Direct real-estate investing and investing in real-estate investment trusts (REITs) are two of the most popular ways to invest in real estate. Choosing one over the other requires exploration of their advantages and disadvantages.
Advantages of Direct Real-estate Investing
Direct real-estate investing means buying a specific property, residential or commercial, and receiving subsequent income from it. The income could come from property rent, appreciation or profits generated from business activities conducted at the property. With direct investing, you have greater control and decision-making power. For example, you could choose which and how many properties to buy and decide on rental prices and tenants. Additionally, there is appreciation. Both real estate and stock markets fluctuate, but property prices usually increase with time, and eventually, you could sell at a higher price.
Another great advantage of investing in physical properties is the multitude of available tax reliefs to offset the cost of purchase. For example, ordinary and necessary costs to manage and maintain the property are deductible. Also, there is a large tax break for depreciation. In this case, you gradually decrease your taxable income by deducting the costs of buying and improving the property throughout its serviceable life.
Disadvantages of Direct Real-Estate Investing
Lack of liquidity is one of the main drawbacks of direct real-estate investing. If you are in urgent need of money, you might not be able to sell the physical property quickly. Another disadvantage is financing. Buying a physical property requires higher initial capital, and many investors resort to taking on a mortgage or other type of financing. If, however, market conditions worsen or you cannot find quality tenants, you run the risk of defaulting on the loan.
Another disadvantage of direct real-estate investing is the higher so-called sweat equity. It takes a significant amount of time and energy to tackle tenant issues and maintenance emergencies. Additionally, you are liable in case of any accidents on the property.
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