When investing in real estate, there are various methods to choose from. These include REITs (real estate investment trusts) and direct real estate investments. Deciding between them can be difficult; however, it’s essential to be aware of their advantages and drawbacks before making your decision.
REITs, like mutual funds, pool the capital of multiple investors. However, in a real estate fund you own shares of the company. This gives you greater control over which properties to invest in and the overall direction of the business.
They provide recurring cash flow through dividend distributions and can be easily sold with minimal investment required. This makes them a great option for those who want to build wealth through real estate but don’t have much spare time or funds available.
One of the major disadvantages to investing in REITs is that they lack a sense of ownership that some investors experience with direct real estate investments. Direct real estate investments give you the chance to purchase properties located in desirable markets and gain firsthand knowledge about them.
Another potential downside is that investing in private real estate usually necessitates taking out a mortgage or other form of financing. This could prove costly if the market slumps or you have difficulty finding quality tenants.
Due to this potential drawback, private real estate isn’t recommended as an investment unless you can stomach the potential illiquidity.
REITs, on the other hand, are publicly traded on exchanges like stock markets and offer much greater liquidity than investing in physical real estate. This is particularly advantageous if you’re trying to diversify your portfolio.
These investments have a proven record for outperforming direct real estate investments. In fact, REITs have generated annual returns of more than 12% since 1977.
Finding REITs with high dividends is straightforward, but you’ll need to do your due diligence and search for those with low minimum investments. These could be as little as a few hundred dollars – less than the upfront costs of purchasing physical property and renovating it.
REITs are less risky than direct real estate, making them a great option for those seeking to increase their income without risking too much capital. Furthermore, REITs typically permit investors to invest in more properties than direct real estate does, helping reduce your overall exposure to risk.
Both REITs and direct real estate investments can be excellent ways to invest your money, but ultimately it comes down to personal preferences. Which option you opt for depends on what kind of experience you want and what’s most important financially for you.
