Real estate investments continue to be an attractive option for many investors, including those with self-directed IRAs. In fact, an increasing number of retirement savers are looking to use their self-directed IRAs to invest in assets that are less volatile than the stock market, while at the same time providing a level of current income that greatly exceeds what they could receive by investing in bank CDs or US government bonds.
But not everyone feels comfortable investing in individual pieces of real estate. For those who want to increase their real estate holdings while still maintaining a measure of diversification in their portfolios, there is the option of investing in Real Estate Investment Trusts (or “REITs”). Let’s explore some of the differences between these methods of investing.
Control Over Investment Decisions
REITs can have a broad focus in their investments, or they can specialize in different types of real estate (i.e., office buildings or strip malls). They can even target their investments on particular areas of the country. While a real estate investment trust will make its broad investment philosophy and strategy publically known, this is all the information you have in deciding whether or not to invest.
In other words, you won’t be able to make individual investment decisions when you hold shares of a REIT. In fact, when you purchase shares of a REIT to gain exposure to real estate investments you’ll never be able to do anything other than sell your holdings if you don’t like investment choices that the REIT is making, or buy more shares if you do.
With direct real estate investments you’ll have complete control over how to proceed with a particular piece of real estate; whether to rent it out, renovate it, sell it, or whatever other decision you believe holds the greatest possibility for maximizing your gains.
Shares of publically trade REITs are generally easier to sell than individual parcels of real estate. However, this greater level of liquidity cuts both ways when it comes to your investment portfolio. For example, some experienced real estate investors find that they are able to realize their greatest gains when there are relatively short-term and seasonal spikes in sales prices that can occur in certain real estate markets. The trading of REITs is generally much more market efficient, so you probably won’t ever be able to realize any of those types of gains.
Local Real Estate Markets
Another advantage that direct real estate investing may hold over real estate investment trust is that when you purchase individual properties you can leverage whatever knowledge you have concerning your local real estate market. Because REITs invest in a number of different properties, that type of investment won’t enable you to purchase an undervalued property that you might be aware of locally.
Finally, while REITs may have a place as a component of many real estate investors’ portfolios, the greatest investment gains are likely to come from well researched and negotiated investments directly in individual pieces of real estate.
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