With the US Real Estate Market Ripe for Investment, Do You Choose REITs or Rentals?
Whether or not real estate in big cities is having a big moment, which tends to hog the national discourse, it is always a good time to invest in real estate. While there are several options to consider, one thing remains true of all—investing in real estate is a long-term endeavor, which can yield a reliable stream of income over time.
Depending on your level of experience in the market, and on factors such as your availability to be either a more hands-on or a more hands-off investor, you should choose the strategy that is more suited to your interests. The two most common investment models in the industry are Real Estate Investment Trusts (REITs) and rental properties. At Build Luxury Red, we have plenty of experience dealing with both investment scenarios, and we’re looking to share some of the things investors should know when trying to decide between the two options. Below, we explore characteristics of both, and you can weigh on what would be more of a pro or a con, depending on your goals and possibilities.
REIT vs Rental Properties: What is Your Investment Capital?
The first major difference that you should consider between these two investment models is regarding your investment capital. How much can you afford to invest? How much would you prefer to invest? How involved would you like to be in the project?
Going for rental properties traditionally means taking on loans to purchase the investment property (or properties). The heft of such loans can depend, of course, on the type of investment property you are putting money into, as well as where it is located. If available capital is not an issue, then the opportunity pool widens considerably, especially when it comes to the luxury segment. Outside of gateway- and big magnet-markets, there awaits a multitude of high-potential investment destinations, such as Wasatch Front, Utah, a market that is having a big moment in the wake of the pandemic.
Investing in either one or more REITs is another option, and a good one if you’re not a hands-on type of investor and/or like to diversify your options by investing in portfolios spread across multiple markets. However, such investment trusts often concentrate on one property type, which you should keep in mind when deciding whether to invest in one REIT or several. While yields vary across property types and fluctuating economic conditions affect segments differently, some real estate will always be in demand, such as luxury real estate developments being drawn to stake a claim to up-and-coming markets.
Hassle or Hustle: Choose Your Investment of Effort & Time
Another essential aspect to consider when deciding between investing directly or through a trust is how hands-on you can or you prefer to be in the whole process. A direct investment, whereby you purchase either a whole asset or a partial stake, grants you certain advantages and more control over the property. However, with ownership comes personal responsibility and a significant degree of personal involvement over time. The success of such a direct investment requires extensive expertise, quality property management and representation, as well as a host of other services. While asset appreciation can lead to a profitable sale down the line, marketing a property and closing the deal may take some time.
By investing in REITs, the “passive income” aspect of real estate investment is truer to its name, as you can reap rewards without owning, operating, or directly financing properties. While these rewards are often comparatively smaller than what you would see in successful rental property investments, the REIT strategy carries lower risk of default. Moreover, REIT investments offer superior liquidity, as you can buy or sell REIT shares easily on an exchange, much as one would do with regular stocks. Unlike owning investment property, owning shares in an investment trust is largely not tax deductible. However, you can also benefit from appreciation with REIT, as the value of underlying real estate assets increases over time.
Risks & Rewards: Homing in on the Profits Beyond the Drawbacks
The underlying assets are the same with both investment strategies. You can collect rewards off real estate whether you embark on a more boots-on-ground approach or you pool your capital with the mutual fund model of an investment trust. Ultimately, you are the best judge of what is a worthwhile reward for you, considering the possible risk and the invested effort.
On the one hand, the rental property model requires greater capital, more personal involvement, dealing with tenants, property maintenance, and the unexpected. Moreover, it requires extensive funding to put together a portfolio that includes diversity of assets and of markets, and carries a relatively higher risk of financial default. On the other hand, a direct investment can mean tax benefits, control over the evolution of the property, over tenant quality and rents, as well as regarding the sale of an investment property that you have improved, and which has supposedly appreciated considerably over time. If you’re looking to diversify your investment portfolio and want to take on a project from start to finish, then direct investment is the right choice for you.
Meanwhile, REITs make it possible to “start small” and sustainably build up from a much lower entry point than what direct real estate investing commands. Although the yield rate for investment trust shares is lower, this model carries the benefit of higher liquidity for less responsibility. Moreover, even though individual REITs are generally focused on a singular property type, there are more than 200 real estate investment trusts, both private and publicly traded, as well as public non-traded trusts, to choose from. With less capital required to participate in one REIT than is needed to purchase at least a stake in one property, diversifying investments can be more readily accessible, which in turn offers better insulation against financial default of your investment.
In closing, it is worth noting that this is not necessarily a choice of one or the other. Should your personal preference align well enough with aspects regarding both REIT and rental property investment, and your possibilities support it, there is no fault in investing both ways. After all, the fact that diversity is the key to a successful investment portfolio is not limited to the assets therein, but also extends to the types of investment you make.
If you need help deciding between rentals or REITs or need assistance or guidance with your next real estate investment, reach out to the Build Luxury Red team and see how we can help.