Cons of Direct Real Estate Investing
One of the main disadvantages of direct investing is that it requires a significant amount of time and energy (sweat equity) if you plan to be successful. You have to deal with tenant issues, maintenance emergencies, and your liability if there are any accidents on the property.
Financing can be another disadvantage. Many investors need to take on a mortgage or some other type of financing to pay for investments. If the market tanks or you have difficulty finding quality tenants, there’s the chance you could default on the loan.
Another negative is that real estate is not a liquid asset. That means you probably won’t be able to sell it quickly if you need cash in an emergency.
Pros of REITs
Perhaps the biggest advantage of REITs is that individual investors can access profits from real estate without the need to own, operate, or directly finance properties. They offer a low-cost way to invest in the real estate market. You can invest in a fund with as little as $500—a much lower entry point than direct real estate investing.
Another benefit is that REITs offer enticing total return potential. By law, REITs have to pay at least 90% of taxable income to shareholders, and it’s not uncommon to have a 5% dividend yield—or more. REITs also have the potential for capital appreciation as the value of the underlying assets increases.
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