Want to jump straight to the best? Diversyfund is definitely the best real estate investing platform for most people.
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.
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 while others rent out their investment properties to long-term tenants and create a stream of income by charging rent.
When you invest in a REIT, you don’t own any type of property. Instead, you’re purchasing shares of stock issued by a corporation that owns or manages property. Shares of REITs trade the exact same way as individual shares of other types of stock, meaning that they’re highly liquid. Minimum investments are also lower when you invest with REITs than when you purchase real estate directly.
Stronger Return Potential
REITs 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.
- 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.
- 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.
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 to access a more diverse range of options. Browse a few of our favorite real estate investing platforms below.
Adding Real Estate to Your Portfolio
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.
Accelerate Your Wealth
DiversyFund accelerates your wealth creation by reinvesting cash flows from the properties — the DiversyFund Growth REIT is a public non-traded REIT designed to build wealth by investing in multifamily real estate and intends to build wealth over an approximate 5-year timeline. You don’t have to be an accredited investor to invest in Diversyfund. Open a Diversyfund account today.