Two Ways to Get Real Estate Income with ETFs

Real Estate Investment Trusts (REITs)

If you're new to the concept, REITs are publicly traded companies that own, operate, and lease out real property. Investing in REITs gives you a slice of the real estate market without the need to buy, manage, or finance properties yourself. You get the benefits of liquidity, similar to stocks, along with regular income through quarterly or even monthly distributions.

REITs are a fantastic way to gain exposure to various property sectors like warehouses, residential buildings, healthcare facilities, telecom infrastructure, data centers, offices, and self-storage units. The best part? You can diversify your investments easily and avoid the hassles that come with direct property ownership.

When it comes to broadening your exposure, buying a basket of top REITs through an ETF is a smart move. Fidelity, Schwab, iShares, and State Street offer some of the most cost-effective, passively managed choices in this space.

For example, with expense ratios as low as 0.07% to 0.10%, you have options like the Schwab U.S. REIT ETF

, Fidelity MSCI Real Estate Index ETF

FREL

-1.09%

, iShares Core U.S. REIT ETF

USRT

-0.97%

, and The Real Estate Select Sector SPDR Fund

XLRE

-1.19%

. These ETFs provide broad exposure to domestic REITs, letting you invest in a variety of real estate sectors all at once.

If you're interested in going global, there are options like the Xtrackers International Real Estate ETF

and the iShares Global REIT ETF

REET

-0.91%

. These funds give you exposure to international markets, allowing you to diversify beyond the U.S.

There are a couple of things to keep in mind when investing in REIT ETFs. The payout schedules can vary, so if you're looking for regular income, make sure to check if the ETF pays monthly.

Additionally, REITs generally aren't very tax-efficient because their distributions are taxed as regular income. Holding them in a tax-advantaged account like an IRA can help mitigate this.

Mortgage REITs

There are actually two types of REITs. The one we went over earlier are the usual ones you know and love—equity REITs that actually own property. However, there's another type of REIT that doesn't invest in property directly.

Instead, they invest in mortgages and are unsurprisingly called mortgage REITs. Examples of mortgage REITs include Annaly Capital Management, AGNC Investment Corp., and Blackstone Mortgage Trust. These companies generate income through three main strategies:

• Agency Mortgage-Backed Securities (MBS): These are bonds secured by pools of mortgage loans. Agency MBS are backed by government agencies, making them relatively safer.
• Commercial Loan Origination: This involves issuing loans for commercial real estate projects, which can offer higher yields.
• Mortgage Servicing Rights: These rights allow the REIT to collect payments on the mortgage loans, earning a fee for the service.

The upside of mortgage REITs is their ability to pay substantial distributions and yields. For instance, mortgage REITs are known for offering higher yields due to the interest payments they collect.

However, there are also risks. These REITs typically see little share price appreciation and are exposed to both real estate market downturns and interest rate fluctuations. As such, they are primarily a yield-first investment.

To mitigate some of the risks associated with individual mortgage REITs, you can diversify by investing in a mortgage REIT ETF. For example, the iShares Mortgage Real Estate ETF

and the VanEck Mortgage REIT Income ETF

MORT

-0.38%

offer high 30-day SEC yields of 9.71% and 12.27% respectively.

However, it's worth noting that the total returns of these ETFs have yet to recover to their pre-COVID-19 peaks from over three years ago.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.