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How to Decide Whether to Invest in Rentals or REITs


Two established ways to invest in real estate are REITs for passive investors and rental properties for active investors. While purchasing a REIT is as easy as trading stock, managing a rental property takes knowledge, training, and skill. Landlords must also be aware of legal responsibilities involving tenants. Here’s a look at what rentals and REITs mean to real estate investors.

Reasons to Invest in Rental Properties

One of the top reasons to invest in a rental property is to generate monthly income, which can be used to pay off the property’s mortgage. That’s an example of how a real estate investment can pay for itself. Landlords can develop long-term leasing agreements that provide consistent, reliable monthly revenue. Income depends on the number of rented units, which can be lucrative when all units are locked in long-term leasing agreements.

Asset appreciation is another key reason to invest in rentals. As long as you maintain the property in good shape, you can realize value growth in a short time. The combination of asset appreciation and monthly rental revenue can be the catalyst that leads to long-term financial growth.

Tax deductions related to expenses are available for property management companies. Property improvements allow you to report cost depreciation over several years. When you sell a rental property and buy another under a 1031 Exchange, you can deter capital gains taxes until a later year. Overall, investing in rental properties gives an owner freedom and flexibility in controlling how their investment develops.

Property Investing Risks

Every investment has risks, including investing in real estate property. You never know when a market downturn might hit and send property values plunging. If the property is not managed appropriately, the consequences can involve short-term losses, complaints, lawsuits, and fines. So you need to be on top of legal, financial, and social concerns at all times.

Why REITs Are Popular

A REIT is a real estate investment trust, which is a company that invests in either real estate debt or equity. This unique investment has been around since 1960 to provide the investment community an option to invest in real estate without worrying about traditional property management responsibilities. REITs do not require investors to be involved with the property other than to buy and sell at any time, as they provide instant liquidity.

The three different categories of REITs are private, publicly traded, and public non-traded REITs. Private REITs usually appeal to investors who already have considerable capital, as it requires high investment minimums and accreditation.  However, since most investors don’t meet these requirements, both publicly traded and public non-traded REITs are more popular among investors.

Perhaps the greatest benefit to REITs is that they are passive investments that don’t require credentials and hands-on experience.  If you’re looking to buy or sell a home anywhere in South Bay or in the Hermosa Beach area, contact the experts at Brighton Escrow today. We are happy to offer you a top-tier escrow service.