When most people think about investing in real estate, they assume that they’ll need to take out a mortgage and invest in a property directly. While direct real estate investing is an excellent way to expand your income and increase your net worth, it’s not the only option you have to invest in property. A real estate investment trust (REIT) is a corporation that owns and manages real estate or real estate debt. REITs provide you with an easy way to invest in real estate without the hassle and expense of owning and managing a property on your own.
So, who wins out in the battle of REIT vs real estate?
Direct real estate investing involves the purchase of a property. You can purchase a property in cash or using a home loan called a mortgage. After you close on your loan or make an agreement with the seller, you own the home and can use it how you like assuming that you stay on top of your mortgage payments. Some investors “flip” houses by fixing them up and putting them back on the market quickly for prospective homebuyers and either selling them personally or hiring an agent. Others rent out their investment properties to long-term tenants and create a stream of income by charging rent.
A rental property has quite a lot of income potential, especially when you’re in big cities like New York, Los Angeles, San Francisco, Kansas City, Washington DC or even exclusive locations like the Hamptons. However, not everyone can hire a real estate agent, get a good interest rate and buy in.
When you invest in an equity REIT, you don’t own any type of investment property outright. Instead, you’re purchasing shares of stock issued by a corporation that owns or manages property. Shares of equity REITs trade the exact same way as individual shares of other types of stock, meaning that they’re highly liquid. They offer shareholder dividends, and they can increase your taxable income. Minimum investments are also lower when you invest with REITs than when you purchase real estate directly.
Stronger Return Potential
REIT shares have a history of outperforming the real estate market at large. From 1977 to 2010, investments in REITs have returned about 12% each year. This return is significantly more than the S&P 500 overall, which tends to return about 10% each year. Real estate in the U.S. has historically risen by 3% to 5% annually, though this percentage can vary widely depending on where the home is located.
While this data might seem like a slam-dunk for REIT investors, it doesn’t give a complete picture of each investment’s potential. When you invest in property directly, you have the potential to create another stream of income through rent, which isn’t considered in the calculation of rising home prices. Even if you decide not to rent out your home, the property has functional utility because you can live in it or use it as a vacation property. The best choice for your real estate investment will vary depending on your needs, where you live, your unique level of risk tolerance and more.
REITs: Pros and Cons
First, let’s take a look at some of the benefits and drawbacks that come along with investing in REITs. Remember, since a real estate fund works differently than other real estate companies, you could be buying into a data center collective, a portfolio of cell towers of infrastructure, a broad portion of the housing market, apartment buildings, etc.
- You can purchase a REIT using the same method as stocks. This makes it significantly easier to invest in a REIT than a piece of real estate.
- REITs have lower minimum investments than property. You can purchase 1 share of a REIT for less than $100 in many cases. Some brokers even allow you to purchase fractional shares, which lowers your minimum investment to $1.
- REITs provide you with a truly passive way to invest in the real estate market. After you purchase your shares, the company will directly distribute dividends to you through your brokerage platform.
- REITs have higher liquidity because you can buy and sell them using the same method as any other share of stock. If you have an emergency expense, you’ll have a much easier time accessing your capital if it’s held in REITs when compared to real estate.
- A REIT can sell above market value and buy below market value because it has the leverage required to make advantageous deals Therefore, the investment managers working for these firms can broker deals that benefit every shareholder, including you.
- Focusing on property sectors is a good way for you to know what you’re buying into because that sector is easy to track. For example, buying into timberland lots tells you quite a bit about how these investments would tend to perform.
- While REITs are easier to invest in and come with lower minimum investments, they also give you much less control over where your money goes. You can’t choose where to invest and you can’t devote your investment to a specific property in the REIT’s portfolio. If the managers of the REITs mismanage your money or the REIT goes bankrupt, you could end up losing a significant amount of money.
- REITs trade on the stock market, which means that they’re subject to market conditions. If the market crashes, your REITs will decrease in value much faster than a similar investment in property. This makes REITs more volatile investments.
Real Estate: Pros and Cons
Now, let’s take a look at a few of the benefits and drawbacks that come with investing in property directly.
Real Estate Pros
- Real estate gives you direct control over your investment. You get to choose how the property is used, how much you’ll charge in rent, any upgrades you need to make to the space and more. If you decide to sell the property, you have the final say on how much the property sells for.
- If you rent out your property, you can create a reliable stream of income each month. You can interview tenants and draw up a lease agreement that ensures that you’ll receive a monthly rental payment each month.
- Real estate is a more stable investment when compared to REITs. It’s very unlikely that your investment in a property will ever be worth $0 — which is possible if you invest in a REIT that goes bankrupt.
Real Estate Cons
- Real estate investments come with a much higher initial investment. Depending on the type of property you’re purchasing, you could need a down payment equal to as much as 25% of the value of the property. This is in addition to closing costs, which usually average around 3% to 5% of the value of the home you’re buying.
- As soon as you become a landlord, you forfeit certain rights to your property because your tenants have the right to enjoy the space in private. For example, in most states, it’s against the law for a landlord to enter a unit without at least a 24-hour notice except in the event of an emergency.
- If your tenant stops paying rent, you must legally evict them. This can be an expensive and time-consuming process.
- Real estate properties require a large amount of work and ongoing maintenance to retain their value. Even as a landlord, real estate investing is not a truly passive form of income.
Best Online Brokers for REITs
If you’ve ever bought or sold shares of stock before, you already understand the REIT-buying process. Don’t have a brokerage account? Consider a few of our top choices below.
Webull offers both a mobile-based and desktop app that are highly intuitive and perfect for intermediate and advanced traders. The Webull platforms feature fundamental and technical analysis tools that include advanced charting and technical indicators.
Consumers can trade over 5,000 stocks, exchange-traded funds (ETFs,) stock trading or options trading on Webull’s platforms free of commissions. You can also open an account without an initial deposit and try out their platforms in a paper trading account that lets you practice without risking your money.
You can even open a margin account where you can short stock — although you’ll be required to deposit a minimum of $2,000. In addition, Webull’s promotional offers include 3 free shares of stock for successfully opening an account determined by random selection using Webull’s lottery system.
- There are plenty of stocks, ETFs and options available
- You can use advanced charting to get more info on each asset before making a trade
- If you want to short stocks, you will need to make quite a substantial deposit to fund your account
TD Ameritrade offers both iPhone and Android apps for enhanced day trading. TD Ameritrade Mobile lets you trade stocks, options, futures and forex.
You can manage your positions with helpful tools and features, including more than 300 technical charts and indicators.
24/5 trading lets you trade select securities 24 hours a day, 5 days a week. You can expand your list of securities to international markets and specific sectors.
TDAmeritrade also offers the TD Ameritrade Mobile App, a powerful mobile trading app compatible across all your smart devices. You can track your investments, trade stocks, ETFs and options, explore integrated charts, set up price alerts, access watchlists and get 3rd-party research.
- The sheer range of charts is enough to make the platform worth it
- The third-party research options make it much easier to learn about assets long before you buy into them
- You can build as many watchlists as you need to make sure you are tracking all the best assets
- Remember that customer care is not available on the weekend, and you do not want to get yourself into a tough situation when you cannot reach out to firm
Interactive Brokers’ award-winning platforms and services were designed with professional and international traders in mind. How can that be? IBKR allows you to trade in 90+ different markets across 200 countries and territories with 26 currencies.
The company also offers multiple trading platforms including its flagship Trader Workstation (TWS) desktop platform, a web-based Client Portal, and various mobile applications including IBKR Mobile, GlobalTrader, and IMPACT. Furthermore, the IBKR Application Programming Interface (API) is available in Excel with the powerful FIX API. Plus, you get some of the lowest margin rates in the industry and a relatively high APY on uninvested cash held in your account.
The firm’s pricing depends on whether you choose IBKR Lite or IBKR Pro, although U.S. stocks and ETFs can be traded commission-free. Because investing can be scaled to your budget, you never feel as though you’re overpaying.
- Because you can invest in so many different currencies, it’s much easier for investors from around the world to access IBKR
- The GlobalTrader, IMPACT and other apps address specific needs that most investors find are unmet in other places
- Despite the many unique tools that IBKR offers, they can seem a bit much for investors who are not yet sure how to leverage all this technology
Best Real Estate Investment Platforms
You can also invest in real estate through a real estate investing platform. These platforms make it easier to compare commercial options and pool your money with other investors through crowdfunding to access a more diverse range of options. Browse a few of our favorite real estate investing platforms below.
Yieldstreet has investment offerings across several different alternative asset classes - including real estate crowdfunding. Unlike the other real estate investment platforms on this list, Yieldstreet also regularly has debt offerings, allowing individuals to invest in real estate notes secured by institutional-quality real estate assets.
While most offerings are only available to accredited investors, Yieldstreet recently launched its Growth & Income REIT, which is available to all investors with a $5,000 minimum investment. This REIT provides access to a diversified portfolio of all real estate offerings that hit the Yieldstreet platform, allowing you to easily diversify your portfolio by investing in multiple forms of alternative real estate.
- You can do all your alt investing in one place
- You can easily buy into real estate to grow your portfolio
- You can also look into multiple offerings to find the exact investment you would prefer
- While Yieldstreet may offer a range of alt investments, that range may not be as robust as some other platforms
CrowdStreet is the largest and most diverse commercial real estate marketplace. It’s a good match if you're an experienced, accredited investor and prefer to choose properties to invest in yourself instead of leaving the decisions up to a fund or REIT manager.
Choose from investment in a managed portfolio or direct access to individual commercial real estate investment opportunities. You can then review and compare deals that meet your own criteria, and that makes it much easier to build your portfolio without fronting all the cash for the deal. You’ll never feel pigeonholed into a deal, and you can back away from deals you don’t like.
A minimum of $25,000 is required for most offerings and your investment can be much steeper depending on the project. To date, the average return to investors on fully realized deals is 18.1% with an average investment term of just under 2.5 years.
Live webinars provide an opportunity for direct access to the project sponsor. The platform also provides numbers and analytical data from past projects so you can compare and consider the potential success of investments.
- CrowdStreet handles the properties on your behalf, meaning that you are simply fronting cash for these investments
- You never need to wholly own real estate
- Investment terms are relatively short
- A high minimum investment may be too much for some
DiversyFund isn’t your average crowdfunding platform. You’ll find that the company puts a twist on the traditional everyday crowdfunding platform, beyond anything you can find online with a simple Google search.
DiversyFund offers a multifamily real estate investment trust, the DiversyFund Growth REIT, and its main goals are to increase cash flow and resale value. It’ll automatically give you access to multi-million dollar real estate assets so that you can buy in at your own pace, ensuring that you can grow your portfolio in a manner that suits your financial situation.
- The REIT works to improve cashflow so that you are more likely to be paid dividends
- Because the platform buys into multifamily properties, there’s quite a range of locations and offerings
- Because the platform specializes in multifamily housing, it can be difficult to find an offering that suits you
- Many multifamily properties are difficult to manage, and investment terms could be lengthy as a result
Add Real Estate to Your Portfolio Today
Struggling to decide between investing in property or a REIT? Many investors choose to do both, investing in a single-family home to use as a primary residence and invest in REITs through their 401(k) or IRA. Planning your future real estate investments can help you lay out a path for a higher level of diversification.
Frequently Asked Questions
Are REITs a safe investment?
REITs can be much safer than buying real estate outright because you can invest far less money in a more diverse fund. However, all investments come with risks and you should not invest money you are not prepared to lose.
Can you make money consistently from real estate?
Yes, you can make money from real estate consistently, but it’s easier to make money if you’re investing in a fund that manages properties for you, like a REIT.
Should you buy both real estate and REIT stocks?
You can buy into REIT stocks with some of your funds and buy real estate with other funds. However, your portfolio might be imbalanced because of the valuations in both markets.
Accelerate Your Wealth
Arrived Homes allows retail investors to buy shares of individual rental properties for as little as $100. Arrived Homes acquires properties in some of the fastest-growing rental markets in the country, then sells shares to individual investors who simply collect passive income while waiting for the property to appreciate in value over 5 to 7 years. When the time is right, Arrived Homes sells the property so investors can cash in on the equity they've gained over time. Offerings are available to non-accredited investors. Sign up for an account on Arrived Homes to browse available properties and add real estate to your portfolio today.