Real estate investing has long been one of the best known and most common ways to generate passive income, and for good reason. People will always need places to live, work and spend time with friends and family.
Direct ownership of a rental property, like a single-family home, apartment or condo, might quickly come to mind if you’re considering an investment in real estate, but owning a rental property tends to require a significant amount of direct involvement on your part. In many cases, investors are responsible for sourcing properties, lining up financing, vetting tenants, making repairs, collecting rents and a whole host of other property-related tasks.
On the other end of the spectrum are real estate investment trusts — commonly referred to as REITs — which enable investors to invest in real estate without having to acquire and manage physical real estate. Similar to how investors can purchase shares of a mutual fund that owns stocks of publicly traded companies, REITs are firms that own commercial real estate assets like warehouses, office space, retail developments, multifamily apartments, hotels and other property types.
It’s important to make sure you fully understand the potential benefits and drawbacks between these two popular approaches because each carries different levels of risk, return, holding periods, ease of access, management duties and many other variables that need to be taken into account before moving forward with any investment.
So which approach makes most sense for you — buying an individual rental property or investing in commercial real estate through a REIT? Here’s a quick comparison to help illustrate the key differences between how these two investment choices work:
Which Option is Best for Me?
You’ll want to consider your own risk tolerance, long-term financial goals and overall portfolio to select the right investment options for you. But you might want to consider investing in residential real estate if:
- You’re involved in the real estate industry or have friends who can help perform due diligence prior to purchasing a property
- You enjoy doing home improvements and/or remodeling projects
- You want full control over selecting tenants and setting rent prices
- You like the flexibility that comes with tenants on shorter-term leases so you can adjust rental terms and rates based on market conditions
- You have the funding to weather potential periods of vacancy as your local economy experiences ups and downs
On the other hand, you might consider investing in commercial real estate through a REIT if:
- You are looking for a more “hands-off” approach
- You don’t have any experience with remodeling or home improvement work but are looking for ways to diversify your investments with real estate
- You live in a part of the country where rising housing prices may make it hard to purchase investment properties and build your own portfolio
- You feel overwhelmed by managing multiple properties you own
Simply put — the best way to invest in real estate is the one that best fits you and your portfolio. No investment is right for everyone, and the right investment for your friend or neighbor may not be the right option for you. Everyone has a different opinion and tolerance for risk when it comes to investing, and there’s no one right answer for everyone. Ultimately, you have to decide which is the best option for you.
This information does not constitute investment, tax, financial or legal advice. Investors should consult their tax professionals for more information about potential tax benefits.
The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.