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On my 57th birthday, I quit my job. Then, I became a real estate investor. At first I was intrigued by Real Estate Investment Trusts, or REITs. I spent seemingly endless hours reading the latest business and financial news as I planned my investment strategy. The returns were nice—better than the stocks and bonds in my retirement accounts. But, I wanted more… and that’s when I examined private real estate investing. Both real estate investment strategies have their advantages and benefits. So let’s evaluate REITs vs. private real estate investing, with a goal of determining whether one of these options may suit your personal aims and objectives.

REITs vs. Private Real Estate Investing: The Pros and Cons of Each

REITs: Pros and Cons of Investment Trusts

A REIT is type of dividend stock offered by a company that owns or finances income-producing real estate. You can find opportunities to invest in REITs through public stock exchanges, but there are also private and public non-listed REITs. REITs enable anyone to invest in real estate by buying into shares of large-scale portfolios for properties in nearly every industry, including hospitals, apartments, shopping malls, and student housing. Effectively, REITs are used to either purchase or develop commercial properties, which are then leased out to tenants. The revenue that’s generated from lease payments is often distributed to shareholders as dividends. REITs are a sweetheart investment for some because they provide several benefits. But there are a few potential downsides too. Let’s take a look.

PROS

  • Low effort. You don’t have to go and find good investment deals, nor do you need to manage the properties that are purchased. The REIT company handles all of these tasks on your behalf, along with many other investors.
  • Return on investment. Compared to the stock market, REITs typically offer above-average returns and those returns may grow as the properties see value appreciation over time.
  • Liquidity. Just like your stock market investments, you can sell REIT shares at any time. You’ll just need to accept the current “going rate,” which is determined by the unique market conditions at a given point in time.

CONS

  • Lack of control. You are relying upon the REIT company to make all investment decisions on your behalf. This means that, in theory, they may make decisions that you wouldn’t make if you were in charge of the decision.
  • Complicated analytics. Do you have the skill set to understand complex reports on the REIT’s operations, financial performance, and security analytics? Just following along with the financial news media may not be sufficient to provide you with the insight you need to make an educated decision.
  • Taxes. REIT dividends are not “qualified” dividends, so you will likely be taxed at the same rate as ordinary income. The effects, of course, will vary according to each investor’s tax bracket. You may also end up owing capital gains taxes, so this is another consideration to keep in mind.
  • Stock market volatility. Like all stocks that are publicly traded, REIT share prices see changes and fluctuations throughout the trading day. You may find yourself riding some rapid ups and downs on a daily basis. If you choose to follow closely, you could find that the volatility is quite stressful.

Overall, REITs are a low-input real estate investment option that compares favorably to other stock options. But you have little control over how the investment performs over time. Additionally, you generally will not see the tax benefits that you might enjoy with other investment opportunities, so that’s an important consideration to keep in mind as you weigh your choices.

A Comparison of REITs vs. Private Real Estate Investing

In comparison to REITs, private real estate investing is a much broader category that entails creating financial returns from buying, selling, or renting tangible property. These properties can range from large, multi-unit commercial buildings to single family residential homes. Acquiring residential property is the most popular private investment option, representing an affordable entry point and a flexible exit strategy. Investors frequently engage in lead generation to locate good opportunities, buying properties below market value and renovating the structure prior to resale or renting. The end-goal for private real estate investors is to sell at a solid profit margin or to create a continuous, reliable source of rental income. What are some of the possible advantages and drawbacks?

PROS

  • Control. You get to hand-select the most lucrative real estate niche; one that happens to align with your personal goals. You have a lot of flexibility since you get to choose properties that represent a good investment decision; one that will align with your financial objectives.
  • Return on investment. When you find a great investment property, the profit margins can far outpace other opportunities.
  • Tax Deductions. From financing and interest to depreciation and cost of repairs, your private investment property can be a source of many tax deductions. What’s more, you have the option of rolling your capital gains into a 401(K) to defer liability.
  • Low entry barrier. Private real estate investors come from all kinds of career backgrounds. Individuals from a wide variety of professions will find that their skill set is useful in this field. This means that a large percentage of real estate investors dive into this new business niche without the need to compensate for a major learning curve.

CONS

  • Liquidity. The liquidity of your real estate investment can ebb and flow according to market pressures—but luckily, you have a variety of potential exit strategies at hand to maximize your end-return.
  • Semi-predictable market cycles. Of course, all real estate investments are, to some degree, affected by regular cycles. This can require a bit of advance planning and an awareness of how social, economic, and political events may impact the real estate market in the coming weeks, months, and years.
  • High input. Some prefer a very hands-on investor role, while others prefer to be very hands-off. For those who would rather sit back and let the money roll in, the time and effort that private real estate investing demands could be a viewed as a major downside or hindrance.

For the kind of person who likes to be in control of their financial future and hands-on with their money, private real estate investing makes sense. Property investing is vulnerable to market pressures just like REITs, but the former provides a broader set of exit strategies and may provide higher potential returns. This can serve to offset much of the risk that you shoulder.

How to Get Started in Private Real Estate Investing

While I tend to jump into things head first, investing in real estate on my own felt like a shock to the system. After doing some research, I decided to do the smart thing and sought some solid training and mentoring as I became a HomeVestors® franchisee. I can confidently evaluate investment opportunities to determine whether they fit with my financial goals. If I ever confront an issue or question, my local HomeVestors Development Agent® is just a phone call away. If REITs are not delivering the returns you need to support your retirement, get in touch with HomeVestors. We’ll provide you with insight to help you become a satisfied private real estate investor.

 

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