Ever wondered about the most logical path towards real estate investing? Been stuck trying to figure out what step one should look like? Many people would point you towards either a REIT or a duplex, so in this article, we’re going to be looking at each to help you determine which is right for you.
But first, let’s make sure we understand how REITs and duplexes work.
What is a REIT?
REITs (Real Estate Investment Trusts) are publicly or privately traded corporations that own or are invested in large real estate portfolios that produce some form of income.
Investing in most REITs is similar to investing in a mutual fund. However, instead of stocks, REITs rely on the properties in their portfolio to generate profit. Essentially, investing in one is like partnering with someone else to do all of your real estate investing for you and reaping just a small portion of whatever business that person or group drums up.
You can find REITs to invest in for as little as a couple bucks, or you could spend thousands on them. The choice is yours. An REIT is legally obligated to pay out 90% or more of its profits in dividends each year, so if the firm you’re working with is making or holding on to solid investments, you’re likely to earn a decent return on your initial investment.
What is a Duplex?
A duplex (also known as a double or two-flat) is a two-unit property that’s owned by one owner. It’s often viewed as an entryway into real estate investing because the required capital to purchase one is significantly lower than most properties of its type. It’s the first logical step up from a single-family home to a multi-family home that can generate a reasonable profit.
Many first-time real estate investors live in their duplexes and rent out one side so that they can essentially roll their own living situation into a property that’s also an investment. Other investors rent out both sides in order to generate profit.
The Benefits of Investing in Duplexes
What’s so great about duplexes? For starters, the barrier to entry is very low. Almost every single individual who can afford to purchase a home can afford to purchase a duplex. The difference is that by renting out at least one side, you’ll be subsidizing the mortgage if not generating a profit (when renting out both units).
Even if you’re only breaking even each month, you’re essentially owning a property for free and readying yourself for massive profit when it comes time to sell. However, most duplex owners can do a little bit better than that. Many are making a large profit each month by collecting rental income that outweighs the mortgage.
There are a couple of reasons that duplexes are often preferred over single-family homes. For one, buying a duplex offers you the potential to collect rental income from one side while offering a living situation for you – the owner. Second, duplexes almost always outperform single-family homes in terms of profitability because in the most basic terminology, two doors is better than one. Two tenants each paying $1200 for a living situation is much more likely than one tenant paying $2400 just to rent.
The Downside of Investing in Duplexes
The downside of investing in buying a duplex is this – your approach is likely to be fairly hands-on. A great rental management company can handle most of the responsibilities of property management for you, but you’re likely to still be involved at some level.
Another downside is that your investment is entirely in one place. If the market hits a downswing, you may suffer some of the blow. The good news is that rental properties are pretty resistant to changes in the market since people always need a place to live. However, you’re not immune from potential ups and downs.
The Benefits of Investing in REITs
The greatest thing about REITs has to be the low barrier to entry. Interestingly, REITs are very similiar to duplexes in this way. Only with a REIT, your initial investment can be even lower – as low as a few bucks.
With a REIT, you’re also able to quickly withdraw your funds for reasons of your choosing instead of waiting for a property to sell or at least get rented out. That said, most REITs don’t offer any kind of revolutionary returns on your investment. You could end up with very modest earnings if you pull out your investment in the short run.
Another great thing about REITs is that your investment will likely be spread out very widely amongst an entire portfolio of properties and markets instead of just one. You could say that this is a defensive option because disaster in one market or on one investment can be balanced out by more positive results in another.
The Downside of Investing in REITs
One of the biggest downsides of REITs that could also be viewed as an upside for certain individuals is this – it’s not really like being a real estate investor. This is more on par with putting money into a mutual fund only relying on real estate instead of stocks.
There’s nothing wrong with that, but for those who are looking to see more of the risk and reward system that real estate’s famous for, this is not the way to go. REITs have a reputation for paying out reliable dividends, but a great year doesn’t necessarily mean your divided payout will change much at all as the goal for REITs is more so focused on sustainability than massive growth.
While REITs are legally required to pay out at least 90% of their profit to shareholders, they’re able to simply re-invest unexpected amounts of profit back into the business to ensure that they’re building more for the long-term.
Another issue with REITs is the fact that your investment dollars are out of your own hands. By investing in your local market and being involved in the community, you’ll likely have a good feel for the community and will be able to make smart decisions based on that knowledge. In an REIT investment, someone else is making the decisions for you. That person (or group) might do things that you wouldn’t and cost you money in the long-term. They might be great at what they do too, but there’s really no easy way for you to know.
How REITs and Duplexes Stack Up
- More Control Over Your Investment
- Typically Higher Dividends
- Hands-On Management
- Monthly Cashflow
- Potential for Appreciation
- 100% Ownership
- Larger Minimum Investment
- Slower Liquidation
- Investment in One Property
- Less Control Over Your Investment
- Typically Lower Dividends
- Hands-Off Management
- Annual or Quarterly Payments
- Regulated Potential for Greater Payouts
- Small Percentage of Ownership
- Smaller Minimum Investment
- Faster Liquidation
- Investment in Many Properties