How to Invest in Real Estate Passively with REITs and ETFs

TL;DR

Passive real estate investing through REITs and ETFs lets you start with just €100 and spend only a few hours per year, avoiding the mortgage bankruptcy risk of direct ownership. Historically, residential real estate has delivered roughly 4 to 5% real returns per year above inflation, similar to global stocks over the past century.

Transcript

So, you're thinking about investing in real estate, but it's hard to get started. You have to choose the right property, get a mortgage, and make a big down payment. Then, you must find good tenants and maintain the property and fix broken toilets. It's a lot of work. But what if you could invest in real estate passively, spending no more than a fe... Read More

Key Insights

• Residential housing prices in Western Europe have risen roughly 5% per year on average over the past 50 years, but after adjusting for inflation the real increase is only around 1% per year, making direct property mainly an inflation hedge.
• Rental yields determine income potential and range from about 2% per year in Macau to nearly 11% in South Africa, while most developed European countries fall in the 4 to 7% range for similar-quality apartments.
• Landlord costs span five categories: maintenance (budget at least 1% of value yearly), time spent managing tenants, vacancy loss, real estate taxes (0% in Malta up to 1%+ in France), and purchase/sale costs reaching 10 to 15% in markets like Spain.
• Total landlord expenses can easily cost 2 to 3% per year or more, reducing a 4 to 7% rental yield down to a real profit of roughly 1 to 5% per year after inflation is covered by rising prices.
• Leverage from a mortgage magnifies returns: a €20,000 down payment on a €200,000 property that rises 10% turns a €20,000 gain into a 100% profit instead of 10%, but the same leverage magnifies losses.
• Most European mortgages are recourse loans, meaning if you stop paying, the bank sells the property and still pursues you for any shortfall, which can lead to debt and bankruptcy, a fate that has ruined many European investors.
• Real estate price charts look smoother than stock charts, but this smoothness is an illusion caused by index averaging where individual property movements cancel out, unlike the concentrated risk of owning one property.
• Academic studies estimate inflation-adjusted real estate returns at 4% per year for Paris (1809-1943), 4.8% for Amsterdam (1900-1979), 2.3% for the UK (1901-1983), and up to 7% globally, landing at roughly 4 to 5% real return.

Questions & Answers

Q: How can I invest in real estate passively with little money?

You can invest in real estate passively by spending no more than a few hours per year and starting with just €100 instead of the tens of thousands required to buy an apartment directly. The presenter explains that passive vehicles like REITs and ETFs let you gain real estate exposure, including leveraged exposure, without the work of choosing property, getting a mortgage, finding tenants, or fixing broken toilets.

Q: How much do real estate prices rise per year in Europe?

Data from the Bank of International Settlements shows that over the past 50 years in Western Europe, residential housing prices have increased roughly 5% per year on average. However, after adjusting for inflation, the average real housing price increase has been around 1% per year. In Spain the rise exceeded 2% per year, while in Germany prices on average simply kept up with inflation, making real estate mainly a way to protect savings from inflation.

Q: What is a rental yield and how much rent can I charge?

A rental yield is the annual rent expressed as a percentage of the property value for your type of property and area. For example, a €200,000 two-bedroom apartment with a typical 5% yield could earn around €10,000 per year, or a little above €800 a month. Global rental yields range from about 2% in Macau to almost 11% in South Africa, with most developed European countries in the 4 to 7% range.

Q: What are the main expenses of being a landlord?

Being a landlord involves five major expense categories. First, maintenance and renovation, budgeting at least 1% of property value per year (€2,000 on a €200,000 apartment). Second, the many hours spent managing properties and tenants. Third, vacancy loss when tenants move out. Fourth, real estate taxes ranging from 0% in Malta to 1% or more in France. Fifth, purchase and sale costs, which can reach 10 to 15% in markets like Spain.

Q: How does leverage from a mortgage affect real estate returns?

Leverage means investing with a bank loan, and it can greatly improve returns. If a €200,000 property rises 10% to €220,000, an all-cash owner earns a 10% profit. But if you made a €20,000 down payment and borrowed the rest, that €20,000 gain equals a 100% profit on your invested money. Leverage amplifies gains, but it equally amplifies losses when prices fall.

Q: Why are mortgages risky for real estate investors in Europe?

Mortgages are risky because leverage magnifies losses. On a €200,000 property with a €20,000 down payment, a 10% price drop wipes out your entire down payment, and a 20 to 30% correction leaves you tens of thousands in debt. Most European mortgages are recourse loans, so if you stop paying, the bank sells the property and still pursues you for any shortfall. This has driven many European investors into debt and bankruptcy.

Q: Why do real estate prices look less volatile than stocks?

Real estate price indexes like the S&P CoreLogic Case-Shiller US National Home Price Index look much smoother than jagged stock charts like the S&P 500, but this smoothness is an illusion. An index averages thousands of properties whose individual movements cancel out, just as the S&P 500 is about half as volatile as its average stock. As a real estate investor, you face concentration risk because your money sits in one or a few properties, not the smooth index.

Q: What real returns has real estate historically earned?

Academic studies of long-term data found inflation-adjusted profits of 4% per year for Paris from 1809 to 1943 and 4.8% per year for Amsterdam from 1900 to 1979, combining rising prices and rental income. A UK study from 1901 to 1983 found only 2.3% per year, while the more optimistic 'Rate of Return on Everything' study estimated 7% per year globally. Landing in the middle gives an estimate of 4 to 5% real return per year, similar to global stocks.

Summary & Key Takeaways

• Traditional real estate investing requires choosing a property, securing a mortgage, making a large down payment, finding tenants, and handling maintenance. Passive alternatives let you start with just €100 and spend only a few hours per year. Over 18 years managing portfolios worth hundreds of millions on Wall Street and in Europe, the presenter built this guide.

• Profit comes from price appreciation and rental income. Western European prices rose about 5% yearly over 50 years, but only 1% after inflation. Rental yields of 4 to 7% in developed Europe get reduced by five expense categories (maintenance, management time, vacancy, taxes, transaction costs) totaling 2 to 3% per year, leaving 1 to 5% real profit.

• Mortgages create leverage that boosts returns but carries severe risk: a 10% price drop can wipe out your entire down payment, and recourse loans mean the bank pursues you for shortfalls, risking bankruptcy. Real estate charts appear smoother than stocks, but this is an illusion from index averaging, while single-property owners face concentration risk.