Since an increasing number of investors are becoming aware of the need to have a more diversified portfolio, real estate continues to be one of the “safe-haven” assets. When it comes to investing in real estate, there are two main options, namely traditional real estate ownership or Real Estate Investment Trusts (REITs).
Traditional real estate ownership
There’s no introduction necessary for traditional real estate ownership, so we’ll move on to talk about the positive and negative aspects involved. Investors going down this avenue are able to manage the real estate effectively (or hire someone to do it) and direct rental property can be a return-providing long-term asset. Control over the investment is the main advantage here doubled by the tangible asset you hold.
Direct ownership comes with several responsibilities and means you’ll have to collect rent, choose tenants, solve their problems, and make sure they won’t make any damages to your property. Also, traditional real estate investing requires more capital in order to get started. In case you can’t invest like Ofir Eyal Bar, Sam Zell, or Steven Roth, then the next option could be appealing.
What is a REIT?
A solution to getting involved in real estate without actually holding the underlying properties is through Real Estate Investment Trusts. These are assets that trade like stocks on the financial markets and represent collections of assets related to the real estate industry. Among the assets included in a REIT, you could find residential, commercial, industrial, or agriculture real estate. These tools help investors gain exposure to the real estate industry, in case they don’t have enough capital to invest traditionally. One of the most important advantages of REITs is diversification. Different property types, geographical locations, plus the ability to gain dividends on some instruments, make REITs an alternative for an income portfolio. Liquidity is not an issue in this case, as compared to owning a property when selling it can represent a real challenge.
On the negative side, we have volatility and the future’s uncertainty. If owning a physical real estate can help investors navigate easily through a market downturn, we can’t say the same about REITs. The prices can fluctuate by a wide margin when strong waves of selling emerge, potentially exposing investors to severe losses.
Which one is better?
As seen in our description, none of the above-mentioned real estate investing avenues represents an ideal solution. Because of that, it all comes down to what each investor can afford and what are the main objectives. In the case of investors looking for stable annual returns in exchange for large investments, the traditional method is the most suited. On the other hand, for people who would like to diversify a portfolio with real-estate assets, REITs represent the best alternative. One should carefully put on the balance the negatives, not just the positives, before deciding to make an investment. That’s one of the most important aspects especially now when we are near the end of an economic cycle.