First of all, a big THANK YOU to everyone who has responded! I appreciate your thoughtful posts, and I have read all the articles and visited the websites you shared. You have all added great info that helped me evaluate the pros and cons. I also talked all this over with my fiancé, and I have made a decision. Here is what I’m going to do:
I am going to start by purchasing the Vanguard REIT index that @Josh mentioned (VGSLX). I like the dividends, reinvestment opportunities, and of course, those low Vanguard fees that we all keep trumpeting on this forum. The initial investment for the REIT is $10k, which I think is a great place to start. Each month, I will dollar-cost average and buy a little more of the fund when there is enough built up in the account.
In five years, I will evaluate the REIT. If it is going down due to market volatility, I will keep buying more and dollar-cost average. If it has made a lot of money, I will consult with an accountant to see what the tax consequences will be for cashing out and using that money for a down payment on an investment property. After the initial investment has had a chance to grow for the first five years, I can repeat this process each year and continue to educate myself on real estate investing in the meantime. I also feel like this is a good way to build wealth for the next few years w/o tying up a lot of capital.
And yes, I am choosing the Vanguard REIT for a reason. I am a big believer in their products anyway, but just to be sure, I analyzed the Vanguard REIT mutual fund and compared it to thirteen other funds, ten of which made U.S. News’ cut for the best real estate mutual funds. The Vanguard REIT didn’t make their cut, but it probably should have. If you take fees into consideration, the Vanguard REIT is the top performing fund (when compared to the top ten rated by U. S. News), and the dividend yield passed on to investors OF 4.8% is more than twice that of many of the other funds. People often buy individual REITs because of the high dividend yield, but these other fund managers are pocketing more of the yield while passing on higher fees to investors. It’s all here in black and white: higher fees and lower yields. I am now thoroughly convinced that the Vanguard REIT mutual fund is, hands down, the best choice!
Here is my analysis for those who are interested. (If it’s too small to read, you can download the image and magnify it.) Thanks again, and happy investing to you all.