Up until a few years ago, everybody just knew that real estate was the “best” investment. Even today, after the crash, real estate is as popular an investment vehicle as it’s ever been. While they may disagree on exactly how much to allocate towards real estate, most experts agree that you should should devote at least a portion of your retirement portfolio to real estate, preferably through a well-regarded REIT fund. Other experts, such as Robert Kiyosaki advocate direct ownership in rental properties. Which is better?
Advantages Of REIT Funds
Owning shares in a REIT mutual fund is arguably safer and undoubtedly easier than owning real estate directly. And because the difficult work of finding tenants, performing maintenance, and improving and updating properties is left to skilled professional real estate managers, investing in REITs can be a stellar passive income opportunity.
The disadvantages of investing in REITs are lower leverage and thus lower expected returns. You also don’t have nearly as much control over the real properties involved, which contributes a bit of additional risk. Still, investing in REITs is far safer than direct investment due to the ease of diversifying across different property types and geographical areas.
Advantages Of Direct Investment
There are two main advantages to investing directly in real estate rather than through a mutual fund: control and (much) higher potential returns. When you own a property directly, you’re the boss. You can knock out a wall, remodel a kitchen, or even choose to let a property become dilapidated if you so choose (although that would be silly). Will you always make the right decision? No, probably not. But you also have the ability to correct mistakes quickly and as cheaply as possible. With a REIT mutual fund, you don’t have that luxury.
As a general rule, REIT managers like to limit the amount of leverage they take on in an effort to control risk. That’s great, but direct investment gives aggressive investors the ability to fine-tune their risk/reward ratio to more closely match their own risk tolerance. The added leverage possible with direct investment can greatly magnify returns (and losses). The downside, of course, is the additional risk involved.
Whichever method of investing in real estate you choose, be sure to do your own homework. After all, nobody cares as much about your finances as you do.