Investing in real estate is huge in Australia, but deciding between a real estate investment trust (REIT) and investing in property directly? That’s not always easy. Both give you access to the real estate market, but they have their differences. REITs let you invest without the hassle of owning a property, while buying a place gives you direct control over your asset.

This article breaks down the key differences to help you see which might fit better with your goals. Whether you're after convenience, growth, or something more hands-on, understanding these options is a great start.

What are REITs?

A real estate investment trust allows you to invest in property without owning a physical building. Instead of purchasing real estate directly, you buy shares in a REIT. It pools money from investors to own and manage income-producing properties like shopping centres, office buildings, or industrial sites. This makes REITs an accessible way to gain exposure to the real estate market with a smaller initial investment.

Types of REITs

There are several types of REITs, each focused on different areas of the property market. Here’s a quick look at the most common ones:

• Equity REITs : These are the most common type of REIT. They own and operate income-generating real estate. Equity REITs make money primarily from rent collected from tenants.
• Mortgage REITs (mREITs) : Instead of owning properties, mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages. They make money from the interest on the loans.
• Hybrid REITs : Combine both equity and mortgage investments. They own properties and invest in real estate debt, providing a mix of rental income and interest income.
• Specialty REITs : Focus on niche real estate sectors such as healthcare facilities, data centres, or storage units. They allow investors to target specific parts of the real estate market that might offer unique growth opportunities.

How REITs work

REITs are traded on the stock exchange, meaning you can buy and sell them just like shares. This makes them highly liquid compared to owning property, where buying or selling can take months. As a REIT investor, you don’t have to worry about tenants, maintenance, or property management – that’s handled by professionals. You simply collect dividends from the income generated by the properties in the REIT’s portfolio.

What sets REITs apart from other investments is their requirement to distribute most of their income (usually 90% or more) as dividends to investors. This provides a regular cash flow, similar to rent, but without the effort of managing a physical property.

What is direct property investment?

Direct property investment means buying and owning a physical real estate, such as a house, apartment, or commercial real estate. As the owner, you control the property and its management, and you can generate income by renting it out or selling it for capital gain. This approach gives you hands-on involvement, and you benefit from any capital appreciation in the property over time.

Real estate property types

There are a few different types of property investments you can choose from. Each comes with its considerations:

• Residential property : Buying homes or apartments to rent out to individuals or families .
• Commercial property : Investing in office buildings, shopping centres, or industrial spaces. Commercial properties typically offer higher rental yields than residential properties, but come with higher risks, like longer vacancy periods or tenant turnover.
• Holiday rental property : Buying properties in tourist areas to rent them out as short-term holiday rentals. This can provide higher rental income during peak seasons but can also be inconsistent and requires more active management.

How direct property investing works

When you own property, you have full control over how it’s used and managed. This can appeal to investors who want direct oversight of their assets. But with ownership comes responsibility. As the landlord, you’ll need to handle property maintenance, deal with tenants, and cover costs like insurance, council rates, and repairs.

Some investors hire property managers to handle day-to-day tasks, like finding tenants and handling maintenance requests. While this can reduce the time commitment, it also adds an extra cost to your investment.

What are the key differences between REITs and property?

When comparing REITs and direct property, several differences stand out. Let’s break them down and start with a summary table before getting deep into the details:

Key differences	REITs	Direct property
Liquidity	Easily traded on the stock market	Time-consuming to buy and sell
Management and control	Professionally managed	Owner responsible for management
Capital requirements	Low capital needed	Requires significant upfront costs
Diversification	Diversified across properties and sectors	Typically tied to one or a few properties

Liquidity

As mentioned, REITs are traded on the stock market , so they’re easier to buy and sell. This liquidity allows investors to enter or exit their positions quickly. Direct property can take time to sell, often involving a lengthy process that includes finding buyers, inspections, and legal requirements.

Management and control

As REITs are managed by professionals, you don’t have to worry about it day-to-day. In contrast, direct real estate investment requires hands-on involvement unless you hire a property manager. Owning real estate offers control over maintenance, tenant selection, and when to sell. With REITs, you have no direct control over the properties within the fund.

Capital requirements

Investing in REITs requires significantly less capital compared to buying property. You can invest in a REIT with a few hundred dollars. Property ownership typically involves securing a loan, paying a deposit, and covering additional costs like stamp duty and legal fees. And, as anyone in Australia will tell you, direct property is expensive. This makes REITs more accessible for investors who want real estate exposure without the need for substantial capital upfront.

Diversification

REITs offer instant diversification across property sectors and regions. By investing in a single REIT, you can gain exposure to a wide range of properties, potentially reducing risk by spreading it across different assets. Direct property investment ties your capital to a single property or a few properties, concentrating risk in those specific locations and sectors.

Do they offer income and capital growth potential?

Both REITs and direct property offer the potential for income and capital growth, but they achieve it in different ways.

	REITs	Direct property
Income	As mentioned, REITs distribute most of their rental income as dividends to shareholders. This can provide consistent cash flow. But dividends can fluctuate based on the performance of the underlying properties and the REIT’s management strategy.	Owning a rental property means you collect rent directly from tenants, creating steady cash flow. However, there may be periods where the property is vacant, which reduces rental income.
Capital growth	Capital appreciation over time as the properties within the trust increase in value. The share prices of REITs historically are influenced by broader market trends and interest rates, making them subject to market volatility.	Property values generally increase over the long term, though growth depends on factors like location, market conditions, and property type. As with REITs, capital growth is not guaranteed, and property markets can experience downturns.

Are there tax implications?

The different tax treatment for REITs and direct property affects how much of your returns you keep.

REITs:

• Dividend tax : Dividends distributed by REITs are typically taxed as regular income. Depending on the REIT, you may receive franking credits , which can reduce your tax liability.
• Capital gains tax (CGT) : If you sell REIT shares for more than you paid, you’ll pay CGT on the profit. If you’ve held the shares for more than a year, you may be eligible for a CGT discount.

Direct property:

• Rental income tax : Income from rent is taxed as part of your overall income. However, you might be able to claim deductions for expenses like property management fees, repairs, and interest on loans.
• CGT : When you sell real estate for a profit, you’ll pay CGT on the capital gain. Like REITs, holding the property for more than a year may qualify you for a CGT discount . Negative gearing may also offer tax benefits if your property expenses exceed rental income.

Tax can get complex, so it’s wise to seek advice from a professional to help you understand the implications.

What are the risks?

Both REITs and direct property carry risks, as with all investments. But the nature of those risks can differ.

REITs:

• Market volatility : As REITs are traded on the stock market, their prices can fluctuate daily. This makes them more sensitive to broader market swings and economic conditions.
• Interest rates : REITs are sensitive to changes in interest rates (set by the Reserve Bank of Australia ). When interest rates rise, REIT dividend yields may become less attractive compared to bonds or savings accounts, potentially lowering share prices.
• Management risk : Since REITs are professionally managed, their performance can be affected by management decisions and the strategies they use.

Direct property:

• Property market cycles : Property prices fluctuate based on location, demand, and market conditions. While direct property is generally considered more stable, it’s not immune to downturns.
• Vacancy risk : Owning property means you could face periods where the rental property remains vacant, reducing rental income.
• Leverage risk : Many investors use loans to finance property purchases. This leverage can magnify gains, but it also increases the risk of significant losses during market downturns. There is also the fact that interest rates may increase, thereby raising mortgage repayment amounts.

What is the time commitment and effort?

The time and effort required for REITs and direct property investments vary greatly. Here are the main differences.

REITs:

• Passive management : As mentioned, REITs are professionally managed, meaning less time on daily oversight tasks. Once you’ve invested, it’s largely hands-off with minimal time commitment.
• Monitoring : While REITs are passive, it’s still wise to monitor their performance and market trends. However, this doesn’t require as much effort as managing physical property.

Direct property:

• Active management : Owning property involves hands-on management. Even with a property manager, you still need to oversee it all.
• Time-consuming processes : Buying or selling property requires significant time. From inspections to legal paperwork, the process can stretch over weeks or months.

Case studies: REITs vs direct property

Investors may choose REITs or direct property for different reasons, depending on their financial objectives, lifestyle, and risk tolerance. Here are a couple of fictional case study examples:

REITs: Marnie’s approach

Marnie enjoys the flexibility of investing in REITs. She wants exposure to real estate but doesn’t want the hassle of managing property. She also finds the price of property to be prohibitively expenses. She therefore decides to invest in a diversified REIT and gains access to a mix of commercial, residential, and industrial properties. Marnie appreciates that she can buy and sell REIT shares quickly and collect regular dividend income. This makes it easier to stay liquid while focusing on her other investments.

Direct property: Felix’s strategy

Felix has saved a lump sum of capital, and prefers the control of owning a physical asset. He buys a small rental property in a growing suburb, managing the tenants himself. While it requires more time and effort, Felix enjoys being directly involved and sees potential for long-term capital growth. He also uses a loan to finance the purchase, although this has increased the amount of debt he has, he's decided on leveraging his initial deposit to increase his exposure to the property market. Felix finds satisfaction in seeing the tangible results of his investment.

Should I choose REITs or direct property?

That’s up to you. But here are a few questions you can ask to help you decide:

• How much capital do I have? REITs require less capital to get started, while direct property involves higher upfront costs.
• How much time can I commit? REITs are low-touch investments, whereas direct property often requires ongoing engagement.
• What level of risk am I comfortable with? REITs offer diversification but can be affected by stock market volatility. Direct property has more concentrated risks but can be stable in the long run (although it isn't always).
• Do I want immediate liquidity? REITs offer quick access to your funds through the stock market, while selling a property can take time and effort.
• Am I looking for regular income or capital growth? REITs provide regular dividends from rental income, while direct property offers rental income and the potential for capital growth over time.

REITs vs property – where do you stand?

Choosing between REITs and direct property depends on your goals, time, and risk tolerance. Each offers unique advantages, whether you prefer a hands-off investment or full control over your asset.

As we’ve said, asking yourself key questions – about capital, time commitment, and risk – can help guide your decision. Both property investment types can be useful in a well-diversified portfolio. Ultimately, the best choice depends on your personal investment strategy.