In the world of real estate investing, one must understand the differences between direct real estate and REITs. Both can be powerful tools when it comes to investing. There are specific pros, cons, and alternatives with both. We will explore exactly how they both work:
What are the advantages of direct real estate?
Direct real estate requires the purchasing of certain properties and generating profit from them. The income could be from owning rental property or any other business dealings. Direct real estate investing also gives the investor more control. And even with the constant market fluctuations, property prices will continue to climb. This means the property could be sold for more money. Another great advantage of property purchases is the number of potential tax offsets.
What are the disadvantages of direct real estate?
Liquidity can be a real issue if you are in need of a quick money infusion. There are times when you may not be able to unload it in a timely manner. Financing can also be a big drawback as some properties require a boatload of capital. Things can go sideways really quickly if market conditions take a dive, or if you have a tenant who is uncooperative.
Advantages of REITs
The good thing about REITs is there is no need to purchase the physical property. Income-generating assets are owned by several investors. The overall return of REITS can be pretty substantial. Unlike Direct real estate, they can be sold pretty much immediately just like stocks.
Disadvantages of REITs
One huge drawback with a REIT is subject to heavy taxation. Because they are viewed as “qualified dividends,” they are taxed at a substantially higher rate. Also, rate fluctuations are not out of the ordinary. Lack of diversification can also be a drawback of REITs. If the economy takes a hit, the risks can increase.
At the end of the day, REITs can be a good way to expand your portfolio. They can be risky because no one can predict when or if they lose value. The bottom line is people should invest wisely. Think about what your portfolio will look like in the future. Always get with a professional finance person to discuss your options and gain clarity.