REIT vs Physical Real Estate: Which is a Better Investment

18 January 2023
4 min read
REIT vs Physical Real Estate: Which is a Better Investment
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Are you interested in Real Estate investing? Investors looking to invest in the real estate market often compare REITs to real, tangible real estate. Corporations, known as REITs, or Real Estate Investment Trusts, function similarly to Mutual Funds in the Real Estate investing space.

You can invest in a REIT without possessing or managing any real estate yourself. Alternatively, you can invest directly in Real Estate by purchasing homes or commercial properties.

This blog will evaluate two real estate investment options – REIT Vs Physical Real Estate- and discover their fundamental differences.

Real Estate Investment Trust (REIT)

Real Estate Investment Trusts, or REITs, own and manage properties to make money. Companies that manage portfolios of high-value real estate properties and mortgages are known as Real Estate Investment Trust companies. For instance, they rent out properties and get paid for them.

The shareholders are later given income and dividends from the rent collected. REITs typically offer investors a chance to own expensive real estate and provide them with a chance to receive dividend income, which will eventually increase their capital. Investors can take advantage of the chance to raise their wealth and simultaneously produce income.

Physical Real Estate

In legal terms, Real refers to property distinct from personal property, and Estate refers to a person's "interest" in that real property. Real Estate is different from private property, which includes things like cars, boats, jewelry, furniture, tools, and a farm's rolling stock but is not affixed to the land permanently. Thus, Physical Real Estate is nothing more than a plot of land with any natural or artificial improvements attached or added.

Trees, water, valuable mineral deposits, and oil are all natural attachments that are a part of the land. On the other hand, structures like fences, sidewalks, and buildings are artificial improvements. Residential and commercial real estate fall into two broad categories.

Key Differences Between REIT & Physical Real Estate

What is the difference between REIT vs Physical Real Estate ? REIT and Physical Real Estate are two distinct concepts with utterly different uses, but there is no denying that even if they are opposites, they are two sides of the same coin.

So, let us examine the main variations between the two.

Characteristics

REIT

Physical Real Estate

Meaning

Individuals have the option of investing in large-scale, income-producing Real Estate through Real Estate Investment Trusts (REITs).

A firm that owns and typically manages real estate or related assets that generate income is known as a REIT.

In a Physical Real Estate investment, you purchase a specific property or a stake in one, like a residential apartment building or a retail space (commercial).

Physical Real Estate investors profit from real estate appreciation, rental income, and profits from any businesses that depend on the property.

Who Should Invest?

Real Estate Investment Trusts (REITs) are a way for investors to diversify their holdings. Thus, Real Estate Investment Trusts are an option for investors seeking assets apart from stocks and bonds.

Investors seeking a consistent income may find REITs appealing because they also regularly pay dividends.

Investments in Physical Real Estate are suitable for those who prefer a more individualized experience.

They gain project experience and a sense of the returns from purchasing, managing, and selling the property.

Liquidity

Buying and selling units are made simple in REITs as they are traded on stock exchanges.

Contrastingly, selling Physical Real Estate property may become difficult as the trade can only be made when a buyer is discovered.

Tax Implications

REITs do not provide comparable tax advantages, and even the dividend payments on REITs are taxed.

Most buyers of Real Estate prefer to finance a home with a mortgage or a loan. As a result, some tax advantages are available.

Exposure to Diversification

The fact that investors in REITs do not have to purchase the entire property is one of the critical aspects of REITs, as investors need to buy the trust units, which leaves a vast space for them to diversify their portfolio by purchasing various trust units.

For investments in Physical Real Estate, investors must purchase the entire property, which is why investors would need an extra lump sum to invest in new real estate.

Ownership of Property

In this case, investors in REITs are not given the title of property ownership, and they only receive trust units.

On the contrary, Real Estate grants investors the freedom to use the property as they deem fit.

Charges and Costs

REITs do not incur additional expenses.

On the other hand, the maintenance of physical property involves several expenses, including maintenance fees, property taxes, water taxes, registration fees, etc.

Income

Regular dividend payments are made or given by REITs.

Physical Real Estate does not typically have regular payments unless it is rented out and generates a rental income.

You may also want to know What is the Difference Between REIT and InVIT?

Conclusion

In conclusion, Real Estate Investment and REIT investment are two entirely different things with perks and disadvantages. Compared to Physical Real Estate, REITs are more easily accessible, and straightforward investment options; however, investing in REITs cannot replace investing in your dream home.

Lastly, after reading this blog post in its entirety, it is now up to you to choose what the better investment option would be.

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