How REITs Compare to Traditional Real Estate Investments
Generating passive income from commercial real estate without direct involvement seems like too good of an investment to pass up. Real estate investment funds (REITs) offer this kind of arrangement by allowing you to purchase interest in large commercial property deals while not having to throw out enormous sums or get involved in buying and selling the property.
In addition, REITs are one of the highest-performing assets. According to the FTSE NAREIT Equity REIT Index, REITs' 10-year average annual return was 8.34%. It could make you wonder why traditional real estate investing isn't dead. However, conventional real estate investing is more popular than ever because it has distinct advantages over REIT investments. This fact is the reason many portfolios have a combination of both.
Let's get a better understanding of REITs by doing a head-to-head matchup between REITs and traditional real estate investing.
Ownership Structure
Traditional Real Estate Investing
In traditional real estate investing, individuals or groups purchase physical properties such as residential homes, commercial buildings, or land. They become landlords or property owners responsible for managing, maintaining, and finding tenants.
REITs
A REIT is a company that owns, operates, or finances income-generating real estate. Investors buy REIT shares, representing ownership in a diversified portfolio of properties. REITs can own various real estate types, including office buildings, apartments, hotels, and shopping centers.
Liquidity
Traditional Real Estate Investing
Buying and selling physical properties can be a time-consuming process. Finding a buyer or seller may take weeks or even months. And it takes even more time to complete legal processes and transfer ownership.
REITs
REIT shares can be bought and sold on major stock exchanges, offering higher liquidity than physical properties. Investors can sell their shares relatively quickly, providing easier investment access.
Investment Size
Traditional Real Estate Investing
Investing in physical properties often requires a significant upfront capital investment. It can be challenging for individual investors to diversify their portfolios across multiple properties.
REITs
Investors can purchase REIT shares with a much smaller initial investment. This option allows for greater diversification across various properties and geographic locations.
Management and Responsibilities
Traditional Real Estate Investing
Property owners are responsible for property management, maintenance, tenant relations, and dealing with any issues. This task can be time-consuming and requires hands-on involvement.
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REITs
REIT management responsibilities belong to property management, leasing, and maintenance professionals. Investors, on the other hand, have a hands-off role.
Income and Returns
Traditional Real Estate Investing
Rental income from tenants and potential property appreciation are the primary sources of returns in traditional real estate investing.
REITs
REITs generate income primarily through rent collected from their properties and capital gains from property value appreciation. By law, REITs must distribute a significant portion of their earnings as dividends to shareholders, making them an attractive option for income-seeking investors.
Risk and Diversification
Traditional Real Estate Investing
Investing in a single property or a few properties can expose investors to higher risks, especially if those properties are in a single location or sector.
REITs
REITs offer greater diversification since they typically own properties across different locations and property types. This position can help mitigate risk and reduce the impact of poor performance on a single property.
Making Your Decision
Traditional real estate investing involves owning and managing physical properties. At the same time, REITs provide a more liquid and diversified way to invest in real estate through publicly traded shares of companies that own and manage real estate properties. The choice between the two depends on your financial goals, risk tolerance, and desired level of involvement in property management.
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