Whether you are an absolute beginner in real estate investing or have a piece of useful knowledge about real estate investing, one of the first questions you need to find an answer to is whether to invest in REITs or Direct Real Estate Investing.
Although on the outlook, the two options might not seem to have considerable differences – they are very different in many ways. Both of them have their own set of advantages and disadvantages.
Making a call between the two is not a tough choice when you are aware of both the options in-depth and can analyze the situation based on your individual goals and preferences.
However, regardless of the option you choose – you can rest assured that real estate can produce high returns for you both in the short term and long term.
Real estate is an excellent way of creating a stable revenue stream.
This blog is a guide to investors who are confused about making a pick between investing in Real Estate Investment Trusts (REITs) and Direct Real Estate Investing through Rental Properties.
The best way to break the confusion we believe is to be aware of both types of investments along with their pros and cons and comparing the two in light of your personal goals and targets.
The research could be daunting, but the good news is that we’ve done the job for you. Read on to understand the pros and cons of entering into real estate through REITs and Real Estate Investing, and further read how to choose the best one for you!
What are REITs?
Before talking about the pros and cons of REITs, let’s look at what REITs are in the first place.
Real Estate Investment Trusts are investment vehicles that pool money from various individual investors to buy real estate properties, maintain and manage such a portfolio of real estate investment properties and share the returns among their investors based on how much each investor has invested.
Put it – REITs are similar to mutual fund investment companies that pool money from various investors, invest in different stocks and shares, and share dividends amongst mutual fund holders.
REITs are an excellent way for novice real estate investors to enter into real estate investing scenarios and get accustomed to the industry. It is also best suited when someone wants to invest in real estate but does not have a considerable capital to pool in.
Bottom-line: REITs are most suitable for people who wish to have exposure to the real estate market without having to own any property directly.
Pros of investing through REITs
#1 – Stable income
Investing through REITs provides a pretty stable income to its investors in the form of dividends. Statistics have it that the majority of REITs provide above-average profits to its investors. So, if you don’t wish to crack your head over finding the right property, managing the property, finding tenants, managing tenants, and everything in between – REITs could be your savior.
#2 – Diversification of properties
Through REITs, you can be investing in various types of features at a time, and thus, you’ll always have the benefit of averaging out. Having a diverse portfolio with your single-handedly owned funds alone is very difficult to achieve and isn’t possible unless you have a huge capital to invest in real estate. REITs are the best way to explore and carefully observe different types of investments as they have a vast scope for diversification of your portfolio.
#3 – Exposure
The next big advantage of choosing to invest through REITs is the element of exposure. Experience and exposure are two things that make a novice investor a pro-investor, and REITs help you achieve just that. In a typical REIT investment scenario, you are provided an opportunity to carefully observe the trends of real estate in your diversified portfolio of investments. It’s easy to learn and get yourself accustomed to the terms used in real estate without the risk of burning your hands in the process.
Cons of investing through REITs
#1 – The poor decisions of REITs’ team can affect your income
The returns from REITs investments are mostly dependent on the kind of decisions your REIT makes. If the REIT management makes poor decisions, it shall directly affect your dividend incomes. In other words, you’re not in control of the choices you make, and thus, there’s always a risk of making less.
#2 – Risk of an investment property type tanking
Since REITs generally invest in a plethora of real estate property types, there’s always a risk that one of the many property types might not perform so well and tank down. During such cases again, there’s a risk of making fewer returns.
Real Estate Investing
Investing in real estate by directly buying or acquiring properties and managing them to warn regular returns is referred to as Direct Real Estate Investing.
It is also a more traditional way of investing and, nonetheless, a lucrative one. It is one of the most common forms of getting into real estate investing game until today, and there have been many people who have made a fortune through real estate investing.
The two basic requirements for direct real estate investing are – One – To be able to scrounge up a decent amount of down payment. Two – To have the ability to manage a bunch of real estate properties. If you can manage to meet both these requirements, direct real estate investing can be a significant investment with lucrative ROI both on your time and money!
Pros of Real Estate Investing
#1 – You can have control over the investment property
Since you own the real estate property, you can have full control over your property and are at liberty to use the property in any way that you wish to. You can make repairs and renovations of the property anytime you want if you believe that it can help you bring in more or better tenants and so on.
#2 – You’ll always have a tangible asset to fall back upon
In a worst-case scenario, when your property value tanks down or you’re not able to find potential tenants for your property, real estate investment properties can always be used for personal uses or in any other way that you want. It’s a physical asset that you own, and this real estate space can come handy, sooner or later. But for as long as you have tenants occupying your space, stable cash flow is something you can always trust.
Cons of Real Estate Investing
#1 – The entire responsibility of your property is on you
The biggest disadvantage with real estate investing is that the entire responsibility of the property falls back on you. You have to run the show and manage everything from – finding the right tenants who do not destroy your property, collecting rent on time, dealing with the tenant concerns, fixing that pipe downhill which is leaking, paying up the bills on time, treating that sewage water which is leaking from a week and so on.
Everything – big or small calls for your attention, and the entire responsibility of making your real estate investing success or failure depends solely on you.
Besides, it goes unsaid that you should bear all the losses that you may incur all by yourself too. So, that can be quite a burden and might come in the way of your real estate investing success.
How to choose the best option for you?
Choosing between REITs and Real Estate Investing ultimately comes down to your personal choice, which is based on the styles and preferences you have as an individual.
Think of it as an option to be made from being an employee versus being a business owner. Both have their own set of advantages and disadvantages.
The best way to go about it is to weigh such pros and cons in light of your individual goals and risk-taking capacities. If you’re someone who likes to be in control of things, can deal with people, and are generally good at management – Direct Real Estate Investment may be for you.
On the other hand, if you are someone who likes to lay back and watch your dividends come at regular intervals without having to be directly involved in investing activities, even at the risk of losing control – then REITs could be a great choice.
Whatever decision that you make ensure that you make an informed one, and you consult somebody who is an expert to oversee your decision. Don’t forget to conduct your due diligence before you choose a REIT to work with!
The same rule goes with real estate investing, and you should be doing a fair amount of research and homework to understand markets better to be able to make an informed decision about the kind of property you want to buy!
Consulting an industry expert for supervision is highly recommended for both the cases.
You can also choose to invest in a mix of REIT and direct real estate investment if you want to get the hang of both of these. In fact, this is a great strategy for beginner real estate investors who are really confused about their choices as this practical exposure helps paint a better and a clear picture of how things work, and you can decide later which one you wish to pursue for a longer time.
Sometimes, some investors continue to balance out their investments in both REITs, and Direct Real Estate Investing throughout and reap the benefits of both.
That’s a great idea, too, as you’ll benefit from the principle of averaging out. Consulting an expert, in any case, is a good way to be assured of making the right decision that suits your style.