Looking for More Portfolio Diversity? Consider Foreign REITs

One of the ways you can add diversity to your investment portfolio is to include real estate. However, for many investors directly buying property is not an option — especially if an effort is being made to diversify geographically with the help of foreign real estate.

In order to gain exposure to real estate, without having to buy property, it’s possible to invest in Real Estate Investment Trusts (REITs). And, just as you can invest in domestic REITs, it’s possible to invest in foreign REITs.

International REITs vs. Buying Property

Including international investments in your portfolio can be a good way to add a layer of diversity to your strategy. REITs offer you the chance to add exposure to foreign real estate without the hassle of buying foreign property. This can be especially attractive to those who don’t want to deal with some of the red tape associated with being a foreigner and buying property in some countries.

REITs are generally fairly easy to invest in (they trade like equities on exchanges), and you can see benefits from dividends and improvements in real estate markets. You won’t have direct control over the property, though, and you face the possibility of loss — just as you would with any other investment.

Direct Investment vs. ETFs

If you decide to invest in foreign REITs, you will need to determine whether you will invest directly, buying the REITs on a foreign exchange, or whether you will use some other method of gaining exposure, such as an exchange-traded fund.

Keep in mind that you have special challenges when you invest directly in a foreign market. You face currency risk, possible liquidity issues, and risks associated with what might be an unstable political situation. Some investors, in order to mitigate some of these risks, choose to invest in ETFs that follow REITs. It is possible to invest in low-cost ETFs that offer accessibility to foreign real estate and international REITs. This can be an option for those who want the diversity while limiting some of the risk.

What about Taxes?

REITs are not particularly tax efficient in general, and this carries over with international REITs. The dividends you receive are taxed as ordinary income, which means they are taxed at your highest rate. For some investors, that’s a poor exchange for international diversity.

One way to offset the tax inefficiency is to hold your international (and domestic) REITs in a tax-advantaged account. You can keep these investments in a 401(k), IRA, or HSA. The earnings grow tax-deferred or tax-free (depending on the type of account you have, and whether you have a Roth version), and neutralize the tax problem.

Overall, international REITs can make a solid addition to your portfolio. Make sure you calculate your risk tolerance, and determine whether or not adding exposure to foreign real estate will enhance your portfolio and help you reach your goals.

What do you think about buying foreign property? Would you rather buy the property, or use REITs to add international real estate exposure to your portfolio?

Comments

  1. fi25m says

    Good article !
    One can take it a step further and look into foreign ETF index such as RWX. I researched and that was the only one I could find which is index-based foreign-RE ETF, which is also highly-liquid.
    It’s also a commission-free in TD. Expense ratio is s bit high: 0.59%. Compare this to VNQI with expense ratio of 0.32%. VNQI is less liquid though, with a lower dividend yield, so each one should do the math and decide.
    Would be nice if people can post more ETFs for foreign-RE.
    Disclaimer: I own RWX.

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