As the investment landscape continues to evolve and adapt, more and more investors are turning to real estate as a resilient and viable addition to their portfolios. However, historically, entering the real estate market has needed significant capital and has been a complex process.
Fortunately, modern solutions have emerged to address these challenges and provide wider access to real estate investing.
One solution is fractional real estate, a concept exemplified by innovative platforms like Groudfloor. Through fractional real estate, anyone can get in the game and invest smaller amounts of capital in a specific property, allowing for greater diversification and flexibility.
Another known real estate investment strategy is through Real Estate Investment Trusts (REITs). These investment vehicles pool funds from multiple investors to invest in a diversified portfolio of income-generating real estate properties. REITs are known for their potential to deliver stable income and long-term capital appreciation.
But which of the two options truly stands out? Let’s dive into the distinctive benefits of fractional real estate and why it may have the edge over traditional REITs.
Advantages of Investing in Fractional Real Estate
Through fractional real estate, you get to directly own a piece of specific properties, giving you a real asset and allowing you to know exactly where your money is going. With REITs, however, it’s a different story. Your money gets spread across many properties managed by a trust, leaving you in the dark about the specifics.
Groundfloor takes fractional real estate investing even further with customization and a set-and-forget model. Customize your portfolio by choosing the exact properties you want to invest in and tailoring your investments to match your preferences and risk appetite. You can also use our auto-investor tool, and we’ll do the investing for you.
REITs, on the other hand, take a one-size-fits-all approach.
The Negatives of Investing in a REIT
Let’s talk about investing in REITs for a moment. One downside to REITs is that they’re managed by professionals who make decisions about property acquisition, disposal, and management. This means you don't have direct control over these matters.
Another crucial point to keep in mind is that REITs are traded on stock exchanges. This means their value can be influenced by broader market trends, making them quite volatile. So even if the real estate market is doing well, external factors like interest rate changes, geopolitical events, or shifts in investor sentiment can still impact the value of REITs.
Now let’s talk about REIT dividends, a share of the rental income generated by the real estate properties. They're a form of passive income generated by REITs, typically distributed to shareholders based on the income generated from the properties owned by the trust.
By investing in REITs, investors have the opportunity to earn regular income from rental payments, mortgage interest, and property sales within the trust’s portfolio. These dividends provide a reliable income stream and can be attractive to those wanting to diversify their portfolio and generate consistent returns.
However, unlike regular stock dividends, REIT dividends are usually taxed as ordinary income. This means that their tax rate may be higher compared to capital gains, which can have implications on your overall tax strategy.
It’s important to understand how these dividends are taxed differently so you can make informed decisions to optimize your tax strategy and maximize your after-tax returns. It's all about being knowledgeable and taking the right steps to make the most of your investments.
REITs have traditionally been the go-to choice for indirect real estate investment. However, the emergence of platforms like Groundfloor has signified a notable transition towards a more transparent, customizable, and direct approach to investing in real estate.
With Groundfloor and similar platforms, investors can gain more insights, have greater control over their investments, and enjoy a closer connection to the real estate projects they choose to support.
As with any investment decisions, it’s crucial to diligently conduct thorough research, evaluate various options, and align them with your financial aspirations and risk tolerance. Adopting a meticulous approach helps you make more informed choices that optimize your investment outcomes and contribute to your long-term financial goals.