Real Estate as Part of Your Retirement Strategy

Indirect Real Estate Investments

When you buy shares in a company that manages real estate, you are making an indirect real estate investment. An example of an indirect real estate investment would be purchasing shares in a real estate investment trust (REIT), an entity that pools investor capital to buy income-producing residential and commercial properties. At a high level, purchasing REIT shares entitles you to regular dividend income. The difference with direct real estate investments is that you typically are not involved in a property’s operations, and you are absolved of associated responsibilities like upkeep and maintenance.

Each REIT company operates differently and offers different products and features to the public. Therefore, it’s important for investors to research each REIT carefully and thoroughly. Below, we describe a few basic features about investing in REITs, which fall into two basic categories: publicly traded and private.

Publicly traded REIT shares trade on a major exchange, just like stocks, and are accessible to most investors. Shares in these investment vehicles are reasonably liquid. Their prices update regularly, and you can purchase them at almost any time.

Private REITs aren’t publicly traded and don’t appear on national exchanges. They tend to be illiquid with significant lock-up periods, which can restrict investors from accessing their capital quickly.

Importantly, you have no control over the properties in the REIT’s portfolio with either a publicly traded or private REIT. This increases your risk that a REIT company may focus on properties within a specific geographic region or industry (known as concentration risk) that may or may not perform as expected.

Contrasting Stocks and Real Estate

If you wish to avoid some of the major drawbacks of investing in real estate (e.g., high capital requirements, liquidity and concentration risk) consider the benefits of building a diversified portfolio of stocks, bonds and other securities.

This investment approach can offer increased liquidity since it offers the opportunity to buy and sell individual securities when it suits you. This strategy also provides effective diversification because you can own a wide range of assets instead of concentrating in one category of the market or a few properties. Another benefit of this investment strategy is flexibility; you can be selective depending on market dynamics. We believe most investors can reach their long-term financial objectives with a properly managed stock portfolio, while avoiding some of the headaches that come with investing in real estate.