Direct Real-Estate Investing or REITs: Which Should You Choose? Before you decide, learn the advantages and disadvantages of both.

By Richard Maize Edited by Amanda Breen

Opinions expressed by Entrepreneur contributors are their own.

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.

Related: 5 Amazing Tips on Turning Real Estate Into a Real Fortune

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.

Advantages of REITs

With REITs, on the other hand, investors do not need to buy any physical property. A REIT is a corporation that acts like a mutual fund for real-estate investing. It owns or operates income-generating real estate or real-estate-related assets and pools the capital of multiple investors. Basically, investors have the opportunity to receive income from real estate without having to own or manage property.

REITs offer a high total return, capital-appreciation potential and liquidity. REITs are legally bound to pay at least 90% of taxable income to shareholders, and often the dividend yield could surpass 5%. Meanwhile, the increase in the value of the underlying assets makes for potential capital appreciation. In terms of liquidity, REITs shares are like stocks. As an investor, you can buy or sell them on an exchange when you want or need to.

Related: Can REIT Really Help the Real-Estate Sector?

Disadvantages of REITs

Heavy taxation is one of the main drawbacks of REITs. The majority of REIT dividends are taxed at a higher rate because they aren't deemed "qualified dividends." Furthermore, REITs could be extremely sensitive to interest-rate fluctuations. Generally, a negative correlation exists between REIT prices and Treasury yields: The increase of one leads to the decrease of the other, and vice versa.

Another disadvantage of REITs is the lack of diversification. Usually, they focus on a particular type of property, such as offices or shopping centers, or hotels. Thus, in case of economic decline, REITs investors might be exposed to a higher property-specific risk.

Whether to choose one type of real estate investing over the other depends on the investor's desire or lack of it to own and manage a physical property and his or her initial capital.

Related: 8 Proven Ways to Make Money in Real Estate

Richard Maize

Financial and Investment Consultant

Richard Maize is a real-estate entrepreneur who has built a well-respected reputation for making astute business investments. Before the age of 30, Maize had already accumulated 1,000 apartment units, and he now owns property in 20 states. Additionally, Maize invests in TV and film and philanthropy.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Business Ideas

70 Small Business Ideas to Start in 2025

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2025.

Business News

'I Love Doing Product Reviews': Bill Gates Stepped Down from Microsoft in 2020, But Admits He Still Spends 15% of His Time Working at the Company

In a new interview with the Wall Street Journal, Gates also said he is still close with Microsoft's CEO Satya Nadella.

Business News

Uber's CEO Says Drivers Have About 10 Years Left Before They Will Be Replaced

Uber CEO Dara Khosrowshahi says the jobs of human drivers are safe for the next decade, but after that, another type of driver will take over.

Business News

'Everyone Can Profit From It': What Is DeepSeek? China's 'Cheap' to Make AI Chatbot Climbs to the Top of Apple, Google U.S. App Stores

DeepSeek researchers claim it was developed for less than $6 million, a contrast to the $100 million it takes U.S. tech startups to create AI.

Branding

How to Build a Strong Brand Identity for Your Early-Stage Startup

Branding might not be your first priority, but neglecting it can hurt your startup. A strong brand identity early on sets the stage for marketing success.

Business News

Elon Musk's DOGE Is Hiring People Eager to 'Work Long Hours' to Eliminate 'Waste, Fraud and Abuse' in the Government. Here's How to Apply.

The Department of Government Efficiency is hiring U.S. citizens to help cut spending and headcounts in the federal government.