Fractional ownerships through REITs and eREITS
When it comes to real estate investment, you have several options to consider, each with its unique benefits and potential drawbacks. One popular method is buying and owning an entire residential property, often called direct investment. Other options, like real estate crowdfunding, Real Estate Investment Trusts (REITs), and their online counterparts, eREITs, fall under indirect investment. Here, we'll compare these options and highlight why direct investment might hold an edge for certain investors.
Real Estate Crowdfunding: This is an increasingly popular form of indirect investment where many investors pool their resources together to invest in a property, much like collective funding of a startup or a project. The appeal of crowdfunding is in the low entry barrier; it allows you to gain exposure to the real estate market with a much smaller capital outlay. However, the downside is the lack of control. As an investor, you don't get a say in the management of the property, and your returns depend on the performance of the property and the management team.
REITs and eREITs: These are companies that own income-producing real estate. When you invest in a REIT or eREIT, you're buying shares of a company, not a direct stake in a property. This provides the advantage of diversification, as these trusts often have a portfolio of properties spread across different locations and sectors. Furthermore, they're traded like stocks, providing liquidity that real estate normally lacks. However, similar to crowdfunding, you're entrusting your investment to the management of the company, and you have no direct control over the properties.
Direct Investment: On the other hand, buying an entire residential property offers an unparalleled degree of control. As the owner, you decide on the rent, handle the maintenance, and choose when to sell. This form of investment also provides two types of income: rental income and potential capital appreciation when you sell the property. Moreover, there are significant tax benefits. For instance, you can write off property-related expenses, take advantage of depreciation, and utilize strategies like 1031 exchange to defer capital gains tax.
While these advantages are compelling, owning a property comes with responsibilities and risks. You have to deal with tenants, maintenance, property taxes, and the possibility of vacant periods. It also requires a substantial upfront investment.
Nevertheless, for those who are willing to handle the managerial duties and can afford the initial investment, owning a residential property often provides an excellent return on investment. It also gives you a tangible asset, which can be quite satisfying.
In conclusion, while real estate crowdfunding, REITs, and eREITs offer an accessible way to enter the real estate market, owning a residential property can provide better control, potential tax benefits, and possibly, higher returns for those willing to put in the effort and capital.