Statistically speaking, between the years 2023-2028, the Indian real estate market is expected to grow at a CAGR of 9.2%. With the possibility of stable and robust growth, many investors are turning to the real estate market as a potential investment opportunity. Be it for a primary income or passive income, real estate acts as an efficient source. As you make your way through the real investment market, you might come across two terms that you must be aware of – direct and indirect investments. Before moving forward, let’s understand what are Direct and Indirect Investments in Real Estate
What are Direct Investments?
Real estate direct investment involves purchasing a property outright or a portion of the property directly. In order to purchase a property, an investor needs to have the financial resources to do so, and the investor takes full ownership of the asset as well. An investor involved in a direct investment must also manage the property, which includes finding tenants, collecting rents, and performing maintenance and repairs.
Some examples of a direct real estate investment include investing in lending capital with a motive to build a property, buying a property, and getting a stake in a commercial real estate investment, among others.
What are Indirect Investments?
Real estate investment trusts (REITs), mutual funds, or other pooled investment vehicles are indirect ways to invest in real estate. The investment gives investors exposure to a diversified portfolio of real estate assets by purchasing shares or units. Investors don’t have to worry about managing the property on a day-to-day basis since the assets are managed by a professional team.
Some examples of indirect real estate investments include ETFs and private REITs, among others.
Investing in Real Estate: Direct or Indirect?
Direct and indirect investments are two of the most prominent ways of investing in real estate. Read on to learn more about direct vs indirect investments.
- Direct: In this type of investment, since the investor is in charge of managing the property and collecting rent, it provides more control and a steady stream of income.
- Indirect: This method can provide cash flow through distributions from investment vehicles such as mutual funds or REITs.
- Direct: Individual investors typically find it difficult to access direct real estate investment due to the high capital requirements and the lack of expertise. The identification and evaluation of potential investments, the negotiation of deals, and the management of the investment can also require a large amount of effort.
- Indirect: Indirect investment in real estate can provide access to a wider range of properties and markets, as well as professional management by a team with specialized expertise. This can make it easier for investors with limited capital or expertise to access real estate investments.
Knowledge and Expertise
- Direct: To invest in real estate through direct investment requires a great deal of knowledge and expertise. It may include understanding local real estate markets, financing options, property management, and legal and regulatory requirements.
- Indirect: On the other hand, this type of investment requires less knowledge and expertise.
- Direct: When it comes to risk, direct investment has a higher risk due to the higher capital requirements and the need for active management. Investors bear the risk of vacancy, market fluctuations, and potential legal liabilities related to property ownership.
- Indirect: Since indirect investments are pooled and diversified across multiple markets and properties, indirectly invested real estate carries a lower risk than direct investments. However, there is still some risk associated with the underlying assets, as well as the performance of the management team.
- Direct: There are numerous tax benefits associated with direct investment in real estate. Some of these may include – depreciation deductions, interest deductions, and capital gains tax breaks, among others.
- Indirect: The tax benefits of indirect investment in real estate depend upon the structure of the investment vehicle and other underlying assets. Some of the benefits, like pass-through tax treatment and lower tax rates on distributions, come with this type of investment.
- Direct: Direct investment in real estate is generally less liquid than indirect investment due to the longer time horizon required to sell a property and the limited market for buying and selling individual properties. This can make it difficult to access capital or sell a property quickly in the event of a downturn or other unforeseen circumstances.
- Indirect: Indirect investment in real estate can be more liquid compared to direct investment since shares or units of the investment vehicle can be bought and sold on public exchanges or through private transactions.
- Direct: Direct investment in real estate is typically less diversified compared to indirect investment since it involves investing in a single property or portfolio of properties. This can increase the risk of losses due to market fluctuations or other unforeseen events.
- Indirect Investment: Indirect investment in real estate offers greater diversification since investors can gain exposure to a diversified portfolio of properties and markets through a single investment vehicle. This can help to reduce risk and increase the potential for returns.
As mentioned above, the real estate market is booming, and with time, it is sure to see a significant amount of growth. However, as an investor, you should be informed about every aspect so as to make an informed and smart decision. If you wish to enhance further your knowledge about direct and indirect investments in real estate or get your investment-related queries answered, head on to the Bhive Alts website.