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How to Invest in Real Estate with ETFs #RealEstate #ETF

How to Invest in Real Estate with ETFs

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Real Estate Investing Guide for New Investors

Real estate investing is a world of its own. You can be a landlord, buy shares in a Real Estate Investment Trust, or buy shares in a mutual fund / Exchange traded fund. Different options that can be useful for different investment strategies.

1) Landlord

When you want a more direct and controlling position you buy a property and rent it out to a tenant. The owner, or landlord, is responsible for paying the mortgage, taxes, and costs of maintaining the property.

If everything goes well, the landlord charges enough rent to cover all of the aforementioned costs, plus a monthly profit. Thus compensating the risk of allocating money to that property.

Another way of making a profit is if the property has appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset.

2) Real Estate Investment Trust (REIT)

A real estate investment trust, or REIT, is a company that owns, operates or finances income-producing real estate. REITs are often bought and sold on the major exchanges just like any other stock. Therefore providing investors with a liquid stake in real estate. (more liquid when compared with the former option – being a landlord)

3) An exchange-traded fund of REIT

A real estate exchange-traded fund (ETF), is an investment vehicle that holds different shares from different REITs. It’s probably the most diversified way of investing in Real Estate. I love this option because for me is the most (low) cost-effective, and a liquid solution to invest in the real estate asset class.

You can also go to mutual funds, but they will have higher fees and a weak(er) performance. Not an option for me.

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What to look for in a REIT ETF

There are certain characteristics that I look for when choosing an ETF of REITs. Here I’ll write some. Feel free to add more relevant in the comment section.

1) Investment Strategy of the ETF

I always look for ETF that diversify globally, by choosing ETF that tracks a global index, such as, Dow Jones Global Real Estate. The Dow Jones Global Select Real Estate Securities Index (RESI) tracks equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded globally.

Another option is the FTSE EPRA/NAREIT. The FTSE EPRA/NAREIT Developed Dividend+ Index tracks listed real estate companies and Real Estate Investment Trusts (REITs) from developed countries worldwide excluding Greece, which has a one-year forecast dividend yield of 2% or greater.

2) Replication

I prefer Physical (Full replication), or at least, Physical (Optimized sampling).

3) Fund currency

Should be the currency that you use in your daily life. Although some argue that if it’s globally diversified it makes little difference if you choose the USD or the EUR. Currencies and forex is a hard topic that I will elaborate some other time.

4) Distribution policy / frequency

Here it depends on the investor and his personal and tax options/strategy. In Europe you have ETFs that reinvest the dividends, turning this vehicle in a more tax efficient product. The downside is that you don’t see the dividends entering your account. Some people love the psychological effect of actually viewing the return of the investment in the form of dividends. Or really wants the money to use in the retirement without wanting to sell shares.

5) Fees

The lower the better. Europe has ETFs that unfortunately are more expensive than in the US. Nonetheless, if an ETF costs you 0.40% or 0.59%, it’s still cheaper than mutual funds out there.

In the US, Vanguard Real Estate Index Fund ETF (VNQ) will cost you 0.12%. That’s approximately 70% cheaper than SPDR Dow Jones Global Real Estate UCITS ETF (0.40%) here in Europe.

The iShares Developed Markets Property Yield UCITS ETF will cost you 0.59%. Very expensive. But on the positive side, it’s the biggest ETF in Europe of REITs (EUR 2,637 m in Assets Under Managment).

Also, choose your broker wisely. Find the ones that have the ETFs that you prefer and with no costs to buy shares of that fund.

6) AuM (Assets Under Management)

This is basically the size of the ETF. The bigger, the better. This way it’s more unlikely that the fund will be shut down. I recommend choosing ETF with at least 100 Million USD / EUR in AuM.

How to Invest in Real Estate with ETFs #RealEstate #ETF

And you reader? Which strategy do you prefer to invest in real estate? 


This post is only for information purposes. It should not be considered financial advice or any kind of advice. Seek professional help if you need.
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About GTRetire

GTRetire is the founder of GrowtoRetire, a blog about financial independence and early retirement. Click here to learn more about starting a blog! Also, this post may contain affiliate links, please read the disclaimer for more info.

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