Investing in real estate is a smart way to diversify your investments, plus it also serves as a hedge against inflation. However, you need to choose the right type of real estate investment that can generate regular cash flows. This is why Graana.com, Pakistan’s smartest property portal, provides a detailed comparison of real estate investment trusts (REITs) and rental property investment so you can choose an appropriate investment plan accordingly.
Real Estate Investment Trusts (REITs)
A REIT is a company that owns and manages different residential and commercial properties, including office spaces, apartment buildings, shopping centers, and hotels. With REITs, you basically buy the shares of the trust that is managing the real property. Buying the shares will not make you the owner of the said property, nor will it give you the right to have a say in the management of the property.
This asset class can be compared to stocks or mutual funds, where investors purchase the share of the trust and earn consistent income through dividends. They are categorized into three types: private REITs, publicly and non-publicly traded REITs.
Private REITs are real estate funds that are not traded on the national stock exchange. They are designed for institutional investors and generally require a higher minimum investment.
Public REITs are traded on the stock exchange and their shares can be purchased just like stocks. On the other hand, non-listed REITs are registered with securities and exchange commissions, but they aren’t traded on the stock exchange.
To help you decide which investment type is best suited for your needs, here are some of the benefits and drawbacks of REIT and rental property investment. get to know how to invest in REITs in Pakistan.
Benefits of REITs
The biggest advantage of this type of investment is that it provides individuals with the chance to invest in real estate without paying any high upfront costs. To give you a better understanding, the following are some benefits of investing in REITs.
Minimum Investment
REITs are one of the best ways to invest in real estate if you don’t have enough capital to buy the property. They are affordable and can be purchased with a minimum investment from stock exchanges.
However, the investment capital may vary according to the type of REIT you have invested in. If you have invested in public and non-public traded shares, the minimum investment may be low. On the other hand, private REITs usually need a higher level of investment initially. Get to know how to calculate ROI in real estate?
Regular Income
Investors can earn from REITs in the form of dividends that are distributed to the shareholders on a monthly or quarterly basis. This income can vary as it depends on the success of the property share you have invested in.
Diverse Investment Portfolio
Unlike rental properties (or any other type), REITs offer more diversification to investors as you will be able to actively invest in different types of properties through REITs. This type of investment doesn’t rely on one or two assets, which makes it a better option than a rental property.
The success of rental property depends on different factors, such as renovation costs and tenancy rates. If the tenancy rate is low in the area, it will result in the loss of capital for the investor.
No Expertise Needed
Another benefit of REIT is that you don’t require any real estate or finance-related expertise to make an investment. However, you should know about the different risks and benefits involved before making any investment.
Liquidity
REITs offer greater liquidity compared to rental property. In a rental property, you have to invest a high amount for a long period of time. On the other hand, REITs shares can be purchased and sold at any time you like.
Drawbacks of REITs
Just like any other investment, there are some drawbacks that you should assess beforehand. The following are some drawbacks of real estate investment trusts.
Volatility
Public REITs are traded in the stock market, which means they are prone to any fluctuation in the market. With the rise and fall of the shares, the value will change constantly.
The fluctuations in the stock market don’t have any effect on non-public and private REITs; they move in tandem with the real estate market.
Less Control
In REITs, you have no control over your investment. They are managed by the investment trusts and the investors don’t have a say in the buying and selling of the property shares. In a rental property, the investor has more control and gets direct ownership of the property.
Rental Property
Rental properties are more appropriate for individuals who want to take an active role in real estate investments. In rental properties, you have sole control and you are responsible for all expenses like taxes, repairs, insurance, etc.
The investors can buy a house or apartment, and then rent it out to generate regular monthly income.
Benefits of Rental Property
Rental properties provide many benefits to investors if they are managed in the right way. Following are some of the advantages of investing in rental properties.
Asset Appreciation
Rental properties not only provide regular monthly income, but they also allow you to earn more money through the appreciation of the property. If the value of the property increases with time, you will be able to gain a profit after selling the property.
Flexibility
Some people like to be in charge of their investments and make decisions regarding the property, like how much rent to charge, what renovations to make, and when to resell the property.
Drawbacks of Rental Property
With any kind of direct investment, the success of it depends on the investor. If the property isn’t managed well, there is a chance of loss in investment. Before buying any rental property, there are some drawbacks that you should consider.
Extensive Real Estate Expertise
When buying any property for rental income, you need to assess its viability. You need to determine the expenses and monthly rental income of the property. In order to do that, you would need financial and real estate expertise. You can hire the services of property managers, but it can take away a large part of the profit.
Upfront Costs
Investing in rental property isn’t cheap; you need to make a down payment first. If there are any renovations needed, you would have to cover those costs too. All these factors require a large portion of the capital. On the other hand, there are some REITs that you can buy with a low minimum investment.
Conclusion
Many investors are aware of the fact that diversifying an investment portfolio has lots of benefits. Adding real estate to your portfolio is the best way for creating a reliable income stream. It is up to you to decide the type of real estate investment you want to make, whether you want to go for a hands-off approach, or you want to opt for an investment that offers more control.
We have listed the pros and cons of both REIT and a rental property so you can decide which investment option is best suited to your style and investment goals.
For more real estate investment guides, visit our blog.
