Are you looking for ways to invest in real property? Investors who wish to invest in real estate often compare REITs with actual, tangible real property. REITs, or real estate investment trusts, are corporations that act as mutual funds for real estate investing. A REIT allows you to invest without owning or managing any properties. You can also choose to invest directly in real estate and purchase residential or commercial properties.

Direct Real Estate

Direct real estate investments allow you to purchase a property, or a stake in it, such as an apartment building (residential) or shopping center (commercial). Direct real property investors make money from rental income, appreciation, and any business activity that is dependent on the realty.

Positives of Direct Real Estate Investing

The potential for substantial cash flow is one of the benefits of investing in property. However, you can also take advantage of many tax breaks to offset this income. You can, for example, deduct the usual and necessary costs of managing, conserving, and maintaining the property. Depreciation is another tax benefit that can be significant. It allows you to deduct the cost of purchasing and improving a property over its useful lifetime (and reduce your taxable income).

There is also the possibility of price appreciation. Although the real estate market is subject to the same fluctuations as the stock market, property prices tend to increase over time, so you might be able to sell later for a higher price.

Direct real estate has another advantage: you can make more decisions than with REITs. You can choose only properties that meet your criteria for location, property type, and financing structure. You can choose your tenants and set the rental price. Refinance your mortgage if interest rates drop or access your home equity via loans or credit lines for other purposes.

Direct Real Estate Investing: The Negatives

Direct investing has its drawbacks. It requires significant time and effort (sweat equity). If you want to succeed. Tenant issues, maintenance emergencies, and liability for any property-related accidents are all things you will need to address.

Another disadvantage is financing. Many investors will need to get a mortgage or another type of financing to pay for their investments. In addition, there is a possibility that you might default on your loan if the market crashes or you are having difficulty finding tenants.

Real estate is not a liquid asset. Unfortunately, this means that you won't likely be able to sell it quickly if your need for cash is urgent.

Positives

• Positive cash flow and appreciation

• Tax benefits

• Control over decisions

Negatives

• It takes time and energy

• Financial default risk

• Illiquid (difficult to sell and buy)

REITs

A REIT corporation owns, manages, finances, or operates income-producing real property or other real estate-related assets. REITs are modeled after mutual funds and pool the capital from many investors.

More than 225 registered REITs in America that trade on major stock markets and are registered with the Securities and Exchange Commission (SEC). These REITs collectively have more than $1 trillion in equity market capitalization. Currently, there are more than 35 countries that offer REITs.

The Positives And Negatives Of REITs

The greatest advantage of REITs is accessing real estate profits without having to own, finance, or operate properties. These funds are a low-cost investment option in the real estate sector. A fund can be invested with as low as $500, which is a lower entry point than a direct investment in real estate.

REITs also offer attractive total returns potential. According to law, REITs must pay at least 90% of their taxable income to shareholders. It is not unusual to have a dividend yield of 5% or more. As the assets increase in value, REITs have the potential for capital appreciation.

Liquidity is another important perk. You can also buy and sell REIT shares via an exchange, just like stocks. REITs trade in heavy volumes, so you can move into and out of positions when you need.

Cons of REITs

There are some disadvantages to REITs. First, REIT dividends are not considered "qualified dividends" and are therefore subject to a higher tax rate. If you have REITs in a tax-exempt brokerage account, this is something to be aware of. You can own REITs in a Roth IRA tax-advantaged account.

Another problem is that REITs are very sensitive to fluctuations in interest rates, leading to a rise in REIT prices. The relationship between REIT prices, Treasury yields are generally inverted. When one goes up, the other falls, and vice versa.

Another problem is that REITs may help diversify your investment portfolio, but most REITs don't offer any diversity. Because they are focused on one type of property, such as offices or shopping malls, this is a problem. For example, you could be at risk if a REIT only invests in hotels.

Pros

• Real estate profit without the need to finance, own or manage property

• Potential for appreciation and dividends higher than average

• Liquid (easy for you to buy and then sell).

Cons

• There are no tax benefits

• Sensitive to fluctuations in interest rates

• Risks specific to the property

The Summary

Direct real estate investment may be the best option if you are looking for cash flow, income tax relief, and a high potential for appreciation. In addition, direct real estate investing is a good option if you prefer more control over your investments and a hands-on approach.

REITs are a good option for investors who do not want to manage or operate real estate. They also make sense for people who can't afford the financing or don't have enough money to purchase real estate. Finally, for novice real estate investors, REITs can be a great way to get some experience in the industry.