Real estate is a popular investment, either for capital appreciation or as income. However, there are challenges. Buying land is expensive. Unless you have a lot of up-front capital to stake, you may be locked out, and once you make that purchase you have a lot to lose if the investment goes poorly. Then, once you own the land, you need to manage it. If you want to sell, that means refurbishment and upgrades. If you want to generate income, that means property management. There are ways, though, to invest in real estate without actually owning property.
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Real Estate Investment Trusts
The most accessible option on this list is probably real estate investment trusts, or REITs. These are fund-based assets, like an ETF or a mutual fund, that specifically hold a portfolio of real estate investments.
Every REIT invests differently. For example, some will handle debt, owning the mortgages or other real estate loans and generating returns based on the interest paid. Others own land directly and rent out their properties or sell that real estate for a return. The precise nature of the portfolio will differ from fund to fund, but they’re always based on an underlying investment in real estate as an asset class.
Real Estate Funds
You can also invest in real estate funds through ETFs and mutual funds. This is a strong option for investors who would like access to this market, but who would also like more diversification. A REIT holds mostly or exclusively real estate investments.
ETF or mutual fund shares the same basic structure as a REIT. That is to say, they are portfolios in which you buy shares then receive a return based on your proportional ownership. With an ETF or mutual fund, however, you receive a wider variety of assets in the underlying portfolio.
Stocks and Bonds in Real Estate Companies
Above, we note that you can invest in ETFs and mutual funds that themselves invest in the real estate market. Many of those hold stock in publicly traded real estate companies. If you want to make a more direct investment in real estate, you can simply buy that stock yourself. Large landlords, which are often organized as REITs in their own right, often operate as publicly traded companies. Other companies specialize in construction or the equipment used in large building projects.
You can also directly invest in real estate companies by purchasing their bonds. Bonds are particularly common among companies that invest in real estate. They will frequently issue these debt assets to raise the capital for land purchases and construction. As an investor, buying those bonds allows you to invest in the company’s long term success. At the same time, this gives you a steadier form of investment compared with buying equities. You get stable income-investment assets, as opposed to the boom-or-bust model that tends to follow stock purchases.
Master Limited Partnerships
You can also purchase shares in master limited partnerships, or MLPs. An MLP is a business that sells shares, known as units, like a publicly traded corporation. MLPs often sell their units on public stock exchanges and they tend to enjoy similar liquidity to stock shares. At the same time, an MLP operates as a partnership. The firm will have general partners who run the company’s operations and limited partners who provide the company’s capital. Each investor who buys units in the MLP is considered a limited partner.
By law, MLPs must operate in real estate or in industries that are adjacent to real estate. This typically means that they either work directly in real estate, such as land development and property management, or in natural resource extraction and otherwise taking value from real property. MLPs tend to be higher-risk, higher-reward assets. They can generate strong yields and capital returns for investors, but are also prone to significant volatility and potential losses.
The Bottom Line
Investing in real estate can be a great way to diversify your portfolio, but it’s expensive and often difficult to do so directly. Instead, by investing in assets like REITs, stocks, bonds and master limited partnership, you can buy into this market for much lower stakes.
Real Estate Investment Tips
- Real estate investment trusts are purpose-built for people who want to invest in real estate without buying property. There are three main types, and each has its own pros and cons.
- A financial advisor can help you figure out how to invest in real estate effectively. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.
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