What is the difference between real estate property investing and REITS?

Real estate investment is an investment technique in which one purchases, manages, and operates real estate of one's own choosing to earn investment income.
On the other hand, a REIT is a real estate investment trust, which is an investment technique that earns dividends and profits from the sale of real estate through trading in the securities market.
Let's take a look at the structure and differences between them.

Difference in how real estate is acquired

In real estate investment, real estate is purchased and ownership is acquired.
Therefore, a purchase agreement is concluded with the seller through a real estate company, and legal procedures such as ownership transfer procedures are required.
On the other hand, in the case of REITs, you do not directly purchase real estate, but rather open an account at a brokerage firm or bank and trade on the securities market.

Difference in type of investment properties

In real estate investment, investments are made mainly in residential properties such as condominiums and detached houses.
In this regard, REITs are managed by investment management companies that invest in a diverse range of properties, from several dozen to several hundred properties, such as hotels and logistics warehouses.
Since REITs are managed with funds from multiple investors, they can invest in a variety of high-value properties that individual investors cannot afford, but on the other hand, they cannot directly choose their own investment destinations.
On the other hand, real estate investment allows investors to freely select properties to invest in based on their own judgment.

Difference in liquidity

When a real estate investment becomes available for sale, a buyer must be found, and depending on the property, it may take some time to sell.
On the other hand, REITs can be bought and sold immediately on the securities market.
From the above, it can be said that REITs are more liquid because they can be invested with smaller amounts of money.s

Difference in yields

Yields on real estate investments vary depending on the property.
For example, the average yield for a studio apartment in central Tokyo ranges from late 3% to 10%, depending on the age and location of the property.
In contrast, the expected annual distribution yield for REITs is 3.53%. (According to the Tokyo Stock Exchange REIT Index as of the end of December 2021)

Different types of acquisitions

Income earned from real estate investment falls under real estate income.
On the other hand, in the case of a REIT, dividends are classified as "dividend income" and income from the sale of a REIT is classified as "transfer income.
The difference in the type of income makes a difference in the way you can adjust your profit and loss in the event of a loss, as well as in your income tax return.

What are the merits and demerits of investing in actual real estate property?

Now that you know the difference between real estate investment and REITs, you are probably wondering about the advantages and disadvantages of each.
Here are the advantages and disadvantages of real estate investment compared to REITs.

Merits of real estate property investing ① The use of loans

Purchasing investment properties allows you to use a real estate investment loan to purchase properties.
You can repay the loan with the proceeds from your real estate investment, allowing you to leverage your assets efficiently.

Merits of real estate property investing ② More control

In real estate investment, since you manage the real estate yourself, you can freely control the earnings.
For example, if the number of vacant rooms in a rental property such as an apartment you purchased increases, you can decide for yourself whether to add value by investing in equipment or lower the rent in line with the surrounding market rate, and operate the property.
Also, you can freely make management decisions by selecting properties in favorable locations and making future projections.
Compared to REITs, the fluctuation range of the investment principal is smaller, so you can manage your assets over the medium to long term.

Demerits of real estate property investing ① Time-consuming

As mentioned in the previous chapter, acquiring real estate requires a variety of legal procedures, which can be time-consuming and costly.
For example, it may take several weeks to several months after deciding to purchase the property to sign a sales contract with the seller and transfer ownership.
In the case of rental properties, there is also the time and effort required to manage and operate the property, such as finding tenants and dealing with them when they move out.
While the advantage is that you can develop your own strategy and manage the property, the disadvantage is that it is time-consuming.

Demerits of real estate property investing ② Tax burden

In the case of real estate investment, the tax burden is a disadvantage.
When acquiring real estate, there is a registration tax and a real estate acquisition tax due upon transfer of ownership.
And there is also the annual property tax burden of owning real estate.
The fact that various taxes are incurred as a cost of real estate ownership is a disadvantage.

What are the merits and demerits of investing in REITs?

The following are the advantages and disadvantages of REITs compared to real estate investment.

Merits of investing in REITs ① You can start investing with a small amount of money

You can start investing in REITS with as little as a few man yen (+10,000 yen = a couple hundred dollars).
Therefore, the advantage of REITs is that even beginners can easily invest in them.
Also, since you can invest with a small amount of money, you can diversify your investment.
Investing in REITs in combination with real estate investment is also a good way to diversify your investment.

Merits of investing in REITs ② It is simple

REITs, like stocks, allow investors to earn dividends without having to do anything but simply hold the securities.
Therefore, unlike real estate investment, there is no need to invest in real estate or manage real estate, and you can earn dividends and profits from the sale of real estate.
Another major advantage of acquiring REITs is that they can be easily bought and sold over the Internet through a brokerage firm.

The demerits of investing in REITs ① Price volatility risk

Because REITs are securities listed on stock exchanges, their prices fluctuate in real time, just like stocks.
Therefore, depending on economic trends and stock market conditions, there is a possibility that the price may plummet.
Since the market price of the securities market fluctuates daily, the risk of breaking the investment principal is higher compared to real estate investment.

The demerits of investing in REITs ② Cannot use investment loans

REITs are basically purchased with cash.
Therefore, it is not possible to take out a loan to leverage the investment, as is the case with real estate property investments.
While REITs are highly liquid and can be invested from small amounts, they may fall in value in a short period of time, making them less suitable for medium- to long-term investment than real estate investments.

In conclusion

In this issue, we have explained the differences between real estate property investment and REITs, and the advantages and disadvantages of each for those who are considering investing in real estate.
Real estate property investing is an investment method in which you "own, manage, and operate real estate yourself, "whereas REIT investing is an investment method in which you "purchase real estate investment trusts in the securities market and indirectly obtain investment profits."
While real estate investment allows you to freely invest in real estate while controlling your own earnings, it also requires a lot of time and effort, as well as taxation costs.
On the other hand, REITs can be easily bought and sold for as little as tens of thousands of yen, but there is a risk of loss of principal because the price fluctuates daily.
Thus, there is a big difference between real estate investment and REITs, even in the same real estate investment.
We hope you will find this article useful in your asset management by combining real estate investment and REITs.