If you want to invest in real estate, there are 2 ways to do that. One is investing in REITs and the other one investing in direct real estate. Many investors can get confused about whether to invest in REITs or direct real estate. Some investors might think direct real estate investment is a hassle and so they are more comfortable with REIT investments.
What is Direct Real Estate Investment?
Direct real estate is a physical property that an investor can buy. Investing in direct real estate means buying a specific property like residential or commercial buildings and generating money through rental income, appreciation, and profits from any business activities that take place in the invested buildings. Direct real estate offers more tax breaks than REIT investments and gives an investor more physical properties.
Benefits of Direct Real Estate Investment
One key benefit of investing in physical properties is to reap benefits from generating substantial cash flow. As discussed earlier, another benefit is that it offers more tax breaks than REIT to offset the income. You can deduct the necessary costs to manage and maintain the property. Another large tax break is for depreciation in which you can cut the costs of buying and improving a property over its useful lifetime. There’s also appreciation in the investment, while the real estate market fluctuates like the stock market, property prices keep on increasing with time. This makes the property eligible to be sold later at a higher price. Plus, you can have more control over decision making than you would with REITs.
Disadvantages of Direct Real Estate Investment
The disadvantage of direct investing is that it requires a significant amount of time and energy for you to generate an income. You have to deal with tenant issues, maintenance of the property, and your liability for any accidents. Many investors also need to take on a mortgage or loans for financing and this can be problematic for them. If the market has a downfall, this will deeply impact the loan repayment. And real estate isn’t liquid, so this means you won’t be able to sell it quickly for quick cash. Thus, most investors dread investing in direct estates.
What is REIT?
Real Estate Investment Trust or REIT is a company that owns, operates, or finances income-generating real estate or assets. Unlike direct real estate, you don’t need to own a physical property for an income. REITs combine the capital of many investors. REITs can be appropriate for new investors with limited experience in real estate and to diversify their portfolio.
Benefits of REIT
Any individual investor can access profits from real estate without needing to own a physical finance property. They offer a less expensive way to invest in the real estate market. That’s one advantage. Another one is that REITs offer attractive return potentials. By law, REITs have to pay a minimum of 90% of taxable income to the shareholders in which you would have a 5% dividend yield or more. REITs to have the potential for capital appreciation with increasing asset value. Another major benefit is that REIT is liquid. Thus you can buy or sell shares anytime you want.
Disadvantages of REIT
One real con of REIT is that most REIT dividends aren’t considered as qualified dividends so the tax rate is high. You need to pay extra attention if you own REITs in a taxable brokerage account. You can hold REITs in a tax-advantaged Roth IRA account. Another problem is that REITs can be very sensitive to interest rate fluctuations which can be bad for the price. Another drawback is that while you can diversify your overall investment portfolio, most individual REITs aren’t diversified at all.
Investing in a direct real estate will be a better choice if you want positive cash flow, tax breaks to generate income or great potential. However, REITs will be a good choice if you don’t want to into hassles of investing in physical properties. REITs are good for beginners, so you can start from here to gather experiences.
Note: the page content was squeezed for you with a focus on REIT , Direct Real Estate Investment by Paperfree Magazine Team, editor