What Are the Pros and Cons of Investing in REITs?

Many people believe that purchasing physical properties is the only way to invest in real estate, but that’s not entirely true. Real estate investment trusts (REITs) are companies that operate, own, and manage income-producing real estate, such as apartment buildings, malls, resorts, and even hospitals. Investors can purchase a share of REIT stocks to receive a portion of the company’s income. This may seem like the perfect way to safely invest in real estate, but this method is not without its roadblocks and hurdles. To help you make better investment decisions, let’s look at the pros and cons of investing in REITs.

The Pros of Investing in REITs

Overall, REITs are great for beginner investors who want to break into the field of real estate investing. This is because it is up to the company to decide what to invest in, and they manage the property or at least hire a management company to do so. In this way, investing in REITs is very passive, and if you don’t want to, you never even have to visit the property you’re investing in. This method also makes it much easier to diversify your portfolio so that you don’t have to rely on one form of investment for income.

Buying REIT stocks is also much more affordable than purchasing a physical property. Most REIT stock prices range from about $25 to $50—much lower than the average purchase price of $400,000 for a single-family home. Plus, REITs are incredibly easy to sell and turn into cash. Their high liquidity means it’s easier for an investor to jump ship should they feel they need to.

The Cons of Investing in REITs

Like any other form of investing, REITs do not come without risks. Many experienced investors will tell you that real estate investing is worth this risk, but you have to determine that for yourself. Let’s jump into the cons of REITs.

There are two main factors that can seriously eat into how much return you’ll receive: management fees and dividend taxes. Many REITs have an annual management fee, where the management group that oversees the ins and outs of the properties will take a percentage of the profits. Dividend taxes occur because the IRS considers the return investors receive taxable income.

Investing in REITs isn’t as safe as it seems either, as they’re very vulnerable to the ever-changing market trends. For example, during the COVID-19 pandemic, many people began working from home, which, in turn, plummeted the amount of income generated through office building rentals. Market trends such as these can be hard to predict, and you won’t see a hit coming until it affects your returns.

Is Investing in REITs Right for You?

Now that you know the pros and cons of investing in REITs, is this investment method the right choice for you? It’s important to note that no method of investing is 100 percent safe. However, if you’re looking for the safest, easiest, and most accessible form of real estate investing, REITs are the way to go.

That said, you may want to invest in REITs that are less vulnerable to market trends, such as apartments, condominiums, and homes. This is because people will always need a place to live. While the demand for homes versus apartments might fluctuate, remember that REITs allow you to diversify your portfolio, so you’ll always have a safe source of extra income.