Real Estate Investment Trusts (REIT) vs. Direct Real Estate: An Overview

A direct real estate investment means you are purchasing a specific property or a stake in one, for like an apartment complex (residential) or shopping center (commercial).

A REIT is a corporation, trust, or association that owns and, in most cases, operates income-producing real estate and/or real estate-related assets. Modeled after mutual funds, REITs pool the capital of numerous investors. This allows individual investors to earn a share of the income produced through commercial real estate ownership without having to go out and buy or finance property or assets.

Key Takeaways

  • Investing in REITs allows individuals to garner earnings on income-producing properties without having to spend large sums or take out hefty loans to purchase real estate.
  • Direct real estate investors have more tax breaks than investors in REITs.
  • First-time investors can benefit from REITs, as they are an affordable way to enter into the real estate market with less risk than outright purchasing. 

Direct Real Estate

As a direct real estate investor, you won't answer to a fund manager. You decide on the rental price, the number of properties to buy, and who lives in and rents your property. And with direct real estate, you can take advantage of tax breaks with strategies such as writing off depreciation to taking a mortgage tax deduction.

In addition, a bigger investment may equal more earnings. If you invest $100,000 in a property and it increases in value 10%, you'll potentially earn $10,000. A $1,000 invested in a REIT with a 10% return nets $100. 

Being an investor of a residential or commercial real estate property often means purchasing the property directly with a loan or buying it outright. There are often more risks associated with being a direct real estate investor, such as defaulting on the loan or dealing with difficult commercial or residential tenants.

REIT

Real estate investment trusts (REIT) are a low-cost way to invest in the real estate market and are becoming increasingly popular. Ernst & Young reports that the global REIT market has grown to $1.7 trillion in 2017 from $300 billion in 2003 and the number of countries now offering REITs has almost doubled to 37 in the last decade. (You can invest in a fund for as little as $500 or $1,000 rather than having to buy a property for six-figures with a hefty down payment.

Like stocks, you can sell REIT shares whenever you like versus a home purchase which can take time to sell depending on market conditions. If you own a rental property, you are subject to tenant complaints; late payments; broken appliances; and yard, driveway, and home maintenance. With REITs, you'll just track your investments on a reasonable and regular basis.

REITs can be appropriate for new investors with limited experience in real estate who want to diversify their portfolio without a ton of risk.

With REITs, you can invest in commercial properties, shopping malls, and even a marina or a group of camping site vacation homes—all at a reasonable entry price. That’s much harder to do as a direct investor where up-front capital can often be a challenge.

In theory, a REIT's share price is more likely to contain all available information about the REIT, meaning investors may have a better chance of getting a higher return. REITs can also be a good choice for investors who don't want to operate and manage real estate as well as for those who do not like the risk associated with owning real estate.