by John S. on February 15, 2012

I have been giving a lot of thought about investing some of my familys money in the real estate market. As I continue my search for entering new passive income streams. owning a rental property keeps coming up. The thought of building up a portfolio of rental units that bring in monthly income always strikes my interest in real estate.

Unfortunately, there are plenty of disadvantages that go with owning rental units. First, I have no idea what it takes to be a landlord. Even though my wife and I are homeowners, I dont have a clue what to expect as a landlord.

There are plenty of other reasons against buying a property and renting it out. We dont have a lot of extra money sitting around to invest in a decent rental unit. Owning and managing a rental unit can take a lot of time and effort, especially if you get questionable tenants. The list can go on and on.

The more I look into buying a house to rent out, the more I dislike the idea. It doesnt really seem to be a passive way to generate income which is why I have decided to invest in real estate investment trusts (REITs) instead. Listed below are 5 advantages to why investing in a REIT is a better option than buying a property on our own.

5 Advantages of Investing in REITs

1. Diversification Similar to a mutual fund, a REIT offers investors a way to diversify in a particular industry or market. In this case, the market is real estate in which the trust company is able to buy many properties instead of just a few. As a small investor, I would only be able to buy a single house on my own based on my current income level. By investing in a REIT, I will become a partial owner in multiple properties which allows me to diversify in the real estate market.
2. Low Barriers to Entry Real estate investment trusts are a low cost alternative to buying a rental property on your own. For example, if I were to purchase a rental property today, I would need a down payment of 10% 20%. Even if I decided to purchase a rental unit for $75,000, I would need to come up with $7,500 to $15,000. I just dont have that kind of money sitting around, which will make it harder for me to enter the real estate market. A REIT on the other hand does not require this large sum of money to enter the market.
3. Positive Cash Flow Investing in REITs generally provides positive cash flow within the first 3 months (depending on when you buy). This income is generated from a quarterly (or monthly) dividend that is paid out by the company. Since these trusts are required to pay at least 90% of their earnings out in dividends, there is a very good chance a shareholder will start earning income very quickly. Buying your own rental property, on the other hand, may actually result in a negative cash flow at the beginning. Chances are there will need to be repairs made to your property or other related expenses for buying a property.
4. Liquid Investments Unlike owning a property, shares of a real estate investment trust are liquid assets. Since they trade like a stock, investors can buy and sell them in a short period of time. Buying a property on your own, however, is not liquid and could take months or even years to sell. If you need access to your investment, then a REIT may be the way to go.
5. Time Savings The nice thing about buying shares of a real estate investment trust is that you dont have to spend a lot of time managing them. While it is important to keep track of your investments, owning shares in a REIT is much less time consuming than being your own landlord. Of course, you could hire out a management company to run your property, but that costs money and takes away from your monthly cash flow.

Investing in a REIT has plenty of advantages compared to buying your own property when it comes to the real estate market. They offer built in diversification based on the number of properties the company manages. REITs also offer a low barrier to entry as an investor can start buying shares immediately through a stock broker. Buying a rental unit on the other hand takes time and money to get started.

A real estate investment trust offers almost immediate cash flow and is a liquid investment, which isnt the case with owning a property. Buying and renting a property doesnt always translate into immediate cash flow and is certainly not a liquid investment. Managing a property also takes up a lot of the owner’s time, unlike becoming a shareholder in a REIT.

While a real estate investment trust is not a guaranteed investment, there are plenty of advantages to owning them. If you are like me and want to enter the real estate market. then a REIT may be the way to go.

Do you invest money in REITs or do you prefer to own real estate properties?