Real estate can be a great addition to any investment portfolio, allowing you to grow your wealth while diversifying your assets or generating additional income on top of your existing investments. However, when it comes to adding real estate to your investments, there are two main approaches to consider: investing in individual properties or investing in REITs. We’ll present the pros and cons of both and help you decide which is the right choice for you.
Buying Real Estate
From a traditional perspective, investing in real estate means buying individual or multiple properties. These properties may be residential or commercial and may include the following:
- House with one residential unit
- More housing units
- Apartments
- Apartment buildings
- Offices
- Office buildings or business premises
- Warehouses
- Storage spaces
As a real estate investor, you can buy a property or buy and fix it up to sell for a profit. Of course, you can purchase real estate on your own or with other investor partners.
Advantages of Independent Property Purchase
Here are some reasons why buying real estate is a good thing:
Greater control
When you are able to buy, manage, and sell an individual property, you are in control of that investment.
This can be the best choice for investors who prefer to have a management role in their real estate investments, as this way, you also get to choose how the property is managed, when it is sold, and choose the tenants who use your space.
Your creativity in projects
Direct investments enable creative projects. Direct investment in real estate offers you the freedom of personal creativity. When you build or renovate a property, you can choose everything from the design of the building to the paint on the walls and even the tenants.
This can make the whole process more personal and give you a sense of emotional investment in addition to the actual financial investment. The feeling that this is a product of your creativity brings benefits that are not visible to the naked eye.
Disadvantages of Independent Property Purchases
Amount of money needed
To buy a particular property, you need a large amount of money. Also, if you don’t have that money, you would have to take out some kind of loan to be able to buy that property/facility and later rent or renovate it for resale.
All costs are yours
Whether the property needs some appliances, has been empty for a few months without tenants, or it’s time for renovations, all costs associated with it fall on you. This can harm your budget if you do not have adequate savings ready and need to return the invested capital within a certain timeframe.
You are responsible for the management of your real estate
If you are the owner of a building, you are also responsible for the management of that building. That means designing, finding tenants, managing repairs, marketing, and more. Also, if you want to hire someone to take over these responsibilities, you must occasionally control their work and be prepared for additional costs.
Low liquidity
Liquidation can be difficult and time-consuming. If you ever want (or need) to liquidate your real estate investments, selling a home can be much more complex and take much longer than selling a REIT investment. You may need to draw money from other sources of income or savings if you need quick access to funds.
On the other hand, there’s the option of investing in real estate through real estate investment funds or REITs.
This manner of investing allows investors to add properties to their portfolio without having to buy, manage, or directly assume the risk of that property/project. The fund itself is responsible for the purchase, management, and eventual sale of any assets it owns. Investing in REITs can be less stressful and time-consuming than owning and managing your own real estate.
Advantages of Investing Through REITs
Smaller amounts of money
Perhaps the most significant advantage of REITs is that individual investors can access real estate profits without having to own, manage, or directly finance the properties. Such funds offer a cheap way of investing in the real estate market. It’s possible to invest in some of these funds with as little as €100, which is a much lower entry point than investing in real estate on your own.
Lower costs
Buying a property can easily be a five- or six-figure initial investment, not to mention the costs related to renovations, repairs, marketing, or management. If you don’t have that much money, a REIT can be a much more affordable way to invest in real estate. Costs, when it comes to funds, represent commissions that can amount to 5%, depending on the type of fund itself, as well as tax on realized capital gains.
Dividends as passive income
At least 90% of the REIT’s taxable income must be distributed to investors as dividends. For this reason, REITs are generally well-managed (with low operating costs). Investors can usually count on dividends as passive income.
Disadvantages of Investing Through REITs
No control or personal creativity
You will not have any creative control. Some investors simply want to increase their net worth and earn from this investment. Others, however, enjoy being part of the “process.” Investing in the real estate market through a REIT does not offer you any kind of creative control over the investment properties that the REIT holds. You will not be able to contribute or make decisions about assets, tenants, clients, or risks assumed.
You are not a real estate owner
There is no real sense of ownership. Owning real estate for rent or managing an office building offers investors a sense of ownership. By buying a property, they can watch the project grow – but REITs can’t provide that. If you’re the type of investor who wants a personal investment experience, buying physical real estate may be more up your alley.
So which is better, investing in REITs or buying real estate? Well, as with most aspects of personal finance, the answer really depends on you.
Investing in real estate can be ideal for investors who want a more personalized experience. By buying, managing, and reselling assets, investors can watch their money move in real-time, from start to finish. They also have full creative and managerial control over their projects.
REITs may be a better choice for investors who prefer a simpler approach.
With a REIT, investors can quickly and easily purchase shares of their initial investment choice. Since the REIT manages the property, investors are not burdened with the day-to-day stress of tenants, management, or repairs. REITs also pay dividends to investors, providing reliable passive income.
In the end, the decision is absolutely yours.
