Investors new to the market are often unsure whether they should put their money in a real estate investment trust (REIT) or a physical real estate asset. To help unravel this quandary and replace confusion with clarity, here are some of the key advantages of REITs vs. direct real estate investing according to Tom Terzis, an independent wealth specialist who has over 25 years of experience working in the banking, manufacturing, and technology industries.
REITs enable investors to spread out their capital across multiple companies and property types. As a result, they are better positioned to handle downturns and setbacks that affect one or a few properties in their overall portfolio. Conversely, investors who own physical property may be forced to borrow money to cover rental revenue shortfalls, or sell to cut their losses if the market plunges.
Due to the relatively lower risk, REITs are often suitable for newer investors, as well as those who have little or no experience in the real estate market.
REITs are far more liquid than physical real estate. Investors can usually buy or sell shares at any time, and without any early exit or other penalties. Transaction fees are also typically minimal or may be non-existent. Conversely, investors who own physical property may find that it takes months to sell, and just as long to buy new property.
According to Tom Terzis, even in a strong market — which for buyers means a glut of supply, and for sellers means pent-up demand, it can take quite a while for a real estate transaction to go through all stages of the process, especially if it is a commercial property such as shopping mall, storage units, and so on. Due diligence and getting the financing in place is significantly more complex than with a more straightforward residential property.
For many REIT investors — particularly those with limited or no experience in real estate investing — the most compelling advantage is ease of administration. Investors are not landlords, and are not responsible for finding and vetting tenants, collecting rents, maintaining properties, paying property taxes, and so on. On the other end of the spectrum, direct real estate investors are on the hook for all of these (and other) obligations, and either need to take care of it themselves or outsource administration to a property management firm.
Investors with limited capital can immediately buy into a REIT with a little as $500 or $1000. However, many people who want to purchase an investment property typically need to diligently save money for several years to make a large down payment, and then may be obligated to borrow additional funds to cover revenue shortfalls due to vacancies and maintenance.
Tom Terzis explains that there are some people who hold that buying into a REIT is not technically real estate investing, because it doesn’t involve owning a property. However, for happy REIT investors — and there are many of them — this argument is irrelevant. The underlying asset is real estate. The fact that their name isn’t on the deed is beside the point. What they care about is generating a solid return on their investment and growing their wealth.
The Bottom Line
Do all of the factors above mean that REITs are categorically better than direct real estate investing? The answer to that is no; or rather, not necessarily. Each investor needs to decide this for themselves based on risk tolerance, marketplace dynamics, investment horizon (e.g. short-term vs. long-term), and a variety of other factors.
Tom Terzis claims that there is some good information out there on REITs and direct real estate investing. However, as the old saying goes, sometimes a little information can be a dangerous thing. The best advice is for investors, whether they are new to the real estate investment landscape or have some experience under their belt, is to partner with a qualified independent wealth specialist so they can get the informed and objective guidance they need, when they need it.