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I Wouldn’t Dare Invest in Rental Property; I’d Do This Instead

Investing in a rental property is not something I am interested in. My husband and I considered buying a vacation rental in the past. But visiting the homes and talking with property managers convinced me I don’t want to be a landlord in any capacity — whether that’s renting out a vacation home, purchasing multifamily properties and looking for tenants, or buying commercial space to lease. 

The good news is, I can still gain exposure to real estate, including rental properties, without having to deal with the hassle of owning them directly. I’ve found that a different approach to making real estate investments would be a much better option for me. 

Image source: Getty Images.

REITs are a far better approach for me — and many others

Rather than buying a rental property that would require hands-on effort, I prefer a simpler approach: investing in real estate investment trusts, or REITs. 

REITs are companies that own, operate, or finance real estate investments. They generally pool investor funds to buy properties or to finance the purchase of them. Investors benefit from this indirect ownership without having to take on the personal responsibility of having properties of their own.

You can buy REITs that make many different types of real estate investments, including trusts focused on acquiring multifamily rentals, nursing homes, or commercial properties. And you don’t have to do the legwork of finding an apartment or duplex to purchase, marketing it to tenants, collecting rent, and responding to complaints. You don’t even have to hire a property manager.

You can just research different REITs and find one with a solid track record that is invested in the type of real estate you’re interested in. You can buy and sell REITs easily with limited cash, and your time spent investing is minimal. Perhaps best of all, you reduce your risk since each REIT typically owns many different properties.

These benefits of REITs give them a clear advantage

As mentioned above, REITs are simple and easy to buy. But they also offer other benefits that make them an ideal real estate investment — and most likely a better one for many people than a rental property.  

One of the biggest advantages is that REITs tend to regularly pay out high dividends. The law actually requires REITs to pay out at least 90% of annual taxable income to shareholders. This ensures a steady flow of cash to investors. And it’s a lot easier to just sit back and collect these dividends than to try to collect rent from tenants in a property you own. 

REITs also tend to have low volatility and they have a consistent record of providing generous returns. If you look at the performance of equity REITs from 1972 to 2021, this sector provided average annual returns of 13.5% compared with the S&P 500, which returned 13.1% over the same period. This means REITs that owned or managed income-producing properties actually outperformed for investors compared with a financial index tracking around 500 of the largest U.S. businesses. While it’s possible that a rental property would also provide similar returns, there’s a lot more variables that affect whether a specific building you buy will go up in value this much over time. 

I feel much more confident that I’ll get the benefit of steady income and generous returns from a REIT rather than an individual rental property due to the long track record of steady performance within this sector. 

Is owning a REIT right for you?

While I personally prefer a REIT rather than buying rental property, that’s not the best choice for everyone. Some would prefer consistent rental income from a tenant rather than earning regular dividends from a REIT. And some people enjoy finding a physical property at a good price and then renting it out to others.

Ultimately, though, the ease of investing in REITs compared to a rental property, combined with the limited risk and solid performance record of this type of investment, make this choice much more attractive for many.

 

The Motley Fool has a disclosure policy.

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