Direct Real Estate Investing Vs. REITs Vs. Dividend Stock Investing
Real estate investing is always a good idea. It’s reasonably safe and lucrative even during times of great economic turmoil. As the global economy is currently going through the worst recession since World War 2, it’s no surprise that more people are turning to real estate in order to protect their fortunes. There is also another advantage to this investing strategy right now because despite the global pandemic crisis, the real estate market is booming in many countries. Therefore, it makes for an even more attractive investment. However, the question is what the best way to invest your money is?
Should you invest in REITs or purchase properties directly? And what about dividend stock investing in real estate stocks?
Direct Real Estate Investing
Direct real estate investing means that you basically purchase a property and then deal with it directly. These investors get income through appreciation, rent, and other profits that are generated by businesses or activities within the property. This type of investment can be most lucrative and it comes with a variety of tax breaks. Real estate can also generate cash flow fast, which is a great advantage for investing.
Also, investing in real estate directly is one of the safest strategies as properties garner appreciation over time. Even the recent crisis shows that no matter what, eventually property prices keep rising.
Another important benefit of direct real estate investing is that you get to make all the decisions. You have a lot more control of your investment portfolio and of the property itself. Therefore, you can try making the best decisions that will generate you more income.
That said, this type of investing takes a lot of time and effort. Also, as you are the one making decisions, you will be solely responsible for any mistakes. It can also be difficult to obtain financing for direct real estate investing. In particular, it’s hard to get a mortgage now as loan origination is down during a recession.
In addition, should you default on the loan, your credit rating will suffer. This will make it harder to rebuild your fortune.
Finally, remember that real estate is not a liquid asset. Therefore, should you need money for an emergency, you won’t be able to sell it fast for cash. That’s why it’s wise to diversify your portfolio in a way that will include both properties and liquid assets.
Real Estate Dividend Stock Investing
It’s a universally acknowledged fact that dividend stock investing is a good strategy. It brings you steady income and has a rather low level of risk. That said, this strategy might not work out so well when you choose to invest in real estate stocks.
The truth of the situation is that dividend growth stock is not a way to get rich fast. In fact, it’s not a way to get exorbitantly rich at all. This type of investing focuses on steady support for your portfolio. It should never be considered a primary source of income. And real estate is an industry that is rather more active. Therefore, it’s not a surprise that there isn’t even a single real estate stock in Canada’s Top 10 best dividend stocks or that for any other developed country. These stocks, while reliable investments, aren’t the first choice for growing wealth.
However, this doesn’t mean that you should discard real estate dividend stock investing completely. The trick is to remember that this is a complementary investment that should diversify your portfolio and help reduce your risks overall. Use it wisely and you’ll be able to grow your fortune steadily.
REITs, or Real Estate Investment Trusts, are, in essence, mutual funds that are traded like stocks. However, it’s important to note that investing in REITs is very different from dividend stock investing. First of all, it’s because the payout is much higher. Usually, REITs will pay about twice of what you can get through dividends. There are also some tax benefits unique to this type of real estate investing.
New investors, in particular, can benefit greatly by including REITs in their portfolio. This allows you to gain some very important experience with real estate with only a small measure of risk.
Another big advantage is that you get to enjoy the profits of what could be direct real estate investing without doing the work involved in it. Also, you can start with a minimal investment and still get a substantial payout over time. The entry point into this type of real estate investing is very low.
Note that REITs pay out no less than 90% of income to shareholders. This is why they bring more yield than dividend stock investing. They also have high liquidity, which means you are safe even in case of an emergency as you can sell them fast.
However, you also need to understand that REIT dividends are different from stock dividends and are taxed differently.
Also, this type of real estate investing is extremely sensitive to changes in interest rates. That’s why REIT investors are currently at more risk as the recession brought down the rates.
Lastly, remember that REITs are very focused. This means that properties within the fund are all the same type. Therefore, should something happen to affect this type of property, your investment might be ruined. The solution to this is to invest in a variety of REITs.
In Conclusion: Which Type of Real Estate Investing Is the Best?
Ultimately, the decision about which type of real estate investing is the best lies with you. Both REITs and direct investing are lucrative and reasonably safe. Real estate dividend stock investing might not bring you a large income. However, it’s definitely a good thing to have in your portfolio for diversification purposes.
All in all, the choice depends on how involved you want to be. Stocks and REITs require little input from you. Therefore, you’ll be able to dedicate your time to other business. Direct real estate investing requires direct management, which can be time consuming. Even if you hire a property management company you’ll need to spend time looking for new investments and make deals. If you are ready to dedicate yourself largely to real estate, this is the road for you. However, if you prefer a hands-off approach, REIT investing will be a better choice.