Investing in real estate, and specifically income-producing rental properties, is a solid investment strategy.
Real estate investments have historically proven to be a powerful way to diversify a portfolio, boost returns, and safeguard against inflation.
Two investment avenues real estate investors may evaluate are real estate investment trusts (REITs) vs investing in a rental property.
As with any investment, it’s ideal to weigh the pros and cons of each to determine the best fit for an investor’s unique investment style, risk preferences, and desired returns.
This article was assembled by the team at The Hartman Companies. In it, we will uncover the important considerations for REIT vs rental property investing.
Before making a case for reit vs rental property investing, it’s essential to first understand how real estate investing came about. Every economy throughout history has benefitted from land ownership. As economic models evolved, property ownership became accessible to a wider group of individuals. In the western world, real estate investment has become a powerful way to build personal wealth and safeguard against inflation or the volatility of the market. As an asset class, real estate has numerous tax advantages and is a tactic used by almost all high net worth individuals, as well as a growing group of moderately prosperous, ambitious individuals.
Real estate investing has gained significant traction and popularity in recent years due to several key factors. Some of the benefits of real estate investing include:
1. Tax Benefits–In many cases, real estate investors benefit from business deductions retailed to mortgage interest, operating expenses, depreciation, and property taxes
2. Increased Cash Flow–Choosing a property that generates a steady monthly cash flow lets you use the tenant’s monthly rent to pay your operating expenses and mortgage payment while still capitalizing on long-term appreciation to help boost total returns.
3. Appreciation–In addition to the value at purchase, real estate investments offer the opportunity to capitalize on market appreciation over time. If your property appreciates, you can sell that property for a profit, sell to make a 1031 exchange, or even cash-out refinance to purchase additional properties or shares in a reit.
4. Inflation Hedge–If you’re looking for a long-term investment, real estate investing offers a predictable hedge against inflation in the long run, as many real estate investments have historically increased in value over a 30-year terms.
5. To Build Equity–In many cases, a real estate investment will grow in value faster than you can save cash, offering the opportunity to build equity and use that equity to trade into other properties.
6. Diversify Portfolio–Adding real estate to your investments boosts your diversification, which can protect you in times of economic turmoil.
7. Lower Portfolio Risk–If your portfolio includes volatile investments, or if your stocks are decreasing in value, oftentimes your real estate investment will still be increasing in value, protecting you from other portfolio losses.
8. Builds a Hard Asset Portfolio–Unlike investing in the stock market, real estate investments create a hard asset investment for your portfolio–giving you more control over how you manage it or when you sell it.
9. Retirement Funding–Creating cash flow from real estate investments (i.e., rental properties or reit investing) is a great way to create income to support retirement.
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs capitalize on special tax treatment that exempts them from federal income taxes on corporate income and gains that it distributes to its investors.
Unlike rental properties or any other real estate investment type, REITs offer investors greater portfolio diversification. By investing in a REIT vs a rental property, investors can actively invest in several properties compared to a single private real estate investment. REIT investments do not rely on one or two assets because they operate by pooling capital from multiple investors. This capital accumulation strategy provides desired portfolio diversification and strengthens the power of the investment as compared to a single, private rental property investment.
A rental property is an investment real estate property purchased with the purpose of generating income through rental income or appreciation. Investment properties are typically purchased by a single investor, pair, or group of investors. Although there are certain risk factors to consider when buying a rental property, people who own one or more rental properties have the opportunity to generate strong and predictable monthly income.
Investors across the board seek investments that provide opportunities for predictable cash flow and appreciation growth. From high-net-worth individuals to a growing group of middle-class investors, real estate has historically an established avenue to diversify any investment portfolio.
REITs are characteristically a powerful, high-yield strategy for motivated investors. REITs provide high dividends plus the potential for moderate, long-term capital appreciation. They combine potential low barriers to entry with little hands-on management and maintenance compared to rental property investments.
In the US, REITs have historically outperformed private investments over time which is key when considering a REIT vs rental property investing. Additionally, REITs have the ability to better leverage their capital structures. With a larger pool of investment properties and investors, REITs can use individual property appreciation to grow the overall portfolio.
Since REITs were first created in 1960, they have grown in size, impact, and popularity. Today, REITs own over 500,000 properties in the U.S., and 145 million Americans live in households with REIT investments through their 401(k) and other investment funds. For investors looking to achieve a balanced portfolio, REITs can be integral to a well-rounded investment strategy.
Real estate investments are a proven strategy to grow your net worth. Whether you invest in a rental property or a REIT, real estate offers an enviable combination of historically strong returns and passive income, while providing a potential hedge against inflation and the volatility of the market.
As an informed investor, always consider your options and the advantages of different types of real estate investments especially when it comes to REIT vs rental property investing. With a desire to invest in real estate, REITs are an unrivaled option that makes it possible for anyone to be a real estate investor, not just high-net-worth individuals.
If you are interested in diversifying your portfolio with a low-cost real estate investment, view our complete guide to REIT investing.
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