Most Americans do not associate real estate investment with retirement. Other than downsizing to a smaller home or, possibly, using a reverse mortgage, few consider it.
It’s not because we are unsophisticated. More so, it’s because we have many easier, safer, simpler choices when it comes to retirement investing.
In many foreign countries, however, real estate is the whole ball of wax. Local stock markets are reserved for elites, are wildly illiquid or both. Often, foreign financial regulations are far from robust, so the security of real assets such as apartments and homes can be enticing to middle-class savers in developing countries.
No, I am not suggesting that you go out and buy five apartments tomorrow. Buying property takes familiarity with the local real estate market and a fair amount of free cash. You have to be able to borrow cheaply and maintain properties with tenants.
Yet you can invest in real estate today and own both residential and commercial property, even foreign real estate, using real estate exchange-traded funds (ETFs).
In a well-designed retirement portfolio, a small holding in real estate acts as a hedge against inflation that generates income, similar to bonds but with the inflation-dampening effects of commodities investments.
One such ETF is the SPDR Dow Jones Real Estate REIT (RWR). It tracks a broad collection of U.S.-based REITs, or real estate investment trusts.
REITs are simply companies in the business of buying and managing real estate, often apartment complexes but also commercial properties such as malls and healthcare facilities.
The advantages of a owning a REIT are numerous, not the least of which is an attractive income stream. Another such fund is the SPDR Dow Jones International Real Estate (RWX), which, as it sounds, is a similar vehicle which owns foreign properties.
It might seem risky to buy Asian office buildings, and for most retail investors it would be. Currency fluctuations and political risk alone keep ordinary people far away from such opportunities.
That’s why a broad REIT ETF is so effective. You take less risk thanks to diversification, and you join thousands of other small investors in the process. It’s exposure that you can dial up or down as necessary in a balanced retirement portfolio.
There are lots of REIT funds out there. I mention here only two commonly traded ones to give you a flavor of the asset class.
The bottom line is that you can be a real estate kingpin without taking out a loan or visiting a single office building under construction. More people should own at least some real estate beyond their own home mortgage, and ETFs offer a way to do so at minimal risk.