Comparing Traditional Real Estate Investing and REITs: Which is best for you in 2023?

In the realm of property investing, people often only consider a buy to let empire as their way to break into the market - today we will compare this with Real Estate Investment Trusts (REITS) see a quick start guide on them here. As they offer different rewards and risks, your choice between the two should align with your financial goals, risk tolerance, and lifestyle preferences.

Traditional Real Estate Investing involves directly purchasing properties such as residential homes, rental apartments, or commercial buildings. This hands-on approach allows investors to leverage properties for rental income or sell at a profit when market values appreciate.

On the other hand, REITs are companies that own, operate, or finance income-generating real estate. By buying shares in a REIT, you indirectly invest in the properties that the trust owns, offering a more passive form of investment. Let's delve deeper into these two strategies to identify which might be the best fit for you.

Liquidity

REITs offer high liquidity as they trade on major exchanges just like stocks and can be bought or sold in seconds. This means you can buy or sell shares at any time during market hours, something perhaps more important given the wider economic volatility in the UK in 2023. Traditional real estate, on the contrary, is not easily converted into cash. The selling process can take months, making it a less liquid investment.

Capital Requirement

Traditional real estate investing usually requires a substantial initial investment for the property purchase, not to mention ongoing maintenance and potential renovation costs. The average UK house price was £286,000 in April 2023 - £9,000 higher than 12 months ago, continuing the upwards trajectory seen over the past few decades. REITs, however, allow investors to start with much less money. You can purchase shares for the price of a single stock, making it accessible for those with less capital. Indeed the biggest REIT in the UK, Segro, is currently (July 2023) trading at 784.40p, allowing you to dip you toes into the REIT water for under £10.

Potential Returns

Both investment paths have the potential for significant returns. In traditional real estate, profits can come from rental income and property appreciation. With REITs, returns are typically from dividends and share price appreciation. Historically, both have shown robust long-term growth, although individual real estate properties can exhibit higher variability in returns.

Time Commitment and Skills Required

Traditional real estate investing is often hands-on, requiring time and effort in property management, including finding tenants, handling maintenance, and dealing with emergencies. In contrast, REITs require no such commitment, making them a more passive investment. Investing in REITs also requires less specialised knowledge, as you don’t need to understand the ins and outs of property management or real estate markets in the same depth. REIT shares can be bought in seconds, often it can take months to exchange contracts on a house.

Risk Level

Both types of investment carry risks. With traditional real estate, these can include property damage, sudden major repairs, market downturns, and problematic tenants. For REITs, risks include market volatility and the potential for company mismanagement. However, an advantage of REITs is that they often have a diverse portfolio of properties, reducing the impact if one property underperforms. This extends to both the number and types of properties, for instance exposure to retail, logistics and residential real estate can be achieved through one REIT alone.

Making a choice between traditional real estate and REITs The key to choosing between traditional real estate investing and REITs depends on your personal circumstances and investment preferences. If you prefer a more hands-on approach, have significant capital to invest, and are willing to wait for longer-term returns, traditional real estate investing may suit you.

However, if you prefer a more passive approach, have less capital to start with, and want the flexibility to move in and out of investments, REITs may be a better choice. Regardless of your decision, always conduct thorough research or seek advice from financial advisors before entering any investment.

Understanding these factors can help you make a more informed decision, taking one step closer to meeting your financial goals and creating your desired lifestyle. Whether you choose the path of traditional real estate or REITs, successful investing is about patience, knowledge, and strategy. Happy investing!

Please note: The information provided in this blog is for informational purposes only and should not be construed as financial advice. It is not intended to be a substitute for professional financial advice. Always seek the advice of a qualified financial advisor with any questions you may have regarding your personal finances. All investments carry risk, and all investment decisions of an individual remain the responsibility of that individual. There is no guarantee that systems, indicators, or signals will result in profits or that they will not result in losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do. Past performance is not indicative of future results.