Is It Better to Buy REITs or Real Estate Directly?

Real estate is a powerful investment. It’s not as risky as, say, investing in the stock market, and it has the ability to give you returns in a number of different ways, including monthly rent collection and gains in the form of long-term appreciation.

However, if you’re nervous about the prospects of finding and managing a real property of your own, you may consider an alternative like real estate investment trusts (REITs). A REIT is a company that owns and manages a number of different properties. Trading REITs works much like trading stocks or ETFs; this way, you can get direct exposure to the real estate market without the upfront effort of finding properties on their own.

So is it better to buy REITs or invest in real estate directly?

The Advantages of Real Estate

There are several advantages to buying your own real estate, including:

•         Unlimited growth potential. First, real estate investing offers nearly unlimited growth potential. If you commit yourself to studying and learning more about the real estate market, you can make smart deals and hold your properties for decades. You can even study to acquire your real estate license and hunt for great deals in your area for years to come. With the income from one rental property, you can buy a second, and with those incomes combined, you can buy a third. It’s relatively easy to snowball.
•         Direct control and flexibility. Buying real estate directly also gives you more control. Instead of relying on a group of external real estate investors and managers, you can guide your own strategy to perfection. You get to decide where to invest. You get to decide how to invest. You get to decide how to manage your properties.
•         Property usefulness. Owning real estate has a number of advantages, independent from your returns. For example, after a tenant moves out, you’ll have the option to move into the property yourself and use it as your primary residence. You could also convert the property into something else entirely, turning it into a business (depending on the area) or demolishing it to build something entirely new.
•         Tax advantages. As a property investor, you’ll get to write off a number of the expenses you’ll face along the way. Accordingly, direct property investment tends to be more tax advantageous than investing in REITs.
•         Long-term appreciation. REITs are great for establishing a stream of steady income, but they don’t offer the same long-term appreciation results as direct property investments (or stocks, for that matter). You may see better long-term results with investments of your own.

The Advantages of REITs

However, there are also some advantages to investing in REITs, including:

•         Hands-free management. While the responsibilities are fairly manageable, being a landlord can be challenging. Choosing the right property, collecting rent, handling repairs, and managing evictions and tenant turnover can all be stressful. REITs offer you many of the benefits of property investing while keeping you as hands-off as possible. For many investors, this is a massive relief.
•         Broad, diverse exposure. Individual property investors often focus on single neighborhoods or one type of investment property (such as multi-family residential real estate). But with REITs, you have the option to get far broader, more diverse exposure. You can add many different types of properties to your virtual portfolio at once.
•         Trading convenience. Buying and selling shares of REITs is much faster and easier than buying and selling properties. There’s no marketing required, fees are minimal, and you don’t generally have to wait for a buyer or seller to come along with the right fit.
•         Steady income. Buying a rental property can provide you with a steady stream of income in many cases, but the income from REITs tends to be even more stable and reliable. This is ideal if you’re planning to retire soon or if you love predictable returns.
•         Minimal capital requirements. You don’t need to save up for a down payment when buying REITs; there are often few, if any capital requirements, making this much more accessible to new investors.
•         Minimal credit requirements. You also don’t need to have a minimum credit score to buy REITs, since you won’t be securing any financing from lending institutions.

If you’re looking to get some exposure to the real estate market without putting in much direct effort or money, REITs are the way to go. If you want more direct control or if you’re interested in building a bigger real estate empire, it’s much better to invest in real estate directly. Otherwise, the pros and cons of real estate investments and REITs tend to balance each other out; it’s up to you which direction you want to go.