–<\/span><\/p>\nWhat Is Real Estate Investing?<\/h2>\n
While REITs are a form of real estate investing, real estate investing in the traditional sense is when a person invests in a physical, tangible piece of real estate. This direct form of investing in real estate involves purchasing a property or a stake in one and attempting to profit from the investment through rental income, appreciation, tax benefits, or cash flow from business activities. Real estate purchased for investment purposes could be anything from commercial to residential to industrial. For example, a real estate investment could mean buying a condo, apartment complex, warehouse, hotel, retail space, storage unit, office building, single-family home, or even land for future use. The property you choose can be purchased individually or with partner investors. It can be held for a long time or flipped and sold shortly after it was bought. Ultimately, the goal of direct real estate investing is to buy low and sell high. Some examples of common real estate investments include the following:<\/p>\n
\u00a0–<\/span><\/p>\n\n- <\/span>Purchasing a property, renovating it, and selling it quickly at a higher price point (also known as house flipping);<\/li>\n
- <\/span>Purchasing a property and renting it out to tenants, generating monthly income while it appreciates in value; and<\/li>\n
- <\/span>Purchasing a property to live in and renting out parts of it, such as a spare room or basement suite.<\/li>\n<\/ul>\n
–<\/span><\/p>\nKey Differences Between REITs and Real Estate<\/h2>\n
Now that you know what REITs and direct real estate investing are, we\u2019re going to compare the two. Based on factors like profitability and affordability, here is a breakdown of the key differences between REITs and real estate.<\/p>\n
\u00a0–<\/span><\/p>\nProfitability<\/b><\/h3>\n
Both REITs and real estate offer the potential for profit. When investing in a property, you have the opportunity to significantly increase your cash flow and earn a passive income by charging rent to tenants. You can also take advantage of several tax breaks, which further inflates your profit margin. On the other hand, REITs pay substantial dividends, which is also a passive form of income.<\/p>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.18.0″ _module_preset=”default” background_color=”#edf7f3″ custom_padding=”32px||32px||true|false” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on” da_disable_devices=”off|off|off”][et_pb_row _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_text _builder_version=”4.18.0″ _module_preset=”default” header_2_text_align=”center” header_2_text_color=”#38505b” header_2_font_size=”2.63rem” header_2_line_height=”3.75rem” max_width=”800px” module_alignment=”center” header_2_font_size_tablet=”32px” header_2_font_size_phone=”27px” header_2_font_size_last_edited=”on|phone” header_2_line_height_tablet=”3.75rem” header_2_line_height_phone=”32px” header_2_line_height_last_edited=”on|phone” global_colors_info=”{}”]<\/p>\n
\u201cREIT stands for Real Estate Investment Trust and they function similarly to mutual funds, except in this case, the fund is held by a corporation that owns, operates, or finances real estate or real estate-related assets. REITs may own anything from condo buildings and residential homes to office buildings, warehouses, or even hotels.\u201d<\/h2>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.18.0″ _module_preset=”default” custom_padding=”||24px||false|false” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on” da_disable_devices=”off|off|off”][et_pb_row _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_text _builder_version=”4.18.0″ _module_preset=”default” text_font_size=”21px” text_line_height=”1.6em” header_2_font=”||||||||” header_2_font_size=”36px” header_2_line_height=”1.3em” header_3_font_size=”1.25rem” header_3_line_height=”1.88rem” header_4_font=”|700|||||||” header_4_font_size=”1.25rem” header_4_line_height=”1.88rem” global_colors_info=”{}”]<\/p>\n
Affordability<\/b><\/h3>\n
REITs require minimal capital, which makes them a much more affordable option than real estate. Like stocks, investors can choose from a wide range of REITs, many of which are affordable. Even more, some online trading platforms allow investors to purchase fractional shares of REITs rather than entire shares, which further increases their affordability.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nIn contrast, buying real estate is expensive, requires a considerable amount of capital, and comes with several hidden costs. For example, as an investor, you will have to budget for the down payment, as well as mortgage costs, maintenance costs, REALTOR\u00ae commissions, capital gains taxes, and property management fees (if applicable). Further, there will invariably be times when you won’t be earning rental income from your investment property.<\/p>\n
\u00a0–<\/span><\/p>\nInflation<\/b><\/h3>\n
Since the price of real estate tends to go up with inflation, both REITs and direct real estate investments perform well against inflation.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nLiquidity<\/b><\/h3>\n
REITs tend to be far more liquid than direct real estate investing. They can be bought or sold equally, similar to the process of buying and selling a mutual fund or exchange-traded fund (ETF). This allows investors to gain access to their money quickly and easily. Oppositely, real estate assets are usually considered long-term investments, making them much less liquid. Buying and selling a property involves longer transaction times (selling a home can take several months), higher costs, and long holding periods.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nVolatility<\/b><\/h3>\n
The real estate market is relatively volatile, whether you invest in REITs or a physical asset. That said, REITs tend to fluctuate more than housing prices.\u00a0<\/p>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.24.2″ _module_preset=”default” min_height=”35px” custom_padding=”0px||0px||true|false” da_disable_devices=”off|off|off” global_module=”1002″ saved_tabs=”all” locked=”off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.18.0″ _module_preset=”default” custom_padding=”54px||48px|||” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on” da_disable_devices=”off|off|off”][et_pb_row _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_text _builder_version=”4.18.0″ _module_preset=”default” text_font_size=”21px” text_line_height=”1.6em” header_2_font=”||||||||” header_2_font_size=”36px” header_2_line_height=”1.3em” header_3_font_size=”1.25rem” header_3_line_height=”1.88rem” header_4_font=”|700|||||||” header_4_font_size=”1.25rem” header_4_line_height=”1.88rem” global_colors_info=”{}”]<\/p>\n
Accessibility<\/b><\/h3>\n
Both real estate and REITs are accessible. However, REITs require minimal capital and minimal expertise, which makes them more accessible than real estate investing. When you invest in a REIT, you can let the fund manager take care of everything while you sit back and earn passive income. You also don\u2019t have to deal with tenants or maintenance. Real estate, on the other hand, is accessible owing to the wide range of properties available (from house flipping to farmland to commercial properties). However, it requires far more research and an overall greater time commitment than investing in a REIT.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nThe Pros and Cons of Investing in REITs<\/h2>\n
There are both drawbacks and advantages to investing in REITs. We outline the pros and cons below.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nThe Pros<\/b><\/h3>\n
\n
\n- <\/span>Cash flow through dividends: All REITs pay dividends that consist of rental income and capital gains, which translates to regular cash flow.\u00a0<\/li>\n
- <\/span>Minimal capital required: Investors do not need to have much capital to invest in REITs. There are plenty of affordable options and you may even be able to buy fractional shares in a REIT, bringing costs down even more.\u00a0<\/li>\n
- <\/span>Convenience: REITs are easy to buy and can often be bought and sold online through your financial institution, just like stocks, mutual funds, or EFTs.\u00a0<\/li>\n
- <\/span>Easy diversification: Since little capital is required, diversifying investments is easy with REITs. For example, an investor can choose to buy shares in a REIT that owns international real estate, or one that focuses on a specific city, sector, or asset class (for example, warehouses or single-family homes).\u00a0<\/li>\n
- <\/span>Less knowledge required: Another pro of purchasing a REIT is that little knowledge or expertise is required to do so. Since a company is deciding which property to invest in and managing the property on behalf of investors, you won\u2019t need to dedicate time to extensively researching the market.<\/li>\n
- <\/span>REITs can be liquid: One of the biggest drawbacks of investing in real estate is that it is illiquid, but REITs represent a liquid form of real estate investing. For example, selling your shares of a publicly traded REIT can be done in a matter of seconds with a few clicks of a button. This is the opposite of traditional real estate investing where gaining access to cash would mean a months-long process of selling your property.\u00a0<\/li>\n<\/ul>\n
–<\/span><\/p>\nThe Cons<\/b><\/h3>\n
\n
\n- <\/span>Less opportunity for growth: Since REITs distribute the majority of their profits to investors, there isn\u2019t much money leftover to reinvest in additional properties or grow a company. Therefore, REIT share prices may increase less than publicly traded company stocks that can reinvest their excess money rather than pay it out in dividends.\u00a0<\/li>\n
- <\/span>Lack of control: With REITs, the investor has very little control over the asset, including how it is managed. It might not even be possible to visit the property owned by the REIT.<\/li>\n
- <\/span>No major tax benefits: REITs don\u2019t offer the same tax breaks as investment properties. Rather, dividends paid out by REITs are considered taxable income and taxed at your marginal tax rate.\u00a0<\/li>\n
- <\/span>Stock market volatility: One final con of REITs is that they have a minor link to the stock market, which means they have the potential to be impacted by stock market volatility. If the stock market drops, so too might your investment, which isn\u2019t usually the case with a direct real estate investment.<\/li>\n<\/ul>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.18.0″ _module_preset=”default” background_color=”#f0faf4″ min_height=”334.8px” custom_padding=”3px||0px|||” da_disable_devices=”off|off|off” global_module=”849″ saved_tabs=”all” locked=”off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][et_pb_row _builder_version=”4.20.2″ _module_preset=”default” height=”1px” custom_padding=”0px||0px||false|false” locked=”off” global_colors_info=”{}”][et_pb_column type=”4_4″ admin_label=”Column” _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_button button_text=”post popup button” button_alignment=”right” module_id=”dipi_popup_id_295151″ _builder_version=”4.20.2″ _module_preset=”default” positioning=”absolute” horizontal_offset=”-10000000px” z_index=”-1000000″ global_colors_info=”{}”][\/et_pb_button][et_pb_code _builder_version=”4.24.2″ _module_preset=”default” global_colors_info=”{}”]