REITs and rental properties serve the same purpose- to provide the investor with reliable, sustainable income- that can be used to pay for expenses and lifestyle throughout retirement. However, REITs and rentals accomplish this in different methods, at least from your point of view.
P.S. Catch up with the Introduction REIT series (Part I, Part II, Part III)
I will take a look at which one is better from an overall lifestyle point of view. Like these (one, two), there are already articles that offer perspectives from a pure investor point of view. Inherently, some differences affect more than just investments and income. Let’s take a look.
Leverage. When it comes to investing, leverage is a significant factor in your choice. I can go out and buy a $200,000 home easily, maybe without any of my money as a down payment. Conversely, I would have to invest $200,000 of my after-tax money to get that amount of money into REITs. The REITs themselves use leverage inside themselves, but to get large amounts of income, you will need to put in immense amounts of income.
Stock Market Investing 101
Liquidity. Liquidity is a term that reflects how fast you can withdraw your money out of an investment. Most REITs trade on the stock market. They are as liquid as things get. A rental property will take a minimum of at least two months to cash out. If you are looking for a short-term investment, 1-3 years, buying a rental property is probably not the best idea.
Safety. Both of these investments could be labeled safe or unsafe. The best way to ensure an overall safe stable of assets is to diversify your portfolio. That is why our Retirement 4-50 plan uses retirement income, investment income, rental income, and business income. If we only depend on income from REITS, then we are in a position to fail- it’s the same with rental income. But if each of these pillars of cash flow is only 10-20% of our over-income strategy, then we can survive a downturn. We also need to set aside cash for emergencies so that we don’t have to liquidate our properties during a recession- the worst time.
Diversity. It is much easier to diversify your portfolio when using REITs. You can diversify your rental properties across different asset classes, but then you run into time constraints of running a big business. Becoming a CEO is something you may not want to do during retirement.
Time and Focus. How much time do you want to spend dealing with properties? Using REITs instead of rentals is a sure-fire way to reduce your time spent on real estate. Once you find a diversified REIT investment list, you will just need to come up with an investing schedule. After that, you will only need to collect your dividends and pay taxes once a year. If you own rental properties, you will have to do much more.
Stocks vs Bonds: A Beginner’s Guide
Family. Your family would love to receive $200,000 worth of REIT investments. However, if you own rental properties, you will be better positioned to assist families throughout your lifespan. When your family (kids, parents, siblings) need assistance or transition, you can access rental properties. You can adjust the price to ensure they can afford to live comfortably. Having this capability is a massive boon for the family and cannot be overstated.
Final decision. You probably already guess that it is going to be an individual decision based on your own needs. If you are young, without much money, you can start investing in REITs today. You will only need $5 a week to get started.
Build the Mindset of an Investor
If you have access to leverage, then you can invest in real estate. It is important to note that you do not have to start with a rental. You can buy a single-family home and rent out parts of the property to grow rental income. The options could be rooms, RV hookups, Airbnb, or finished basements. From there, you can start to build your rental portfolio.
My personal view. My take is to use both investment options. I do not want to limit myself to any one investment philosophy. Currently, I have three rental properties, multiple REIT investments on the stock market, and one REIT investment off the stock market (Fundrise). They all perform differently in the same overall economic situation, which leads to a more balanced return than if I was going for the highest possible income.
I am an investor, not a trader. I buy and hold investments. My rental homes will slowly appreciate home value, and rental income will slowly grow. My REITs will slowly appreciate value, and dividends will slowly grow year-over-year. Because I am investing for the long-term, I can reap the benefits from both investing methods and enjoy all my appreciation and income increases. Buy-and-hold is my preferred way to earn a steady income.
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https://www.pinterest.com/kingmarine/military-family-investing/Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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