How I invest in real estate without actually purchasing properties

I wish someone had told me earlier about this: 

You can invest in real estate without purchasing properties!


You can do so through REITs, crowdfunding or investing in real estate focused businesses. I have been investing in REITs for a while now. In this article, I will talk about what are REITs, the benefits of REITs, the performance of REITs, its correlation to stocks, how to invest in REITs and tax considerations.

Summary

  • What are REITs

  • The benefits of REITs

  • The performance of REITs

    • Dividend yield

    • Fund performance

  • Correlation of REITs and stock

  • How to invest in REITs

  • Tax considerations

What are REITs

REITs stands for real estate investment trusts. They are companies who own and manage real estate. There are REITs in a lot of different property sectors, like industrial, retail, residential, mortgage, etc.

The benefits of REITs

The major benefit of REITs is dividend income. 


REIT must distribute at least 90% of its taxable income as dividends to its stockholders. So you as an investor, get to enjoy the income from real estate without actually purchasing and managing properties. 

The performance of REITs

Dividend yield

The average REITS dividend yield is around 3%, which is way higher than the 1.2% average yield of S&P 500.

Fund performance

Besides dividends, you also get fund appreciation while investing in REITs. 


Here I will compare the Fidelity Real Estate Index Fund (FSRNX) with the Fidelity 500 Index Fund (FXAIX).


In the past one year, the real estate index fund has out-performed S&P 500.



However, in the long term, S&P 500 has out-performed the real estate index fund.



Correlation of REITs and stock


You probably have noticed from the above two charts, that REITs are positively correlated with stocks. So if you want to diversify your portfolio by purchasing some investment that is negatively correlated to stocks, REITs are not an option. You can, however, invest in bonds for that purpose.

How to invest in REITs

You can invest in publicly traded REITs from almost all major stock brokers. 

Tax considerations

If you want to use the dividends as a passive income for living expenses, then feel free to put REITs in your personal brokerage account.


However, if you are investing for the long term and want to delay the tax burden for REITs dividends, you can put them in your tax-advantaged account (401k, roth IRA, etc).

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