Real Estate Investing: Rental Property vs. REIT Investing — Which Is Better?

Do you want to invest in real estate? Passive REIT investing will be less work and requires little money to start.

| More on:
House Key And Keychain On Wooden Table

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

In real estate investing, there’s always a hot debate between rental properties and real estate investment trusts (REITs). Surely, both investments have pros and cons. Here are some key differences between the two.

Investing in a rental property

Most investors of rental properties get a loan in the form of a mortgage, so that they can pay back the amount over time. As long as you’re eligible for a good-sized mortgage, you don’t have to come up with a huge amount of money to invest in a property. This works well if you can secure a stable tenant and get rental income every month without delays. In the long run, you also expect the property value to rise, which works beautifully since you used leverage to buy the property initially.

The location of the property is key. Although it’s ideal to invest in high-population cities like Toronto and Vancouver, these rental property investments are also on the expensive end versus the country’s average. If the rental income isn’t enough to cover the mortgage and other fees (insurance, property tax, and potentially strata/condo fees, etc.), then you’ll need to cover it with your own money each month. The property should also provide convenience — easy access to groceries shopping, restaurants, schools, transportation, etc.

Rental properties also need attention from landlords. Periodically, maintenance is required or tenants need to be replaced. Oh, and if there is a big problem with the property for whatever reason, you’ll likely need to pay out of pocket. Condos have a contingency reserve fund for those uncommon major renovations or repairs. However, if the amount is not enough, landlords will need to pay from their pockets.

Passive REIT investing is another option

If you only care about getting that stable rental income every month, you can invest in REITs that pay out safe cash distributions. To increase your chance of getting price gains, you will need to be choosy about your buy and sell points in quality REITs. Moreover, investments in REITs can be as small as you want such that no leverage is needed.

Professional management teams at REITs take care of acquisitions and dispositions of properties and the work that’s required of landlords (management of mortgages and tenants, insurance payments, etc.)

REITs provide immediate diversification because their portfolio consists of many properties. You can also easily diversify by asset type through investing in different REIT industries. For example, you can build a passive REIT portfolio that consists of residential, industrial, and retail REITs.

CFA Paul Gardner just recommended Nexus Industrial REIT (TSX:NXR.UN) as one of his top stock picks on BNN.

“Nexus is a small cap with a market cap of about $1 billion. However, it has very good assets. And it’s restructured to become a pure-play industrial, which is the sweet spot right now. It trades at about a 10% discount to its net asset value. It got hit because of liquidity issues — not because of fundamentals.”

Paul Gardner, partner and portfolio manager at Avenue Investment Management

The stock popped 4.5% yesterday on the backdrop of this positive recommendation. Nexus now yields about 5.4%.

The fact is, investors don’t have to choose one over the other. Why not invest in rental properties and REITs if your finances allow it? For example, you could have a rental property and then invest in industrial, data centre, and self-storage REITs.

Rising interest rates could cool down the enthusiasm for real estate investing over the next 12-24 months. This gives some time for investors to do their research before deciding what to invest in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Kay Ng has no position in any of the stocks mentioned.

More on Dividend Stocks

Dividend Stocks

2 Undervalued TSX Dividend Stocks to Buy in July

These unloved TSX dividend stocks could deliver attractive returns in the back half of 2022.

Read more »

sad concerned deep in thought
Dividend Stocks

$20 Billion Telco Merger: More Concessions and Conditions Ahead?

The mediation process in the proposed telco merger could lead to more concessions and conditions before the competition watchdog grants…

Read more »

Dividend Stocks

RRSP Investors: 2 Cheap TSX Dividend Stars to Buy for Total Returns

RRSP investors seeking attractive total returns can now buy top TSX dividend stock with high yields at discounted prices.

Read more »

rail train
Dividend Stocks

Canadian Pacific Railway (TSX:CP): A Top Wide-Moat Stock to Buy and Hold Forever

CP Rail keeps the goods moving around the country. Here’s why it’s a great pick for new investors.

Read more »

Businessmen teamwork brainstorming meeting.
Dividend Stocks

The 3 Top Large-Cap Stocks for TSX Investors

Have peace of mind by investing in top large-cap stocks during this market correction. Start researching BAM (TSX:BAM.A)(NYSE:BAM)!

Read more »

Golden crown on a red velvet background
Dividend Stocks

3 Dividend Aristocrat Stocks to Buy and Hold Forever

Three Dividend Aristocrats are excellent holdings for new and old investors with long-term financial goals.

Read more »

Dividend Stocks

Top TSX Stocks: 2 Industry Leaders to Own for 25 Years

These top TSX stocks pay attractive dividends and have made some long-term investors quite wealthy.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

Retirees: 2 Great TSX Dividend Stocks to Buy Now for TFSA Passive Income

These stocks look cheap to buy for a TFSA focused on passive income.

Read more »