You might think that investing in real estate is out of your reach; after all, saving up money for a down payment, buying the property and then managing it is a tall order. If you’re not ready to take that leap, real estate investment trusts are a low-cost alternative to investing in real estate.
A REIT is a company that owns income-generating real estate. Similar to stock or bond exchange-traded funds and mutual funds, REITs allow the everyday investor to own real estate across various industries, from residential homes and commercial property to healthcare facilities, shopping centers and even mortgages.
REITs are generally required by law to pay their taxable income as dividends. That makes them an ideal investment for investors seeking both portfolio diversification and an income stream. So if you’re considering investing in real estate, examine these four REIT strategies.
Invest in the Highest Paying REITs
If you’re seeking an income stream, high-yield REIT funds might be your answer. It’s easy to find the highest yielding REITs with the screener tool on ETFdb.com. After you select the REIT category from the ETF database, sort according to dividend yield percentage to find the highest yielding REITs.
REITs own property such as apartment buildings offices, malls, warehouses, and hotels, and they’re required to pay least 90 percent of their taxable income to shareholders as dividends. REIT stocks today yield an average of 3.8 percent, well above the 2.2 percent yield of the Standard & Poor’s 500 index, according to Kiplinger.
Although you might be earning a nice return on your high-yield REIT investment, the actual amount you invested, or principal, could be subject to great risk. For instance, if you invested in the VanEck Vectors Mortgage REIT Income ETF (MORT) on Jan. 25, 2017, and paid $22.53 per share, you’d earn an 8.2 percent yield on your investment. There’s no guarantee, however, that the $22.53 price will remain the same or increase going forward, and it could drop. And REITs that use leverage and hedging strategies are extra risky.
If your investment process includes reaching for yield, and you’re prepared for this level of risk in your investment plan, explore these top-yielding REITs at ETFdb.com:
- ETRACS Monthly Pay 2sLeveraged Mortgage REIT ETN (MORL): 19.92 percent
- Tierra XP Latin America Real Estate ETF (LARE): 13.38 percent
- X-Links Monthly Pay 2xLeveraged Mortgage REIT ETN (REML): 10.27 percent
- SPDR Dow Jones International Real Estate ETF (RWX): 8.69 percent
- VanEck Vectors Mortgage REIT Income ETF (MORT): 8.20 percent
Choose Diversified REITs
For the best diversification across sectors, consider investing in a REIT that encompasses the entire real estate marketplace, including mortgage, healthcare, commercial and more. This strategy enables you to easily tap into the benefits of investing in REITs without choosing a specific sector.
Diversified REITs offer lower dividend yields than high-yield REITs, but they have lower risk or share price volatility. One diversified REIT fund is generally suitable for the typical investor. For example, the popular Vanguard REIT ETF (VNQ) owns $61.3 billion in assets and holds 156 stocks. The holdings within this diversified REIT come from healthcare, hotel and resort, industrial, office, residential, retail and specialized categories.
Here’s a list of diversified REIT funds from various investment companies, compiled on Jan. 24, 2017:
- Vanguard REIT ETF (VNQ): 4.82 percent
- iShares U.S. Real Estate ETF (IYR): 4.41 percent
- SPDR Dow Jones REIT ETF (RWR): 4.40 percent
- iShares Cohen & Steer REIT ETF (ICF): 4.21 percent
Consider Global REITs
If you want to build a broadly diversified investment portfolio, consider adding an international REIT fund to your holdings. Fourteen global real estate ETFs are available, according to ETFdb.com.
You can explore the most diversified global real estate REIT funds, which will generally be less risky than a single country or regional international real estate fund. Get started with this list of select global real estate ETFs and their yields, compiled on Jan. 24, 2017:
- Vanguard Global ex-U.S. Real Estate ETF (VNQI): 5.08 percent
- SPDR Dow Jones Global Real Estate ETF (RWO): 3.73 percent
- IShares Global REIT ETF (REET): 5.23 percent
- Cohen & Steer Global Realty Majors ETF (GRI): 3.64 percent
- WisdomTree Global ex-U.S. Real Estate Fund (DRW): 5.91 percent
Specialize in Sector REITs
ETFdb.com covers 41 REITs, and if that’s not enough for you to choose from, there are additional REIT mutual funds. You can try your hand at sector investing if you want to target your REIT investment within various sectors.
Some sector REITs might segment into specialized properties, such as biochemistry or life sciences facilities, according to the National Association of Real Estate Investment Trusts. Here’s what five different sector REITs include:
- Industrial REITs: own and manage industrial warehouses, distributions centers and other commercial buildings
- Retail REITs: own, manage and rent space in retail properties, including shopping malls of all sizes
- Lodging REITs: own and manage hotels, from basic facilities to luxury brands
- Residential REITs: might include segments such as manufactured homes, single-family dwellings, student housing, or specific geographical locations; these became popular during the 2008 mortgage meltdown, when many homeowners foreclosed and many residential properties were available at bargain prices
- Timberland REITs: focus on wood-related industries, such as cellulose products, harvesting and selling timber, and home building
Additional REIT sectors include healthcare, self-storage, infrastructure, mortgages and data centers.
If you have a hunch about the future of various market sectors, investing in specific REIT sectors might be profitable if those specialized REITs outperform. There’s also the risk that your investment bet might not pan out, however.