Investing in REIT Stocks vs. Individual Rental Properties

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If you’re interested in investing money in real estate (and given the great market, you should be!) then you may wonder which route is the best. Should you invest in Real Estate Investment Trusts (REITs) or buy your own properties and become a full time landlord? There are pros and cons to both.

Currently, the real estate market is hot. This makes REITs and housing stocks valuable additions to your portfolio and 401k plans. Investing in REIT stocks can allow you the opportunity to put some money in the housing market, and still keep a balanced portfolio with investments in other stocks and bonds. The dividends on REIT stocks are secured by stable rents from long-term leases. For many investors, REITs have been attractive due to their high yields. You should first research the fund and also the reputation of the account manager, then choose to invest these pre-tax dollars in real estate as a part of a diversified portfolio. Someone who is less savvy in real estate, or an individual who wants a hands-off approach can find a lot of security in REIT stocks.

So what’s the downside? The challenge with REIT stocks often comes with the fund managers. These large funds go out to hot real estate markets like the one in Houston, TX and will buy up property from foreclosure auctions and distressed sellers. This can be problematic because the funds’ representatives may not know the market they are buying in and could end up paying more than they should for the investment properties. Also in strong real estate markets, the REIT representative has to compete with local investors who know the market better and may beat those investors to properties at auction simply because they are willing to pay more. When the market is good, this may not be a big issue. But if the real estate market slows down, you should consider selling off the REIT stocks in your portfolio.

Buying individual property for your own investment portfolio has pros and cons as well. Investing in rental property may require more maintenance and more contact with tenants, but it also gives you more control over your investment. You decide where to buy, what you will buy, how much you can pay, how much you will charge for rent. While you can decide how much you invest in particular stocks or trusts, you have little control over what happens. If you are a landlord and the market is poor, you can decide the best way to act in the situation.

As mentioned earlier, there are also several tax deductions associated with becoming a landlord. Forbes.com lists some of the possible deductions in an article called “Ten Reasons Landlords Pay Too Much Tax”. They list examples such as interest, depreciation, repairs, local travel, long distance travel, employees and contractors, theft losses, insurance and legal and professional services. All of the above have deductions associated with the costs. Before becoming a landlord, it is worthwhile to become familiar with what deductions might be available to you.

The landlord’s property is also a tangible asset, another major benefit to becoming a landlord. It can be used for personal use later, used for collateral for a loan, and can even be used to sell later if you need the cash.

There are also challenges or risks associated with becoming a landlord. Asbankrate.com states, becoming a landlord may have hidden costs. Rental homes may be more expensive to insure. There may also be costs associated with creating contracts and obtaining legal advice and administrative fees. Owning a property also comes with long-term maintenance. Landlords must consider the area in which they are buying, the price for which the property can be rented and the times during the year that the property might be unoccupied. While there are tax breaks associated with being a landlord, in certain states there may also be increased taxes associated with rental properties.

For more information on real estate investment strategies, contact an agent at Big State Home Buyers. We have years of experience guiding investors with varying levels of experience through real estate transactions. We also offer investment properties for sale at prices below any offering on the open market. Call us at (713) 263-7466 for more information or visit us on the web at www.BigStateHouseDeals.com. For information on selling your house fast, check out www.BigStateHomeBuyers.com. Together, we can find a solution to any of your real estate needs.