Real estate investment trusts (REITs) and fractional real estate investing are both popular options for those looking to invest in real estate, but they have different pros and cons. In this blog post, we will explore the differences between REITs and fractional real estate investing, and help you determine which option may be right for you.
Real estate investment trusts (REITs)
REITs are publicly traded companies that own and operate income-generating real estate assets, such as apartment buildings, office buildings, and shopping centers. They are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends, making them an attractive option for income-focused investors.
REITs can be classified into two categories: equity REITs, which own and operate properties, and mortgage REITs, which lend money to property owners and developers. Both types of REITs allow investors to own a piece of a diversified portfolio of real estate assets without having to purchase a property outright.
One of the main advantages of REITs is that they offer a relatively low barrier to entry. Since they are publicly traded, they can be purchased with relatively small amounts of capital, and they are also easy to buy and sell. This makes them a good option for those who are new to real estate investing or who want to diversify their portfolio with a relatively low-risk investment.
Another advantage of REITs is that they offer a relatively high level of diversification. Since REITs own a variety of properties in different locations, sectors, and markets, they can help investors spread their risk across a wide range of assets. This can be especially beneficial for those who are not comfortable with the risk associated with investing in a single property.
However, REITs also have some disadvantages. One of the main disadvantages is that they are often dependent on the performance of the overall stock market. When the stock market is performing well, REITs tend to do well, but when the stock market is performing poorly, REITs tend to do poorly. This means that REITs are not always the best option for those who are looking for a stable and consistent return on their investment.
Another disadvantage of REITs is that they tend to pay a lower return on investment (ROI) than other real estate investments. This is because REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which limits the amount of money that can be reinvested into the business. As a result, REITs tend to have a lower ROI than other real estate investments.
Fractional Investing
Fractional real estate investing, also known as real estate crowdfunding, is a newer form of real estate investing that allows investors to purchase shares of a property, usually through an online platform.
Fractional real estate investing can take a number of different forms. One common model is to form a partnership or LLC with a group of investors and purchase a property together. The investors will then share ownership of the property and any income or expenses associated with it.
One of the main advantages of fractional real estate investing is that it offers a relatively high ROI. Since investors are buying a small share of a property, they are able to share in the income and appreciation of the property without having to bear the full cost of owning the property. This can lead to a higher ROI than other forms of real estate investing.
Another advantage of fractional real estate investing is that it allows investors to diversify their real estate portfolio. Since investors can purchase small shares of a variety of properties, they can spread their risk across a wide range of assets, similar to REITs.
However, fractional real estate investing also has some disadvantages. One of the main disadvantages is that it can be difficult to find good deals. Since the market for fractional real estate investing is relatively new, it can be difficult for investors to find quality properties that are available for investment. This can make it difficult for investors to find good deals and can limit the number of properties available for investment.
Another disadvantage of fractional real estate investing is that it may not be as liquid as other forms of real estate investing. While it is possible to sell shares in a property through the online platform, it may take longer to find a buyer and the process may not be as easy as selling a publicly traded REIT. Additionally, since the market for fractional real estate investing is relatively new, there is less historical data available to help investors determine the potential performance of these investments.
In conclusion, both REITs and fractional real estate investing have their advantages and disadvantages. REITs offer a low barrier to entry and a high level of diversification, but may have a lower ROI and be more dependent on the stock market. Fractional real estate investing offers a relatively high ROI and the ability to diversify a real estate portfolio, but may be less liquid and have a higher risk of finding good deals. Ultimately, the choice between REITs and fractional real estate investing will depend on your investment goals, risk tolerance, and the level of control and involvement you want in the property. It's important to do your own research and consult with a financial advisor before making any investment decisions.
