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REITs provide a unique investment opportunity for individuals who wish to invest in real estate but don't want the hassle of being a landlord. Understanding this investment product will help investors determine whether it is right for them.
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Investing in Real Estate Real estate investment is a time-honored way to protect and increase wealth. There are a number of ways you can invest in real estate, including buying property directly or purchasing shares of a real estate investment trust, or REIT. Each method has advantages and drawbacks, and the educated investor will study the pros and cons closely before making a choice.
What Is An REIT? The concept of purchasing a home and either renting it out or holding onto it is fairly straightforward, but an REIT is a less well-known option. REITs are essentially traded securities that represent real estate development, holding or sales companies. These securities provide special tax benefits and must satisfy stringent requirements to qualify as REITs. To invest in an REIT, investors may purchase shares of a specific real estate company such as a property developer or an ETF that holds shares in a variety of REIT businesses. Purchasing shares in an ETF allows you to reduce risk by spreading your investment around several companies.
Why Choose An REIT? • There are a variety of reasons why investors may feel that an REIT is the right investment for them, including: • Less up-front cash needed. To purchase properties, you typically need at least $10,000 up front for down payments and to satisfy closing costs and associated costs. REIT investors can get in for much less. • When you purchase real estate, you often take on a mortgage to pay for the property. REIT investment requires no debt.
Advantages of REITs (cont.) • There are a variety of reasons why investors may feel that an REIT is the right investment for them, including: • Liquidity. Real estate can be tough to unload when you need cash. Selling shares of REIT is as easy as selling stocks in a company as REIT shares are traded daily on markets. • Less hassle. When you invest in an REIT, you don’t have to deal with the headaches of being a landlord – maintenance, late night calls, finding tenants, etc.
Why Choose Traditional Real Estate? • Traditional real estate investing also provides a number of advantages that investors should be sure to consider before making a choice, such as: • Leverage and amortization. By making a $10,000 down payment, you can purchase a $100,000 property that you can use the rents from your tenants to pay off. Long-term, investing in property may be more profitable than REIT investing. • Careful monitoring. When you purchase property, you’re in greater control of your investment than you would be if you purchased an REIT. REIT shareholders don’t have as much say so over the companies they invest in as property owners have over their houses and other buildings.
Advantages of Traditional Real Estate (cont.) • Tax benefits. Owning property allows you to deduct many costs such as mortgage interest, repairs, etc. on your taxes, which can be helpful when April 15 rolls around. • Steady costs. Over time, you may be able to charge higher rents, but your mortgage payments will stay the same, increasing the profitability of your property.
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