Should You Invest in Rental Property or a REIT?

by Krantcents · 35 comments

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I love rental property!  I bought my first home when I was twenty-seven (27) years old.  My next investment was a nine (9) unit apartment building when I was thirty-one (31) years old.  Over seven (7) years, I accumulated more properties.  By the time I was thirty-eight (38) years old, I achieved financial freedom.  Investing has its risks and rewards.  Can you invest in rental property without being a landlord?

A Real Estate Investment Trust (REIT) is a company that owns and operates or manages income producing real estate.  It is also a security that sells like a stock on a major stock exchange.  It is a way of investing in rental property without some of the responsibilities of owning real estate.  Similar to any stock it is liquid because you can buy and sell it on any day.  You can invest directly by buying shares directly on a stock exchange or invest in mutual funds that specialize in various kinds of income property.

REITs invest in shopping malls, office buildings, apartments, warehouses and hotels.  They may invest in just one (1) area of real estate such as apartment buildings and specialize in one specific region, state or country.  It is a good way to invest in a diverse portfolio of income producing properties that were professionally selected and managed.  REITs have special tax status that allows them to avoid corporate tax as long as they distribute nearly all income to the investors.

Rental Property 

Advantages:

  • Control of property – selection, management, tenants, repairs, maintenance and rents.  You make the purchase decision, manage all aspects of your property or use a service.  You have more control of who rents your property and decide what repairs or maintenance is performed to increase or maintain value.
  • Equity – as you pay down the mortgage, you increase your equity in the asset.
  • Tax considerations – You can deduct your expenses and depreciation as well as associated expenses of managing your property.

Disadvantages:

  • Management – Owning rental property takes time and effort.
  • Problems – Delinquent tenants, lawsuits, vacancies, cash flow and rent limitations.
  • Illiquid Investment – Real estate takes time to sell.
  • Leverage – It is a disadvantage and advantage because a mortgage affects your cash flow, but allows you to buy a larger property with just a (20-25%) down payment.

 Real Estate Investment Trust (REIT) 

Advantages:

  • ResearchYou still need to do research because not all REITs are the same.
  • Professional Management – Hands off ownership, no day to day responsibility.
  • Cost – Share price is much lower than a purchase.
  • Diversity – A typical REIT has many more properties than the average person would own which may cover a region, state or country.

Disadvantages:

  • Performance – It typifies stock performance and relies totally on management.  If the stock or fund is out of favor or volatile, you are at the mercy of the market in terms of value.
  • Taxes – variety of tax disadvantages depending on choice of stock or fund.

Final thoughts

There are good and bad things about both owning individual properties and REITs.  If investing in rental property is a long term goal to build equity and income in an asset that may support you in retirement, you must buy property.  If you just want to have some exposure to rental properties to diversify your portfolio, REIT investment may a more appropriate choice.  If you want to have more control of your investments and counter the stock market volatility, you should buy an individual property.  Many people do not invest in rental property because of all the work and tenant problems.  You can hire a management company that will professionally manage the property for a service fee of six (6) to ten (10) percent.  It is important to look at ll the choices   and make a reasonable choice.  Let me know your thoughts in the comments.  I still love rental property!

Photo by:  Flikkesteph

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