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Disadvantages Of Direct Investment

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According to Siegel and Yacht (2009), there are two types of investments in real estate: direct and indirect investments (p. 317). In a direct investment, a person buys a house or an apartment to live in. For this person, this is probably the biggest investment he might invest in for his entire life. He needs to find a way to finance the payment of his house or apartment by getting a mortgage. In this case, he is the owner and the investor of his estate and holds legal title of his property (Siegel & Yacht, 2009, p. 317). In an indirect investment, a person only invests in “an entity that owns and manages real estate.” (Siegel & Yacht, 2009, p. 317). This type of investment is added to a person’s portfolio and helps him diversify his investments …show more content…

On the one hand, the advantages are that once the mortgage is fully paid, the house becomes the property of the investor. According to Siegel and Yacht (2009) “the advantages to a direct investment are the additional rental income and tax benefits.” (p. 318). On the other hand, the disadvantages of direct investment are in direct relation with the illiquidity of the investment and the concentration of a person’s portfolio in one asset (Siegel & Yacht, 2009, p. 318). Under direct investment comes the commercial property which revolves around buying a property, refurbishing it, and putting it for …show more content…

I know about direct investment very well, and I am familiar with mortgage loans and commercial property, but when it comes to indirect investment I hardly have any clue about it. Therefore I will use the information found in our textbook, to discuss at least two main ways to invest in real estate indirectly in the United States.
In an indirect investment, a person buys shares in a company that owns and manages real estate (Siegel & Yacht, 2009, p. 318). This company can be a syndicate which can have the structure of a corporation or a limited partnership. In the latter, there is one general partner who manages the entity and a number of limited partners “who invest in partnership shares and who are only liable for the amount of their investment” (Siegel & Yacht, 2009, p. 318).
The REIT (real estate investment trust) is a mutual fund of real estate holdings and constitutes another form of indirect investments (Siegel & Yacht, 2009, p. 318). An important feature of a REIT is that its shares “may be privately held or publicly traded on an exchange” (Siegel & Yacht, 2009, p. 318) and that it might specialize in specific types of properties. There are different criteria for a fund to qualify as a REIT in the US. They are as follows according to Siegel and Yacht

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