There are many ways to invest in real estate. Two of the most obvious are purchasing a rental property or investing in fix-and-flip projects. Investing in global real estate is also a possibility. If you’re expanding your horizons, here’s what you should know about real estate beyond your backyard.
Why Invest In Global Real Estate
Before looking at the various ways you can add international properties to your portfolio, it’s helpful to consider the benefits first. There are three main reasons to consider global real estate as part of your investment strategy:
- Volatility hedge.
First, real estate is a way to diversify your investment portfolio beyond the typical mix of stocks and bonds you might already own. Diversification is a good thing, since it helps you to manage and balance risk in your portfolio.
Investing in global real estate adds a new diversification dimension, since you’re adding exposure to international real estate markets. The way the real estate market operates in another country may be very different than the way it operates in the United States. Global real estate investments can capitalize on those differences when a particular international market is performing well.
Adding real estate to your portfolio can hedge against stock market volatility. Real estate typically doesn’t correlate as strongly to stock market movements as other investments. As a result, it handles ups and downs better than most. Global real estate investments correlate even less strongly if those investments are not directly affected by trends in the U.S. stock market.
Finally, real estate can generate stable income in your portfolio through dividends or returns when you sell investments at a profit. That can be beneficial when the U.S. economy begins to slow down or inflation is rising. If you own real estate investments associated with a country that has a strong economy, the gains and income generated by those investments could help to offset any inflationary impacts on the rest of your portfolio.
How to Invest In Global Real Estate
In the U.S., direct real estate ownership is a popular option. If you’re trying to invest in property in another country, however, buying a piece of real estate can mean navigating some tricky legal issues.
Fortunately, there are some easier ways to invest in global real estate that don’t require direct ownership. Your options for owning international real estate include:
- Global REITs
- Exchange-traded funds
- Real estate mutual funds
Global REIT Investing
REIT is short for real estate investment trust. A REIT is a legal entity that owns real estate investments. REITs must pay out 90% of their earnings to investors in dividends.
The upside of investing in global REITs — REITs that own international residential and commercial properties — is that you get the benefits of direct ownership without having to own any property or deal with the headaches of property management. That includes dividend income, as well as the benefit of depreciation.
Global REITs can offer exposure to multiple countries in a single package. They can own a variety of different property types or concentrate investments in a single property type, such as hotels or health care facilities. Depending on the REIT, you may be investing in established countries or emerging markets. The possibilities for diversifying with global REITs are numerous.
Investing In Global Exchange-Traded Funds
Exchange-traded funds or ETFs combine the best features of stocks and mutual funds. These funds can hold a collection of different investments — in this case, international real estate holdings — but they trade on an exchange like a stock.
The chief benefits of investing in global ETFs for real estate are cost and diversification. International real estate ETFs can give you access to a wide range of foreign real estate markets and property types but they tend to have lower expense ratios compared to traditional real estate mutual funds or even REITs.
An ETF can also be a more tax-efficient way to invest in global real estate. ETFs often have a lower turnover ratio, meaning the assets held in the ETF are traded in and out less frequently. A lower turnover ratio means that fewer taxable events are triggered when underlying investments are sold for a gain.
Global Real Estate Mutual Funds
Mutual funds also hold a basket of investments. But rather than trading on an exchange, their price is settled at the end of the trading day. Global real estate funds can have different objectives, depending on how they’re structured and the investments they own.
Some funds, for example, may focus solely on capital appreciation. Meanwhile,others are centered around providing income for investors. There are also funds that seek to merge the two, offering both appreciation and income. Similar to global REITs and international real estate ETFs, global real estate funds can offer broad or narrow diversification based on what they invest in.
Global Real Estate Risks
Similar to any other investment, it’s important to know what you’re getting into when investing in international real estate. There are a few things to keep in mind when vetting investments.
First, consider the real estate market and the overall economic conditions of the country where you’re investing. Then think about what type of exposure you’re looking to add to your portfolio. For example, do you want global investments in an established country or one with a developing economy?
Next, evaluate the risk/reward potential for a particular global real estate investment. Generally, riskier investments can have a higher reward potential, in terms of returns earned. Less risky investments, on the other hand, may generate lower returns. You should understand how a particular investment aligns with your personal risk tolerance and how well it may fit in with the rest of your portfolio.
Also, think about your objectives. Depending on your retirement investment timeline, for example, you may want income more than growth or vice versa. You should be looking closely at a global REIT, ETF or mutual fund’s objectives to make sure it matches up with your own.
Finally, consider cost. International REITs, ETFs and mutual funds all have expense ratios. This ratio represents the cost of owning the investment on a yearly basis, as a percentage of assets. The lower the expense ratio, the less you’ll pay in investment fees. That also lets you keep more returns.
The Bottom Line
Investing in global real estate isn’t as complicated as you might think. REITs, ETFs and mutual funds offer convenient access to properties around the world. Taking time to consider your overall investment strategy can help you decide if investing in global real estate is the right move for you and your portfolio.
- Consider talking to your financial advisor about how global real estate is a good fits in your portfolio. Your advisor can walk you through owning international real estate. They can discuss the pros or cons before diving in. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re investing in global real estate through a fund or REIT, consider dividend reinvestment. Dividend reinvestment plans use dividends to purchase additional shares of an investment. This can grow your global real estate holdings without having to invest anything out of pocket.
Photo credit: ©iStock.com/EmirMemedovski, ©iStock.com/SARINYAPINNGAM, ©iStock.com/andresr