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The Pros and Cons of Investing in Rental Property or REITs

The Pros and Cons of Investing in Rental Property or REITs

November 7, 2014 by Justin

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. Rental property is an excellent way to build wealth!

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 

Pros:

  • 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.

Cons:

  • 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) 

Pros:

  • Research – You 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.

Cons:

  • 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:  Flickr

Filed Under: Investments Tagged With: Budget, Budgeting, financial decisions, Goal setting, Goals, information, interesting, lifestyle, Money, Personal Finance, Planning, Retirement, Savings, Values, Wealth

Comments

  1. Money Beagle says

    November 7, 2014 at 6:31 am

    Thanks for the information. I had thought about getting involved but so far have not. Maybe someday.

    • Krantcents says

      November 7, 2014 at 7:01 am

      You can invest in REITs which provides some exposure to real estate.

  2. Harry says

    November 7, 2014 at 9:11 am

    Great read and some very clear pros and cons – in my personal experience getting into rental property was a good move for me an my wife, we were recommended this calculator that you can use to determine your investment costs and likely returns, we found it really useful – Money Beagle if you ever get a chance some day it’s worth checking out at https://www.ezlandlordforms.com/rental-property-investment-calculator/

    • Krantcents says

      November 7, 2014 at 2:52 pm

      Thanks, a calculator is a good start, but you still need to assess the potential based on a survey of the market.

    • Krantcents says

      November 7, 2014 at 4:50 pm

      I used income property (apartments & shopping center) to build wealth and financial independence. I think it is the best way to build wealth. Unlike the stock market, you can control your investment much more.

  3. Tawcan says

    November 7, 2014 at 10:54 am

    We are investing in REITs right now to get our feet wet in real estate investing. Hopefully in the next few years we’ll be able to invest in a rental property.

    Do you use a management company to manage your rental properties? Or do you take care of the landlord job?

  4. Michael | The Student Loan Sherpa says

    November 9, 2014 at 8:32 am

    I’ve always been on the fence about rental properties. These REITs sound like a neat alternative. How often are dividend payments made on them?

    • Krantcents says

      November 9, 2014 at 4:57 pm

      Many REITs issue dividends, capital gains and return of capital monthly.

  5. May says

    November 10, 2014 at 6:35 am

    I have been hearing a lot about REITs but don’t own any. I can see how it would be a great way to get into and profit form real estate without the hassles of “owning” real estate.

    • Krantcents says

      November 10, 2014 at 6:58 am

      It is similar to stocks, the benefits of owning without many of the shortcomings.

  6. Even Steven says

    November 10, 2014 at 1:19 pm

    What’s interesting is I usually see people invest in real estate rather than use a REIT, very few publicize the 5 or 10 percent REIT portfolio. I’m a real estate person as well and like having a hands on approach in this area.

    • Krantcents says

      November 10, 2014 at 3:35 pm

      Investing in rental property is my preference too, but REITs are similar to stock. You do not have to run the business , but still share in the profits.

  7. FinanceQA says

    November 20, 2014 at 7:52 am

    My parents invested in rental property when I was in first grade and our family has maintained it over the years. I’m over 30 and my parents are still reaping its benefits until today.

    • Krantcents says

      November 20, 2014 at 1:04 pm

      Real estate is one of the best ways to build wealth. It takes time and patience too.

  8. Valerie says

    November 25, 2014 at 2:46 pm

    Great article! Purchasing rental properties to manage can be wonderful for financial purposes, but you should research and consider all of your options before you make any decisions. Thanks so much for sharing!

    • Krantcents says

      November 25, 2014 at 3:55 pm

      Rental properties are no different from any other investment. You need to do your due diligence!

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