If you’re an investor who wants to diversify your holdings, you’re undoubtedly familiar with REITs. REIT is short for “real estate investment trust,” and investors can purchase shares in one of these trusts to take partial ownership of the group’s real estate holdings.
While this might seem like a financial move similar to purchasing a rental property for investment, REITs offer a substantially different value proposition and can introduce more problems than they solve. If you’re interested in real estate investing and unsure where to spend your money, read through this list of common misconceptions to learn the truth about fully-managed single-family rental investments and REITs:
1. REITs are more stable than SFR
While many people attempt to portray REITs as a stable alternative to other forms of investing, the idea that they’re more stable than owning SFR property is patently false. This boils down to the simple fact that REITs remain tied to the stock market.
This misconception comes from how REITs function. The trust purchases properties, manages them and collects rental income. At the end of each year, 90 percent of the REIT’s taxable income is distributed to shareholders as a dividend, according to the National Association of Real Estate Investment Trusts. Investors who purchase shares of a REIT are actually investing in the trust’s performance instead of the real estate market. This means that REITs fluctuate along with the stock market instead of the housing market. Traditionally, the real estate market is less volatile and offers more consistent returns.
2. REITs allow investors to profit from market shifts
It might appear easy to buy and sell shares of REITs in anticipation of market trends to maximize returns, but even Ralph Block, the author of “Investing in REITs,” admitted this was untrue in an interview with The Motley Fool. While REITs do respond to stock market and real estate market shifts, accurately predicting these shifts is nearly impossible. Successful REIT investment relies on holding shares for a significant amount of time. If that’s the case, many investors would be well served by maintaining sole ownership of a purchased SFR property that would accumulate value and remain a tangible asset.
3. REITs provide real estate ownership
Shares in a REIT provides fractional ownership of the properties owned by the trust, but that ownership doesn’t amount to anything tangible. As an investor in a REIT, you’re entirely reliant on the trust’s managers to properly manage your tiny portion of the trust’s overall assets.
It’s technically true that you own property when you invest in a REIT, but you’ll never be fully in control of the property.
4. REIT investing is easier than SFR ownership
Because investing hands over control to a cadre of managers, it can be easier than owning a property yourself. While that ignorance might be blissful, it could also lead to some awkward situations. A REIT can own an enormous portfolio of properties. Information on the trust’s holdings is publicly available by law, but that doesn’t mean you’ll have a good sense for the properties’ locations and tenants.
Because you own a SFR property outright, you have a far deeper understanding of its location and can monitor your tenants to ensure they’re a good fit. While this management would have involved a lot of hard work in the past, HomeUnion® has made it easy.
HomeUnion® handles all aspects of property management, finds tenants and keeps investors apprised of the situation through an easy to use online portal. This offers the relative ease of a REIT without the uncertainty and lack of control. Register today to view prevetted properties in strong markets across the country.