REITs vs Rental Property: Which One is Right for You?
Real estate is one of the most popular and lucrative investments available today. With a public investment of more than [$3 trillion](https://www.reit.com/what-reit#:~:text=with public REITs owning approximately %243 trillion in assets) in assets, real estate investment trusts (REITs) offer investors a way to access diversified portfolios of income-producing properties without having to own them directly. Whereas renting out a property can provide an ongoing stream of passive income for landlords. But which option is right for you?
To help make your decision easier, we’ve compared REITs vs rental property so that you can decide which one best fits your needs.
REITs: Overview, Pros and Cons
REITs own and operate income-producing real estate assets such as retail centers, office buildings, apartments, hotels, and other properties. By pooling capital from many investors, REITs allow you to purchase a stake in these high-value assets without actually owning them.
Real estate investment trusts, or REITs, are an excellent way to make a passive income with less investment and management. If you want to learn more about them, check our guide on what is a real estate investment trust (REIT).
Pros of REIT
- Access to high-value real estate with minimal capital
- Diversified portfolio of income-producing and private properties
- Professional and easy management and oversight
- Freedom to decide purchase price, rent, and number of tenants
- Regular income in the form of dividends
- High liquidity as REITs can be bought and sold on major exchanges
Cons of REIT
- Risk of fluctuations in the real estate market
- No direct control over how REITs are managed
- Lower potential for capital appreciation compared to owning a property
- Maintenance problems can be unexpected
- You may need to hire property management companies to address urgent tenant requests
Rental Property Overview
Renting out a residential or commercial property is another popular option for investors looking to earn passive income and build wealth through real estate. By purchasing and managing a property, you have direct control over who occupies it, how much rent they pay, and any improvements or repairs you decide to undertake.
Aside from the traditional model of finding tenants, renting out a property can also be done through sites like Airbnb. Check out the guide on Airbnb investment in 2024: What you need to know for more information.
Vacation rental properties are also a great way to capitalize on the growing travel industry and help you generate income from your investment property. So, is buying a vacation property a good investment? If you buy in the right location, it can be profitable.
Pros of Rental Property
- Potential for capital appreciation over time due to property appreciation
- Direct control over who occupies and pays rent on the property
- No need to pay out dividends or share profits with other investors
- Stable income from ongoing rental payments
- Ability to manage your maintenance and repairs
Cons of Rental Property
- Requires large initial capital investment
- Time-consuming management responsibilities
- Profits are limited to rent income and property appreciation
- Increased risk of tenant vacancy and late payments
- Liability for any damages caused by tenants
REITs vs Rental Property: Key Differences to Know
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Active vs Passive Investing
With REITs, investors benefit from passive investing by simply purchasing shares in the trust. They will receive dividends in exchange for their investment and won’t need to worry about the day-to-day management of the property. With rental property investing, investors will have to actively manage the property, from finding tenants to collecting rent, performing repairs, and advertising it.
Asset Control
When investing in REITs, investors will not have any control of the underlying assets. With rental property investment, on the other hand, investors will have direct control of the property and can make decisions regarding how it is managed.
Tax Advantages of Direct Ownership
When investing in rental property, investors can take advantage of the tax advantages that come with direct ownership. These include being able to deduct the cost of repairs and other expenses related to managing the property from their taxable income. REITs cannot take advantage of these same tax benefits as they do not directly own the property.
Liquidity Options
Because REITs are publicly traded, investors can sell their shares for cash anytime. This makes them a great option for those looking for quick and easy liquidation of investments. With rental property, it can take significant time to find a buyer and close the sale.
Upfront Cost of Investment
Investing in REITs is much less expensive than investing in rental property. Investors will need to purchase the shares of a REIT, typically done through an online brokerage account, and then can own a stake in the trust with just a few hundred dollars. REITs offer an array of benefits, including diversification, high yields, and liquidity, which are particularly attractive to investors looking for cash flow investments. Learn what are cash flow investments are to understand more.
On the other hand, rental property investments require more capital upfront as investors will need to purchase the property and may also need to pay closing costs.
Key Takeaways
REITs are an excellent option for those looking to invest in real estate passively while still taking advantage of potential market gains. Rental property investment is a more active way to get involved with real estate investing and allows investors to take advantage of the tax benefits associated with direct ownership.
- Before deciding what real estate investment is right for you, understand the key differences between REITs and rental property investments.
- Investors who choose to invest in REITs enjoy the benefits of passive investing and receive dividends without actively managing the property.
- With rental property investment, investors have direct control over the asset and can benefit from tax advantages associated with direct ownership.
- When investing in REITs, investors benefit from liquidity since they are publicly traded and can easily be sold for cash.
- Upfront investment costs differ between REITs and rental property investments, with REITs requiring less capital upfront than rental properties.
Investing in REITs or rental properties needs careful consideration and planning. Make your investment portfolio successful with Getaway’s insightful and reliable guidance. Get started today.