You're sitting at your favourite café, flat white in hand, mulling over where to park your hard-earned cash. You've heard talk about real estate investment trusts (REITs) and listed investment companies (LICs), but how do they work? And more importantly, which one is right for you?

Both have their merits, but the right pick depends on your personal goals and circumstances. In this article, we'll break down REITs and LICs, compare their features, and help you decide which might fit your investment journey better.

So, let's dive in and demystify these investment options.

What are REITs?

REITs are companies that own, operate, or finance income-producing real estate. They’re a way to invest in property without directly buying bricks and mortar. When you invest in a REIT, you're buying a share of a company that owns and manages various real estate assets. This could include shopping centres, office buildings, apartments, and hotels.

Here's how they work:

1. REITs pool money from many investors (like managed funds ).
2. They use this money to buy and manage properties.
3. Any profits earned from rent and property sales are distributed to investors.

Building on point three above, REITs are designed to generate income for investors. They do this by collecting rent from their properties and distributing most of this income to their shareholders. Because of this focus on income distribution, REITs can be attractive if you're seeking regular income from your investments.

In Australia, you'll find REITs that focus on different property types:

• Residential (apartments and houses)
• Commercial (office buildings and shopping centres)
• Industrial (warehouses and factories)
• Healthcare (hospitals and aged care facilities)

You can invest in REITs through the Australian Securities Exchange (ASX) . It's as simple as buying shares in any other company. You don't need huge sums of money to get started; even small investments can give you exposure to the property market.

Before investing, it's wise to research different REITs. Take the time to understand the potential benefits and risks of this investment type. Here are some to note:

Potential benefits	Risks
Regular income through dividends Exposure to the property market without large capital outlay Professional management of the property portfolio Potential for capital growth as property values increase More liquid than buying physical property, allowing you to buy and sell shares of a REIT like you would with stocks	Property values can decrease, affecting REIT share prices Changes in interest rates can impact REIT performance Economic downturns may lead to lower rental incomes Unlike diversified investments like ETFs , REITs are focused on a single asset class. This sector concentration can lead to more volatility Specific sectors (like retail) can face challenges from market shifts

REITs offer a way to diversify your portfolio with real estate. But like all investments, they require careful consideration. When you do your research, consider how they align with your investment goals and risk tolerance.

What are LICs?

Listed Investment Companies are publicly traded companies that invest in a portfolio of assets. Like exchange-traded funds (ETFs), they offer investors a way to access diverse investments through a single share purchase.

When you buy shares in an LIC, you're investing in a portfolio of assets managed by a fund manager – like managed funds. These assets can include shares, bonds, and other financial instruments.

Here's how LICs operate:

1. They raise money by issuing shares to investors, offering units at net asset value.
2. A professional fund manager invests this money in various assets.
3. LICs aim to generate returns through capital growth and dividends.

LIC strategies can vary widely, from conservative income-focused approaches to more aggressive capital growth strategies. They operate on a closed-end basis, meaning the number of shares available does not change. Investors buy or sell shares in the LIC on the stock exchange, but the capital raised from these sales is not directly invested or withdrawn from the fund.

In Australia, you'll find LICs with different investment focuses:

• Some target blue-chip Australian companies
• Others seek out small, growing businesses
• Some invest in international markets
• A few specialise in specific sectors like technology or healthcare

You can buy and sell LIC shares on the ASX, just like any other listed company. This makes them accessible to most investors. If you’re thinking of investing in an LIC, consider these potential benefits and risks:

Potential benefits	Risks
Access to professional investment management Possibility of dividend income Exposure to a diverse range of assets Potential for buying shares at a discount to asset value Listed on the stock exchange and so offer liquidity to buy and sell shares more easily	Share prices can fluctuate, sometimes dramatically, depending on the underlying asset class investments Performance depends on the skill of the fund managers They may trade at a premium or discount to their asset value Fees can impact overall returns

How do REITs and LICs compare?

Choosing between REITs and LICs can seem daunting, but it's about matching your investment goals with the right features. Here’s a simple look at how these two options stack up against each other.

Investment focus

As established, REITs focus on real estate. They manage properties and offer you a chance to indirectly invest in real estate. LICs, meanwhile, invest across a broader spectrum of asset classes, including stocks, bonds , and sometimes properties. Their focus is on diversifying investments to potentially manage risks and opportunities.

Liquidity

Both REITs and LICs trade on the stock exchange, making them relatively easy to buy and sell compared to direct investments like owning physical property.

Dividend yield and payout patterns

REITs typically pay out most of their income as dividends, making for potentially regular income streams. LICs also pay dividends, but the amounts can vary more since they depend on the overall performance of a diverse portfolio.

Listing of securities

REITs primarily invest in listed or unlisted real estate assets, depending on the type of REIT. LICs generally invest in listed assets, such as stocks and bonds across various markets. While some LICs might also invest in unlisted assets, their primary focus tends to be on publicly traded securities.

Historical performance trends

While REITs are influenced by real estate market conditions, LICs are affected by broader stock market trends. Their performances can diverge based on different economic factors.

Suitability for investment goals

REITs are often sought for stable income and a direct link to the property market. LICs appeal to those looking for diversified investment management and potentially lower risk through variety.

Here's a quick comparison table to help you see the differences at a glance:

Feature	REITs	LICs
Investment focus	Directly tied to real estate properties	Diverse assets including stocks and bonds
Liquidity	Varies (higher for those traded on the stock exchange)	High (typically traded on the stock exchange)
Dividend stability	Generally high (regular income from rent)	Variable (depends on portfolio performance)
Listing of securities	Invest in listed or unlisted real estate assets	Generally invest in listed assets, but can also invest in unlisted
Performance trends	Influenced by real estate markets	Influenced by broader financial markets
Suitability	Suited for regular income and property exposure	Suited for diversification and risk management

Understanding these differences can help you make investment choices suited to your financial objectives and personal preferences. Consider how each aligns with your existing portfolio and long-term goals.

Long-term investing using REITs vs LICs

Investing in REITs and LICs offers distinct pathways to building long-term wealth, each tailored to different investment preferences and goals. Let’s explore two fictional examples of how investors can use REITs and LICs to grow their portfolios over time.

Case study: REITs

Shannon looks to build a stable income stream as part of her retirement plan. She opts for REITs because of their focus on real estate, an asset class she understands. Shannon chooses a REIT that invests in commercial properties with long-term leases, such as office buildings and shopping centres.

She invests a portion of her savings into the REIT as she is attracted by the historically regular dividend payments from rental income. The REIT has traditionally paid dividends quarterly, potentially providing her with a predictable return. Of course, past performance isn't an indicator of future returns, and there is the possibility that the REIT will underperform. However, in this hypothetical, the value of the properties increases, and so does the value of her investment, contributing to her overall wealth.

Shannon appreciates that her investment in the REIT allows her to tap into the property market without the need to manage properties directly. This convenience is an advantage for her as it saves time and effort. Meanwhile, she can still participate in the property market's potential growth.

Case study: LICs

Randy wants to diversify his investment portfolio beyond his business. He chooses an LIC with a strong track record of managing a diversified portfolio. It includes shares, bonds, and some property.

Randy invests in the LIC because it offers exposure to a range of assets, managed by a professional fund manager. This diversification could potentially help reduce his investment risk, as not all asset types are likely to perform poorly simultaneously.

The LIC's fund managers focus on long-term growth, which aligns with Randy’s goal of building wealth over decades. Although the dividends from the LIC vary based on its performance, which can be variable, this hypothetical LIC delivered an overall increase in Randy’s investment value. This growth is part of his broader strategy to create a robust financial foundation for the future.

Both Shannon and Randy benefit from their choices, tailored to their unique financial situations and goals. Each strategy plays a key role in their long-term wealth-building plans. But it’s important to note that these are fictional examples for illustrative purposes only. All investments carry risks and past performance doesn’t determine future results. It could help to seek advice from a financial adviser to support your decision-making.

REITs vs LICs – how to decide which is right for you

Deciding between REITs and LICs comes down to your personal investment goals and circumstances. Here are some key factors to consider:

1. Consider your goals: Are you seeking regular income or long-term growth?

If regular income is appealing and you're comfortable with the real estate market's cycles, REITs might catch your interest. If you prefer a broader spread across various assets and value diversification to manage risk, LICs could help.

2. Assess your risk tolerance: How comfortable are you with market fluctuations?

REITs often reflect the direct impact of property market fluctuations, which can be significant. LICs, while also subject to market risks, typically offer more varied investments which might mitigate some risk through diversification.

3. Look at your investment horizon: How long do you plan to invest for?

Both REITs and LICs can be suitable for long-term strategies. But your timeline might influence which fits better based on potential growth and income stability.

4. Check the fit in your portfolio: What do you already own?

Adding REITs and/or LICs should complement and balance your existing investments. If you already have a lot of direct property investments, an LIC might offer better diversification, and vice versa.

5. Understand the costs: How much are you willing to pay?

Be aware of any management or transaction costs associated with REITs and LICs. These can affect your returns over time, so it's important to understand them fully.

This guide is just a starting point. To avoid going down a rabbit hole, a financial adviser can offer personalised advice based on your specific circumstances. They can also help you weigh the potential benefits and risks so you can choose the investment that’s right for you.

Wrapping it up – choose your path

Choosing between REITs and LICs involves understanding their distinct characteristics and how they align with your financial needs and goals. We've explored each investment type, their potential benefits and risks, and how they might create long-term wealth. Remember, the right choice is specific to your circumstances and investment objectives. Getting independent, professional advice can help you make informed decisions to build your portfolio.