Investing $100,000: Rental Property vs. REITs

When considering a $100,000 investment in real estate, you can either buy a rental property with a $100k down payment (financing the rest of a ~$400k property with a mortgage), or invest $100k into public REITs (Real Estate Investment Trusts). Each approach has distinct advantages and drawbacks. Below, we compare the two in terms of the effort involved, tax implications, and income/return potential.

Becoming a landlord is hands-on – you must handle property maintenance, tenant issues, vacancies, and more. Many investors find that managing even one rental can feel like a part-time job, and multiple properties can become "another full-time job" if self-managed. You’ll need to advertise vacancies, collect rent, deal with repairs (sometimes in the middle of the night), and handle difficult tenants or late payments. These tasks demand significant work hours and attention, unless you hire a property manager, which typically costs around 8–10% of the rent and reduces your profits. A rental property offers full control but requires continuous effort and oversight.

In contrast, investing in REITs is essentially maintenance-free for the investor. You simply buy shares of a REIT or a REIT fund and let professional management handle acquisition, leasing, and upkeep. REIT investing is a passive, “set it and forget it” approach. Once you purchase REIT shares, there are no landlord duties—just dividend income. The time commitment is minimal beyond the initial research and periodic investment reviews. However, this convenience comes at the cost of control. With REITs, you cannot choose tenants, property upgrades, or the timing of property sales, as all decisions are handled by the REIT’s management.

Direct real estate ownership comes with substantial tax advantages. Landlords can deduct expenses from rental income, including mortgage interest, property taxes, insurance, repairs, and management costs. A major benefit is depreciation, which allows you to depreciate the building value over 27.5 years. This can significantly reduce taxable rental profits. These deductions often result in taxable income being much lower than the actual cash flow. When selling the property, long-term capital gains tax rates apply, and investors can defer taxes on gains through a 1031 exchange. In short, the tax code provides multiple avenues for property owners to defer income and reduce tax liabilities—benefits that REIT investors do not directly enjoy.

REITs, on the other hand, are structured to be tax-efficient at the corporate level, provided they distribute at least 90% of their taxable income to shareholders. However, the tax burden is passed on to the investor. REIT dividends are generally taxed as ordinary income, not at the lower qualified dividend rate. This means dividends can be taxed up to your regular income tax bracket. A partial break exists under the current tax law (2018–2025), which allows individuals to deduct 20% of qualified REIT dividends. This reduces the effective tax rate, though REIT dividends are still typically taxed higher than net rental income from a property with depreciation and other deductions. Capital gains from selling REIT shares are taxed at long-term rates, and holding REITs in tax-advantaged accounts can help defer or eliminate taxes. Ultimately, REITs offer simplicity, but fewer opportunities to reduce taxable income.

A well-chosen rental property provides two income streams: ongoing rental cash flow and long-term appreciation through equity growth. If the property is purchased at a good price and the rent is strong, monthly rent can exceed expenses such as mortgage payments, taxes, insurance, and upkeep, resulting in profit. However, net income is not guaranteed and depends on factors like occupancy, maintenance costs, and market conditions. Unexpected repairs or vacancies can reduce profits, especially if operating margins are tight.

In strong markets, rental properties can yield solid returns. Analyses suggest that well-managed rental properties in desirable locations can achieve total returns of 8–10% or more annually. This includes both the net rental yield and property value appreciation. Historically, U.S. home values appreciate around 3–5% annually. Leveraging a mortgage amplifies these returns. For instance, if a $400k property appreciates by 5%, that’s a $20k gain on the property—but a 20% return on your $100k equity. In hot markets, value increases can lead to even more dramatic returns. Additionally, each mortgage payment made by tenants gradually increases your equity through principal pay-down. A successful rental can combine cash flow, rent increases, appreciation, and loan amortization to build significant wealth over a 10-year period. However, outcomes can vary widely. Overpaying or mismanaging a rental may result in returns that are no better than a stock market index—and require much more work.

Publicly traded REITs, by contrast, have historically delivered returns comparable to the stock market and often better than private real estate. They are required to pay out most of their earnings as dividends, providing investors with a steady yield. Today, REIT dividend yields generally range from 3% to 7% depending on the sector and market conditions. In addition to dividends, REIT shares can appreciate over time as property values and rents rise. Long-term, U.S. equity REITs have averaged total returns of around 9–10% annually. REITs benefit from scale, professional management, and diversified portfolios, which often results in strong performance.

REIT income is also relatively stable due to their diversified portfolios of leased properties, which generate consistent rental income. However, the value of REIT shares can fluctuate with market sentiment, and your investment may experience volatility. Unlike owning a single property, investing in REITs allows easy diversification across hundreds of properties and multiple sectors, which can help smooth out performance.

One major difference between the two options is diversification. Putting $100k into a single property concentrates risk in one asset and one location. A bad tenant, structural issue, or local downturn could significantly hurt returns. REITs, by nature, offer broad diversification. A single REIT may own hundreds of properties in various cities or states. Investing in REIT funds provides even broader exposure, helping to mitigate localized risks.

Liquidity is another important factor. Direct real estate is illiquid—accessing equity often requires refinancing or selling the property, both of which take time and incur significant transaction costs. REITs, on the other hand, trade on stock exchanges. You can buy or sell them quickly, offering far greater flexibility to rebalance or access funds.

In terms of volatility, REIT shares are subject to daily market pricing, which can make them appear more volatile. In contrast, property values are assessed less frequently, which can give the illusion of stability. Both are susceptible to market downturns, but the way this is reflected in valuations differs. REITs may experience short-term price swings, but often recover as property fundamentals reassert themselves. Direct property ownership involves leverage, which can amplify both gains and losses. A 25% decline in property value could wipe out much of your equity. REIT investors typically don’t use personal leverage and aren’t exposed to the same legal or liability risks that landlords face.

There is no universal answer to whether a $100k investment is better placed in a rental property or REITs. The right choice depends on your personal goals, skills, and risk tolerance.

If you seek a passive investment with low time commitment, instant diversification, and liquidity, REITs are an excellent choice. They offer consistent dividends and competitive long-term returns, without the need to manage tenants or repairs. The trade-off is reduced control and fewer tax advantages.

If you're willing to be more hands-on and want greater control over your investment, a rental property may be the way to go. It offers powerful tax deductions, leverage, and the ability to increase value through active management. However, it demands significant effort, management skills, and tolerance for unexpected issues.

Many investors choose to blend both strategies—using rentals for tax and equity-building benefits, and REITs for passive income and diversification. Both paths can lead to substantial wealth over a 10-year horizon—they simply follow very different routes.