The difference between REITs and mutual funds Renting Properties: Pros and Cons for Investors

If you want to invest in property for the long-term, investing in rental properties or real estate investment trusts can help build wealth. You’ll have to choose which option is right for you. Both options come with their own set of pros and cons. Compare the pros and con of each investment strategy when comparing rental property vs REITs.

Renting out your property: A proactive approach

A single-family home or multiunit building which can be used to generate passive income can be very profitable, especially if the property is in a highly sought after area and at an affordable price. As with any investment in real estate, you need to be aware of the risks and benefits before making a decision.

Renting a property has many benefits

• You can take full control of your investment in real estate.
• It can be easy to manage your property if you are lucky enough to have good tenants.
• Multi-unit housing can increase your cash flow.
• You can either invest in residential properties or commercial property.
• Decide on the price of the property, the amount of rent to be charged and the number of tenants.
• Upgrades to the property can be made at any time, and you can increase rent.
• You can build equity while generating positive cash flow.

Cons of Renting Property

• Unexpected maintenance issues can occur.
• You can have vacancies in your office for several months if demand is low.
• You may need to evict an unruly tenant or fix damage caused by them.
• It is time consuming to do everything on your own.
• If you have urgent requests for tenants, then you need to be available (or hire someone to be available).
• Property management companies usually take 10% of the rent.

REITs: A passive Approach

REITs are a way to profit from a real estate investment without the responsibility of owning it. Three major types of REITs exist – equity, hybrid and mortgage. What’s the difference between them?

Mortgage REITs

Mortgage REITs invest in mortgages, and make money by charging interest to borrowers who borrow cash to finance the purchase of a home. They make up less that 10% of all REITs.

Hybrid REITs

REITs are REITs that combine equity assets with mortgage assets. Very few companies do both.

Take a look at both the risks and benefits of investing in REITs.

The Pros of REITs

• A property management company can provide a more predictable maintenance schedule.
• The property management company is usually responsible for filling vacant space.
• Investors share losses, so you don’t feel it as much.
• Direct tenant management is not required.
• There are no major commitments other than the occasional investor meeting.
• You may be able re-use a property if demand falls off (ex. retail).
• If you are investing in mortgage REITs and interest rates rise, your money can grow.

The Cons of REITs

• You’re investing in real-estate stock, and you know that the economics of an industry can change on a dime.
• All investors will be affected by bankruptcy.
• Rents and profits will decrease if property values decline and you have invested in equity REITs.
• Rising interest rates may result in a reduction of your dividends if you own equity REITs.

The decision to invest in rental properties or REITs comes down to the amount of risk you are willing to accept and your level of involvement.

You can think of it as deciding the aggressiveness you want to have in your portfolio. REITs are a good option for those who do not want to deal with tenants or maintenance. Rental properties are a good option for those who prefer to have more control over their returns.