I would like to diversify my investment portfolio by putting some money into real estate. Tell me some pros and cons of:
-buying shares of an REIT (or shares of an REIT-based mutual fund)
-buying (and renting out) a specific piece of real estate
The biggest difference I can currently see is that buying real estate directly requires a significant lump-sum investment to cover the downpayment, whereas investing in an REIT can be done more incrementally.
I am not an investment professional and have no experience with rental property. However, it seems obvious to me that actually owning and maintaining property has the additional hassles of, well, owning and maintaining property. If you’re diversifying your portfolio, then the risk of your property getting wrecked by fire, flood, spiteful tenants, or the like might be acceptable to you compared to greater expected returns. I have no idea what kind of money you can make renting property versus owning REIT shares, but I do know that every (that is to say, both) landlord I know complains about the hassles in dealing with tenants and government and the like.
Also, if you do decide to go with an index fund, might I recommend Vanguard’s REIT ETF? It’s got an expense ratio of .1%, which I’m pretty sure is the lowest in the business.
First, I must nitpick: it’s “a REIT,” not “an REIT”–REIT rhymes with feet.
Second, the decision seems to hinge on how diversified you want the real estate part of your portfolio. If you think you can pick good properties and have the time and money to maintain them, rent them out, and sell them in the future, then by all means by a few properties. Next down the diversification continuum is to pick a REIT. Then you could pick one or two REITs in each sector (i.e., multifamily, hotel, office, etc.). Then there are REIT ETFs (which it sounds like you know about).
If you are into diversifying your entire portfolio, then it seems odd to pick the most un-diverse way to invest in real estate.