Real Estate Investment Trust (REIT) vs Direct Real Estate

[Jonathan Small]

I was recently explaining for an investor the difference between investing in Real Estate Investment Trust (REIT) vs Direct Real Estate. I see this topic in 2 buckets: rental properties (hands-on) and REITs (hands-off). I personally invest in both, and you can too if you choose. Below is my summary or each. I try to point out just the pros of each. Feel free to post your con or other side of the investment in a reply.

Real Estate Investment Trust (REIT): A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.

Direct Real Estate:  A real estate investment where you are actually buying a physical asset that you (or a property manager) actually touches.    Buying a property and renting it to a family is a basic example.  Rental property investments can be lucrative opportunities for those interested in taking a more active role in their real estate investments. They can produce monthly cash flow in addition to long-term appreciation. They also offer the benefit of direct ownership, which presents tax advantages, greater control over the investment, and the potential for the growth of your personal net worth.

Pros of REITS

Get in and out of investment quickly  You can buy and sell REITs quickly.  For example, I personally can log into my brokerage account and buy Simon Property Group (ticker SPG).  I could do this in about 17 seconds.  It is currently trading about $160 per share.  Low level of cash needed:  I can get into this investment with as little as $160.  This company pays a 4% dividend which is cash flow.  You get appreciation:  This stock can go up to $180.  I consider this appreciation.  When I am ready to sell it takes me about 17 seconds to sell and get my money.  In short, buying REITs are very liquid.  I also like that this can be done in a tax sheltered retirement account or an investment brokerage account.

Pros of Direct Real Estate

Regular cash flow: Rental properties can offer reliable monthly cash flow in the form of rental income. Multiple income streams provide diversification of earning power, reducing dependence on a single income source while increasing income.  Asset appreciation: In addition to monthly payments from tenants, rental properties can earn money through appreciation. Equity ownership gives an investor the right not only to lease a property, but to capture any appreciation earned upon the sale of that property.  Tax deductions: Rental property owners can deduct from their taxes the majority of expenses that they incur in managing their investment property. Some examples include legal fees, insurance premiums, taxes, and maintenance costs paid in operating the property.   Control your outcomes: You bear the responsibility of your investment, which means that you are in charge and get to make all of the decisions concerning your investment. You are able to determine how much to charge in rent, what renovations to make and when, who to work with, and the property’s eventual resell cost as well as the timing of the sale.  Leverage:  When you buy direct real estate you often get a mortgage.  You put down down 10-30% down and the bank will give you the rest.  This allows you to buy more of an asset when a bank is willing to be your 70% partner.

I currently use REITs to grow my IRA, brokerage, and SEP accounts. I actively buy physical real estate to take advantage of cash flow, appreciation, loan pay down (not mentioned up above but very beneficial), and tax benefits. FYI...I am looking into using my IRA as a self directed investment. I will post my experience later.

How can you see using REITS and Direct Property in your financial goals?