Buying Rental Property Vs. Investing in a REIT

You can own real estate without attending a single open house.

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When you’re ready to get into the real estate market, your first thought might be to start looking at properties. However, you can also invest in real estate by putting money into a real estate investment trust. Each of these types of real estate investments can provide money-making opportunities. Consider the characteristics of each so you can choose the real estate investment that suits your personality and style.

Advantages of Buying Rental Property

When investors own a brick-and-mortar property that they rent out, they have the advantage of leverage. This means, for a relatively small down payment investors get the income from the entire property. If the property appreciates in value, they could have a good return on their money. For example, a $20,000 down payment might get an investor into a $100,000 rental property. If it goes up 10 percent in value, that’s a $10,000 return on a $20,000 investment, which comes to a 50 percent return. In addition, investors can earn income from tenants. Because it’s an investment property, investors can also depreciate part of the value as a tax deduction each year for 27.5 years.

Disadvantages of Buying Rental Property

Investors must perform maintenance on property or hire somebody to do that maintenance. Similarly, either the investor or a manager will have to collect rents and handle any issues that arise. The investor will have to pay for advertising for new tenants and deal with the occasional bad tenant who cannot pay or who does damage to the property. You will also have to pay for insurance.

Advantages of Investing in a REIT

A real estate investment trust, commonly called a REIT and pronounced "reet," provides an income without having to hire a property manager. The investor doesn’t have to advertise for tenants. In addition, a REIT is diversified across many properties so that if one doesn't do well the others may perform better. A REIT is also a more liquid asset than a house. An investor can sell out and get her money back more quickly.

Disadvantages of Investing in a REIT

A REIT may grow slowly because by law it must distribute 90 percent of its profits to its investors. With only 10 percent going back into the REIT, it can only buy a limited number of new properties. The investor will have to pay money managers’ fees. Also, the investor has no control over what types of properties go into the trust. REITs specialize in particular areas of real estate, such as apartment buildings, commercial office space, shopping malls and retirement villages. An investor may have to put money into more than one REIT to diversify among many types of properties.