Buy actual real estate or invest in REITs?

Question

I am starting out in real estate. Which way is better to invest, buying actual real estate or investing in REITs? What are the pros and cons

Corina Eufinger · Answer

If you are just getting started I recommend you buy your own property first.  It's the best way to get hands on experience and learn.  It will be hard to judge what's a well planned and functioning REIT if you haven't invested yet.  Once you have real world experience you'll be a better judge of sound investment strategies and plans.

Account Closed · Answer

@Logan Edmunds

Depends financially. However, if money isn’t the problem, I’d rather own hard assets than paper assets. Better for taxes, more secure and you have a bit more of control.

Alina Trigub · Answer

@Logan Edmunds

A better strategy is the one customized for you specifically.

I'll underline the main differences, but it's on you to dig dipper and read up on both.

REITs

1) act like a mutual fund so liquid

2) ordinary income so taxed at your tax rate

3) returns are unpredictable

4) intangible asset

Real Estate

1) less liquid (you'd want to hold for at least a year or more)

2) returns can be projected based on the Actuals used as an input

3) long term hold offers you sometimes losses in the first few years via depreciation deduction and then long term cap gains taxed at a max of 20%

4) actual asset

Isaac Johnson · Answer

REAL ESTATE IS THE BEST INVESTMENT, that anyone can make. It’s shelter, It was here before us and it will be here after us. People will always need shelter. If you own shelter especially in a place where housing is needed, that is the best investment. I don’t like to speculate, so I think cash flow is the way to go.

Patrick Buttermark · Answer

You need to:

A) Know thyself

B) Develop an understanding of what REIT's are and factors that effect their pricing

C) Develop an understanding of where you're going to invest if you buy physical property

For this comment Ill be talking about publicly traded REIT's as they're available to everyone through a brokerage account. Private REIT's are another topic.

Investing in REIT's is more like stock investing, you analyze them like a stock because they are stocks. Like any investment you have red flags to stay away from, one problem with stocks is the red flags seem very attractive to the uninformed-  like a low share price and a high dividend (stay far away from that) Do you have an interest in stock analysis or following the markets? Will you loose sleep if the market overreacts to a .25 basis point move by the federal reserve? The market loves to overreact to things ( especially nonsense ) that will not effect the fundamental value of your investment but  cause the share price to drop-how will your personality handle that? Will you buy more seeing share prices on "sale"? Will you panic,sell and loose money ?

As for physical property, if you live in or near an area that's reasonably affordable,has a good economy (for example if 80% of the town works for one employer you might want to stay away from there) and has fair laws pertaining to landlord/tenant issues I would look into actual property. You need to know yourself though. How will you handle evicting someone? Can you handle any repairs? If you have to pay someone to fix even the smallest things that'll add up and cut into your profits. How will you handle a 3 am call that the toilet is overflowing ?(and of course it will have been used before it overflows)

My exposure to investment property is through REIT's only because I live in one of the outer boroughs of NYC and I see no point in spending a ridiculously high amount of money for a building that's going  to produce a ridiculously low cash flow (that's IF everyone paid and IF nothing broke- big IF's)  add to that gross over regulation along with moronic laws that give all the power to the tenant  and I can't see a reason for me, if I want to be able to sleep at night and have peace of mind, to own physical property. If I lived somewhere else I would own physical property without a doubt.

Sam Shueh · Answer

Have control on your own investment 100%.

Michael Gansberg · Answer

@Logan Edmunds I think the value of your time along is an important factor in deciding on REITs or direct ownership. Don't have the time/inclination to self-manage, or interface with a manager? REITs might be better- in theory, the share price(or what you pay) takes management into account. Want your liquidity available immediately? REITs are better for that. Tend to trade stocks too often and when you shouldn't? Direct ownership might be better.

In theory, with REITs, you're paying professionals to own, acquire, and operate real estate, so you shouldn't have to pay as much attention. That's the theory. In practice- who cares about your money more than you do? Nobody. So while I once invested in REITs, I prefer direct ownership now. It gives me control, my mistakes are my own, and there are no opaque, inscrutable accounting books. You can listen to all the quarterly conference calls of a REIT, read all the quarterly and annual reports, and you'll still have the smallest fraction of an idea as to what's going on when compared to what's happening in your own portfolio of directly-owned properties.

MG

Nate Marshall · Answer

With most REIT's you will be buying through brokers since many are like stocks. BREIT comes to mind and they have 472 billion under management. Probably one of the best. Eric Trump is also launching a REIT.

If you want to get into real estate decide what you want to do. I've found a lot of newer people will be more accepted in the Multi Family world because it's a team sport and if you can bring value to a team who does syndication or a 506(C) or (B) raise you can learn a lot and its quite lucrative.

Buy actual real estate or invest in REITs?

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