Rentals vs REITs: Comparative List of Two Real Estate Investment Route

Source: Photo by Antonio Feregrino on Unsplash

When it comes to investing in real estate, there are 2 paths that can be considered: active investing via buying rental properties or passive investing through REITs (real estate investment trusts). There is a lot of debate about which one is better, but the truth is that both have their pros and cons—and are lucrative only if done correctly.

Today, we’re going to compare the 2 options in terms of cash flow, expenses, tax benefits, liquidity, and other key factors. Then, you can decide which route is the best investment plan for you.

Comparing Rental vs. REIT Investments

DIrectly buying rental properties requires you to identify & purchase a rental property, find & manage tenants and repeat the process to grow your portfolio. You’ll take an active role in the investment, then either manage it yourself or manage a property management company you hire. Since you’ll own the property, you’ll also have tax advantages and grow your personal net worth.

Real estate investment trusts (REITs), in contrast, do all this without you having to do anything but writing a check to them. You'll have a passive way to garner returns by purchasing shares—similar to buying shares of company stock, or a mutual fund. As an added bonus, you'll also have higher liquidity and less responsibility since you aren’t buying the property directly.

Here are the pros and cons of each:

Choose Your Investment Option Wisely

As you can see, there are pros and cons to each investment strategy. Assessing which option fits your available time and investment goals the best will help you maximize the total return potential based on the expertise you have, the time and money you’re willing to shell out, and the level of responsibility you want to take on.

Here are a few questions to ask when choosing between the best real estate investing strategies:

1. Do you have the time and expertise for an active rental investment strategy? Do you want more control of your assets and to hire your own property managers?

2. Would you rather have a more passive role and have professionals manage and decide on everything for you?

3. How much capital are you willing to spend? Can you afford down payments and property acquisition costs, or do you only have a couple of thousands of dollars for real estate investing?

4. For the REIT route, do you want a publicly-traded REIT that has increased liquidity but is correlated to the stock market or a non-traded REIT that is insulated from market shifts, but less liquid?

Whichever method you choose, real estate investing will always be an excellent way to grow your money. It’s no surprise that real estate is the asset of choice for many beginner and experienced investors. Use this guide to help you get started and make the best possible choice for your investments.

If you’re looking for help with rental properties, get in touch with us for expert property managers that have been in the business for decades. We love answering any questions you have (or comments on what we missed!)