Which Is the Better Investment: ETF/REITs or Rental Properties?
Andrew J. Matella
Everyone is a snowflake. That means everyone is unique in their preference and approach to investing, and what works for me or what I consider “better” may or may not be the same for you.
That said, I’ll outline the differences between the two styles, so that you may make an informed decision. Historically, both ETFs and real estate yield long-term year over year gains in the macro long run. I own and operate several rental properties in different kinds of areas (ranging from upper middle-income neighborhoods to warzones) and they’ve been an awesome investment for me.
I personally enjoy the process of fixing up a property to later rent it, but others may not get the same enjoyment from it as I do. Some may prefer to invest in stocks/REITs.
The main difference between the two investment styles is the level of control you have over each asset. What do I mean by control? Control is measured by how much your decisions contribute to the successful outcome of your investment. This is the principal advantage I attribute to owning a rental property. There are so many avenues you can take to improve its value and risk ride out economic downturns
1. Control Over Investment: Rental Property Wins
Owning A Rental Property Is A Tangible Asset.
This means you choose:
(1) Where to invest
(2) What improvements to (not) make
(3) Who to rent to
(4) How long to hold and when to sell, among many other things.
I take a lot of comfort in the fact that if I see an area going downhill, I can pull out, sell and reallocate my portfolio elsewhere. I also take comfort knowing that if I make improvements like changing a roof or painting the exterior, I can increase the house’s value by X amount. I also enjoy the fact that I can see my investment in front of me. It's not just some number on a screen.
You do not have nearly as much control over the price of stock you invest in an ETF or REIT. While ETFs and index funds are well diversified, it is still a hands-off investment. There’s not much- if anything - you can do to improve the asset’s value. That may keep some people up at night.
2. Amount of Work Involved: ETF Wins
Less work is required with investing in long-term stocks/ETFs once you’ve made your initial investment. You just sit and wait. On the flip side, your active involvement is required in profitably operating a rental property. You have to work for it to work. That means you have to undergo excruciating effort in screening tenants, staying on top of your tenants to ensure they’re abiding by the lease and paying rent, handling all maintenance calls, and monitoring/maintaining the condition of your property. In sum, it is a very hands-on investment and if you aren’t planning on being hands-on then your investment can quickly go sour. Mounting maintenance fees, opportunistic tenants sensing your weakness, lower rents during economic downturns, and not doing your due-diligence with which properties you invest in all add up over time and can be bad news for an investor.
3. Returns: Rental Properties Win
There’s a lot of heat and debate that arises over this topic. And I’m sure I’ll have no exception from being thrown under the fire, but for returns real estate is the way to go.
(1) Appreciation: while some may argue that home values only increase 3% year-by-year (which doesn’t cover inflation), I have seen much higher appreciation in most rental properties I’ve invested in. Some have appreciated over 250% in a 3 year time frame. I can’t say the same for any stock I’ve invested in.
(2) Tax Benefits: (e.g. depreciation, interest, property taxes, other expense write-offs.)
(3) Building Equity: Over the long-term someone else is paying for you to have an asset. I think that is pretty cool and an important point most investors miss out on.
(4) Easier to Finance: You can get most of your cash out once you’ve rented the property and made improvements by refinancing and use those funds to continue buying more properties.
While investing in both real estate and the stock markets can yield great returns in the long-run, each strategy has its advantages and disadvantages. Knowing which of these three points is more important to you will help you determine which is a better investment for your circumstance. I don’t mind doing the work involved in owning and operating a rental property and the returns are awesome so that’s the investment I choose. Your preferences and situation may be totally different, and that is okay too!