15 Reasons to Choose REITs Over Income Properties for Your Portfolio

If you're interested in becoming a real estate investor, you have choices. You could become a landlord by purchasing one or more income properties or by loading your portfolio with REITs, or real estate investment trusts, instead. Here's why you may want to favor REITs.

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Buying an income property often means forking over a large sum of cash up front. If that's financially out of reach, REITs may be a better bet since they come with a much lower buy-in. In fact, these days, many brokerages allow you to buy shares of publicly traded companies on a fractional basis, so you can actually invest in REITs with very little money.

ALSO READ: Fractional Shares: What Are They & How Do They Work?

Many people who buy income properties wind up needing to finance them with a mortgage. But if you don't like the idea of adding to your personal debt load, you may want to stick with REITs.

When you buy a home, you run the risk that its property tax bill will increase over time. On the other hand, when you buy REITs, you pay whatever they're trading for right then. You don't have to worry about extra costs.

ALSO READ: How to Calculate Property Taxes

Maintaining an income property takes time -- and you may not have a lot of it. When you buy REITs, it's a good idea to check up on their performance from time to time, but it's not nearly the same amount of work as maintaining a home.

Home repairs can pop up out of nowhere, and it can be difficult to budget for them. If that's a cost you're nervous about, then REITs may be a safer bet.

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Even if you price your rental just right, there's always the risk that you won't be able to find a tenant. And if your income property sits vacant, you'll lose out on rental income. You can avoid that concern entirely by buying REITs.

ALSO READ: Managing a Rental? 6 Reasons a Property Management Company Is the Way to Go

Managing tenants can take work. You need to track payments, keep tabs on lease renewals, and deal with problems as they arise. If that sounds like too much of a chore, then REITs are probably the way to go.

Home prices are soaring these days, to the point where many experts are convinced they're unsustainable. If you don't think buying a home today is a good investment but are eager to put your money to work, it pays to look at REITs instead.

ALSO READ: This Was the Median Home Price in May. Would It Bust Your Budget?

It's important to choose the right rental market when buying an income property. If you're worried about getting that decision wrong, you may want to stick with REITs.

REITs do require some research up front. But once you land on the right ones, there's really very little to do. If you're more of a hands-off investor, REITs are probably a better choice than an income property, which could require constant work.

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Even if you manage to find steady tenants for your income property and avoid vacancies, there's always the risk that a tenant won't be able to pay at some point in time. On the other hand, REITs give you access to steady dividend payments you can rely on.

ALSO READ: Buying REITs? Why You Shouldn't Look at Dividends Alone

Some people are nervous about analyzing companies and choosing the right ones. But if you've been buying stocks for years and know what metrics to look at, then you should be in a great position to do the same with REITs.

When you buy an income property, you tie up a lot of money in a fairly illiquid asset. REITs, on the other hand, are very easy to convert to cash. If you want more liquidity, REITs are the better solution.

ALSO READ: What Is Liquidity?

Both homes and REITs tend to gain value over time. But if you have a shorter investing time frame, you may want to stick with REITs. If you finance an income property, it could take several years to recoup your closing costs alone. You may have better luck making a shorter-term profit with REITs (though, to be clear, it's always a good idea to hold investments for a longer period of time).

You may only have the finances to swing a single income property. But for the money you might put toward a physical home, you could instead invest in dozens of REITs across a range of market sectors. And that could lend to more diversity in your portfolio.

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Many people who break into real estate investing do very well owning income properties. But it pays to consider the benefits of investing in REITs instead. Granted, you don't have to choose one over the other. But REITs are, hands down, the easier investment to manage of the two, so that alone may dictate your decision.

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