Are you torn between REITs (Real Estate Investment Trusts) and directly investing in your property? While there is no comparison between Personal Property Investing and Real Estate REIT returns, both are similar. The main difference lies in the way the funds were acquired. The former involves money that has been accumulated by the investor.
In contrast, the latter involves money that has already been invested by the investor, or at least a large part of it. Since investors who invest in the latter also buy a part of their money back from the property, it makes sense that the returns are more predictable than those from the former. The property’s value generally determines the real estate REIT returns after the actual purchase has been made.
It can be overwhelming to choose between them, especially with little or no knowledge about how they operate. Several investors in real estate are keen to compare doing it individually and REITs. If you don’t understand, REITs means getting in companies with mutual funds in property investment.
Bugis Credit covers a wide range of information regarding REITs. One can invest with the companies without owning property or taking part in the management. You can buy residential or commercial houses for direct real estate investment and take charge of everything it involves. This article discusses the comparison between REITs and personal property investment. Continue reading to get more knowledge.
REITs returns vs. personal property investment
Information you should know about REITs
As said earlier, REITs own, run, and finance real estate properties and assets. They’re mutual fund corporations that collect and use capital from several investors. Most REITs are designed to allocate around 75% of their company’s assets to treasuries, real estate, and cash. The US contains about 230 REITs trading on chief stock exchanges and is certified by the Securities and Exchange Commission. The collective equity market capitalization for these corporations is valued at about $1 trillion. Today, the globe has over 35 states providing REITs. Below are some advantages and disadvantages concerning REITs;
- The most amazing advantage is how investors can get returns without directing getting involved with properties. One gets a low-cost investment method. The lowest entry point is $500, which you may not use to buy an individual property.
- You acquire total return potential through REITs. Shareholders benefit from having about 90% of their taxable income paid by REITs as required by law. In very rare cases, we will find a five percent dividend yield or above. Furthermore, with an increase in the underlying assets’ value, REITs have to stand for capital appreciation.
- Liquidity is a very vital point. REIT shares can be bought and sold on an exchange. In other words, the trade operates under a huge volume, meaning you can get in or out whenever interested. It’s due to the REITs’ ability to be bought or sold like live stock.
- Unfortunately, most REITs beginners are grouped to have ‘nonqualified dividends’. That means their tax rate is higher than others. For this reason, you should be considerate when deciding to invest in REITs, especially ones with a taxable brokerage account.
- REITs are keen on interest rate fluctuations, and their prices are very high for rising interest rates. REITs treasury yields and prices are inversely related. For instance, when treasury yields rise, prices go low, and vice versa is true.
- You can diversify your portfolio through REITs’ help, but most REITs aren’t diversified completely. It could probably be due to majoring in specific investment kinds such as shopping centers and offices. An example of a REIT mainly investing in hotels, and unfortunately, traveling is stopped due to a pandemic. What happens to investors? You’re likely to be submitted to property-specific risks.
- You lack control over the investments. Being a passive investor, nobody allows you to contribute by giving ideas on the property types to be bought. The only thing to do is evaluating different REITs and picking one with a trusted team.
Individual property investment
There’s direct buying of a specific structure like a residential building or a commercial house in individual property investment. If you do so, money is generated from rental income, other profits from the business, and appreciation sometimes.
- Individual property buying enables substantial cash flow. You can also offset your returns through the multiple tax breaks available. A good instance is reducing the unnecessary and ordinary expenses for maintaining, conserving, and generally managing your investment. You can also take advantage of depreciation as a tax break. It can be done by lowering the buying costs and making improvements on the property to serve longer. By doing so, you’d have reduced your taxable income.
- You’ll enjoy overall decision making, unlike in REITs. You’ve got control over choosing where you want your properties located, their financing structure, and type. Additionally, it’s you to set rental charges, the number of properties to purchase, and tenant types you wish to have.
- Enjoy the benefits from property appreciation. Just like the stock market fluctuates in prices, so does the real estate industry. With time, property prices increase, meaning you can sell yours at a higher price when that moment comes and gives satisfaction.
- A major setback in investing alone is that you need time and energy for your plan to succeed. There’s also a lot of pressure in maintaining emergencies, dealing with tenants, being liable for any accidental occurrences on your property.
- Financing issues whereby most investors count on mortgages and other financing loans to pay off their properties. If you get tenants that fail to cooperate in rent payment as expected, the loan may have to have defaulted.
- You can’t quickly sell your property to settle an emergency because real estate isn’t a liquid investment.
The bottom line
REITs are a great choice for investors wanting to act as spectators in real estate and still benefit. It’s also great for individuals lacking enough savings or can’t get financing to buy a building. Beginners without more knowledge in real investment can start learning by joining REITs. Through that, you can get some experience before deciding to move on to your individual property. Personal property investing is a choice for those wanting direct cash flow.
Moreover, if you wish to gain from tax breaks that can offset your earnings or generate income from potential appreciation, then the direct investment is your suit. While it may not give harmony because of various challenges, investing in your property gives you full control over decision making and management. The ball now lies in your coat. Weigh the two by looking at the advantages and setbacks, then make your choice.