Buying REITs or Rental Properties? What is best for you?

Getting into real estate in any shape or form is a great way to build up solid passive income. Two great ways to get exposure into this sector are rental properties and REITs. For definitions of many terms I use in this article please check out https://beginnerstockinvesting.com/2020/03/19/the-basic-definitions-of-stock-investing/.

A REIT (Real Estate Investment Trust) is a company that finances, owns, or operates income producing properties and is publicly traded in the stock market. These companies can operate in any real estate sector including hotels, single residences, apartment buildings, theme parks, commercial, federal, retail centers, warehouses, data centers, cell towers, medical facilities you name it. The cool thing about REITs is they’re required by law to pay 90% of their profits back to the shareholders in the form of dividends. If you’re familiar with dividends these REITs tend to pay a higher yield than most publicly traded companies creating a more equal system in which you would receive profits rather than physical rental income. You can trade through an LLC just like a rental property if you choose, but there are far less tax right offs than owning the physical asset. Most lenders require you to put 20% down with a conventional loan, but with REITs you can get started share by share. With free trading it’s now easier than ever to get started. A couple benefits of buying REITs over physical rentals is it’s liquid, no maintenance costs, property management, or the chance of renters destroying your house. It’s truly as passive as it gets, but unfortunately isn’t a dream come true. You’re reliant on these companies to manage themselves to increase growth/revenue. Since we’re focused on the dividends the share price fluctuation really makes little to no difference on capital, but if you dollar cost average this will compound and create mass amounts of wealth. If you pair the dividends with DRIP (Dividend Reinvestment Plan) those shares with increase and compound exponentially. Over time these reinvested dividends and increased share price will significantly grow your overall portfolio. The stock market overall averages a 10% increase each year with and without the volatility that can come from any bull/bear market. If you would like more specifics on how the stock market operates and the best ways to invest visit https://beginnerstockinvesting.com/.

Let’s do some math shall we? We’ll say the average rental property with a full mortgage can yield $200 per month of profit minus any unforeseen maintenance costs. For the REIT we’ll pick ticker SPG (Simon Properties Group) which is a stock I recently picked up. Both avenues are subject to market fluctuations and generally follow each other since they are both rental incomes. Keep in mind market crashes are the best time to invest due to low costs. We’ll roughly estimate we have $30,000 to play with for a down payment or stock investment.

Rental Property $200 x 12 months will yield $2,400 per year, but not only are you getting that income you are also building some serious equity in the home for a renter paying down your mortgage. Now I can’t go into too much equity profit due to every mortgage is significantly different.

REIT Generally SPG is anywhere from $160-$210 per share, but due to the most recent market crash this fantastic stock is only priced at $54. If you were to spend that $30,000 into SPG it would buy you ($30,000/54) 555 shares. Based on the most recent dividend the expected annual yield is $8.40 per share which would equal $4,662 annually. If you were to DRIP these shares it would buy you an additional 84 shares the following year. These 84 additional shares would bring our total up to (555+84)641. Next year we would have a dividend of $5,384.40. As you can see the growth rate of reinvested dividends significantly increases your yield. Let us say the share price returns back to its average of $185 which is very possible based on research. Our total capital on those 555 shares would in turn equal (555×185) $102,675.

After looking at the numbers I’d say it’s fair that the share price increase follows market fluctuations well just like physical rental property equity. Some pros for physical properties I see can see are people will always need a place to sleep, your property can significantly increase in value (based on renovations/market fluctuation), many tax right offs, and there is only so much land available which makes it a moderately safe investment. A few cons might be maintenance costs, bad renters, not being a liquid asset, and property management fees. REITs are extremely passive and require little to no work (minus your company research), zero outside costs, and 100% liquid (you can pull out cash whenever you choose). Cons would be market fluctuations in share price, shareholder returns could vary per year, tax right offs are minimal, and not building equity on a physical property.

This article was for educational purposes only. Please do not buy a stock anyone recommends without doing the proper research for yourself. Invest with a margin of safety and remember only you are responsible for your financial well-being.

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