IInvesting in a rental property is not something you are interested in. My husband and I have thought about buying vacation rentals in the past. But visiting homes and talking to property managers convinced me that I didn’t want to be a landlord in any capacity – whether it was renting a vacation home, buying multi-family properties and looking for tenants, or buying a commercial space for rent.
The good news is that I can still learn about real estate, including rental properties, without having to deal with the hassles of owning it directly. I have found that a different approach to making real estate investments would be a much better option for me.
REITs are a much better approach for me – and many others
Instead of buying rental property that requires practical effort, I prefer a simpler approach: investing in real estate investment trusts, or REITs.
Real estate investment trusts are companies that own, operate or finance real estate investments. It generally collects investors’ money to buy real estate or to finance its purchase. Investors benefit from this indirect ownership without having to take the personal responsibility of owning their own property.
You can buy REITs that make many different types of real estate investments, including those focused on obtaining multifamily rentals, nursing homes, or commercial real estate. And you don’t have to do the hard work of finding an apartment or duplex to buy, marketing it to tenants, collecting rent, and responding to complaints. You don’t even have to hire a property manager.
You can just search for different REITs and find one with a solid track record being invested in the type of real estate you are interested in. You can buy and sell REITs easily with limited money, and the time you spend on investing is minimal. Perhaps the best part is that you reduce your risk because each REIT usually has many different characteristics.
These benefits of REITs give them a clear advantage
As mentioned above, REITs are simple and easy to purchase. But it also offers other advantages that make it an ideal real estate investment – and probably better for many people than renting a property.
One of the biggest advantages is that REITs tend to pay high dividends regularly. The law actually requires REITs to pay at least 90% of their annual taxable income to shareholders. This ensures continuous cash flow for investors. It is much easier to sit back and collect these profits than to try to collect rent from tenants on a property you own.
REITs also tend to have low volatility and have a proven track record of providing generous returns. If you look at the performance of REITs from 1972 to 2021, this sector has delivered average annual returns of 13.5% compared to the S&P 500, which generated a 13.1% return over the same period. This means that REITs that own or manage income-producing properties have already outperformed investors compared to a financial index that tracks about 500 of the largest US companies. While rental properties can provide similar returns, there are a lot of variables that affect whether the value of a particular building you buy will rise that much over time.
I feel more confident that I will benefit from the generous fixed income and returns from a REIT rather than a single rental property due to the long track record of consistent performance in this sector.
Is Owning a REIT Right for You?
While I personally prefer a REIT rather than buying a rental property, this is not the best option for everyone. Some prefer stable rental income from the tenant rather than earning regular dividends from a REIT. Some enjoy finding physical property at a good price and then renting it to others.
In the end, however, the ease of investing in REITs compared to rental property, along with the limited risks and solid track record of this type of investment, makes this option more attractive to many.
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