There was a point in my life when I didn't really know much about real estate investing. But a few years ago, I started writing about it and realized how lucrative real estate can be. And so I decided to expand my investing horizons into real estate rather than stick to my previous plan that largely centered on buying traditional stocks.
But one thing I've yet to do is add income properties to my investment portfolio. Instead, I've opted to stick with REITs, or real estate investment trusts. Here are three reasons why I have a strong preference for REITs over physical properties.
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1. I don't have the time to be a hands-on landlord
Being a landlord requires commitment. You need to be available to tenants and address issues as they arise. Sometimes, that means actually dropping what you're doing and driving over to a rental to fix a problem when an emergency strikes.
As a full-time working parent of young kids, I just can't commit to that. And while I know that I could outsource most or all of those landlord duties to a property manager, that would, no doubt, heavily eat into my profits.
REITs are a much less time-consuming investment. In fact, once you buy REITs, you really don't have to do anything at all other than track their performance to make sure it's up to par.
REITs also tend to pay higher dividends than your typical stock. And again, that's money I don't have to do anything to collect.
2. I don't have a big appetite for risk
When you own physical properties, many things could go wrong. You could have a tenant who trashes the place or doesn't pay rent, or you could have a long stretch of time when you're unable to get a tenant in the first place.
REITs aren't a risk-free investment. In time, your REIT shares could lose value the same way regular stocks can. But to me, it's a lower level of risk. And if you research REITs carefully before adding them to your portfolio, that may be less likely to happen.
3. I'm nervous to tie up money in an illiquid asset
The REITs I own right now are investments I have no plans to cash out for many years. But you never know when circumstances might change. And if a scenario arises where I do have to tap my investment portfolio for cash, I can sell my REIT shares when I want to.
Owning income properties is different. When you own a home, you can't just sell it on the spot if you're renting it to someone who's signed a lease. And even if your home happens to be lease free at the time you want to sell it, there's no guarantee that you'll find a buyer.
Plus, even if you do find a buyer quickly, real estate transactions like home purchases can take many weeks to close on -- especially if your buyer needs financing. And so to me, REITs are a safer bet because they're far more liquid.
What's the right call for you?
Many real estate investors do very well owning and managing income properties, or owning those properties and outsourcing their maintenance and management. I may decide to purchase an income property one day, but for now, I'm sticking with REITs -- especially since they align with both my comfort zone and investing strategy.
