When I first started exploring real estate investment, I got confused between two main options. These options are buying a property or just investing in REIT. Traditional real estate investment is better or investment in REIT is good, choosing between both is difficult.

Going through the traditional investment, I realize that I have full control whether it is doing upgrades, deciding tenants or selling my property at the right time.

But then there was a second option that is investing in REITs. It’s just having a great experience without having a management hustle. No day to day headaches just buying shares and no need to save up for a down payment.

But still there is a doubt in my mind about what to do and where to invest. Then I weighed the pros and cons of both to take a clear picture. 

It wasn’t just about potential returns but is about how much control I want or how hands off I preferred my investment to be.

Traditional Real Estate Investment:

As I began to dive more deeply into the subject of traditional real estate investing, I came to the realization quite quickly that it was filled with exciting opportunities with some serious challenges. On the other side of the coin, buying physical properties as a means of building wealth also has its pros and cons.

Advantages:

• Rent Income:

One of the great appeals for me was some potential rental income. Owning a piece of property will provide one with a continuous flow of cash every month.  

This can help pay off one’s mortgage, maintenance, and maybe even turn a profit. Over time, rental income can build up and actually make a difference in one’s financial future.

• Property Appreciation:

Any given real estate market has its ups and downs, but I liked the concept of my property increasing in value over the years. 

According to the Pakistan Bureau of Statistics, property values in urban areas have appreciated by an average of 6-8% per year

• Tax Benefits:

There is also one pretty cool side when it comes to taxes in owning real estate. You can deduct items such as mortgage interest, property taxes, and depreciation. 

Plus, The capital gains tax on property sales is typically 15%, which is lower than the income tax rate for many individuals, so you may save quite a bit of money that way.

• Control Over the Property:

I liked the idea of direct control over my investment. You can’t really do that with stocks or a mutual fund; you can only hope the market goes your way. 

In this case, you can take action in terms of Who you rent the place to? What kind of renovations to do? What to include or exclude in the management?

Disadvantages:

• High Initial Costs: 

On the other hand, getting into traditional real estate wasn’t exactly cheap. Between the down payment-usually a minimum of 20 % and closing costs.

I realized it takes so much capital at the outset. That is one big financial commitment, especially for someone just starting out.

• Ongoing Expenses

Owning property isn’t just a “buy it and forget it” sort of thing. The ongoing costs include maintenance, repairs, property taxes, and quite often management fees. These costs can amount to approximately 1-2% of the property’s value annually.

These add up quickly and sometimes eat into your rental income a lot more than you may expect.

• Liquidity shortage: 

Real estate does not act like stocks, which you sell practically with the click of a button. If ever you need quick cash, selling a property will really take time, sometimes months, depending on the market. 

It certainly is not one of the most flexible investments. 

• Vacancy risk: 

Then, there is the risk of vacancy. If you have no tenants, there is no income arising from rentals, but all those ongoing expenses must still be paid. 

The vacancy rate for rental properties in urban areas of Pakistan can vary but is generally around 8-10%. It’s a genuine concern if you have no plan in place for keeping vacancies to a minimum through attractive marketing or property management. 

REITs Real Estate Investment:

My interest in REITs is rooted in the way they offer ways of investing in real estate without actually owning a single piece of property.

 It’s definitely a different kind of approach from traditional real estate investment, and like any investment class, there are some great benefits and a few downsides to consider.

Pros:

• Diversification over several properties:

What really worked with REITs is the mere fact that they allow one to diversify across multiple properties. 

Crawling up the funds of many investors, REITs are able to own a diverse portfolio of real estate assets-be it residential, commercial, or industrial. 

This spreads out the risk so that if one property is not doing great, others in the portfolio help to balance things out.

Also Check: Sapphire Bay Islamic Developmental REIT-Lahore

• Liquidity is high:

Another big plus is the liquidity; since REITs are traded on major stock exchanges, one can buy or sell shares in them at any time.

Of course, one of the major rip-offs with traditional real estate is that it tends to take months upon months to sell your property. In this respect, if you invest in REITs, you can get quick access to your money whenever you need it.

The average time for a property sale in Pakistan can range from 3 to 6 months

• Professional management by Experts:

What really convinced me, however, is their professional management. REITs are professionally managed by individuals who understand everything from A to Z about the real estate business. 

The professionals manage all the tough stuff that involves managing tenants, maintenance, and financial reporting, and you do not have to. 

It is like having a property management team without all of the headaches associated with owning property.

• Lower entry barriers for individual investors:

If you don’t have a load of capital and want to get into real estate, then REITs are among the best options. 

You can buy shares for literally a fraction of the cost you to purchase any property and hence more accessible to the regular investor.

That was a major selling point to me because I did not have to spend an arm and a leg just to get started.

Drawbacks:

• Dependence on Market Conditions:

That being said, REITs are not entirely devoid of risks. They are pegged on market performance; hence, if the economy goes through a downturn or interest rates go up, the value of your shares might take a tumble. 

It is definitely an aspect you might want to consider, more so if you were seeking some other form of long-term investment that’s sure.

• Management fees can cut into returns.

While professional management is great, it’s not free. Many REITs charge management fees, which factor into your overall returns. 

Fees cover everything from administrative costs to the big ticket: performance bonuses, meaning you’re not always getting quite as much profit as you might with direct property ownership.

• Less control over specific property decisions: 

The thing with REITs is that you’re basically investing in the management team. You don’t have any control over what the REIT does, unlike owning a property where you can make any decision you feel like.

 They make the decisions with regards to acquisitions, sales, and day-to-day management, sometimes those decisions may not be what you would have done. 

Returns by comparison may be pretty low in direct property investment.

Final Verdict :

Last but not least, while REITs can provide consistent income in the form of dividends, it doesn’t involve the same level of return one might get from directly owning a property.

Traditional real estate investment after some time, as a result of properties appreciating and yielding rental income, will give better profits if someone is really ready and willing to put in the additional responsibility involved in being the owner of a property. 

Ultimately, REITs are a great way to wet one’s feet in real estate with minimal headaches. Like any other investment vehicle, however, it pays dividends in the long run to consider some pros and cons of REITs before diving in.

Choosing the Right Investment:

Frankly speaking, the more I consider an investment strategy, the more early it becomes apparent that this is one of those rare one-size-fits-all scenarios.

 You really need to step back and take into consideration a few of the key factors so that your choice matches up with your financial goals and where you are in life.

• Investment Goals: 

First, I had to determine what I was looking for from my investments. Was I after a quick gain, or was long-term growth more important? 

Perhaps I just wanted a reliable source of income. Whatever the objectives I nailed down, it made choosing the right type of investment that much easier.

• Risk Tolerance

I asked myself, “How much risk am I willing to take?” Is it all right if the value of my investment goes up and down, or do I want something more stable?

 Well, if you are like me and a little risk for bigger returns is acceptable, maybe stocks or even cryptocurrencies may be enjoyable. But if you’re cautious, then bonds or even savings accounts are good conservative options.

• Time Horizon:

 It also makes a great deal of difference how long I plan on holding an investment. Still a few decades away from retirement, I have more time to ride out the jolts in the market, which can well allow me to take on more risk. 

Closer to retirement or needing the money sooner, I would probably stick to much safer investments to protect my capital.

• Economic Resources

Lastly, I needed to take into consideration my financial situation. How much could I really invest without being at a disadvantage? It is good to know you have some cash for emergencies before investing in stocks and bonds. 

If I didn’t have a ton of extra cash, it would be prudent to start with lower-cost options like index funds or ETFs. 

Moreover, I had also considered my outstanding debts and what current disposable income was sufficient for investment without affecting my everyday finances.