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Is a Rental Property a Better Investment Than a REIT?

Real estate has the potential to be a highly lucrative investment. If you pick the right assets, get started early, and commit to a solid strategy, you can multiply your initial principal and establish a stream of incoming cash that could fund your retirement.

But when you pursue real estate, you have a lot of options. One of the most common ways to get your feet wet is to purchase a rental property (and possibly hire a property management company to look after it).

If your total rental income exceeds your expenses, you’ll make a nice profit. On the other hand, you could invest in a real estate investment trust (REIT), which is a stake in a company that manages real estate professionally.

It’s a way of getting indirect exposure to the real estate business without requiring you to select and manage properties on your own. So which is the better option?

Advantages of Rental Properties

These are the important advantages of rental properties:

·         Total control and transparency. First, if you buy rental properties, you’ll have total control over the process. You’ll also have transparency; you’ll know what’s going on at all times. You’ll be the person who chooses which properties get added to your portfolio. You’ll be the one who screens and selects the tenants. You’ll picking which upgrades to make. And you’ll always have a way to see what’s happening with your properties.

·         Neighborhood selection. If you choose the right property in the right neighborhood, it could skyrocket in value. Although REITs often promise steady, long-term optimized returns, adopting your own rental property management strategy might result in more explosive returns.

·         Property flexibility. If you own your properties, you’ll potentially be able to use them for more than just renting to tenants. After tenants move out, for example, you always have the option of moving into a rental for your primary residence.

·         Tax advantages. Becoming a landlord and managing your own property entails some impressive tax advantages. You’ll be able to write off many of your expenses, including interest you pay on your mortgage and the cost of travel and legal fees. Check with your financial advisor to learn more about these and other advantages.

·         Portfolio adjustments over time. With rental properties, you can gradually flesh out an entire portfolio of personal holdings. Each site or structure you add will give you more rental income, and potentially empower you to diversify your portfolio in other directions. Again, you’ll have much more control over your earnings this way.

Advantages of REITs

REITs offer an array of solid advantages, as well:

·         Cheap, easy transactions. Buying a property can be both expensive and time consuming. You’ll have to spend lots of time doing research, hire a real estate agent and/or a lawyer, and negotiate the complexities of securing a loan (if needed). By contrast, investing in REITs is both cheap and easy. You don’t need much money or any qualifications to get started, and you don’t have to do much research before investing, either.

·         Truly passive income. If you hire a property manager, your owned rental properties can be utterly passive income generators. But you’ll still have several responsibilities to address on your own. With REIT ownership, you’ll have access to truly passive income which requires almost nothing from you (other than occasional research and check-ins).

·         Reliable management. Most REITs are companies owned and managed by people with a lot of past experience in real estate. They know what it takes to identify profitable operations and manage them responsibly. You’ll stand to benefit from someone else’s expertise.

·         Steady returns. Long-term REIT investment typically allows you to enjoy steady, predictable returns. Though a smart play in the rental property market could multiply your investments quicker, that approach tends to be more volatile and the results are less predictable. That’s not to say there’s no risk in investing in REITs – they also follow the real estate market closely, and a dip in the market could still result in a major loss. But REITs tend to be more consistent.

·         Broader exposure. Investing in a REIT means getting exposure to a wide variety of properties. Instead of adding new investments one by one, you will get immediate diversification in your real estate portfolio. You can also invest in multiple REITs to expand your exposure further.

Choosing the Right Path for Yourself

There aren’t enough advantages to either approach to make one unmistakably superior to the other. Ultimately, the “better” option will come down to your personal preferences and priorities.

In fact, there’s nothing to prevent you from investing in both, and thereby capitalize on the best of both worlds. The more experience you get in real estate investing, the more comfortable you’ll become with whichever approach you select.