When it comes to real estate investment, investors often face the decision between investing in REITs (real estate investment trusts) versus directly owning physical real estate properties. Both options have their own pros and cons and suit different investor profiles. Key considerations include liquidity, diversification, potential returns, control, expertise required, etc. This article compares REITs and direct real estate investment across these factors.
REITs provide better liquidity than physical real estate
One of the biggest advantages of REITs is that they trade on public stock exchanges, providing much higher liquidity than directly owned real estate which has low trading volumes and can take months to sell. This makes REITs more suitable for investors who want to access their capital anytime or need to rebalance their portfolios regularly.
REIT investments are more diversified
A portfolio of REITs tends to be more diversified, investing across different geographies, sectors (office, retail, residential etc.), risk-return profiles etc. In contrast, owning just 1-2 directly purchased properties concentrates exposure to those assets. Diversification reduces portfolio volatility and downside risk.
Direct ownership allows higher control
Physically owning real estate gives investors full control over selecting the property, its usage, tenants, maintenance etc. However with REITs, the investment decisions are made by fund managers. Hence investors wanting control over their real estate exposure prefer direct ownership despite the higher effort and expertise required.
Both methods provide inflation protection and income
REITs and physical real estate can both provide steady rental income streams and capital appreciation over time, offering inflation protection. Their returns also tend to have low correlation with other equities. However, direct property investments have exhibited higher total returns historically owing to the additional control and leverage.
In summary, REITs offer easy diversification and liquidity but with less control, while direct real estate investment provides higher potential returns for investors willing to put in more effort and expertise.