Most real estate investors are familiar with the concept of investing in rental property. After purchasing a property in an in-demand neighborhood, you can rent that property to various tenants, collecting income in the form of rent on a monthly basis. If you plan things right, you can make enough money to more than make up for all your expenses, ultimately resulting in a recurring profit – all on top of your long-term property appreciation.
An alternative investment for investors who don’t have the capital for a standalone property is a real estate investment trust (REIT). But what exactly is this type of investment? Does it have any advantages over traditional REITs? And what are the advantages that rental properties have over REITs?
What Are REITs?
Real estate investment trusts (REITs) allow you to invest in organizations that practice real estate investing. In a way, it allows you to indirectly invest in real estate, since you’re investing in the entity that does all the purchasing, selling, and managing of property.
It’s easiest to understand how REITs work by thinking of them like stocks or ETFs. They even trade like stocks and ETFs, allowing investors to purchase individual shares at market prices and sell them at will. Hopefully, your investment will increase in price over time, allowing you to capitalize on a long-term return. Depending on the REIT you choose, you may also qualify for a regular dividend.
These are some of the advantages that REITs present:
- Convenient purchasing. Even seasoned real estate investors are forced to acknowledge that the process of buying a new property is long and somewhat arduous. You’ll probably need to hire a real estate agent, or at least a lawyer, and go through weeks of negotiations and paperwork before finalizing the transaction. But with REITs, you can buy and sell assets as quickly as you want.
- Minimal necessary research. It’s important to do your research before investing in anything, but investing in a REIT requires far less due diligence than investing in a real property. You just need to have confidence that this organization is being run by competent leadership with a solid strategy; when buying a house, you’ll need to conduct a thorough inspection before committing to your purchase.
- Built-in diversification. REITs tend to diversify their holdings by default. You won’t have to worry about diversifying your own portfolio this way; you’ll naturally get exposure to many different types of properties across many different markets.
- No active management. If you plan on acting as a landlord without a property manager, you’ll be responsible for marketing the property, finding tenants, collecting rent, and dealing with issues (including evictions). REITs are much more passive by comparison.
- Liquidity. REITs can be bought and sold anytime, making them much more liquid than real properties. If you want to retain access to your cash at all times, REITs could be for you.
The Advantages of Real Rental Properties
However, real rental properties offer some significant advantages of their own, including:
- A physical asset. When you purchase shares of a REIT, you’ll be holding conceptual ownership of an organization. But when you purchase an actual property, you’ll hold a physical asset. For some people, this is extremely valuable – especially if you plan on utilizing this physical asset for your own physical needs.
- Tax breaks. Property investors benefit from a number of tax breaks. Depending on where you live and how you purchased this property, you may be able to write off the insurance on your mortgage, expenses related to the maintenance and upkeep of this property, or even certain repairs and upgrades you make. As a REIT investor, you’ll be able to write off any losses you sustained, but there aren’t many other tax advantages to enjoy.
- Total control. Investing in a REIT puts someone else in the driver’s seat. Some other group of people is going to be responsible for choosing which properties to invest in and how to manage the fund’s portfolio. For some investors, this is an advantage, since it relieves them of the burden of decision making. But for most investors, it’s better to remain in total control of how you manage your money.
- Access to unique markets. One aspect of that control is deciding when and where to invest. If you have strong convictions that a local neighborhood is going to undergo a massive surge in growth in the next several years, you can take advantage of that and start investing in property there. You’re not going to have that pull or flexibility if you’re exclusively invested in REITs.
- Leverage potential. A commonly touted advantage of real estate investing is its capacity to grant you financial leverage; in other words, you can invest with money that isn’t yours by borrowing it. While it might be technically possible to invest in REITs with borrowed funds, it’s significantly more difficult and riskier to do so.
- Primary residence potential. Owning a house means you’ll have the option of living in it. You could purchase a house as your primary residence, then convert it to a rental property when you move. Conversely, you could own a rental property for many years, then eventually move into it as your retirement home. Owning physical property is the only way to benefit from this advantage.
- Refinancing options. On top of that, owning real rental property gives you the option to refinance that property whenever you deem this financial move to be advantageous. If mortgage rates drop precipitously, you can refinance and save hundreds of dollars every month.
Because real estate is such a consistently valuable investment, both REITs and physical properties can be excellent additions to your portfolio. But as your real estate portfolio grows, it’s going to get harder for you to manage your assets effectively. That’s why property management companies exist; at Green Residential, we help all kinds of property owners and investors make the best possible real estate decisions. Contact us for more information today!
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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