REITs, ETFs, ETNs, mutual funds… oh my. The list of acronyms and cryptic terms for investing could fill a spreadsheet. While the average investor doesn’t need to be an expert on these investment vehicles, investing and riding the wave of compound gains is really the only retirement option for the majority of Americans. After all, only 21% of Americans have a pension.
While diving into the depths of every investment vehicle, and the companion tax-sheltered accounts you should be taking advantage of, is beyond the scope of this post, I did want to call out the first term from the list and explore five popular real estate investment vehicles that average investors just wanting to hang their boots up one day can take advantage of starting with REITs.
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REITs
REITs, or real estate investment trusts, are companies that own, operate, or finance income-generating real estate. I only list this first because, well, few recognize the acronym or know what these are, but REITs are the lowest barrier to entry into real estate ownership. REITs offer a way for the average investor to invest in large-scale, income-producing real estate without directly owning properties.
REITs are traded on major stock exchanges requiring no down payment, loan to your name, or other headaches making them highly liquid and accessible. I won’t recommend specifics, but you can find a list of tickers here as an example of how these can be bought and sold like any single stock. They typically provide regular income through dividends, making them a popular choice for investors seeking steady cash flow.
There are some cons such as having their value and cash flow measured against real estate value and real estate income generation with terms such as occupancy rate affecting return. However, the value of these is you do not need to know these terms to get exposure to real estate via REITs.
I’ll call out real estate ETFs and mutual funds here since they are similar retirement vehicles. For the average investor, knowing the nuance of each isn’t as important as finding the individual ticker you think will perform the best between these vehicles based on your own due diligence.
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Homestead
“Homestead” in this capacity just means your primary residence. It’s arguable to call the place you and your family live in an investment vehicle seeing as how once you sell it you’ll need to figure out different housing arrangements, so it’s the least liquid of all these options. However, for some Americans, their homestead may be their only nest egg and with the homeownership rate at 65.6%, it’s important to touch on a homestead and how it may act as a retirement vehicle.
The most obvious pro is that you need a place to live and owning your residence can largely lock in your cost of living with respect to taxes and insurance always going up. Americans also enjoy the luxury of a 30-year fixed-rate mortgage with many currently outstanding mortgages at or below the rate of inflation we’ve seen over the past few years.
While housing costs constantly rising is far more controversial than something like Nvidia stock mooning, it must be said that over the long term and taking in national averages, housing prices have always gone up. With high rates currently, this can be drawn into question, but historically, buying a home you can comfortably afford is a great wealth-building tool and a relatively liquid asset you can offload in retirement.
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Residential Rental Properties
Rental properties share many characteristics of homeownership. In fact, you own the home. However, you don’t live there and you must ensure the home is occupied and is covering your costs to own the home as well as any headaches that may come up and routine maintenance.
The benefit here is that you can 5x leverage these properties with 20% down and ride the predictable housing gains. The cons are that many of these don’t cash flow with current high rates, at least immediately, and you take on a lot of personal responsibility to manage all the ins and outs of another’s living experience or you hire a management company to take on this role – also putting headwinds on profitability.
A small call-out to short-term rentals here. With these, you get in bed with companies like Airbnb. Some cities have banned or are actively looking to ban Airbnbs and I feel most will find them more high-touch than having one or two rental properties, so I’ve left them off the list of average investors.
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Commercial Real Estate
Commercial real estate investing is a loaded topic which I’ll condense into a single item here. Commercial real estate involves investing in properties used for business purposes, such as office buildings, retail spaces, industrial warehouses, and multifamily apartment complexes. The above is primarily in the wheelhouse of commercial real estate professionals with the time and acumen for dealing with operations such as commercial lease management.
However, the average investor can get exposure to commercial real estate through many of the vehicles mentioned in the REITs section including REITs themselves, ETFs, and mutual funds that all diversify you into commercial real estate in addition to, or instead of, residential.
While the average investor doesn’t need to learn the acronym alphabet, this is your retirement on the line and it is important to understand how exposure to real estate can diversify you outside of sometimes overly-safe bonds or volatile big tech. Many target-date funds or other managed accounts will get you exposure to real estate. If not wanting to be a custodian for your retirement funds, I at least recommend you get more than a cursory understanding and keep an open line of communication with your financial planner.
Interesting Related Article: “What is a Real Estate Investment Trust (REIT)?“