Types of Real Estate Stocks
As with any stock market sector, real estate stocks can be divided into several sub-sectors based on their business. The real estate industry is usually divided into the following sub-sectors.
1. Residential. Residential real estate stocks are companies that focus on owning and leasing tenant-owned properties, including apartments, condominiums and executive housing.
2. 2. Commercial. Commercial real estate stocks focus on owning, operating or developing office or retail space to house various types of businesses.
3. 3. Healthcare. Healthcare real estate stocks purchase, build or manage healthcare-related facilities, including senior housing, assisted living facilities and post-acute care centers.
4. 4. Professional. In addition to REITs that invest in core property types such as residential and commercial, there are professional stocks that invest in entertainment venues (such as arenas) and other venues.
In addition to the various types of real estate stocks that own, operate or develop physical properties, there are stocks that invest in real estate related businesses. These include companies like mortgage real estate investment trusts, which invest in a variety of mortgage-backed securities.
Advantages of investing in real estate stocks
1. Diversity. Real estate stocks give investors the ability to invest in the entire portfolio of properties represented by a single ownership share.
2. Professional Management. Real estate companies provide shareholders with a layer of professional management focused on managing the company’s portfolio of properties to maximize shareholder value.
3. 3. Liquidity. Publicly traded real estate stocks give investors the ability to invest in actual properties without having to identify, purchase and manage those properties themselves. In addition, if investors need access to cash, they can more easily sell their shares.
4. 4. Tax benefits. Companies that generate passive income by leasing real estate enjoy several key tax benefits.
5. 5. Regular income. Investors who own shares in REITs typically receive regular dividend payments based on the size of their investment.
Risks of investing in real estate stocks
1. Management costs. Although shareholders of real estate stocks enjoy professional management, this management comes at a cost. The salaries and benefits of the company’s managers can significantly reduce a real estate company’s net operating income.
2. Moderate growth. Unlike technology stocks and some more volatile investments, REITs are traditionally low-growth investments. Their primary value to shareholders is usually through regular dividend payments.
3. 3. Interest rate risk. Because real estate companies typically finance the properties in their portfolios, changes in interest rates present a risk to investors. If interest rates rise, the company may generate less net income that could be paid out in the form of dividends.
4. 4. Potential market downturns. Real estate markets tend to experience cyclical market downturns, especially during economic downturns. Recent examples include the financial crisis of 2008 and commercial real estate during the Covid-19 pandemic of 2020 and 2021.