high.

    jerichofortman|edbutowsky

    July 4, 2012

  14. @Jericho-Please understand that risk in investing refers to the possibility of volatile returns (both up and down). Using that definition, REITS share risk with stocks and bonds, the amount of volatility depends upon the particular holdings within the REIT.

    Barb

    July 5, 2012

  15. Thanks for sharing such great information. I think real estate market has plenty of opportunities for making big gains, buying and owning real estate is a lot more complicated than investing in stocks and bonds. I think it is very helpful post for real estate investors.

    Custodian Wealth Builders

    August 28, 2012

  16. @Custodian, Thanks for your input. I agree that one needs to go into real estate investing with the realization that it is very demanding.

    Barb

    August 28, 2012

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