REITS vs Rental Properties: Which is Better?

If you are looking for a smart way to build a diversified portfolio, incorporating real estate investments can be an ideal choice. However, it is essential to consider all your options and find the best solutions for your investment portfolio. Two of the most common real estate investment options include a Real Estate Investment Trust (REIT) and rental properties. Both of these options offer great benefits, and both also come with risks to consider. Keep reading to learn more about these investment options and how to make the most of real estate investing. 

Purchasing Rental Property

As you may already know, investing in a rental property means purchasing a property that you will then rent out to tenants. This can include a condominium, apartment building, single or multi-family home, or even commercial real estate. In ideal situations, when you buy rental properties, your property will bring enough income to cover your mortgage, any mortgage interest, taxes, and insurance.

The revenue from your real estate assets will provide you with monthly profits, which you can then save for future investments or reinvest into your property. With continued care and maintenance, most properties will appreciate over time, meaning you should be able to sell the rental properties in the future for a substantial profit.

Benefits of Rental Properties

Here is a breakdown of the key benefits of purchasing a rental property. 

• Asset Appreciation: In addition to monthly tenant payments, rental properties will also appreciate in value over time. Any renovations or upgrades you choose to make as the property manager will add value and increase your profits over time. 
• Steady Cash Flow: Income-producing rental properties bring in monthly rental income from tenants, creating steady cash flow and boosting your overall income.
• Tax Benefits: You can significantly reduce your expenses, including property taxes, maintenance, payroll, etc., by taking over property management duties. 
• Flexibility: Because you are the sole investor, you are the primary decision-maker when it comes to all things concerning your real estate portfolio. 
• Diversification: Rental property investments can help you diversify your portfolio, secure your savings, and help defend against market fluctuations and inflation. As a general rule, the more varied your investments are, the more protected your portfolio may be from losses. 

Disadvantages to Consider with Rental Property

While there are significant benefits to direct real estate investment, it’s essential for real estate investors to consider the risks. Here are the most important disadvantages to consider. 

• Market Conditions: The real estate market has been on a steady rise for several years now. However, the market is still susceptible to changes and downturns. Fluctuations in economic conditions, interest rates, and local property demand can lead to rapid shifts in property values. A booming market might lead to inflated property prices, while a downturn could result in decreased demand and lower property values. Additionally, unforeseen events such as regulatory changes or shifts in consumer preferences can swiftly alter the real estate landscape. 
• Upfront Capital: Rental property owners must be able to provide a substantial down payment or secure a loan that does not require a down payment. However, when you work with Spartan Invest, we will work to find an ideal financial option and walk you through all the pros and cons of financial assistance versus a cash purchase. 
• Additional Responsibility: When working with a company specializing in real estate investments, they will offer to advertise that they will handle all aspects of the investment, from financials to property management. However, some of these “turn-key” investors only offer low-level service, leaving much of the management up to you. This is why Spartan Invest has worked to create and embrace our complete full-service model to ensure you are making the most of your investments.

Real Estate Investment Trusts (REITs)

While a REIT is still considered a real estate investment, it functions differently than an investment property. When you choose a REIT, you purchase shares of a trust that owns and manages a property. As an investor, often one of several, you typically have no say in the property held by the REIT, and you will not have any responsibility for its management. When the assets in the REIT appreciate and produce a profit, as an investor, you will be provided with dividends. Additionally, if you need to liquidate your REIT shares, you can do so at the current market value. REITs can be privately or publicly traded. Each REIT will operate differently with specified fund accessibility and investment requirements. 

Benefits of a Real Estate Investment Trust

As with real estate investments, REIT investing also offers a wide range of highly beneficial factors. 

• Less Hands-On Approach: REITs are an excellent opportunity for investors looking to add real estate to their investment portfolio but want to take a more hands-off approach. With this investment style, you will contribute the capital, but you can delegate all responsibilities to those managing the REIT. 
• Low Investment Minimums: Unlike direct real estate investing, REITs don’t require a large lump sum to submit as a deposit or down payment. Instead, you will only provide interest minimums. These minimums are typically much lower than a rental property’s financial requirements. 
• Regular Cash Flow: Similar to how a rental property will generate regular monthly cash flow from tenants, REITs will provide quarterly or monthly dividends. This amount can vary over time depending on the market conditions, inflation, and the success of each REIT. 

Disadvantages to Consider with Real Estate Investment Trusts

Now that we’ve covered the benefits of REITs, we must also address the disadvantages. 

• Volatility: REITs that are publicly traded can experience the sometimes volatile conditions of the stock market. The rise and fall of the market can happen at any time, even if the value of your property has not changed. 
• Lack of Control: Unlike property owners, REIT investors only have to worry about the potential loss of their invested capital. Although REITS offer less financial risk, it also results in investors having minimal control over the real estate asset.
• Fewer Tax Benefits: Rental property owners can capitalize on tax advantages, including writing off property taxes, repairs, management, and mortgage interest. However, REITs do not offer these specific tax deductions. 

Which is the Better Investment Option?

Both property rental purchases and REITs come with their own set of advantages and disadvantages. Choosing the most secure option relies on your personal investment preferences and specific goals. It’s essential to carefully evaluate the pros and cons and choose the investment option that fits your lifestyle and will add value to your portfolio. Regardless of your chosen path, real estate investment offers an excellent opportunity to supplement your income and diversify your financial portfolio.

It’s worth noting that housing remains a fundamental necessity, meaning real estate will continue to be a fundamentally sound investment avenue. While housing markets can experience price fluctuations, the consistent demand for housing remains relatively steady. No matter if you choose to invest in a rental property or a REIT, Spartan Invest is here to walk you through every step of your real estate investment journey. 

Contact Spartan Invest Today

If you are looking to jump into the real estate market, Spartan Invest is ready to help! We provide high-quality investment properties at reasonable market prices. Whether you are looking to diversify your portfolio or need to improve your current investments, turn-key investments with Spartan Invest are a great opportunity you will want to take advantage of. Our team is dedicated to finding you profitable investment opportunities and delivering exceptional results so you can enjoy the benefits of your hard work for years to come. Get in touch with one of our experts to discuss our current inventory today! 

Contact us at 205-202-4118 on weekdays from 8 AM to 5 PM (CST), or email us at [email protected] to get in touch with a member of our team.