If you like the thought of investing in REITs, you should also be considering real estate ETFs.
- Up-Front Investment: Can be as low as $500.
- On-Going Investment: None, unless you choose to continue adding more money to your portfolio.
- Return on investment: Sell when you want at the current exchange price. You will earn a % dividend paid monthly.
- Best for: Anyone looking for a passive and flexible investment strategy.
What Is It?
A real estate exchange-traded fund (ETF) is an exchange-traded fund that invests the majority of its assets into equity REIT securities. Two popular benchmarks used for ETFs are the Dow Jones U.S. REIT Index and the MSCI U.S. REIT Index (both of which cover around ⅔ the aggregate value of the public REIT market).
To buy ETFs you need to open a brokerage account. We recommend Webull if you're in the USA. You get a free stock worth up to $1400 just for opening an account and depositing $5.
Real estate ETFs are known for having above-average dividend yields. These ETFs share traits of both fixed income securities and equities. Due to the high dividend yields, you can use an ETF to provide consistent income. Do your research before buying into one because many different indexes exist and they can have a variety of different focuses, from commercial mortgages to high-risk mortgages.
If you are trying to decide between buying into REITs directly or choosing a REIT ETF, here's the difference: a REIT ETF is a lower-cost way to get exposed to the potential value of REITs. A REIT ETF owns a basket of REITs and will be designed to mirror an underlying index (like those mentioned above). You can invest in an international REIT ETF or a domestic one.
Investing in REIT ETFs is a proven investment strategy. In fact, more than 80 million Americans already own shares in one through their retirement or savings plan. They are a wonderful, low-cost way to get into the profitable real estate market.
Like REITs, you can begin profiting from real estate through a REIT ETF without the need to purchase/own your own property. This lowers your risk by lowering your up-front and (optional) on-going investment.
You can invest as much as you are comfortable with and hold on to it for as long as you like. If you need to get your money out quickly, you can sell it on the stock market for the current share price.
Holding on to your REIT ETF will allow your investment to continue to grow through the years and, meanwhile, you’ll be enjoying dividends. The rate will vary based on your REIT ETF and its success, but if you put in $1,000 and saw a 5% return the first year, that means you would earn $50 for the year. Nothing that will get you rich, but keep in mind that $1,000 is still there to keep growing in value the longer you leave it on the market.
For instance, if you buy in at $1,000/share but the price doubles in the next decade, you essentially have $2,000 (if you choose to sell) along with the dividends you’ve earned in the meantime. REIT ETFs are a great way to stow away your money while earning higher rates compared to any typical savings account, if you trust the market will stay strong.
The biggest con with REIT ETF is shared with all types of investments: you may not get out what you put in. If you choose to sell your REIT ETF at any point, you’ll be selling it at the current market price. That may be really high, which is great, or really low, which wouldn’t be so great.
They can be a strong asset to add into your investment portfolio, but similarly to REITs, you should expect to leave your money in for the longer term (think 5+ years).
You can, of course, sell your shares at any point, at the risk of taking a loss. Buying and selling in the short-term probably won’t prove profitable, so plan on holding onto your shares for a long time while you enjoy the higher-than-average dividends in the meantime
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