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Which Is Better: REITs VS Direct Purchase Of Property?

Are you considering investing in real estate? If so, you may be wondering whether to invest in Real Estate Investment Trusts (REITs) or to make a direct purchase of a property. 

Both options have their own unique set of pros and cons, so making the decision can be a difficult one. 

But there’s more to REITs than you may think…

This video below goes through all you need to know about REITs and make the most out of your investments:

Although the video goes through essential things to consider, there is more you need to think about.

In this article, we’ll break down the differences between REITs and the direct purchase of property, providing you with a comprehensive guide to help you make an informed investment decision. 

Whether you’re a seasoned investor or just starting, we’ll help you understand the pros and cons of each investment strategy and determine which one is better for you. 

So, sit back, relax, and let’s explore the world of REITs vs. the Direct Purchase of Property.

REITs vs. Direct Purchase of Property

If you’re thinking about investing in real estate, you may be wondering whether to choose REITs or a direct purchase of a property. 

Each option comes with its own set of pros and cons, so it’s essential to understand the differences to make an informed decision. 

Here’s what you need to know:

REITs:

  • Real Estate Investment Trusts (REITs) allow investors to buy shares in a professionally managed real estate portfolio.
  • They offer exposure to a diverse range of properties without the hassle of owning and managing the property.
  • REITs are often less expensive than the direct purchase of property, making them accessible to more investors.
  • They provide a regular income stream from rent payments and can be a stable source of passive income.

Direct Purchase of Property:

  • Direct purchase of property offers greater control and potential for higher returns.
  • Investors can make strategic decisions about the property, such as renovations or rental rates, that can increase its value over time.
  • Direct purchase of a property can be an excellent hedge against inflation as the property value often appreciates over time.
  • It can also provide a tax shelter through depreciation deductions and other tax benefits.

Choosing between REITs and direct purchase of property depends on your investment goals, risk tolerance, and overall financial situation. 

That’s not all…

If you’re looking for a stable source of passive income with lower costs, REITs might be the better option. 

But if you want more control over your investment and the potential for higher returns, direct purchase of property might be the way to go.

Ultimately, both REITs and the direct purchase of a property can be lucrative investment strategies in the real estate market. 

Although there are many things to consider before choosing which investment is right for you, then you must understand what your getting into before putting your hard-earned money at work for you. That’s why you should take a look at this post which goes through REITs vs Real Estate investing for beginners.

TOP TIP:
It’s essential to understand the differences between them to make the right choice for your investment portfolio. 

Understanding REITs: What They Are and How They Work

If you’re considering investing in real estate, you might have heard about Real Estate Investment Trusts (REITs). 

But what exactly are they, and how do they work? 

Here’s what you need to know:

  • REITs are companies that own, operate, or finance income-producing real estate, such as apartments, office buildings, shopping centres, and hotels.
  • They allow investors to invest in real estate without owning physical property themselves.
  • REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, making them a popular choice for investors seeking a stable income stream.
  • They’re regulated by the Securities and Exchange Commission (SEC) and must meet strict requirements to qualify as a REIT, including investing at least 75% of their assets in real estate and distributing a significant portion of their income to shareholders.
  • REITs can be publicly traded on stock exchanges, making them accessible to a broad range of investors.

One of the key advantages of investing in REITs is that they offer exposure to a diverse range of real estate properties, which can provide a level of risk diversification. 

Additionally, they are managed by professionals, which can make the investment process more passive for investors. 

However, as with any investment, there are also potential drawbacks to consider, such as management fees, and the possibility of fluctuating stock prices.

Pros & Cons of Owning Property

Owning property can be a fulfilling and rewarding experience, but it’s important to weigh the pros and cons before making such a significant investment. 

Here are some of the key advantages and disadvantages of owning property:

Pros

  • Appreciation: Property values tend to appreciate over time, meaning that your investment may increase in value.
  • Equity: As you pay down your mortgage, you build equity in the property, which can be used as collateral for future loans or as a source of funds in retirement.
  • Control: Owning property gives you control over how it’s used, decorated, and maintained.
  • Rental income: If you’re able to rent out your property, you can generate passive income and potentially cover some or all of your mortgage costs.
  • Tax benefits: Homeowners may be eligible for certain tax deductions, such as mortgage interest and property tax deductions.

Cons

  • High costs: Purchasing property can be expensive, with upfront costs including a down payment, closing costs, and ongoing expenses such as property taxes and maintenance.
  • Illiquidity: Property is not a liquid asset, meaning it can be difficult to sell quickly if you need to access funds.
  • Risk: Property values can fluctuate, and there’s no guarantee that your investment will appreciate over time.
  • Maintenance: As a property owner, you’re responsible for maintaining the property and addressing any repairs or upgrades.
  • Liability: Property owners can be held liable for injuries or accidents that occur on their property, which can result in costly legal fees.

Owning property can be a smart investment for those willing to take on the associated costs and responsibilities. 

It’s important to carefully consider the pros and cons before making a decision and to have a solid financial plan in place.

If you feel investing in physical property is the right choice for you, but feel it’s expensive to get started, then this post will help you get started with real estate with no money and bad credit. Which is quite an eye-opening at the opportunities available.

Pros & Cons of Investing in REITs

Investing in Real Estate Investment Trusts (REITs) can offer many benefits for investors, but it’s important to weigh the pros and cons before making such an investment. 

Here are some of the key pros & cons of investing in REITs:

Pros

  • Diversification: REITs allow investors to diversify their portfolios by investing in real estate assets without the burden of owning and managing properties directly.
  • High-income potential: REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends, which can provide investors with a steady stream of income.
  • Liquidity: REITs are traded on public exchanges, making them more liquid than owning physical real estate.
  • Professional management: REITs are managed by experienced real estate professionals who are responsible for property management, maintenance, and other operational tasks.
  • Access to different real estate sectors: REITs can provide investors with access to different real estate sectors, such as residential, commercial, and industrial properties.

Cons

  • Market risk: Like any other investment, REITs are subject to market fluctuations and may be affected by economic conditions.
  • Dividend fluctuations: The amount of the dividend can fluctuate based on the performance of the underlying assets.
  • Management fees: REITs may charge management fees, which can eat into returns.
  • Limited control: As a REIT investor, you have limited control over the underlying assets and how they are managed.
  • Interest rate sensitivity: REITs are sensitive to changes in interest rates, which can affect the cost of borrowing and the valuation of the underlying assets.

Investing in REITs can offer many benefits for investors, including diversification, high-income potential, and access to different real estate sectors. 

However, investors should also be aware of the potential risks and drawbacks, such as market risk, dividend fluctuations, and management fees. 

It’s important to carefully consider your investment goals and risk tolerance before investing in REITs or any other asset class.

Navigate the complexities of real estate investment with confidence using the Financial Freedom Blueprint. This essential guide is your compass to understanding REITs and crafting an investment strategy that aligns with your goals and risk profile. Take the guesswork out of your financial future—secure your blueprint to savvy investing today!

Factors to Consider When Choosing Between REITs and Direct Purchase

When it comes to choosing between investing in REITs and direct property purchases, there are several factors to consider. 

Here are some key factors to help you make an informed decision:

  • Risk tolerance: Direct property purchase carries more risk as it involves a significant amount of money and ongoing maintenance costs. REITs are a lower-risk option as they are managed by professionals and offer diversification.
  • Time commitment: Direct property purchase requires a lot of time and effort, from finding the right property to managing it. REITs are a passive investment and require a minimal time commitment.
  • Liquidity: Direct property purchase is a highly illiquid investment, and it can take months or even years to sell a property. REITs, on the other hand, are highly liquid, and you can easily buy and sell them on the stock market.
  • Tax implications: Direct property purchase offers several tax benefits, such as mortgage interest deductions and property tax deductions. REITs are subject to different tax rules, and their distributions are taxed differently.
  • Investment goals: Your investment goals and portfolio diversification strategy will play a role in your decision. If you want exposure to the real estate market without the hassle of direct ownership, REITs might be the better choice. 

If you’re looking for a long-term investment with the potential for higher returns and more control, direct property purchase might be the way to go.

The decision between REITs and direct property purchases comes down to your circumstances and goals. 

TOP TIP:
Consider the factors above and consult with a financial advisor to make the best choice for your portfolio.

Case Study: Comparing the Performance of REITs vs. Direct Purchase

One case study conducted by NAREIT found that, from 1992 to 2019, equity REITs provided an average annual return of 9.9%, while the average annual return for direct property investment was 6.7%. 

In 2019, the FTSE NAREIT All Equity REITs index returned 28.7%, while the S&P 500 index returned 31.5%. Meanwhile, direct property investments returned an average of 10% annually over the same period.

However, both of these studies don’t tell the whole story, as there are several factors to consider before making a decision. 

For instance, while REITs offer greater liquidity and diversification, owning property directly allows for more control and the potential for greater returns. 

But there’s more to this…

  • You see during bear markets, stocks are impacted almost immediately and can crash up to 50% or more in a single year.
  • Whereas physical real estate can crash a lot less which can range between a 10%-30% market crash, this is often the last sector to crash after stocks, cryptocurrencies and commodities.
  • But if you’re renting out your properties you can dictate the cash flow you earn and the type of properties in certain locations.
  • Whereas REITs can restrict this in terms of choosing specific properties in specific locations.

Investors are always looking for the best way to maximize returns on their investments. 

  • However, it is important to note that the performance of direct property purchase is heavily dependent on factors such as location, property type, and market conditions. 
  • On the other hand, REITs offer diversification and liquidity, which can make them a more attractive option for some investors. 

The decision between REITs and direct property purchases comes down to the individual investor’s risk tolerance, investment goals, and personal preferences.

Hang On A Moment…

The choice between investing in REITs or direct purchase of property ultimately depends on your financial goals, risk tolerance, and personal preferences. 

Both options have their own set of advantages and disadvantages that need to be considered. 

REITs can provide diversification, liquidity, and ease of management, while direct property ownership offers the potential for higher returns, control over the property, and tax benefits. 

It is important to thoroughly research and analyze both options before making a decision. We hope this article has provided valuable insights to help you make an informed choice. 

For more information on investing, check out these articles right here.

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