1. Home
  2. /
  3. education
  4. /
  5. REITs vs Real Estate:...

REITs vs Real Estate: What You Need To Know

  • By Jenna Gleespen
  • Oct 02, 2022

Making the decision between REITs and investing directly in real estate directly can be difficult. Both have their own benefits and drawbacks, making it hard to decide which option is right for you. In this blog post, we will compare REITs vs real estate investments and list the pros and cons of each one. By the end, you should better understand which option best suits your needs!

reits vs real estate

Basic Overview of Reits vs. Real Estate

REITs, or real estate investment trusts, are a type of investment that allows you to pool your money with other investors to purchase properties. REITs can be a great way to diversify your portfolio and get exposure to the real estate market without having to own property directly.

However, it also comes with some risks. For example, if the real estate market crashes, your REIT investment could lose value.

Direct real estate investing can be a great way to build wealth over time. Unlike REITs, you will have full control over the property and can make all of the decisions about what to do with it. However, investing in real estate is not without its risks.

For one, it can be costly to purchase a property outright. Additionally, if the property is not managed correctly, it could cost you more money than it makes.

Investing in Real Estate

There are many different types of real estate that you can invest in, such as single-family rental homes or multifamily buildings.

People invest in real estate for many reasons, including the potential for rental income and property appreciation. Some tax benefits include using depreciation to reduce taxable net incomes as well!

An investor may own physical real estate individually or by partnering with other investors. When individuals directly own the property, they can take advantage of the long-term investments while also being capable participants in flippers’ games that generate profits from rapid appreciation — all without risking too much money on one bet!

reits vs real estate

Benefits of Investing in Real Estate

Active real estate investing is a great way to grow your money. Let’s look at some of the benefits.

Diversification – By investing in real estate, you can diversify your investment portfolio. This is important because it helps to spread out your risk and gives you the potential to make more money if the market goes up.

Passive income – Another benefit of investing in real estate is that provides passive income. This is money income that doesn’t;t require you to work directly for it. Passive investments like real estate can be a great way to make extra money or even replace your current income.

Potential for appreciation – Another reason people invest in real estate is because of the potential for appreciation. This is when the value of your property goes up over time. This can provide you with a nice nest egg for retirement or help you make a down payment on a new home.

Cash flow – By investing in real estate, you can create a steady cash flow from monthly rental income. Over time, this may lead to multiple streams of money coming into your bank account!

Asset appreciation – The long-term returns on investment in property are impressive, with an average annual return of 7%. But there’s no guarantee that this will happen (real estate markets can go down as well).

Tax deductions – Investors can take advantage of tax deductions by owning real estate. Operating expenses such as property management fees, and repairs are common in this industry, so it’s worth noting that these types of expenses may be deducted from rental income when filing taxes with the IRS every year!

Drawbacks of Investing in Real Estate

Research and analysis – In order to be a successful real estate investor, you need more than just capital. You have access and knowledge of all the different factors that go into making such investment decisions like occupancy levels or rent growth rates for example.

It can be expensive – One of the drawbacks of investing in real estate is that it can be expensive. This is especially true if you are buying a property outright. You will also need to factor in the cost of repairs and upkeep.

Illiquidity – The illiquidity of property makes it difficult to buy and sell. If an investor needs cash in a hurry, they may have to deal with prices that are below fair market value because there’s no other buyer but themself (and this could happen quickly).

It can be time-consuming – Another downside to investing in real estate is that it can be time-consuming. This is especially true if you are managing the property yourself. You will need to deal with tenants, repairs, and other issues that can take up a lot of your time.

There are risks – Just like with any investment, there are risks involved with investing in real estate. For example, the value of your property could go down if the market crashes.

Investing in REITs

A REIT, or real estate investment trust, is an investment vehicle run by a third party that owns, operates, or finances income-producing real estate. REITs typically offer investors high dividend yields and the potential for capital appreciation. In exchange, investors give up some control to the REIT management team.

Let’s look at both the advantages and disadvantages of this type of investment.

reits vs real estate

Benefits of Investing in REITs

They offer high dividend yields – A REIT typically gives investors a high dividend yield. This is because the REIT is required to distribute at least 90% of its taxable income to shareholders in the form of dividends.

They provide the potential for capital appreciation – In addition to high dividend yields, REITs also offer the potential for capital appreciation. This is because REITs often trade at a discount to their net asset value (NAV). As such, when the market recognizes the value of the REIT, there can be a significant increase in its price.

They are less risky than real estate – One of the advantages of investing in a REIT is that they are less risky than real estate. This is because REITs are required to diversify their holdings across multiple properties. This diversification reduces the risk of anyone’s property dragging down the performance of the entire portfolio.

reits vs. real estate

Diversification – If you’re looking for a way to diversify your investment portfolio, purchase shares in Real Estate Investment Trusts. They work the same as buying an ETF or mutual funds on online trading platforms like Robinhood that allow an investor to buy fractional shares.

Don’t need any expertise – Investing in a REIT is an easy way to get involved with the increasingly popular business of owning and managing commercial properties.

Disadvantages of Investing in REITs

They offer less control – One of the disadvantages of investing in a REIT is that investors give up some control to the REIT management team. This is because the management team makes all of the decisions regarding the properties in the portfolio.

They are subject to market volatility – Another disadvantage of investing in a REIT is that they are subject to market volatility. This is because the value of the REIT is based on the underlying properties in the portfolio. If the market value of these properties decreases, then the value of the REIT will also decrease.

They are illiquid – Another disadvantage of investing in a REIT is that they are illiquid. This is due to the fact that there are often a limited number of buyers for REIT shares. It can take time to find a buyer willing to pay the price you are looking for.

REITS vs Real Estate: Final Words

Investing in real estate or investing in REITs both have advantages and disadvantages. As an investor, you will need to decide which one is right for you.

There is no right or wrong answer, as each investment has its own risks and rewards. Ultimately, the decision comes down to your personal investment goals and objectives.

If you are looking for an investment that offers high dividend yields and the potential for capital appreciation, then investing in a REIT may be the right choice for you. However, if you are looking for an investment that offers more control, then investing in commercial real estate may be the better choice.

Whichever option you choose, make sure to do your own research to ensure that it is the right fit for your investment portfolio.

 

mm

Jenna Gleespen is a published author and copywriter specializing in personal and investment finance. Her expertise is in financial product reviews and stock market education.