REITs vs Rental Properties for Retirement Income: Which is the Better Choice?

So, you’re wondering which is a better option – REITs vs rental properties for retirement income?

Well, if you’re looking for a way to supplement your retirement income, investing in rental properties may seem like a tempting option.

After all, owning rental property can provide you with a steady stream of passive income for years to come.

However, before you jump into the world of real estate investing, it’s important to weigh the pros and cons of this strategy.

While rental properties can be a great source of income, they also require a significant amount of work and effort.

From finding and screening tenants to handling repairs and maintenance, being a landlord can be a full-time job.

Additionally, rental properties can be risky investments, as they are subject to market fluctuations and unexpected expenses.

For these reasons, some investors may find that investing in real estate investment trusts (REITs) is a better option for retirement income.

REITs are companies that own and manage income-generating real estate properties, such as apartment buildings, shopping centers, and office buildings.

By investing in REITs, you can gain exposure to the real estate market without the hassle of managing properties yourself.

Additionally, REITs offer potential tax benefits and can provide a reliable source of passive income.

While they may not offer the same potential for high returns as rental properties, they are generally considered to be a safer and more convenient investment option for retirees.

And I should know.

I was an active real estate investor for decades until I finally sold them all and reinvested that money into REITs.

I’ve never looked back because at the end of the day I value peace and truly passive income over dealing with the dreaded three T’s – toilets, trash, and tenants.

So, let’s do a deep dive and settle the REITs vs rental properties for retirement income debate once and for all.

Pros and Cons of Investing in Rental Properties

Pros of Investing in Rental Properties

Investing in rental properties can be a great way to generate retirement income.

Here are some of the benefits of investing in rental properties:

  • Rental income: One of the biggest advantages of investing in rental properties is the rental income you will receive each month. This income can provide a steady stream of cash flow to supplement your retirement income.
  • Tax benefits: Rental properties offer several tax benefits, including deductions for mortgage interest, property taxes, and repairs.
  • Appreciation: Over time, rental properties can appreciate in value, which can provide a significant return on investment if you decide to sell the property.
  • Control: When you invest in rental properties, you have control over the property and can make decisions about how to manage it and improve its value.

Cons of Investing in Rental Properties

While there are many benefits to investing in rental properties, there are also some drawbacks to consider:

  • Time and effort: Managing a rental property can be time-consuming and require a lot of effort. You will need to find tenants, handle repairs and maintenance, and deal with any issues that arise.
  • Upfront costs: Investing in rental properties requires a significant upfront investment, including a down payment, closing costs, and any repairs or renovations needed to get the property ready to rent.
  • Risk: Investing in rental properties comes with some risk, including the possibility of vacancies, damage to the property, or tenants who don’t pay rent on time.
  • Lack of diversification: Investing in rental properties can be risky because it involves putting a large amount of money into a single asset. This lack of diversification can be a problem if the property does not perform as expected.

Overall, investing in rental properties can be a great way to generate retirement income, but it’s important to weigh the pros and cons before making a decision.

Consider your financial goals, risk tolerance, and the amount of time and effort you are willing to put into managing a rental property before making a decision.

Factors to Consider before Investing in Rental Properties

Investing in rental properties can be a great way to generate retirement income, but it’s important to carefully consider all the factors involved before making a decision.

Here are several key factors you should keep in mind:

Location

One of the most important factors to consider when investing in rental properties is location.

You want to choose a property that is in a desirable area, ideally with good schools, low crime rates, and access to public transportation, shopping, and other amenities.

Properties in high-demand areas will generally command higher rental rates, which can help increase your cash flow and overall return on investment.

Price and Financing

Another important factor to consider is the price of the property and how you plan to finance it.

You’ll want to ensure that the purchase price is reasonable and that you can afford to make a down payment and cover ongoing expenses like mortgage payments, property taxes, insurance, and maintenance costs.

You may also want to consider working with a lender or financial advisor to explore your financing options and ensure that you’re getting the best possible terms and interest rates.

Maintenance and Repairs

Maintenance and repairs are an inevitable part of owning rental properties, and it’s important to factor these costs into your overall investment strategy.

You’ll need to budget for routine maintenance like lawn care, cleaning, and painting, as well as unexpected repairs like plumbing or electrical issues.

unplanned rental expenses

This was the deal killer for me.

One unexpected repair can (and did) wipe out the entire annual profit of a property.

You may also want to consider hiring a property manager or maintenance team to help oversee these tasks and ensure that your property is well-maintained and in good condition.

Property Management

Finally, it’s important to consider how you plan to manage your rental property once you’ve purchased it.

Will you manage it yourself, or hire a property management company to handle the day-to-day tasks?

If you choose to manage it yourself, you’ll need to be prepared to handle tenant screening, rent collection, maintenance and repairs, and other tasks. (Sounds like a job to me.)

If you hire a property manager, you’ll need to factor their fees – about 10% plus commissions – into your overall expenses and ensure that they are providing quality service and support.

All in all, rental property expenses average 35% – 45% of your gross income annually.

Why REITs are a Better Investment Option

What are REITs?

Real Estate Investment Trusts (REITs) are companies that own and operate income-generating real estate assets such as apartments, office buildings, hotels, and shopping centers.

By investing in REITs, you can own a share of these properties without having to purchase them outright.

REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which makes them an attractive investment option for those seeking regular income.

One of my favorite REITs, Arbor Realty Trust (ABR) currently yields 14.5% which means that on a $100,000 investment, I get $14,500 in dividend income every year.

TAX-FREE if I hold the shares in my Roth IRA. Oh, and ABR increases the dividend about 10% every year.

Advantages of Investing in REITs

One of the main advantages of investing in REITs is that they offer diversification.

By investing in a REIT, you can own shares in multiple properties and locations, which spreads out your risk.

Additionally, REITs are professionally managed, which means you don’t have to worry about the day-to-day operations of the properties. No tenant will ever call you!

This makes them a TRULY passive investment option compared to owning rental properties.

Another advantage of investing in REITs is that they offer liquidity.

Unlike owning rental properties, which can take time to sell, you can easily buy and sell REITs on the stock market in seconds with zero fees and commissions.

This makes them a more flexible investment option.

Disadvantages of Investing in REITs

One disadvantage of investing in REITs is that they are subject to market volatility.

Just like any other stock, the value of REITs can fluctuate based on market conditions.

Another disadvantage of investing in REITs is that you have less control over the properties.

As a shareholder, you do not have a say in the day-to-day operations of the properties. This means that you have to trust the management team to make the right decisions on your behalf.

Overall, investing in REITs can be a great option for those looking for regular income and diversification because they are a more passive and flexible investment option.

REITs vs Rental Properties for Retirement Income Comparison

Ok, let’s see how these two options stack up side-by-side.

I ran a comparison (thanks, ChatGPT!) to calculate ow much actual pre-tax income each of these investments would produce over the course of 10 years.

Rental Assumptions:

  • One rental for $100,000
  • Produces $12,000 rent annually (12% yield)
  • Rent increases 5% a year
  • Expenses are 45% of gross rent

REIT Assumptions:

  • Invest $100,000 into one REIT
  • Produces $10,000 dividend income annually (10% yield)
  • Dividend increases 5% a year
  • No expenses or fees

Here’s what happens:

Annual Distributable Income Comparison (Years 1-10)

YearREIT IncomeRental Property Income
1$10,000.00$6,600.00
2$10,500.00$6,930.00
3$11,025.00$7,276.50
4$11,576.25$7,640.33
5$12,155.06$8,022.34
6$12,762.82$8,423.46
7$13,400.96$8,844.63
8$14,071.00$9,286.87
9$14,774.55$9,751.21
10$15,513.28$10,238.77

If I bought when I retired at 65, I guarantee you I’m much happier collecting $15,513.28 a year when I’m 75 with no property or tenant hassles.

The Final Takeaway

When it comes to investing in rental properties for retirement income, it’s important to consider the amount of work and potential profitability.

While owning rental properties can be a lucrative investment, it requires a significant amount of time, effort, and money to manage and maintain the properties.

On the other hand, investing in REITs allows you to collect truly passive income from real estate investments without the same level of commitment.

REITs offer a diversified portfolio of properties and professional management, which can lead to higher returns and lower risk.

Based on the research and analysis, it’s clear that investing in REITs is a better option for most people looking to invest in real estate for retirement income.

While rental properties *could* offer higher potential returns, the amount of work and investment required may not be worth it in the long run.

Ultimately, the decision to invest in rental properties or REITs depends on your personal goals, financial situation, and risk tolerance.

It’s important to weigh the pros and cons of each option and make an informed decision that aligns with your overall investment strategy.

For me, the choice was clear.

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