REITs vs. Rental Properties: Which is Better?

REITs vs. Rental Properties are the main options if you choose to invest in Real Estate. Let’s see which is better for you.

REITs and Rental Properties, for many investors, are the best ways to build wealth, generate passive income, and reach Financial Independence.

Investing your money in the Real Estate sector is a good strategy: you can pursue your Financial Freedom by buying assets that generate a consistent cash flow. Adopting this strategy, you simply have to be patient and consistent, in order to increase your passive income over time by simply buying and owning multiple assets.

Real Estate can provide a consistent income, long-term increasing value, and a hedge against the rise in prices of goods and services over time (inflation).

REITs

REIT stands for Real estate investment trust.

It is a company that owns different income-producing real estate (office buildings, apartments, shopping centers, hotels, etc).

REITs give you the ability to invest in real estate without buying a physical property.

They are very similar to mutual funds: you’re simply investing in a company that does the work for you.

The following is a shortlist of the Pros and Cons of investing in REITs.

REITS PROS

Passive income.

Invest in REITs and you’ll regularly receive dividends. This is one of the most passive income you can choose.

Performance.

REITs have delivered one of the best annual returns of any major asset class: 11.0% annual returns (2000-2020).

Liquidity.

You can buy and sell shares of REITs like stocks.

They are a very liquid asset, much more than rental properties. Physical properties need much more time and effort to buy and sell.

Diversification.

REITs usually hold various properties in the U.S. in order to have a good diversification of their portfolio.

Low barrier to entry.

If you want to own a rental property, you need thousands of dollars or a mortgage.

If you want to own a REIT, you can simply buy one single share, usually priced at $100 or less (depending on REIT).

No expertise needed.

To own a REIT, you don’t have to be a Real Estate expert.

Cash flow.

REITs must distribute 90% of their annual income in form of (quarterly or monthly) dividends to shareholders.

This is a completely passive and almost predictable cash flow.

REITS CONS

Here are the cons to investing in REITs.

Lack of control.

You haven’t any form of control over the investment returns or the company operations.

Less tax benefits.

REIT dividends are heavily taxed as ordinary income (up to 37%). Rental property owners, instead, can deduct their expenses for the managing of the property.

RENTAL PROPERTIES

The most practical approach to making money through real estate is to buy a physical property and rent it to tenants.

The higher the rent, the higher your profit.

RENTAL PROPERTIES PROS

Complete control.

You have complete control of your own property.

You decide upgrades, monthly rent, potential tenants, etc.

Obviously, it requires more effort and active work.

Potential higher returns.

If you are a real estate market expert, you can find great deals and easily make six figures gains.

Tax deductions. 

Owning a rental property gives you the right to deduct the expenses for managing

the property.

RENTAL PROPERTIES CONS

Active management.

Investing in a rental property can be riskier and really exhausting.

High barrier to entry.

Invest in a rental property need you to have a lot of money or apply for a mortgage.

Higher risk.

Insolvent tenants can be a nuisance, especially if you have to pay your monthly mortgage without getting any renting payment.

Conclusion. REITs vs. Rental Properties: Which is better?

I invest in REITs because I love to receive a consistent dividend cash flow, without having to worry about insolvent tenants.

Also, I don’t like the idea of taking out a mortgage and managing physical rental property.

I also understand that many people had great success with rental properties.

Many ways lead to financial freedom.

Now, the choice is yours. 😉

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