Broker Check

Real Estate Investing: Directions and Drawbacks

| March 18, 2019

Last time we looked at real estate as an investment option relative to other types of investments.

Now it’s time for a simple real estate investing question – do you want to do the dirty work of property ownership, or would you rather invest from the sidelines?

We’ll look at each and dig more into the drawbacks of real estate investing in general.

Indirect Investments

An indirect real estate investment is investing in real estate without owning property. It can take many forms.

One example is a real estate investment trust (REIT), which is essentially an investment fund that focuses on real estate. The REIT is a popular indirect real estate investment – they’re sometimes even offered within workplace retirement plans.

It’s not surprising. The world of REITs is vast and offers investors diversification, along with access to different wealth managers and strategies.

Other examples of indirect investments include real estate private equity funds, hedge funds, and so on.

All can offer attractive real estate investments, often with low barriers to entry. For instance, minimum investments can be as low as a few thousand dollars or less, which means access to billion-dollar deals for small increments.

Also, property selection and acquisition timing can be rapid (even same-day), allowing for quick access to sectors and geographies without the usual travel and due diligence required.

Direct Investments

Direct investing means owning property. While we’ve been covering the virtues of indirect real estate investing, there are unique advantages to direct real estate investing, to be sure.

For example, total control. That includes which properties to pursue, what improvements to make, how to market, setting rent prices and so on. Only direct investment provides those opportunities.

Similarly, being able to acquire long-term assets at fixed borrowing costs and enjoying the equity of those assets are other benefits only experienced by direct investors. Similarly, some unique tax advantages of real estate ownership may be available as a direct investor.

Drawbacks of Real Estate

This blog series isn’t to say real estate investing is free from risk, consequences or potential pitfalls. Far from it. There are drawbacks of real estate investing. There are also drawbacks of both direct and indirect real estate investments.

For instance, investing in real estate can leave money “locked up” for long stretches of time, even years. That can be particularly true with direct investing.

And, while real estate is not necessarily correlated to the stock market, it can suffer in recessions. It’s also less likely to appreciate as quickly as stocks during economic expansions.

In Our Next Installment

Because they’re so popular, we spoke a lot about indirect real estate investments in this post.

Next time, we’ll dig more into the reality of direct real estate investing, where you actually own the property.

Be warned, you may need a hard hat!