REIT vs Direct Investing
When looking to add something to your overall financial portfolio real estate investments provide an attractive option. Having these valuable assets can open you up to many awesome financial opportunities in the future, such as appreciation and rental income. If you are seeking to invest in real estate, you have two options: buying into a REIT (real estate investment trust) or directly buying a piece of real estate. Understanding the pros and cons associated with each of these choices will help you make an informed decision:
Direct Investment
Pros:
More than anything else, the advantage you will gain by investing directly will be the control you will maintain over a property. Additionally, you can see, touch, and control an IRA owned property which REIT investors simply cannot do. Take advantage of local real estate opportunities when investing directly, as you may be able to scoop up a piece of land or property for much less than its actual worth and turn it in to a great investment.
Cons:
While having more control is excellent, you will also have a much larger financial entry point. You will typically need tons of capital to make even the initial purchase of most properties that hold re-sell value and general worth. Additionally, the process of selling a piece of property is not always guaranteed to make you money or even happen at all, and could take months if not years. However, if you have lots of money to invest, direct investment can provide a potential goldmine!
REIT
Pros:
For those familiar with stock trading, REITs will feel rather natural. Since they trade just like stocks, it will make it easy for you to add real estate assets to your financial portfolio. What is awesome about REITs is that you can invest in specific types of properties, buying shares in companies that handle such properties. Typically, REIT shares will pay dividends with yields higher than stocks. This type of real estate investing is more hands off and you don’t have to be an expert in real estate to potentially make great returns.
Cons:
Just like a stock’s value follows the financial market, REITs follow the trends of the housing and real estate market. Due to the somewhat dire state the market is going through recently, it makes an investment in REITs a bit more risky. However, some properties continue to sell consistently, so with some research REITs can still be an excellent investment option if chosen wisely. Additionally, keep in mind REITs act like mutual funds in that the REIT has certain expenses that must be paid (e.g. operating costs, management fees) before dividends are paid out to the investors which dilutes the overall return. The flexibility of managing REITs is not as strong as normal stocks, as 90% of the payouts on them are typically required to be done through dividends.