Alternative investing in real estate through REITS
By G. R. Krahmer
The housing market we are currently in is at an all-time high and is breaking record after record.
Houses are sold well above the asking price and in the last month of 2021 house prices even
rose by 20%. Because these prices have become so high, many people are wondering whether
it is wise to wait before buying a house until the overheated market cools down a bit and house
prices become affordable again. An owner-occupied home cost about €400,000 on average in
December 2021. And 1 in 20 homes now sells for more than a million.
It is currently unaffordable for many people to buy a house. If you are currently renting and
would like to buy, you are probably going through a difficult period. Although buying often seems
better than renting (renting is money in the trash or not?) that is unfortunately not always the
case. There are several factors involved, and many costs are overlooked. Are you curious
whether buying is better for your wallet, or whether it is better to continue renting? We said in
the article: “ARTICLE Renting Versus Buying” listed a number of points so that you could
perhaps make a better choice.
Investing in real estate without buying a house?
When you think about investing in real estate, you probably quickly think about buying
apartments or houses, for example. These types of investments often involve investing relatively
high amounts. Fortunately, there is also an alternative way of investing in real estate. This way
you can still benefit from a growing housing market and passively grow your assets with small
amounts. Buying bricks is not the only way to invest in real estate.
In addition to investing in real estate in the traditional way, which is also called investing in
bricks, you can also invest in real estate alternatively by using ETFs. These are financial
products that allow you to invest relatively low amounts in, among other things, multiple
properties or real estate.
REITs or Real Estate ETFs
An ETF, also called a tracker, stands for: Exchange Traded Fund. It is a product that tracks an
index, commodity, bond or a combination of products. An ETF tracks the price of the underlying
products in the fund. In the case of real estate ETFs, the underlying products are related to the
real estate sector. These ETFs may be specifically designed to reflect an underlying real estate
fund index.
Unlike other real estate companies, real estate funds do not develop real estate for resale. Real
estate funds own or lease real estate and then distribute (part of) the rental income to investors.
This is called dividend income. The types of properties these funds own can range from hotels,
or holiday homes, to terraced houses and shopping centres.
An important advantage of real estate ETFs, and ETFs in general, is that they are traded like
shares on the stock exchange. This allows them to be more flexible than other investment
funds. In addition, costs can be lower than other funds because they are usually passively
managed. With a Real Estate ETF you can purchase a large, broadly diversified real estate
portfolio with one small investment.
3 Benefits of REITs
- A major advantage is the extra diversification you get by adding REITs to your portfolio.
Not many people have the opportunity to purchase a piece of commercial real estate for
some rental income. REITs can ensure that you have this option now, with just a few
clicks of your mouse. - Vulnerability to changing interest rates can pose a problem when investing in REITs.
Prices of REITs generally fall when the Fed Reserve raises interest rates. In addition,
there are specific risks for different types of REITs. Hotel REITs are likely to do worse if,
for example, a global lockdown arrives. - The liquidity of REITs is much greater than traditional real estate because they are
traded on the stock market. Buying and selling REITs is therefore a lot faster than with
traditional real estate.
Conclusion
Since 1960, the government has made it possible for private investors to invest in
large-scale real estate projects by setting up REITs. A Real Estate Investment Trust is a
fund with real estate in the portfolio from which income is generated. REITs increase in
value along with real estate and often pay out rental income in the form of dividends.
REITS can be a good way to invest in real estate, without actually purchasing a property
or house. REITs give you exposure to the real estate market of your choice in the form of
ETFs. By holding a REIT such as a Global Real Estate ETF you have exposure to the
global real estate market.
Despite this, these Real Estate Investment Trusts can be an important part of a
well-diversified investment portfolio. In addition to a portfolio of shares and bonds, REITs
could be added for a ‘better’ risk-return ratio. REITs have historically achieved average
annual returns between 7%-10%. For many people, buying ‘brick and mortar’ real estate
is too expensive or too difficult, and they prefer to opt for REITs. If you want to buy a
REIT or are looking for some examples of REITs, you can download a list of ETFs below.
