Investing in real estate has long been a favored choice for those looking to build wealth and secure their financial future. When it comes to real estate investments, two primary options often come to mind: owning physical properties and investing in Real Estate Investment Trusts (REITs). While both options offer potential benefits, this article will reveal five reasons why investment property ownership is superior to REITs for many investors.
1. Full Control and Flexibility
One of the most compelling reasons to favor investment property ownership over REITs is the level of control and flexibility it provides.
When you own a physical property, you have the power to make decisions about everything from property management to renovations. You can choose your tenants, set the rental rates, and tailor your investment strategy to your specific goals.
In contrast, REITs are managed by professionals who make decisions on your behalf. While this can be advantageous for hands-off investors, it means you have limited control over the assets in the trust.
If you prefer a more hands-on approach to real estate investing, direct property ownership is the way to go.
2. Potential for Higher Returns
Investors often seek real estate for its potential for impressive returns, and direct property ownership can offer a pathway to higher profitability.
When you own physical properties, you have the opportunity to increase their value through improvements and renovations. Additionally, rental income from investment properties can provide a steady cash flow and yield significant profits over time.
REITs, on the other hand, typically offer lower returns than direct property ownership. While they can provide diversification and liquidity, the returns are often more modest due to management fees and the passive nature of the investment.
3. Tax Advantages
Investment property ownership also comes with unique tax advantages that can enhance your overall returns. The tax code provides numerous deductions and incentives for property owners. Some of these benefits include:
- Depreciation deductions
- Mortgage interest deductions
- Property tax deductions
- 1031 exchanges for tax-deferred property swaps
- Deductions for property management expenses
REITs, while they do offer certain tax benefits, may not provide the same level of tax advantages that come with direct property ownership.
Investors should consult with a tax professional to fully understand and optimize their tax situation based on their investment strategy.
4. Inflation Hedge
Inflation is a concern for many investors, and real estate, particularly investment property ownership, can serve as an effective hedge against inflation.
As prices rise over time, the value of physical assets like real estate often appreciates. This appreciation can help preserve your purchasing power and maintain your investment’s value.
REITs may also offer some protection against inflation, but the correlation may not be as strong as with direct property ownership.
The performance of REITs is influenced by various factors, including interest rates and market sentiment, which can impact their ability to effectively hedge against inflation.
5. Portfolio Diversification
Diversification is a key principle in building a resilient investment portfolio.
While REITs can play a valuable role in diversifying your investment holdings, owning physical properties can offer an even greater level of diversification.
With direct property ownership, you can spread your investments across different types of real estate, such as residential, commercial, or industrial properties, reducing the risk associated with a single asset class.
Moreover, owning properties in different geographic locations can further diversify your real estate portfolio, potentially mitigating the impact of regional economic fluctuations.
REITs, while diversified in their own right, may not provide the same level of control over the types and locations of properties in your portfolio.
Final Thoughts
Investing in real estate through direct property ownership and REITs are both valid strategies, each with its own set of advantages and disadvantages.
While REITs offer liquidity and professional management, investment property ownership provides control, higher return potential, tax advantages, inflation protection, and portfolio diversification.
Ultimately, the choice between investment property ownership and REITs should align with your investment goals, risk tolerance, and personal preferences.
Some investors may prefer the passive nature of REITs, while others may thrive on the hands-on approach and potential for higher returns that come with direct property ownership.
Whatever your choice, a well-informed decision will set you on the path to building a successful real estate investment portfolio.
If you prefer the option of owning REITs or would like to find out the benefits of owning REITs, head over to our related article, Five Reasons Why REITs Are Superior To Investment Property Ownership.
Leave a comment below if you prefer REITs over direct property ownership, or if you have other reasons why you’d choose one over the other.
