Comparing Investment Options for Real Estate Investors

There are seemingly endless real estate investment options out there, which may confuse a new investor. If you’re just beginning your investment journey in the real estate space, there are three main options we suggest focusing on: direct ownership, REITs, and syndication. This article will discuss the advantages and disadvantages of each option so that investors can make an informed decision on how they want to proceed with their investment strategies.

Direct Ownership

Direct ownership is when you buy property directly from a seller. There are no additional layers of management or partners involved. If the property is in good condition, you can immediately start getting returns on your investment. You also get to keep all the profit from the investment because you are not splitting it with anyone. 

The main advantage of direct ownership is that you have a large say in how the property is managed and can see what it would take to do any repairs yourself. This gives you more freedom over the property, the tenants, and how long you keep it.

Depending on the capital at hand, you can opt for a residential or commercial property. Although direct ownership can be profitable in the long term, there are several things to keep in mind if this is your first foray into real estate:

Cost

Buying a single property requires a lot of money. Getting a property loan for your first investment will also require a large down payment. Additionally, you will be in charge of the cost of repairs and other expenses.

Vacancies

Residential properties allow you to buy a relatively inexpensive house that still has potential for appreciation in value. However, you should also be prepared for vacancies. Commercial real estate, as opposed to residential, is typically seen as a more stable and predictable investment. The demand for commercial space is generally less cyclical than the demand for housing.

Liquidity

If you think you may have an urgent need for money in the near future, don’t invest in real estate. For one, you can’t just sell a house. Even if you’ve got a ready buyer, the deal may take a while to close. Secondly, although the demand for real estate may continue increasing, you can’t tell how long that will continue.

Effort

If you are not keen on hands-on work, this might not be for you as managing a property requires additional time and effort beyond just making your initial investment. A good property manager can make the work easier, but they will not do the insurance and tax work for you. That means you’ll still have to do some of that yourself or incur additional expenses by hiring an asset manager.

REITs

If you are looking for a more hands-off investment, consider joining a REIT. A REIT is often a publicly-traded company, which means that they are listed on the stock market, and their stocks can be bought and sold by anyone.

REITs allow investors to buy shares in an asset management company instead of purchasing individual properties. They are a great option for investors who do not want to manage properties but still want some exposure. Unlike direct ownership, REITs don't involve any work on the investor’s part other than watching their stock value grow or decline with market fluctuations. REITs are good investments if you're looking for a fixed income and low-risk investment.

A REIT makes money by paying dividends. It collects money from stockholders and uses it to pay dividends on its shares. Basically, a REIT will put money into a real estate property. The properties are developed by building the real estate structure and then renting it out. The REIT will get a large amount of rent from each property, which they use to pay the management fees and expenses. The rest of the money is then divided amongst the shareholders.

The biggest advantage of investing in REITs is their diversification. Since there is no need to buy only one property, investors can invest in more than one rental property. You can invest in residential, commercial, and industrial properties.

The downside is that you will not have as much control over how the property is managed and can't see what it would take to make any repairs yourself. Also, it is important to remember that REITs are limited in the types of properties they can invest in. Most REITs only invest in commercial real estate. 

Real Estate Syndication

Real estate syndication can be a great way for investors to get into the real estate market without having to invest a large sum of money. Syndication allows investors to pool their funds with other investors, including those who already own property, to buy a larger or more expensive investment. Many risks can be mitigated through syndication since the investor shares the risk with others, and if one investor defaults, the others can share the cost. Diversifying assets and risks is perhaps the main attraction of becoming a real estate syndicator. 

The other advantage of syndication is access. Real estate syndication can provide investors with access to deals that they might not be able to get on their own and offer a higher potential return on investment. As long as you are careful to make sure you can manage the properties in question, investing in syndication can be a very profitable strategy.

The other advantage is capital. Real estate syndication allows for the pooling of resources, which can make it easier to purchase and manage larger properties. Since you are not required to buy properties yourself, you only need a small amount of initial capital for your initial expenses. You will, in turn, get commissions based on your investment.

The main drawback of being a syndicator is that it can be very hard to make money. In fact, the biggest problem with syndication is that most of your money will be tied up for long periods of time.

In Conclusion

If you are thinking about getting into real estate investment, there are several avenues to consider. Direct ownership is more demanding, financially and time-wise, but it will give you more control. REITs will offer more liquidity and lower risk. Real estate syndication will allow you to diversify. If passive income is your primary goal, investing in syndication or REITs would be a good choice.