Investing in Real Estate Stocks vs. Direct Investment
It is true that the demand for REIT yields is high and that Trulia’s recent IPO success certainly kicked Facebook’s behind but there are many pitfalls of this type of real estate investing that most individuals are unaware of… For a start these stocks are not tied to real assets and many are currently seriously overvalued due to high demand. This means a lack of security if anything goes wrong and while they may boast promises of great income in the short term hardly provide the value advantages that getting in on the ground floor of real property prices offers today. On top of this these investments suffer from exposure to high volatility and their value being subject to the whims of the market do not guarantee to continue to increase in line with the extended period of growth expected in home values. Finally consider the lack of control and the fact that issuers will continue to create offerings to meet demand regardless of how sound they are, resulting in a deterioration of quality. Don’t confuse these disadvantages for end investors with not being good business ideas. REITs and launching startups with IPO potential offer great structures and profits for the investors creating them, the just aren’t as safe for protecting capital for the end investor as some other options. In contrast direct investment in real property means a tangible asset which secures capital. Even though the market may fluctuate in the long term investors won’t lose unless they choose to sell at the wrong moment. Direct real estate investing also offers more flexibility and control for individual investors as well as cutting out all of the third party hands trying to take a slice of profits, resulting in higher net returns. For those concerned about their level of real estate investing education and expertise or who are purely seeking passive income investors can always hire professional property managers or select turnkey rental investments to benefit from the best of both strategies.
Real estate may be the only attractive investing option out there today but not all strategies are equally safe and profitable. This is especially true for those considering jumping on real estate stocks or investing in public real estate investment trusts (REITS).