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Differences between REIT's and Real Estate (Real Estate vs REIT's)

Updated: Mar 29

I'll start off by saying these are two AWESOME ways to build your wealth and achieve financial freedom!


Most of you have an idea of what real estate investing is in general. If you do not know check out this post I created on how to make money in real estate.


However when it comes to what a REIT is, many people do not know!



REIT's and real estate have similarities and differences and with that comes pros and cons which we will look to get into later. But for now lets's start quickly with what a REIT is.


What is a REIT?

A REIT is short for a Real Estate Investment Trust.


They are typically an organisation or company that works within the real estate industry in order to make a profit. These companies can and normally trade on the public stock market. Due to the size of these organisations they can diversify to cover many aspects of real estate.


That meaning they can own real estate in the residential, commercial and industrial area. Within that many REIT's tend to specialise in a certain area, whether that be shopping centres, apartment buildings, single family homes ECT.


There are three classifications of REIT's:


Equity REIT's

What people think of first when they think of how REIT's make their money. These type of REIT's look to build an income based property portfolio. Usually obtaining their income through rental type properties.


Mortgage REIT's

This can be a more confusing REIT. But I will dumb it down for the sake of this post. A Mortgage REIT basically means that they become a bank for real estate property borrowers. That means they will lend their money to clients looking to borrow money in order to buy real estate. They then create an income off the interest paid back to them for loaning their money.


Hybrid REIT's

A hybrid is quite simply a REIT that combines both Equity and Mortgage ways in order to make a profit.



Differences between REIT's and Real Estate

Now it is quite simple to understand the difference between the two.


In real estate you're essentially the "organisation" that has ownership over the property legally. Opposed to REIT's in which you don't really own the property you own a portion of the organisation and hence a portion of all the properties that they manage.


In order to further compare the two below we will go into a similar comparison and list of differences.


Cost

Want to get started in real estate but only have a few $100?


Well good luck buying a property all by yourself with that! This is where a REIT's entry point differs largely from real estate. That meaning you can buy shares in a publicly traded REIT for as low as a few $1 a share...


This opposed to real estate in which the entry price is usually in the tens of thousands. And that more times than not is just for a small deposit in which you then have to take on debt in order to purchase the property.



Control

The levels of control between real estate and REIT's are polar opposites!


When it comes to a REIT you have pretty much no control over the property or where your money is going. You are buying pretty much the organisations portfolio hence you have no say on what properties are being bought/sold/kept.


With a REIT you have the mindset that once you have researched that particular REIT you are investing your money into that organisations business model. Your basically saying:


"Here is my money, I trust you with it, now please give me a great return!"


Whereas with real estate you have complete control over the property. You decide what property you want to buy and what you want to do with that property. It is all up to you! That leads me to the next point!



Time involved

As mentioned above you can probably assume the time involved will correlate with the control. That being with a REIT the organisation or company you invest in takes care of everything when it comes to the property. Investing in a REIT will turn into a passive income stream where your money will give you a regular return.


The opposite goes for real estate. If you decide to go down this path you can find yourself investing a lot of time as well as money into the investment. This is because YOU own the property. Therefore it is your responsibility for example to fix any damages that occur or collect payments from the tenants.


However the time involved when investing in real estate can be minimised by the use of property managers. They can take care of all the maintenance work of your property for a % of the income!


Diversification

For investors this is huge! And it is a huge difference between REIT's and real estate investing.


When it comes to REIT's the organisation or company you invest in will be actively looking to diversify their portfolios. They may own properties in all sectors of residential, commercial and industrial. Or they may diversify within that for example the commercial sector, they may own gyms, hospitals, cafes, retail shops ect. Therefore building a much more diverse portfolio which is said to minimise your investment risk.


This differs to real estate investing. For a majority of investors they may for example own 1 or 2 single family homes. This is not very diverse at all and could pose a risk say if the market for single family homes disappears. It becomes hard to personally diversify your real estate portfolio due to large amounts of money required to spread into multiple sectors of real estate.



Return/Risk Factor

So I bet you can further assume this next difference. That is when you invest in REIT's your risk can be much less than if you invest in real estate.


Why you ask?


Well when you invest in REIT's you can only lose whatever money you choose to initially invest. Whereas with real estate if you choose to take on an amount of debt it then becomes your responsibility to pay it back.


If things go belly up and you're forced to sell back your property at a lower price it is your responsibility to then therefore payback all of the debt you owe.


However by taking on this risk you are opened up to the biggest positive when it comes to investing in real estate. That is, high risk high reward!

YOU own that property, therefore if housing prices sharply increase or even increase greatly overtime that is your wealth you are building. That's money straight in your pocket! This is opposed to REIT's where the returns usually paid in dividends are a set amount. The big profits go to to the organisation!



Conclusion

By reading this and further researching each aspect of REIT's and real estate you can grasp a great idea of what each involves. In summary REIT's will involve a much more passive approach opposed to real estate investing. That meaning that you create a very passive income stream by investing in a REIT. Opposed to real estate which can be a much more active approach where you have full control over your property.


However with more control can come with greater risk but with greater risk comes with greater reward!


It all depends on how actively involved you want to be with your investment and how much risk you are willing to take in order to receive a greater reward!






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