How to Invest in Real Estate Through Stocks

You can get exposure to the real estate market without the responsibilities of property ownership by investing in real estate through stocks. Real estate investment trusts (REITs) represent one method. REITS own, operate or finance income-generating real estate across various sectors, such as commercial, residential or industrial. REIT shares trade on major stock exchanges, making them accessible to most investors. Additionally, some mutual funds and exchange-traded funds (ETFs) focus specifically on real estate stocks, providing diversified exposure to the sector.

If you want to add REITs to your real estate portfolio, a financial advisor can work with you to assess the benefits and risks.

How to Invest in Real Estate Stocks

Investing in real estate stocks lets investors tap into the real estate market without the complexities of buying and managing physical properties. One of the most popular methods is through real estate investment trusts (REITs) . A REIT is a company that owns, operates or finances income-producing real estate. REITs typically specialize in commercial, residential or industrial properties.

These companies generate revenue through rent, lease payments or the sale of properties. They are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. REITs generally provide regular income, along with the potential for capital appreciation.

Investing in REITs works similarly to buying stocks in any other public company. REITs trade on major stock exchanges, providing liquidity and ease of access for investors. You can purchase shares through a brokerage account, just as you would with other stocks.

Notably, this approach typically doesn't call for the large upfront capital usually required for direct property investments. Additionally, REITs offer diversification , as many REITs hold a portfolio of properties across different regions and property types, reducing the risk associated with investing in a single property.

REIT performance is tied to the health of the real estate market and the overall economy. When real estate values rise, REITs tend to perform well and investors can benefit from both income and stock price appreciation. However, like all investments, REITs carry risks, including market volatility and interest rate fluctuations, which can impact their performance.

How to Choose a REIT

Choosing the right REIT involves more than just looking at its dividend yield or stock price. The task requires careful consideration of several factors to ensure it aligns with your investment goals and risk tolerance. Here are five general aspects to evaluate when selecting a REIT:

• Type of REIT : There are different types of REITs, including equity REITs, mortgage REITs and hybrid REITs. Equity REITs own and operate real estate properties, while mortgage REITs invest in real estate debt. Hybrid REITs combine both approaches.
• Sector focus : REITs can specialize in various real estate sectors, such as commercial, residential, industrial or healthcare properties. The performance of these sectors can vary based on economic conditions.
• Dividend yield and payout ratio : REITs are required to distribute a significant portion of their income as dividends. While a high dividend yield can be attractive, it's important to assess the sustainability of these payouts. The payout ratio, which shows the percentage of earnings paid as dividends, can indicate whether the REIT is overextending itself.
• Management team and track record : The success of a REIT is often tied to the expertise of its management team. A strong track record in managing properties, generating income and navigating economic cycles can provide confidence in the REIT’s future performance. Research the management team's experience and past performance before making an investment.
• Geographic diversification : A REIT's geographic footprint can influence its risk and return. Those with properties in diverse locations may offer more stability, as they are less vulnerable to economic downturns in any single region. Consider how well the REIT's portfolio is diversified geographically.

How to Start Investing in REITs

Starting to invest in REITs begins with opening a brokerage account . You can choose from a wide range of online brokers, many of which offer low fees and user-friendly platforms.

Once your account is set up, you can begin researching different REITs to find those that align with your investment goals. Consider factors such as the type of REIT (equity, mortgage or hybrid), the sectors they focus on (commercial, residential, healthcare, etc.) and their geographic diversification. Each has different traits. For instance, equity REITs are typically more stable, while mortgage REITs can be more volatile.

After choosing the REITs that match your investment strategy, you can purchase shares directly through your brokerage account. Many brokers allow you to buy fractional shares, making it easier to invest small amounts regularly. Monitor your investments, keeping an eye on market conditions and the performance of your chosen REITs. Over time, you may choose to diversify your REIT holdings across different sectors and regions to mitigate risk and take advantage of various growth opportunities.

Real Estate Funds

Real estate-focused mutual funds and exchange-traded funds (ETFs) offer another way to gain exposure to the property market without direct ownership. These funds pool investor money to purchase and manage a diversified portfolio of real estate assets, which may include commercial properties, apartment buildings and industrial sites.

Real estate funds can offer liquidity and ease of trading, much like traditional stocks. Also, buying shares in one or several funds can provide broad exposure to the real estate sector, spreading risk across various properties and regions. This diversification helps mitigate the impact of downturns in any single market segment.

Furthermore, these funds often pay dividends , which can be appealing for those seeking regular income. However, it’s important to consider factors such as expense ratios and market conditions, as the performance of real estate funds can be influenced by broader economic trends and interest rates.

How a Real Estate Stocks Work in Your Portfolio

Integrating a REIT or real estate fund into your portfolio can enhance diversification and provide a steady income stream. REITs, for example, tend to perform differently from traditional stocks and bonds. By including REITs in your portfolio, you can reduce the overall risk by spreading your investments across various asset classes.

REITs and some funds also offer the benefit of regular income in the form of dividends. These securities may appeal to income-focused investors, such as those nearing or in retirement, who seek stable cash flow from their investments. The dividend yield can complement the growth potential of stocks and the safety of bonds, providing a balanced mix within your portfolio.

Importantly, the liquidity of publicly traded real estate funds and REITs means you can adjust your portfolio more easily than if you were investing directly in physical real estate. You can buy and sell these shares through your brokerage account, just like any stock, giving you a high degree of flexibility in managing your investment strategy.

Bottom Line

Investing in real estate through stocks, such as REITs and real estate-focused ETFs, can offer a convenient way to diversify your portfolio and gain exposure to the real estate market without the complexities of direct property ownership. However, as with any investment, it's important to conduct thorough research and consider how these investments align with your overall financial goals and risk tolerance.

Tips for Real Estate Investing

• If you want to invest in real estate, a financial advisor can help you analyze investments and manage them. 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 have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• SmartAsset's mortgage calculator can help you figure out how much the mortgage payment on your next real estate investment will be.

Photo credit: ©iStock.com/Szepy, ©iStock.com/Nansan Houn, ©iStock.com/Kateryna Onyshchuk

The post How to Invest in Real Estate Through Stocks appeared first on SmartReads by SmartAsset .