Individual 401k retirement plans target small business owners and self-employed individuals, offering them a wide variety of investment options along with flexible contributions. Along with their higher contribution limits, self employed retirements plans such as Solo 401k allow investments in real estate, precious metals, private financing, traditional investments, mortgage notes and a variety of investment tools. In this post, we are going to compare real estate investments, including real estate investment trusts (REITs) and traditional home ownership.
Real Estate Investment Trusts (REITs): Real estate investment trusts are companies or organizations that own commercial or residential income-generating properties. There are more than 300 REITs registered with the U.S. Securities and Exchange Commission, with 210 REITs trading on NYSE and NASDAQ.
Traditional Home Ownership: Under a traditional homeownership, you can buy a property through your Individual 401k plan. Home ownership offers benefits such as rental income, capital appreciation, and risk-cover from stock market investments.
Individual 401k: One on One Comparison between REITs and Home Ownership
- Maintenance cost: A traditional real estate investment involves recurring costs, including mortgage interest, insurance payments, repairs, and administration fees. On the other hand, REITs are purchased like stocks and you will receive regular dividends without any maintenance charges. Further, you can make smaller investments in REITs, whereas physical properties require large capital investment.
- Diversification: A physical property is influenced by the local market conditions and its value can drop significantly under adverse economic conditions. REITs invest in a wide variety of commercial properties spread through different geographic locations, allowing them to minimize the impact of local markets and generate comparatively higher returns.
- Professional Management: In general, small business owners or self-employed individuals might find it difficult to manage a physical property and they might end up hiring property managers for the same. On the contrary, REITs are managed by a group of directors, who have shown excellence in managing real estate investments and hold a rich experience. They understand market trends and are likely to outperform local markets over a longer period.
- Liquidity: REITs are traded over stock exchanges much like shares, offering great liquidity to the investors. You can add different REITs to your individual 401k as per your discretion, with minimal efforts. Physical properties, on the other hand, entrap capital investments and selling or even purchasing a property requires multiple steps, hence limiting the liquidity of your portfolio.
In short, both REITs and home ownership present their individual benefits, however, investing in REITs present a feasible investment opportunity for every single business owner unlike home ownership. On the contrary, if you have a sound knowledge of the industry, you are likely to beat REIT returns on well-chosen real estate investments.