Know The Difference: REITs vs. Direct Real Estate Investing

Written by Bloom Investment Counsel, Inc. on March 18, 2024. Posted in Investing.

Investment in real estate can be a strong addition to your investment portfolio and can improve its diversification.

There are two main approaches to investing in real estate: investing directly in individual properties, or investing in Real Estate Investment Trusts (REITs). Over the past few years, an increasingly larger percentage of investors hold some form of real estate in their portfolios.

Direct Real Estate Investing

The traditional form of real estate investment is to buy properties directly and then manage them as a landlord, or flip them after making improvements.

Properties can be residential or commercial and can include single-family homes, multi-family homes, condos, commercial property, storage units, office buildings, warehouses, and raw land for future development.

Pros of Direct Investing

Tax Benefits: There are usually tax breaks for operating costs, making property improvements and paying for repairs. These deductions can help offset your taxable earnings.
More Control: When you purchase and then manage or sell a property, you have more control over your investment. You will have a say in choosing the tenants and in how the property is managed.
Leverage Home Equity: You may be able to leverage any equity you have in a property to fund the purchase of more property.
Increased Profit Potential: You are entitled to 100% of income, capital gains, profits, and tax benefits related to any property you buy.

Cons of Direct Real Estate Investing

You are Responsible for Managing the Property: This can be time-consuming, or expensive if you contract this out.
Can be Illiquid: It may take several months or more to sell a property depending on market conditions.
High Transaction Costs: Commissions can be up to 5% plus closing costs.
Can be Expensive: As the property owner you are responsible for all expenses.
Financing Requirements: You must qualify for a mortgage with each property.

Investing in REITs

A REIT allows you to add real estate to your portfolio without having to buy, manage or directly assume ownership of a property.

A REIT is a unitized fund of real estate investments, much like a mutual fund. A REIT can hold hundreds or even thousands of properties.

Pros of Investing in REITs

Ease of Purchase: Typically REITs trade on a public market, like stocks and bonds.
Distribution Payments: REITs usually pay out distributions at an attractive yield.
Very Liquid. REITs are easy to buy or sell as they trade on a public market.
Low-Cost Real Estate Access: The low transaction cost to purchase the units on the stock market is much lower than direct investing.
Diversification: Provides a quick and efficient way to invest in a well-diversified portfolio of properties.

Cons of Investing in Real Estate Trust

No Tax Breaks: There are no direct real estate tax breaks as you do not have title to the properties.
No Actual Ownership: Since you are not an actual real estate owner but rather a holder of units in a real estate fund, you have limited say on how the properties are managed and when they are bought and sold.
Distributions: Higher distributions, resulting in a higher amount of income distributed to you, can have higher tax consequences.

Which is Best for You?

Direct investing or investing in REITs? The answer depends on the individual. REITs offer investors a hands-off way to invest in real estate and may be preferable for many investors as it provides real estate exposure without being tied to the day-to-day issues that can arise when holding an actual piece of real estate.

Direct real estate investments are more expensive up front but give investors more control.

You should consider working with a qualified financial professional to help you determine how to best invest in real estate as part of your overall investment portfolio.

Investing in REITs with Bloom Investment Counsel, Inc.

Established in 1985, Bloom Investment Counsel, Inc. provides actively managed, customized investment management services to wealthy individuals, family offices, foundations, trusts, institutions and corporations.

For over twenty-five years we have specialized in investing in dividend-paying equities including REITs. To learn more about how we can help protect, preserve and build your wealth with a diversified portfolios comprised of REITs and other dividend-paying equities, please contact us at 416–861–9941 or info@bloominvestmentcounsel.com.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.