Pros and Cons of REITs

[Danyelle Edwards]

In my research, REITs seem like a good option for me to start an initial cash flow from real estate investing before considering multiple rental properties. Is anyone able to share the pros and cons of REITs?

[Ian Ippolito]

Quote from @Danyelle Edwards:

In my research, REITs seem like a good option for me to start an initial cash flow from real estate investing before considering multiple rental properties. Is anyone able to share the pros and cons of REITs?

I have both passive investments (REITs and syndication/crowdfunding) and nonpassive (directly owned real estate) in my portfolio. In my opinion, both have pros and cons and neither is 100% superior to the other. And I like having both in a fully diversified portfolio.

The main pro with a REIT is that it's passive (meaning you don't have to do any work). If you choose well it should also be diversified many times more than buying an individual property (which gives additional protection in case something goes wrong). And again if you choose well, the manager should have years more experience than you (and avoid making newbie mistakes that you would be likely to).

The downside is that you have to pay an extra management fee, and you can't put in sweat equity (meaning that you can't work extra hard to get an extra return like with direct real estate).

If you decide you want to go with a REIT, there are multiple choices. There are publicly traded REITS (which are stocks and you can easily research on many sites like MorningStar), there are private REITs (which are syndication/crowdfunding funds) and there are private REITs that report publicly (like BREIT and SREIT).

Also...REITs also offer liquidity which can be an advantage or disadvantage depending on how you look at it in your situation. When liquidity is available, and allows you to cash out of the investment quickly.

On the other hand, many of the private REITs have no or limited liquidity. So if you are wanting to liquidate during severe downturn (when everyone is) then you might get gated and not be allowed to.

Additionally, real estate in itself is not liquid. So, the REIT is essentially implement a hybrid scheme to provide that and at the minimum it costs more than a direct investment that doesn't have this. At worst, some of the privately held publicly reporting REITs may be investing in things like noninvestment grade bonds to allow for liquidity, and the investor may not want to be in them.

Good luck!