There are various ways to invest in real estate, either directly by purchasing physical property or indirectly through real estate investment vehicles. Indirect real estate investing can provide exposure to the real estate market without the hassles of being a landlord. One of the most common examples of an indirect investment in real estate is through real estate investment trusts (REITs) and real estate funds.
Real Estate Investment Trusts (REITs) as Indirect Investments
REITs allow individual investors to invest in portfolios of real estate assets the same way they invest in other securities, without having to directly purchase or manage property. REITs own and operate commercial or residential real estate that generates rental income, and they are required to pay out at least 90% of taxable income to shareholders in dividends. For investors, REITs provide liquid real estate exposure, diversification benefits, and decent dividend yields in many cases. Some REITs focus on specific property sectors like apartments, hotels, offices, warehouses, retail spaces, healthcare facilities and more. Investing in a REIT counts as an indirect real estate investment.
Real Estate Funds as Indirect Real Estate Investments
There are various types of real estate funds that pool investor capital to invest in portfolios of property assets, similar to REITs in some ways. Real estate mutual funds and ETFs allow investors to invest in diversified portfolios of REIT stocks and real estate securities. Private real estate funds target institutional investors, high net worth individuals and may invest more actively in property development projects or direct property purchases. Real estate debt funds focus on financing real estate transactions. Investors can gain broad real estate exposure through these fund vehicles without having to directly source, purchase and manage properties.
In summary, investing in instruments like REITs and real estate funds provides exposure to the real estate asset class without needing to become a direct landlord or property manager. These allow individual investors to add real estate to their portfolios indirectly as part of a diversified investment strategy.