Why real estate stocks are an obvious addition to your portfolio

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The tech-stock correction is a perfect example of why putting all your eggs in one basket is risky. Although there are dozens of industries that allow you to diversify your portfolio, real estate is one of the few, long-established ways to build wealth and generate income, and should be seriously considered in the market. volatile environment today.

Fortunately, investors don’t have to buy, own or manage a real estate investment themselves to enjoy the income and other benefits of this reliable asset class. If you’re looking to hedge your exposure and diversify your portfolio, here’s why real estate stocks are an obvious addition.

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REITs offer an easy way to invest in real estate

REITs, which are short for real estate investment trusts, are a special type of company that derives substantially all of its income from investments in real estate or real estate-related securities. Shares of these companies, which may be publicly traded or publicly traded, have become popular because they provide exposure to various types of real estate while also being required to pay out most of their net income in the form of dividends to benefit tax advantages of the REIT’s unique structure. .

Invitation houses ( INVH -0.32% )an equity REIT specializing in the ownership and rental of single-family rental homes primarily in the Sun Belt, is a prime example of the growth potential and income benefits of investing in REITs.

The increased demand for single-family rental homes in recent years has driven rental rates to sky-high levels. At the same time, a lack of home inventory drove home prices up nearly 20% year over year, boosting the value of its portfolio by more than 80,000 single-family homes. Since the company’s initial public offering (IPO) in 2017, the company has outperformed the S&P500 while offering a higher dividend yield. And because the company operates on short-term leases, it has the ability to hedge against inflation by raising rents to combat rising operating costs.

Newly developed neighborhood with mountains in the background.

Image source: Getty Images.

Beyond REITs

REITs are one of the most popular ways to invest in real estate, but not the only one. Besides the nascent real estate technology sector, there are brokers, banks, homebuilders, iBuyers, data providers and even investment management companies to invest in.

CBRE Group ( CBRE -1.44% ), for example, is a hybrid of these. It is a leading commercial real estate adviser, helping to rent, list and manage commercial real estate for independent operators. Additionally, the company provides data for commercial market and asset valuations, while developing and managing its own real estate portfolio.

CBRE Group has consistently outperformed the S&P500 since its IPO in 2004, delivering double the total return over that time, and it has had an incredibly strong year, despite market volatility.

Another property stock that stands out is the home builder LGI houses (LGIH -5.06% ) which benefits from the strong demand for additional housing. LGI has posted exceptional profits over the past year, while managing to outperform the S&P 500 over the past 10 years, and it is in a strong position for continued growth due to the current housing shortage.

Real estate stocks certainly have their own set of challenges and headwinds to overcome. Most of them are driven by completely different factors than the rest of the stock market, which can be a great way to diversify and hedge a portfolio against volatility or inflationary risks.

As always, using fundamentals when choosing which real estate stocks to buy is paramount, allowing you to identify companies in high-growth sectors with well-managed management and strong track records.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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