By Eric Rosenberg, WCI Contributor

Direct real estate investing allows you to buy investment properties to own and manage individually. In contrast, a real estate investment trust (REIT) allows you to buy into a company that manages properties on behalf of the shareholders. Both are ways of investing in real estate, but they are truly different approaches to this asset class.

You can buy a REIT like a share of stock or through real estate investing platforms, which is much quicker and easier than buying and managing real estate independently. Each of these approaches to real estate investing has unique pros and cons, and neither is perfect for everyone. Here’s a closer look at direct real estate investing vs. REITs to help you understand which makes the most sense for your portfolio.

 

What Is Direct Real Estate Investing?

Direct real estate investing is a major endeavor where you buy investment properties on your own or with a small group of partners. In this case, you get to keep all (or your portion) of the profits, but you also take on all of the risk if something goes wrong.

If you’re a busy medical professional, you probably don’t want the significant time commitment to manage rental properties. Unless you want to take on that responsibility, hiring an experienced property manager can be a good idea. But it's also costly. Typical property management fees are 10% of the monthly rent, plus additional fees for finding and screening new tenants.

Depending on your budget, you potentially could buy single-family homes, multi-unit homes with up to four units, or larger apartments. Commercial real estate is also on the menu if you’re interested.

 

Pros of Direct Real Estate Investing

  • Get all profits from a well-managed property.
  • Complete control over which properties you buy, rent levels, and improvements.
  • Invest in properties locally or in other states.
  • Property managers can take on much of the work.

 

Cons of Direct Real Estate Investing

direct real estate vs reits

  • All risk of losses falls on the investor.
  • The owner must pay for maintenance, improvements, and repairs.
  • Tenants are not always reliable, and they may damage property.
  • Property managers can be expensive.

More information here:

How Our Portfolio Performed in 2023 (Including Real Estate!)

The Case for Private Real Estate

 

What Are REITs?

REITs are a way to invest in property management companies or a portfolio of properties with the risk shared with many additional investors. To qualify as a REIT, companies must distribute at least 90% of their taxable income to shareholders as dividends (among other requirements).

Some REITs are companies you can buy and sell using your stock brokerage, while others are run through other websites or private listings.

Some REITs are companies you may recognize. For example, Public Storage is a REIT. Simon Property Group owns shopping centers and malls. VICI Properties owns gaming and hospitality real estate. Public REITs span many industries—including logistics, communications, digital infrastructure, data centers, industrial properties, golf courses, retirement homes, and more.

Other REITs are run through specialized apps and websites. Fundrise, RealtyMogul, DiversyFund, HappyNest, Streitwise, and Roofstock offer privately managed REITs. Some allow anyone to invest, while others require you to be an accredited investor.

 

Pros of REITs

  • Make a diverse investment with a single purchase.
  • Buy and sell on the stock market in some cases.
  • Someone else manages individual properties.
  • At least 90% of profits are paid out as dividends.

 

Cons of REITs

  • You have to pay the REIT to manage the properties.
  • Fees may apply.
  • Investors have much less control over their real estate portfolio.

More information here:

Using REITs to Supplement a 401(k)

 

How to Decide Between Direct Real Estate Investing and REITs

REITs make a lot of sense for doctors who want to delve into real estate investing without the time commitment and risk of managing individual properties. By investing in REITs, you're essentially buying shares in companies that manage a portfolio of properties, which distributes risks among many investors.

This option is appealing for its simplicity and lower time investment. You can easily buy and sell REITs through stock brokerages or real estate platforms, making it a convenient choice for busy professionals. You can also start small, sometimes with as little as $5 at some brokerages.

On the other hand, direct real estate investing is more hands-on, and it can be a significant undertaking. It involves purchasing properties, which you then manage or choose to have managed by professionals. While this route offers full control over your investments—including decisions about property types, rent levels, and improvements—it also carries the full weight of risks and responsibilities.

For doctors already managing a demanding career, direct investing can be a substantial addition to your workload unless you opt for property management services, which come at an additional cost.

Some investors find a balance by diversifying into both direct real estate and REITs. This approach allows you to enjoy the hands-on control and potentially higher profits of direct investing while benefiting from a REIT's diversified, hands-off nature. It's a strategy that can blend active involvement and passive income, fitting for different risk appetites and time commitments. As with any investment, it's crucial to weigh the pros and cons of each option and consider how they align with your financial goals and lifestyle.

 

Bottom Line on Real Estate Investing

Real estate is a unique investment opportunity. After all, everyone needs a place to live. However, getting into direct real estate investing can involve putting down tens or hundreds of thousands of dollars at once, and that can be a deal breaker for many households.

Ultimately, it’s up to you to decide how to invest. Starting with REITs is a great way to dabble in real estate with less risk and commitment. But if you can afford it and have the stomach for the real estate markets, direct real estate investing can be a great way to diversify your income, build semi-passive income streams for retirement, and create generational wealth for your family.

 

If you are interested in private real estate investing opportunities, start your due diligence with those who support The White Coat Investor site:

Featured  Real Estate  Partners

DLP Capital
DLP Capital
Type of Offering:
Fund
Primary Focus:
Multi-Family
Minimum Investment:
$100,000
Year Founded:
2008

Origin Investments
Origin Investments
Type of Offering:
Fund
Primary Focus:
Multi-Family
Minimum Investment:
$50,000
Year Founded:
2007

37th Parallel
37th Parallel
Type of Offering:
Fund / Syndication
Primary Focus:
Multi-Family
Minimum Investment:
$100,000
Year Founded:
2008

SI Homes
Southern Impression Homes
Type of Offering:
Turnkey
Primary Focus:
Single Family
Minimum Investment:
$60,000
Year Founded:
2017

Wellings Capital
Wellings Capital
Type of Offering:
Fund
Primary Focus:
Self-Storage / Mobile Homes
Minimum Investment:
$50,000
Year Founded:
2014

MLG Capital
MLG Capital
Type of Offering:
Fund
Primary Focus:
Multi-Family
Minimum Investment:
$50,000
Year Founded:
1987

MORTAR Group
Mortar Group
Type of Offering:
Syndication
Primary Focus:
Multi-Family
Minimum Investment:
$50,000
Year Founded:
2001

AcreTrader
AcreTrader
Type of Offering:
Platform
Primary Focus:
Farmland
Minimum Investment:
$15,000
Year Founded:
2017

* Please consider this an introduction to these companies and not a recommendation. You should do your own due diligence on any investment before investing. Most of these opportunities require accredited investor status.

 

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