Real Estate vs. REITs

It's well known that you can make money from real estate investments and even become wealthy. One focus that many people (including myself) is passive income. Passive income is money you invest that does the work for you and your investment generates a return. This can be in the form of dividends, interest, or rent.

One point of view is that real estate investment in rental properties isn't totally passive. Even if you are hiring a property manager there is still some overhead in terms of managing the finances, communicating with the managers, and deciding what to spend on maintenance, improvements, mortgages, etc. That can be fine if you have the time and interest to put into your real estate portfolio.

Another way to expose yourself to real estate and generate passive income is via Real Estate Investment Trusts (REITs). REITs fit the bill for passive income more closely to true passive income streams. Take a look at some investment examples and see how they might play out.

By the Numbers

Say you've $100,000 to invest. You can buy a rental property or invest in a REIT. Have a look at the numbers for each.

Rental Property

If you find a suitable property, secure a loan, and put down $100k, the rental, costs, and cash flow might look something like this:

Property Cost Mort/Mo Down Payment Rent/mo Management Costs Repair/Maintenance Cash Flow ROI
$350,000.00 $1,349.67 $100,000.00 $2,000.00 $200.00 $400.00 $50.33 3.73%

This is assuming a 10% property management fee, 20% maintenance costs, and a 30 year mortgage at 5% interest.

REIT

Taking the same $100k and investing in a REIT say Realty Income Trust (O) might look like this:

Investment Dividend Yield Dividend Monthly Income ROI
$100,000.00 5% $416.66 $416.66 5%

This is assuming O at a share price of $60 and a dividend of $0.25 per share.

Analysis

Just on a cash flow basis the REIT is generating 728% more income than the rental property. So, from a strictly passive income perspective the REIT is the winner.

There are other considerations like the real estate property is likely to appreciate in value over time and your equity in the property can grow. If you keep the property long enough and get more aggressive on the mortgage you could see a much higher ROI and eventually sell the property for a profit.

On the REIT side you could use DRIP to reinvest the dividends and grow your position over time. The stock price could also appreciate and you could sell the shares for a profit.

With real estate you are also leveraging debt and other peoples money, which comes with its own risks and rewards. Real Estate can require a significant amount of capital to get started, where with a REIT you can start with as little as 1 share.

In reality you can pick multiple dividend stocks and REITs to diversify your passive income portfolio, and indeed you can have a dividend portfolio and invest in real estate. Key to all of it's to do your research, come up with a plan, and stick to it.

Conclusion

For some circumstances REITs and dividend stocks are the way to go for passive income. In large part because day job's can take up your time, but if you have the time or even want to make real estate investing your day job either real estate, REITs, or both could be the way to go.