Real Estate Investment Trust vs Buy-to-Let Property
Property has always been one of the most sought after investment assets. Now, with investment vehicles including crowdfunding, real estate investment trusts (REIT) and buy-to-let property, investors have more options than ever before. Investing in a real estate investment trust vs property is one of the most common questions for property investors and for good reason. Both avenues offer direct access into UK property investment and have unique merits.
In this article, we’ll be explaining the differences between investing in a real estate investment trust vs property. By comparing the pros and cons of each investment, we’ll also explore how the two can co-exist within a single investment portfolio.
What is a REIT?
Fundamentally, REITs are companies that own, manage and finance income-generating real estate. Based on mutual funds, this asset revolves around investing in a cluster of properties and earning dividends from the investments. A notable difference between investing in a REIT vs buying property is that investors don’t have to commit to financing and managing the property.
Since REITs require significantly less input from the investor than a buy-to-let property and also represent a share of a wider index, they’re typically considered ‘lower risk’ than a full buy-to-let investment. Conversely, this also means that REITs offer lower returns than investing in property directly.
What is a buy-to-let property?
On the other side of the real estate investment trust vs property debate is buy-to-let property. A much more traditional investment asset, buy-to-let property involves purchasing a property with the intention of renting it out to tenants for a monthly sum. Over the years, the opportunity to build a substantial passive income with buy-to-let property has made it one of the more common investment vehicles in the market.
There are many differences between buy-to-let property and REITs, such as the upfront costs. Investing in buy-to-let property comes with a considerably bigger upfront cost in the form of a deposit, as well as the overall cost of either purchasing the property or paying a monthly buy-to-let mortgage. Upon completion, buy-to-let investors will also find themselves managing their property which can often come with more financial responsibilities further down the line.
Related: Top Reasons for Investing in Property
However, the initial upfront costs and responsibilities of managing a rental property are usually offsetted by the potential of buy-to-let property. As well as the monthly rental income buy-to-let property provides, investors often benefit from capital growth on their property upon sale. This makes the ceiling for returns much higher than a REIT.
Real estate investment trust vs property?
When it comes to investing, we’re big advocates for investors choosing assets that work best with their financial goals and investment strategies, so these factors will inevitably determine whether a REIT or buy-to-let property is the best option.
Below we explore some of the key comparisons and differences between REITs and traditional property investments.
Diversity
One of the major similarities between REITs and buy-to-let property is the diversification they can offer a portfolio. Regardless of which side you fall on in the argument, property remains at the heart of the investment and is an incredibly resilient asset.
While REITs are inherently diverse since they typically offer a mix of property types and locations, the same strategy can be applied to your buy-to-let portfolio. As long as you’re buying in different locations with different property types, you can mitigate risk with diversification.
Passive income
By having either a REIT or a buy-to-let property in your portfolio, you’ll find a vehicle that provides security and consistent returns. Property in general is chosen because of the passive income it can provide.
While REITs are generally managed for you, buy-to-let property can be as hands-on or as hands-off as you’re comfortable with. If you’re just looking for the returns, you can pay partners to help you handle the day-to-day. If you’re an active investor, you can save the money and do this yourself.
Related: What’s The Difference Between A Passive And Active Investor?
Flexibility
Generally speaking, the more flexible an investment asset is, the better it will perform as part of a wider portfolio. A key difference in the real estate investment trust vs property debate revolves around flexibility, with buy-to-let property providing investors with significantly more control than REITs.
Although REITs are relatively easy to integrate into a wider portfolio, you’ll only be able to invest in whatever property is included in the trust. For example, commercial REITs will only include this particular property type, and you won’t be able to change this or add different asset classes to this further down the line.
With a traditional buy-to-let, you can always choose between different property types (such as apartments and houses), with a successful portfolio often including a combination of the two. By having a balanced portfolio of houses and apartments, you’ll not only be able to benefit from multiple streams of income and reap the rewards of two different markets, but these assets will also increase the resilience of your portfolio as a whole.
Scalability
The nature of a REIT means you’ll typically only receive a single income stream, although this will be a consistent return. On the other hand, buy-to-let property offers the flexibility of both rental returns and capital appreciation, which makes scaling much more efficient.
While you can always invest more into a REIT, you’re effectively locked into the trusts you’re either in or can find on the market. With a buy-to-let property, the potential for reinvestment is much higher thanks to larger returns.
Related: Scaling A Property Portfolio
If you find yourself deciding between investing in REITs vs buying property, it’s best to consider your long-term goals – would the added flexibility of a single buy-to-let make your financial goals more achievable in the long run?
Liquidity and returns
Generally speaking, a tangible property is a relatively illiquid asset – once you’ve invested in a buy-to-let property, you’re in the market until you sell and this can take a relatively long time.
This is one of the major advantages of a REIT. Real Estate Investment Trusts are traded in a similar way to stocks and shares, meaning they’re much easier to manage and much easier to sell. With this asset also being traded in large quantities, it’s much quicker to get into your ideal investment position.
Regardless of what you choose in the REIT vs property debate, you’ll need to remember that both assets are most lucrative as long-term investments. If you do intend on staying in the market for a longer period of time, the illiquidity of single buy-to-let investments is no longer a drawback – you just need to factor that into your plans.
If you’re more focused on the returns an asset can offer and less on the liquidity of it, single buy-to-let properties are often the most lucrative option. Not only will you benefit from short-term returns with a consistent rental income, you’ll likely be able to see your property increase in value over the years at a much quicker rate than a REIT.
Can I invest in both?
In the REIT vs property debate, investors usually find themselves choosing one or the other, but the most successful portfolios are usually the ones with a combination of assets. REITs and buy-to-let property can co-exist in a single portfolio and can even complement one another.
As we have discussed, REITS and buy-to-let property have their own strengths and weaknesses, so by having both assets within one portfolio, you’ll be able to offset their individual drawbacks whilst benefiting from their returns.
Specifically, REITS can provide a consistent annual dividend, with a proven track record of outperforming the S&P 500 Index alongside the rate of inflation.
Alongside this consistent income, a buy-to-let property offers the potential for long-term growth that REITS often lack. The flexibility of buy-to-let property means that you could diversify with different property types to safeguard your portfolio whilst investing for your future.
So, if you’re stuck between investing in a REIT vs buying property, why choose? Investing in both would offer the best of both worlds – the opportunity to build a sustainable portfolio that can also provide lucrative returns over time.
Investing in both isn’t always suitable for everyone but it’s something to work towards in the long-term, and with this comparison of the two assets, you’ll be able to choose the best investment for your short-term goals and a solid base to build upon.
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