Landlord vs. REITs: Pros and Cons (2024)

Investors seeking exposure to real estate can look for investment properties to purchase and rent out, or they can buy shares of a real estate investment trust (REIT). Becoming a landlord offers greater leverage and a better chance of realizing big returns, but it comes with a long list of hassles, such as collecting rent and responding to maintenance issues. REITs provide a much simpler way to invest in real estate and earn consistent income through dividends, but they confer less control, and their upside tends to be lower than that of rental properties.

Landlord Pros

Becoming a landlord offers several advantages. Perhaps the biggest advantage is leverage. Investors with good credit can buy rental property with as little as 20% down, financing the rest. Therefore, the investor's cash outlay on a $100,000 property is only $20,000. If the value of the property increases by 20% in the first year, an amount not unheard of in a hot real estate market, then the investor enjoys a 100% return.

Although mortgage payments must be made on the financed amount, a smart real estate investor earns enough money in rental income to cover the mortgage, with money left over as profit. This allows the investor to earn money from both property appreciation and rent payments from tenants.

Landlord Cons

Being a landlord is a much more hands-on investment than owning shares of a REIT. Many people who have gotten into the business of purchasing rental properties have quickly learned that the time required to manage all of their properties becomes another full-time job. A person considering buying rental properties should brace themselves for a huge time commitment, or be prepared to pay a professional property manager to handle the minutiae involved, such as advertising vacancies, collecting rent and dealing with delinquent tenants.

Then there are the myriad expenses involved with owning property. Depending on how the lease agreement is written, a landlord could be financially responsible for everything from a leaky faucet to a broken refrigerator. This can eat into an investor's profit quickly. Moreover, dealing with frantic late-night phone calls every time a tenant's toilet does not flush properly can impede quality of life.

REIT Pros

Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit. Building a diversified portfolio of one's own rental properties requires a hefty budget and a lot of time and expertise. Investing in the right REIT offers done-for-you diversification in one simple purchase. Furthermore, while rental properties are potentially lucrative investments, they can be highly illiquid, particularly when the real estate market turns soft. REIT shares, on the other hand, can be redeemed for cash in one five-minute phone call.

REIT Cons

REITs lack the leverage advantage offered by financing rental properties. Because a REIT is required by law to distribute 90% of its profits to investors, that leaves only 10% to grow the company by investing in additional properties. Consequently, REIT share prices rarely grow as fast as, say, Silicon Valley tech companies, which rarely pay dividends and usually invest every penny of their profits into growth and innovation.

REIT investing offers less control than being a landlord. When an investor buys rental properties, the investor can see, touch and smell each property before owning it. The investor can research the local rental market and examine data on how similar properties have fared recently. Buying REIT shares means ceding that control to someone else. This can be ideal for investors not wanting to make such decisions, but those who prefer a hands-on approach might be better off as landlords.

Landlord vs. REITs: Pros and Cons (2024)

FAQs

Is it better to own rental property or a REIT? ›

REITs provide a much simpler way to invest in real estate and earn consistent income through dividends, but they confer less control, and their upside tends to be lower than that of rental properties.

What I wish I knew before buying REITs? ›

Must Know #1 - Lower Leverage = Higher Returns

The conservatively financed REITs have outperformed the aggressively financed REITs in most cases over the long run. That's despite typically offering much lower dividend yields and trading at higher valuation multiples.

What are the pros and cons of owning REITs? ›

Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.

What are 3 drawbacks to owning rental real estate? ›

The drawbacks of having rental properties include a lack of liquidity, the cost of upkeep, and the potential for difficult tenants and for the neighborhood's appeal to decline.

What is a better investment than rental property? ›

As mentioned above, stocks generally perform better than real estate, with the S&P 500 providing an 8% return over the last 30 years compared with a 5.4% return in the housing market. Still, real estate investors could see additional rental income and tax benefits, which push their earnings higher.

What is considered bad income for a REIT? ›

Bad REIT earnings tend to run afoul of Section 856, which provides that at least 95% of a REIT's gross income must be derived from “rents from real property.” It also provides that at least 75% of its gross income must be derived from that source.

Why are REITs good in a recession? ›

REITs allow investors to pool their money and purchase real estate properties. By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions.

Will REITs do well in 2024? ›

AEW Capital Management forecasts total REIT returns of approximately 25% over the next two years, which also roughly translates to low double digits in 2024, according to Gina Szymanski, managing director and portfolio manager, real estate securities group for North America, with the firm.

Are there tax benefits to owning REITs? ›

Return of capital (ROC) distributions benefit from real estate-related tax deductions. As real estate vehicles, REITs are able to claim tax deductions for depreciation and amortization, which reduce the REIT's net taxable income but do not reduce its cash.

What is the biggest risk of owning a rental property? ›

An extended vacancy is undoubtedly one of the biggest financial risks involved in investing in rental homes since it's essentially lost money. If you can't consistently rent your space, you're still responsible for paying the property's expenses — without generating income to offset the cost.

Is it wise to keep a rental property? ›

Key Takeaways. There are many financial and tax benefits to owning a rental property, particularly if you lock in reliable long-term residents who can care for the home while it appreciates and generates equity and passive income.

Is rental property a good asset? ›

Investing in a rental property is a great way to generate steady, ongoing income. And if you hold on to a rental property for many years, it could appreciate quite nicely in value over time. But investing in real estate isn't the same thing as investing in assets like stocks.

Is REIT the best investment? ›

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

What is the average return on a REIT? ›

The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.

What are the disadvantages of a private REIT? ›

Cons of Investing in a Private REIT

On the flip side, private REITs typically have longer holding periods, which means your money may be tied up for an extended period. Additionally, they may lack the liquidity of publicly traded REITs, making it more challenging to sell your investment if needed.

Do REITs outperform the market? ›

REITs are also attractive thanks to their market-beating returns. During the past 25 years, REITs have delivered an 11.4% annual return, crushing the S&P 500's 7.6% annualized total return in the same period. Image source: Getty Images. One reason for REITs' outperformance is their dividends.

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