Invest in Real Estate

Investors have many different investment opportunities, and the option to invest in real estate is just one choice. As part of our series on investing for beginners, let’s take a look at investing in real estate through the following:

  1. Advantages of investing in real estate
  2. Ways to invest in real estate
  3. Publicly-traded real estate
  4. Conclusion: Consider real estate ETFs

Okay, let’s get started.

Advantages of investing in real estate

Real estate is often referred to as concrete gold because it generally stands for security and value retention. Investors are always looking for protection against inflation, especially in times when central banks adopt an expansive monetary policy. Low fluctuations in value and attractive distributions, e.g. from rental income, also encourage many investors to invest in real estate.

Real estate investments can offer investors a number of benefits:

  • Returns on capital over the long term.
  • Diversification with respect to traditional asset classes such as stocks and bonds.
  • Income from rental payments, which can be higher than from other asset classes.

Benefits of investing in real estate
Source: VanEck.

Ways to invest in real estate

Real estate funds

When investing in real estate, many people think about purchasing an investment property, such as a rental home or even a commercial rental property. However, that is not your only option.

Although it is less well known, you also can invest in real estate using a mutual fund. There are many different variants of real estate funds. In some of them, you cannot get your investment back for a long time. In others, your minimum investment is very high.

Due to the sharp rise in prices on the real estate market, it is virtually impossible for most people to take advantage of this boom by investing directly. A real estate ETF or REITs ETF offers the opportunity to invest even small amounts and affords a significantly higher degree of flexibility compared to a traditional property purchase. They take advantage of easy access to the stock exchange to make investing in a real estate ETF easy, unlike the traditional purchase of a house or apartment, which involves much higher overheads. Purchase price negotiations, notarial certification, land register entry and even searching for tenants are not necessary.

Passive real estate ETFs offer an attractive alternative to mutual funds, which charge higher fees, often tie up the invested capital for long periods and may require an extremely high minimum investment. Real estate ETFs are characterised by higher liquidity, flexibility and lower costs compared to mutual real estate funds.

Publicly-traded real estate companies (REITs)

Publicly-traded real estate consists of companies that invest primarily in real estate and whose shares are traded on the stock exchange. These companies often are known as Real Estate Investment Trusts or a REIT. You often will see terms such a REIT funds or REIT ETFs or REIT investments talked about in various financial journals.

A REIT is a company that owns an income-producing property or multiple properties. They also might operate an income-producing property, such as the companies that manage large rental communities. Sometimes a REIT simply finances these income-producing properties, and sometimes a REIT will do a combination of these three options.

REITs are often exempt from paying tax on operating profit in order to avoid double taxation for investors. When you purchase a share in this type of company, you effectively buy a portion of a real estate portfolio.

The structure, process and participants for how REITs work
Source: VanEck.

There are two types of REITS – publicly-traded REITS, also known as exchange-traded REITS and non-traded REITS. Non-traded REITS are not listed on any stock exchanges, but they are an investment option.

Advantages of publicly-traded real estate

Publicly traded real estate offers a number of advantages compared to non-publicly traded real estate:

  • Liquidity: Because it is traded on the stock exchange, you can enter and exit at any time when the stock exchange is open and bid and offer prices are offered.
  • Low minimum investment: The minimum investment is very low, equivalent to the price of one share, which is usually in the range of a few tens of euros.
  • Country diversification: Real estate companies usually invest in a specific region. By investing in various real estate companies, you can diversify across various sectors and regions.
  • Sector diversification:Several hundred publicly traded real estate companies exist throughout the world. Thus there are real estate companies that specialise in a sector, for instance:
    • Residential
    • Office buildings
    • Shopping centres
    • Logistics warehouses
    • Factories
    • And many more

Of course there are also risks connected with publicly traded real estate, such as:

  • Market risk: Investments in real estate shares can be negatively influenced by developments in the capital markets, specifically interest rates.
  • Concentration risk: The underlying real estate may be concentrated in specific regions, sectors, or currencies. As a consequence, real estate shares may be sensitive to local economic, market-related, or political developments.
  • Currency risk: The value of an investment can be negatively influenced by exchange rate fluctuations.

Conclusion: Consider real estate ETFs

Investing in real estate doesn’t have to be difficult. For investors who do not want to spend the time looking for the right real estate shares, there is the option of buying an ETF (exchange-traded fund) that invests in real estate stocks.

This can provide investors with an easy way to get started with real-estate investing and diversify their equity portfolio:

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