Should I buy a rental property or invest in a REIT? If you’re asking yourself this question, you’re not alone. Most investors are confused about which option to choose. Not to worry, though; this article will help you make the right decision when it comes to REIT vs. the rental investment.
Many money managers recommend investing in rental property because you can usually expect a good return on your investment. But this can either go really well, doubling or tripling your investment, or the value of the property you invested in might decline, and you are left with no or minimal ROI.
This all depends on the decisions that you make when investing. Putting your money on real estate property is a huge feat that requires a lot of planning, research, and preparation. Doing this will increase the chances of you making a smart investment and getting a satisfactory ROI.
When it comes to large-scale real estate investment, an investor has two options: investing in rental property and real estate investment trust. The two differ significantly, and being aware of their similarities and differences will help you make the right decision.
What’s the Difference between the Two Investments?
In apartment investing, the GP or general partner collects capital from a pool of other investors, who are called limited partners or passive investors. Their collective contributions are used to pay for the investment, so all the parties involved will share the profit and proceeds of the investment.
On the other hand, a real estate investment trust refers to a company that either owns, operates or finances real estate properties. REIT works the same way as regular stocks do, where the investors receive income in the form of dividends.
Should You Invest in REIT of Rental Property?
Each type of passive real estate investment is structured differently. So it’s important to be aware of how they are different to make an informed decision and a smart investment choice among your options.
1. REIT vs. Rental Property: Diversification
Real estate investment trusts have fewer fluctuations in income. This is thanks to their structure, where the money is spread across different assets instead of a singular one like in apartment investing.
That way, you can better ensure that you’re going to have a good ROI every year because you’re not relying a hundred percent on a single piece of property. But of course, this would also depend on how the property performs.
In terms of diversification, you can also create your own structure in a real estate investment trust. It ultimately depends on where you want to invest your money and how you want to divide your capital into different properties.
2. REIT vs. Rental: Initial Investment
A real estate investment trust is significantly more affordable than apartment investments. In a REIT, you can invest as low as $1,000. So it’s a good option if you’re starting or testing the waters of real estate investing.
On the other hand, rental property investment has a lot of requirements before you can invest. The initial investment is also a higher rate, with some sponsors requiring a minimum of $50,000 or more. The requirements needed for apartment investing are the following:
- High capital
- Accreditation status – This means that you should be earning 200k if you’re an individual investor. If you file jointly, the joint income should be 300k. This, or you have a net worth of 1 million dollars.
3. REITs vs. Real Estate: Liquidation
Liquidation is essential when considering REIT vs. owning rental property.
As mentioned, a real estate investment trust works the same way as a regular stock. So in terms of liquidation, you can buy in or sell out anytime you need to. Hence, there is more flexibility with a REIT.
But it’s not the same when investing in rental property. In this type of investment, you cannot pull out anytime you want. You need to stay in the investment for the entirety of the business plan. However, there may be instances when you can pull out your capital when there is really a need to.
But do take this pro tip: when investing, make sure that you are willing to keep the money in the investment for a long time.
4. REIT vs. Rental Property: Ownership
In the last few factors, the real estate investment trust has significantly overtaken rental property investment. But in terms of ownership, the game is interchanged.
The benefit of rental property is that you have sole ownership of that specific property where your money is. Remember, you invested 100% in that property, so it is yours.
Having ownership of it, you also have the authority to access the benefits of a general partnership and get updated with reports, status, financials, etc.
This is not possible in REIT because you do not have ownership of whatever property you invested in. So you enjoy fewer benefits like speaking to the company, getting updates and reports, etc.
5. REITs vs. Rentals: Returns
When it comes to the rate of returns, rental property investment wins by a landslide. From 2013 to 2018, the percentage of returns has been 25%, which is a higher average than real estate investment trust.
That means that if you put your money, say $200,000, in apartment syndication in 2013, by now, you would have a total profit of over $50,000.
Having said that, it doesn’t mean you’ll lose when you choose to invest in REIT. Just be sure to find the best REITs to buy to increase your chances of reaping big.
6. REIT vs. Rental: Taxes
Are REITs tax efficient?
Well, both types of passive investments are taxable, so there’s bound to be a depreciation in income regardless of what you choose. But there is one benefit of investing in rental properties, which is known as the 1031 exchange.
In this setup, limited partners can use 1031 to reinvest whatever they earned from the initial property into another investment. In effect, this defers the taxes on the profits. The 1031 exchange is only possible in apartment investing and not in REIT.
REIT vs. Owning Rental Property: Concluding Thoughts
Both types of passive investments offer their own benefits. What you should choose will ultimately depend on what your goals are when it comes to your investment.
The important thing is to be aware of what each type entails and your rights in each setup. Being informed will help you make a wiser investment decision when considering REIT vs. rental property.