Real estate has been a solid long-term investment for many. There are different ways to capitalize on the real estate market for an investor. One way is through direct investment in property. A second option is to invest in a real estate investment trust (REIT). Both options have their advantages and disadvantages that you should take into consideration before investing.
Advantages of direct real estate investing
Investing directly in real estate means that you are purchasing specific real estate properties with the aim of earning a return. This can be a residential property or a commercial property. Direct real estate investors earn a return through collecting rent or through capital gains.
There are several advantages to choosing to invest in real estate directly. One advantage is you have potential for large amounts of cash flow from collecting rental income. You also can benefit from direct real estate investing when the value of the property appreciates. This means at some point in the future you will be able to sell the real estate for more than you had paid for it.
You are also allowed to take numerous tax deductions for costs you incur related to managing the property. This includes costs of making repairs, maintenance and conservation. Additionally, when you directly own a real estate investment property you will have more control over decisions, compared to if you had invested in a REIT. This means you can decide exactly which tenants to rent to, how many properties to purchase, your preferred location and how to finance the purchase.
Disadvantages of directly investing in real estate
One of the disadvantages of direct investing is that it requires more hard work. This could mean dealing with tenants, performing maintenance and potential liability if something unexpected happens on your property. You could also see the real estate market depreciate quite rapidly if macroeconomic conditions are poor. Also, real estate property can take a long time to sell when you decide to do so.
Advantages of investing in REITs
REITs are corporations that own, operate or finance real estate property or other types of assets related to real estate. The objective of a REIT is to produce income from its activities in order to benefit investors. REITs are launched by pooling together the capital of many investors.
You may consider REIT investing to be advantageous due to not having to own and operate the real estate property yourself. The barrier to entry for REIT investing is low compared to directly buying real estate. Also, unlike directly owning property, you can buy and sell shares of REITs quite easily.
Disadvantages of investing in REITs
One drawback of REIT investing is that you do not have the same tax benefits that you would receive when directly investing in real estate. You would also be subject to the bad decisions of REIT managers which could result in the REIT corporation losing money which pushes the value of your shares down.
Many REITs focus on one type of property or location which means your investment would not be diversified. In contrast, if you directly invested in real estate property you could diversify your holdings to fit your individual risk profile.
There are many ways that one can invest in the real estate market. Please give us at Rademacher Financial a call to discuss what options may be available for you!
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