Some Americans believe real estate is the best long-term investment. If you’re one of them, real estate investment trusts (REITs) might be the easiest way to get into the market.
According to a recent survey by Gallup, a global analytics and consulting firm, approximately 36 percent of Americans surveyed ranked real estate as their top long-term investment priority, ahead of stocks and mutual funds (22 percent), gold (18 percent), and savings accounts and certificates of deposit (13 percent).
The report found that fewer adults surveyed believe bonds and cryptocurrencies are good long-term investments — 4% and 3%, respectively.
The company conducted the poll of 1,001 U.S. adults via telephone interviews from April 1 to 22.
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For people who see long-term investment potential in real estate, REITs can be a great way to get started because they have a “low barrier to entry,” said Stacey Francis, a certified financial planner and president and CEO of Francis Financial in New York City.
REITs are publicly traded companies that invest in residential or commercial real estate that produces various types of income. You can often buy shares in publicly traded REITs, or shares in REIT mutual funds or exchange-traded funds, just like stocks. REIT investors typically earn profits through dividend payments.
“You can invest in some for as little as $25,” said Francis, a member of the CNBC Council of Financial Advisors.
“Nobody gets emotional about stocks.”
Francis said real estate is a popular investment choice among some Americans because, unlike stocks and bonds, it evokes emotion and feeling.
“Nobody gets emotional about stocks,” she says, “but people definitely get emotional about real estate.”
Some see it as a legacy to leave to their children.
“Instead of giving them a stock portfolio, we want to give them a home they can actually use,” Francis said, giving an example.
However, buying real estate and becoming a landlord requires a larger investment of money and time than other types of portfolio assets.
“Being a homeowner isn’t easy,” says Kashif Ahmed, CFP, president of American Private Wealth in Bedford, Mass. “It requires a lot more than just getting a check every month.”
Once you have purchased a property and turned it into an investment, you need to ensure that the property is managed, properly insured and serviced.
Whether you do this yourself or hire someone to manage it on your behalf, it can be costly, Ahmed explained.
REITs also offer an opportunity for diversification: Depending on the company, they can invest in hundreds or even thousands of different properties and geographies, experts say.
You can also invest in different types of real estate, such as shopping malls, warehouses, office buildings, etc. However, if you invest in an area or sector that is declining in value, your portfolio will reflect that decline in prices.
“If a REIT has investments in malls across the country and the malls are not doing well, you’re going to feel it,” Francis said. “You’re not going to be protected.”
How much real estate should you have in your portfolio?
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If you want to seriously get into the property market as a long-term investment, you need to “research these funds seriously,” Francis explained.
REITs should also help diversify a portfolio, but “your entire portfolio shouldn’t be made up of REITs,” Francis said.Some advisers recommend that REITs make up no more than 25% of a portfolio, Francis said.
Be careful about how REITs affect your tax situation: Experts say REITs often pay out more than 90% of their profits as dividends, which can make them subject to ordinary income taxes.
“It’s like that dividend is paid to you as a salary at work,” Francis said.
If you don’t need the additional income, consider adding your REIT to a tax-free account such as an individual retirement account, says Ahmed.
“The location of assets matters,” he added.
