Real Estate Investment Vs Reit

Buying Real Estate Pros

• You may be eligible for more tax breaksWhen you do direct real estate investing, you run a business along with investment. Therefore, the IRS allows certain tax breaks for this type of investment to write off the ordinary costs of managing and owning the property.
• You may earn a larger cash flowWhen you own rental property yourself, you earn the rental income, which can be regular monthly cash flow. You also earn all equity buildup and capital appreciation. You don’t have to worry about sharing it with anyone if you are the sole owner.
• Real estate often appreciatesThere’s no guarantee physical real estate will appreciate, but historically, it performs well over the long term. Unfortunately, the same can’t always be said about alternative investments you could add to your portfolio.
• You are in controlWhen you own the real estate yourself, you are in charge of what properties you buy, how you manage them, what rent you charge, and what is allowed or not allowed on the property. You don’t need anybody else’s input, and even if you hire a property management company, you still call the shots.
• You can leverage your investmentWhen you invest in real estate, you can borrow money to buy the physical real estate, purchasing a property worth more than the investment capital you have.

How Have Reits Performed In The Past

REITs’ track record of reliable and growing dividends, combined with long-term capital appreciation through stock price increases, has provided investors with attractive total return performance for most periods over the past 45 years compared to the broader stock market as well as bonds and other assets.

Listed REITs are professionally managed, publicly traded companies that manage their businesses with the goal of maximizing shareholder value. That means positioning their properties to attract tenants and earn rental income and managing their property portfolios and buying and selling of assets to build value throughout long-term real estate cycles.

This drives total return performance for REIT investors, who benefit from a strong, reliable annual dividend payout and the potential for long-term capital appreciation. For example, REIT total return performance over the past 20 years has outstripped the performance of the S& P 500 Index and other major indicesas well as the rate of inflation.

Reit Vs Real Estate Fund: Whats The Difference

There are several differences between REITs and real estate investment funds. The two most notable, which we will describe in more detail below, pertain to liquidity and the actual investment product.

REIT investments, as noted above, are highly liquid. REIT shares can be purchased and sold as easily as any other stock or bond. Real estate fund investments, meanwhile, are significantly more illiquid. Most funds have a 3- to 7-year lifecycle, in which the investors capital can be tied up. This is known as the liquidity/illiquidity premium as follows:

REIT

Buy-and-Hold

High Liquidity vs Low Liquidity

REIT investments, as noted above, are highly liquid. REIT shares can be purchased and sold as easily as any other stock or bond.Real estate fund investments, meanwhile, are significantly more illiquid. Most funds have a 3- to 7-year lifecycle, in which the investors capital can be tied up.

Low Investment Minimum vs High Investment Minimum

When buying a REIT, you are buying a share of the company that owns or manages investment properties. REITs have a much lower barrier to entry for those looking to invest in commercial real estate.Real estate funds tend to have much more substantial investment minimums. Oftentimes, a fund will require a minimum investment of at least $50,000 and sometimes, much more.

Less Control vs More ControlMore like Stocks and ETFs vs More like Traditional Mutual FundsHigher vs Lower Capital Gains TaxLow Leverage vs High Leverage

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Real Estate Investment Partnership Vs Reit

Who Can Invest In Fundrise

Fundrise is open to all U.S. residents who are 18 years or older. With a minimum required investment of $10, investing in a well-diversified portfolio of real estate properties through Fundrise is open to everyone.

Investors may use a variety of account types to invest with Fundrise, such as:

• Individual account

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Does Fundrise Pay Dividends

Yes, Fundrise investors may receive quarterly dividends based on the performance of the real estate owned in their eFunds and eREITs. You may choose to have your dividends deposited into your bank account or to be reinvested into your Fundrise account. Additionally, investors will receive a proportional share of the proceeds whenever a property is sold.

Reits Vs Real Estate Mutual Funds: An Overview

Real estate investment trusts and real estate mutual funds both offer diversification and an easy, affordable way for individual investors to invest in various segments of the real estate market. They also represent a more liquid vehicle for investment in this sector than owning or investing in real estate directly.

There exists a wide variety of REITs and real estate sector mutual funds to choose from. Before considering either type of instrument, you need to understand the key differences between the two, as well as their pros and cons.

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Investing In Real Estate

From a traditional perspective, investing in real estate means buying individual properties. These properties could be residential or commercial in nature, and may include:

• Single-family homes
• Land for future development

As a real estate investor, you can either buy and hold property, or fix it up to sell for a profit. You can also purchase this property on your own or with partner investors.

Invest In Kona: A Unique Private Equity Real Estate Opportunity For Accredited Investors To Enter The Luxury Coastal Market Of Kona Hawaii

Kona Estates at Opihihale is a private equity real estate fund with a proven track record the sponsors have successfully developed over a billion dollars with of property over the past two decades. This fund is offering exclusive access to the development of luxury homes on oceanfront property in one of Hawaiis most desirable locations the real estate of the Kona coast. This fund offers all the advantages of a general management partnership the team has elite expertise in both luxury property development and management.

While many accredited investor opportunities require a minimum investment of $250,000 or higher, this fund requires a minimum investment of just $100,000, with no upper limit on the number of units acquired. Managing partners can’t draw benefits until the distributions have paid your capital back entirely.

The Kona Development Partners team projects a 22% IRR, excluding the tax benefits accredited investors under a Section 506 C arrangement. And for risk management, the project in early stages is completely debt free, eliminating the liquidity risks associated with many real estate development funds.

If you would like to schedule an exclusive, one-on-one meeting with our sponsors, contact us.

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Read Also: Everything You Need To Know About Investing In Reits Safely & Efficiently

In return, the rental income collected from the properties held in the REIT will be distributed back to investors you will receive a dividend proportionate to the number of shares you hold.

Note that management fees, property maintenance fees and other charges are deducted from the income collected before distribution to investors.

The dividends you receive can be used to buy up more REIT shares, or withdrawn to your bank account in cash. You can also sell your REIT shares at any time to cash out your investment.

Real Estate Investing Example

For real estate investing, lets assess the cap rate and the cash-on-cash return.

• Cap rate tells you how much the property is going to profit you when you fully paid for it in cash. According to Nolo, a reasonable cap rate ranges between 4 to 10%.

Cap Rate = Net Annual Operating Income/Purchase Price or Propertys Market Value * 100

• Cash-on-cash return tells you how much income youre getting relative to the total cash youve invested. This is applicable when you purchase the property through financing options.

CoC = Net Annual Cash Flow/Total Cash Invested

For this example, lets look at this listed single-family home property with 2 beds and 2 baths in Las Vegas, Nevada:

Screenshot taken from Realtor.com

This property has a current market value of $259,990.

Case 1: You bought the full price of the property in cash. You are looking for tenants to generate cash flow.

• Insurance: According to Bankrate, the average cost of home insurance in Nevada is $822/year which is equivalent to $69/month.
• Repairs: As a rule-of-thumb, a property owner must allocate 1% of the property value annually for repair costs. Thats equivalent to $217/month.

Lets calculate the cap rate:

Cap Rate = / $259,990 x 100 = 4.9%

This is a good investment since your cap rate is in the reasonable range.

Case 2: You bought the property through a loan. You are looking for tenants to generate cash flow.

To simulate the financing costs, see the mortgage calculation below:

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The Net Worth Qualification:

Proving you have a net worth of $1 million also works. However, the task isnt simple, requiring presenting a combination of audited assets and liabilities statements that should include:

• Recognized consumer credit reports.
• Property deeds with the latest appraisals.
• CPA verified equity valuations.
• The income IRS documents under the income qualification above .

So Is There A Catch With Pefs

PEFS do not register with the SEC, thus falling under significantly less regulation. Theres no rule governing PEF dividend policy, reinvestment of retained earnings, and transparency requirements. As a result, managing partners can practically do what they want, sometimes making no distributions to investors for years.

The one SEC stipulation is that PEFS are only open to accredited investors persons or entities who qualify to invest in Regulation D unregistered securities as financially sophisticated investors.

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Reit Vs Real Estate Fund

Theres a common misconception in the passive income community regarding syndicated real estate investments, so lets be clear: a real estate investment trust and a real estate fund are not the same thing. When real estate sponsors purchase real estate, then establish a corporation with the purpose of offering income-producing opportunities to investors, its called a REIT. Interested investors then buy and sell shares of this corporation like a traditional stock.A private real estate fund is a pool of investment properties purchased by a real estate equity group or firm. Investors contribute capital for the purchase offered by these private or public real estate companies. Real estate funds have typically invested in REITs and real estate-related stocks. These funds have employees who manage the purchasing, maintenance, and ultimate selling of the properties, while the income generated is distributed to the shareholders as dividends.Both REITs and real estate funds pay out regular dividends. However, unlike a real estate investment trust that is subject to market fluctuations, real estate funds provide added value through appreciation. And funds are historically available only to accredited, high-net-worth investors and typically require a large minimum investment.Much of the confusion of a REIT vs. Real Estate Fund likely occurs from the different types of real estate funds.

Drawbacks To Investing In Reits

• No tax benefits compared to directly owning a rental property: While an investor who physically owns real estate may benefit from tax deductions such as mortgage interest and depreciation expense to reduce taxable net income, REITs dont offer the same tax breaks. Instead, dividend income from a REIT is taxed based on an investors total taxable income and filing status.
• Less opportunity for leverage and growth: Because REITs are required to distribute 90% of their profits to investors, only 10% is left over to reinvest in additional properties and grow a company. As a result, REIT shares prices may increase less than publicly-traded companies that reinvest their excess cash instead of paying dividends.
• Lack of direct control in underlying assets: Some investors may feel that owning a REIT doesnt provide the same pride of ownership that owning physical real estate does. While an investor can periodically visit a rental property and have lunch with the property manager, it can be much more difficult to visit properties that a REIT actually owns.
• Potential for stock market volatility: Although REITs have a low correlation to the broad stock market, according to Nareit, there may still be the possibility of a sell-off if the overall stock market drops. On the other hand, single-family rentals offer a strong investment alternative to stocks and bonds, with much less volatility.

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How Do I Invest In Reits

Your approach to investing in REITs depends on what type of investor you are. Some investors may want to invest in an exchange-traded fund or mutual fund that tracks a broad-based REIT index rather than investing in individual REITs. You can buy and sell REITs on your own with a Schwab One® brokerage account or call us at 877-566-0054 to talk to an experienced specialist about whether REITs are right for you.

Important Differences Between Fundrise And Reits

Although both investment choices Fundrise and REITs invest in real estate, there are differences between them. As mentioned above, REITs can take many different forms, so we will continue the comparison of Fundrise vs. REITs by using the Vanguard Real Estate ETF as our example.

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Reit Diversification Helps To Mitigate Investor Risk

One of the appeals to investing in a REIT is that a REIT usually owns dozens, if not hundreds or thousands, of investment properties. This diversification helps to mitigate investors risk compared to real estate funds, which depending on the size of the fund, may only include a few investments. This concentrates investors risk into fewer deals, and if any one of those deals underperforms, that one deal can drag down the performance of the entire fund.

That said, some REITs are exclusively focused on investing in only one product type such as retail or hospitality. This creates a different kind of exposure for investors if that product type is underperforming, the REIT might struggle as well. Of course, this is also true for funds that invest in only one product type.

Which Is The Better Investment For You

Piranka / Getty Images

You may have heard that real estate can be a solid investment option. But is it better to buy real estate properties or to invest in real estate investment trusts ? Whether you decide to become a landlord, buy and resell properties for a profit, or passively earn income through REITs, its important to first understand the requirements, benefits, and drawbacks of each real estate investment strategy.

Well walk you through what it means to buy real estate and invest in REITs, and help you weigh the pros and cons to better understand if either investment choice fits into your financial plan.

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Reit Vs Real Estate Mutual Fund Example

If you want to invest in New York Citys dynamic and notoriously pricey real estate market, for instance, consider the appropriately named Empire State Realty Trust Inc. a REIT that can claim the iconic Empire State Building as one of its portfolio properties. Its portfolio totals six retail and 14 office properties in Manhattan and the New York City metropolitan area.

T. Rowe Price Real Estate is an example of a sector mutual fund with diverse holdings. Boasting some 40 holdings, it invests primarily in REITs as well as publicly-traded real estate-related companies.