Real estate investing was once an exclusive club of the wealthy. They were the only ones with the access and finances to invest in income-producing commercial real estate. That gave wealthy investors an advantage because they could use real estate to build and sustain their wealth.
That's no longer the case. Anyone can invest in wealth-creating real estate through real estate investment trusts (REITs) and other options. However, while the door is open to anyone to invest in real estate, the ultra-wealthy invest more money into alternative investments like real estate than other investors. Here's a closer look at the data on why wealthy investors gravitate toward alternatives like real estate and why others should consider following the money and increasing their allocation to real estate.
Why the wealthy invest in real estate
According to a survey by alternative investment manager KKR, high-net-worth families allocated 11% of their portfolio to real estate. That was third behind listed equities at 31% and private equity at 27%.
The wealthy have a meaningful allocation to real estate because it has proved to be a solid investment. Over the past decade, real estate has returned 8.8% annually, based on the NCRIEF Property Index. That has significantly outpaced the 1.5% annual return over the past decade of bonds, which many wealthy investors use to help diversify their portfolios, reduce risk, and generate income. Real estate can accomplish those goals while delivering a higher total return thanks to property value appreciation. On top of that, it has tax advantages and benefits from inflation, something bonds don't offer.
Real estate's diversification benefits are noteworthy. A major reason the wealthy invest in alternatives is to reduce their exposure to public stock and bond markets. Alternatives like private equity and real estate deliver returns that are less correlated to the daily gyrations of the public markets, which can help investors reduce volatility and enhance returns.
How you can invest like the wealthy
Congress created REITs in 1960 to empower anyone to invest in income-producing and wealth-creating real estate. All you need to do is open and fund a brokerage account to start investing in REITs. Here are two solid options for beginners:
Realty Income
Realty Income(NYSE: O) is a diversified REIT that invests in free-standing retail, industrial, gaming, and other properties. It signs long-term net leases for these properties with high-quality tenants. Net leases make the tenant responsible for covering real estate taxes, building insurance, and maintenance costs. Wealthy individuals will often invest in net lease real estate because these properties are more passive investments compared to other types of real estate investment.
The REIT pays a monthly dividend that currently yields 5.9%. It has increased its dividend 124 times since its public market listing in 1994, growing the payout at a 4.3% compound annual rate. That growing income stream and rising property values have enabled Realty Income to deliver a strong 13.9% compound annual total return since it came public. Shares of the REIT only cost around $50 a piece, making it a very affordable investment.
Invitation Homes
Invitation Homes(NYSE: INVH) is a residential REIT focused on single-family rental homes. Many people start investing in real estate by purchasing a rental property. Invitation Homes is an easier way to get started. It offers instant diversification, owning or managing over 100,000 homes across 16 markets, and does so for a very low cost, considering shares are about $35 apiece.
The REIT pays a quarterly dividend that yields 3.2%. Invitation Homes is better than owning a rental property because it supplies truly passive income. You don't need to manage tenants or deal with unexpected repairs, which can turn a property from a money maker into a money pit in no time. Invitation Homes has historically supplied investors with a steadily rising passive income stream. It has increased its dividend every year since it came public in 2017, including by nearly 8% late last year.
Congress leveled the playing field to enable anyone to invest in income-generating real estate by creating REITs. Technology and additional legislation have made private real estate more accessible in recent years. Several online platforms have launched to enable anyone to invest in private real estate to benefit from the additional diversification these non-correlated investments offer. Notable options include:
- Fundrise: Fundrise enables anyone to invest in private real estate through its funds and nontraded REITs. The company's flagship fund focuses on build-for-rent single-family homes, multifamily apartments, and industrial properties. Anyone can invest on the platform starting with as little as $10.
- Arrived: Arrived offers anyone the opportunity to invest in professionally managed rental homes and vacation rentals. The company sells interests in the properties on its website for as little as $100.
It's easy to invest like the wealthy
The wealthy have historically invested in real estate because it's a solid investment. It generates passive income, delivers attractive returns, and has other benefits.
However, you don't have to be wealthy to invest in real estate. Anyone can invest in wealth-creating REITs or private real estate through an online portal. Real estate can help you diversify your investments and build wealth, making it a solid addition to any portfolio.
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Matt DiLallo has positions in Invitation Homes, KKR, and Realty Income. The Motley Fool has positions in and recommends Invitation Homes, KKR, and Realty Income. The Motley Fool has a disclosure policy.
