Retail REITs are among the many ways to gain exposure to real estate without becoming a landlord. Here, a strip mall parking lot in Marlboro, N.J. Michael Loccisano/Getty Images

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What role should REITs play in my FIRE portfolio?

To achieve financial independence before traditional retirement age, you need a portfolio that includes investments that can provide large returns, particularly during an economic downturn. So its no surprise that many FIRE adherents turn to real estate as a key element in their financial planning.

Yet while many look to become landlords for the steady income and growth potential, a high bar to entry means property ownership isnt for everyone, says Angela Palacios, a financial planner and director of investment at the Southfield, Mich.-based Center for Financial Planning, where she oversees asset allocation for $1.2 billion in client portfolios.

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Instead, she recommends real estate investment trusts for FIRE investors to access the returns that rental properties can offer, without the overhead or legwork required to be a landlord. REITs blend the ability of owning real estate with the convenience of purchasing a stock, she says.

REITs are companies that generate income through rental properties, which are often commercial. For example, a company might own and manage multiple strip malls, apartment complexes, or industrial properties. Publicly traded REITs are bought and sold much like stocks, giving shareholders access to a percentage of the rental income that those properties generate.

REITs are required to pay out at least 90% of their annual taxable income to investorstranslating to largely consistent, and potentially large, dividends. That income can help prevent a FIRE investor from drawing on accounts that he or she is banking on for the long term. And if the income isnt needed yet, the dividends can be reinvested to help boost savings.

On average, REIT dividends tend to hover around 4%. So, theyre naturally appealing when interest rates are down and investors are looking for something with decent yields, Palacios says.

But beware of using REITs in place of corporate or government bonds in your portfolio, she says. REITs are often more volatile than bonds, so Palacios recommends treating them more like a part of your stock portfolio. You can hold them in a taxable brokerage account, but a tax-deferred account can allow an investor to shelter returns, which may be particularly appealing to those in a high tax bracket.

Palacios generally makes sure clients have exposure to REITs through REIT mutual funds or exchange-traded funds. Both options provide diversification, which can be particularly beneficial in an uncertain economy. A simple and inexpensive ETF that Palacios recommends is Vanguard Real Estate ETF (ticker: VNQ), which is based on a U.S. REIT market index .

If choosing to invest in an individual REIT on your own, make sure to seek out impartial sources of information, Palacios says. She recommends researching on the Securities and Exchange Commission website or Morningstar.com, both of which can provide the valuation metrics needed to make an informed investment. If youre not sure what to look for, start with paying attention to the analyst comments and a REITs price versus fair value ratings. Undervalued REITs are priced below their fair value.

While Palacios deals only with publicly traded REITs, some investors do seek out a broker to help them purchase privately held REITs. Investors should beware that private REITs may be available only to accredited investors who either have at least $1 million in net worth (excluding their primary residence) or who have earned over $200,000 per year for the past two years. They dont provide the same liquidity as publicly traded options. They may also have high buy-in fees, and because theyre privately held, they arent required to publish the same information on their performance.

REITs offer FIRE investors a potentially strong passive income stream. Some investors may still prefer buying whole properties themselves, for the hands-on aspect and financial benefits of being a landlord. Either option can work, if you know what youre looking for, Palacios says. Youre building your wealth, so whatever will give you the return you need to help you reach your goals may be worth considering.

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Forget the Rent, Collect the Yield: Why Investors Looking to Retire Early Should Consider REITs - Barron's