Investors new to the real estate investment space are often found looking for the most common pros and cons of REITs, or real estate investment trusts. While investing in REITs can be a great way to diversify your real estate investment portfolio, they may not be ideal for all investors in all situations. Let’s take a close look at the various upsides and downsides to these someone nebulous real estate funds.
What Is An REIT?
A REIT is a real estate investment trust, and it consists of a company that invests in income-producing real estate. They handle all of the necessary property investment and management of these properties, taking most of the research, work, and ongoing hassle of managing real estate investments. Individual investors are then able to buy shares of the REIT, and that per-share ownership entitles those investors to shares of the revenue and profits the REIT produces. This allows investors to more easily add the properties the REIT owns to their portfolios.
What Are The Pros And Cons Of REITs?
- Investors with minimal capital can more easily invest in real estate by buying shares of a REIT, instead of purchasing an entire property or building. This makes them very attractive options for new investors, or those trying to get more exposure to real estate investing in general.
- REITs are also, generally, publicly-traded. Anything publicly traded is much more accessible to the beginner, and allows a softer and more affordable entry point into the real estate market.
- Investors with limited capital can still experience capital appreciation and receive dividends. This lets more investors become familiar with the asset class than would otherwise be able to.
- REITs can often focus on a particular type of real estate, so investors can frequently choose to invest specifically in REITs that manage apartment complexes, commercial properties, or even raw land.
- They tend to be more inefficient for the advanced investor, and often don’t have the potential for returns that can be seen by investing in a single property or multiple properties by an investor.
- The return from a REIT is often reduced by the operating costs and expenses of the company that runs the trust. This increased cost and expense level directly translates to lower profit potential.
- REITs with higher returns are also more expensive to invest in, which can price some investors out entirely.
Instead Of Dealing With The Pros And Cons Of REITs
An alternative to dealing with the potential risks of REITs is to work with a wealth planning or investment advisor that can help you determine real estate investments that are more closely aligned with your goals and personal risk tolerance. You may find that while REITs are fully managed, you also have little influence on properties that are added to the REIT, which takes much of your investment autonomy away. In cases like this, you may be better suited to investing in individual properties or units, either on market or off-market, where you can ultimately manage the investment and the potential income it will create, returning autonomy to you and your real estate portfolio.
Talk To A Pro Before Jumping In & Investing In REITs
Real estate investing can be complex and full of specific risks inherent to owning property, but unless the situation is just right, it may not be conducive to your investment strategy. Before taking the leap and buying into a REIT, reach out and talk with an advisor who can discuss the pros and cons of REITs in more detail, and help you decide if they are right for your wealth management strategy.