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REITs vs investment property: Which is better?

Australians have historically had a love of property investment, with much of the older generation enjoying lower house prices and buying up on bricks-and-mortar real estate.

But with the growth in the quality and number of Australian real estate investment trusts (REITs) on the ASX, is there any benefit to owning a physical property in 2019?

The case for investment properties

Investor psychology means that we do traditionally like to be able to see what we are investing in, and for many, this is a great appeal of investing in physical real estate.

Additionally, investors like the ability to borrow big on a smaller cash deposit, meaning you could potentially control a $1 million asset with just $100,000 in the bank.

On this basis, leveraged returns can be attractive, but investment properties don’t usually make financial sense if you were to buy in cash.

The ability to see strong capital gains while also making a property cash flow positive can be attractive to investors, with the idea being in an ideal world that you could take out the mortgage, install tenants and set-and-forget for an easy $1 million asset.

It’s usually not quite that simple though, and it is easy to forget that significant maintenance costs and taxes crop up all the time in real estate investing.

The risk of being overleveraged is also very real, while asset concentration risk is also present given a significant portion of wealth is tied up in that one house or apartment.

The case for REITs

The advent of Aussie REITs means that investors can gain that same real estate exposure without taking on the idiosyncratic risk of being concentrated in one asset.

Much like having just one ASX share in your portfolio, the investment risk is extremely high, and you’d want to be compensated with some seriously above-average returns.

In comparison, an investment in the likes of Mirvac Group Ltd (ASX: MGR) or Stockland Corporation Ltd (ASX: SGP) can provide significant residential real estate exposure in your portfolio without the same level of asset concentration.

Stockland is currently yielding 6.22%, which you would be hard-pressed to find in most rental markets across Australia, with a recent CoreLogic report putting the average rental yield across capital cities at 3.8% per annum, just above Mirvac’s own 3.6% p.a. yield.

One of the big knocks on REITs is the lack of capital gains given their high payout ratios, but even still, the Stockland share price is up more than 25% so far this year.

Foolish takeaway

There are plenty of investors in Australia who have made their wealth in both equities and property, meaning it really is an individual decision on where to invest.

From a personal standpoint, the lower risk and higher yield from an Aussie REIT like Mirvac is a better trade-off than the leverage risk and potential hiccups that can occur in physical property.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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