Owing rental property has always been something that Americans have done. Even my grandfather did back in the day. But the real estate boom of the early 2000’s made owning rental real estate more common. You could even argue that the aftermath of the real estate bust has lead to even more people owning rental property.
For those looking to get into rental real estate, there are many options. Below I present the various options as well as some advantages and disadvantages to each.
Owning Rental Property Options
Physically Owned Rental Real Estate
This is the most common type of rental real estate. You buy a house or apartment building and rent it out. But, it rarely is as easy as this. You have to get it ready for rent, find prospective renters, and then collect the monthly rent and respond to any needs that the renter has with the rental itself. Of course, you could hire a property management firm to handle it for you, but they will take a cut of your profit.
The advantages of getting into rental real estate this way are big. You can earn a monthly income check when you deduct the monthly mortgage and bills from the rent check you receive. Over time, you also get to take part in the appreciation of the house itself.
Of course, with great reward comes great risk. Owning rental property can be a nightmare. When I was renting out my house, my attorney told me to be prepared for the worst and be happy if it doesn’t happen. So far, I have been lucky. I have a great renter that doesn’t cause me any headaches. But this is not always the case.
Next, getting into rental real estate can be tough for some. Many lenders require you to come up with 20-25% down payment. This is a large sum of money that many cannot afford.
You also have to keep detailed tax records for the rental as well. In all, it can be a lot of work and a major hassle that isn’t right for everyone.
Investing In REITs
REITs are real estate investment trusts. You can invest in these either through stock, mutual funds or exchange traded funds (ETFs). While the benefits of owning rental real estate in this manner include lower barrier for entry (meaning you don’t need a lot of money to buy a few shares, there are still disadvantages.
But before I get to the disadvantage, understand that not only will you benefit in share appreciation of the stock/mutual fund/ETF itself, you will also earn quarterly dividends. So, for no work you get to take part in earning an income from this method.
Now the disadvantages. First, the money you earn from dividends and/or share appreciation will rarely, if ever, reach the levels of actually owning the property itself. Furthermore, with REITs, you aren’t investing in homes and apartment buildings for residential use. You are investing in retail complexes. Think strip malls, malls and office spaces.
This is a totally different beast than residential real estate. You really have to understand commercial real estate to make smart decisions with these investments. Additionally, you need to know where these building are that the investment owns. If it is not in your geographical location, how do you know how well the market is? As the old saying goes, when it comes to real estate, it’s all about location, location, location.
With the recent bust of housing prices, there are companies out there that are buying up single family homes and apartment buildings and allowing you as an investor to get an ownership stake. As of this writing there are two ways of doing this.