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REIT vs Buy-to-Let

It’s one of the common questions amongst property investors. You’re looking to invest into property but you can’t decide between a REIT vs a Buy-to-Let investment. Both types of investment have their merits and both can deliver exceptional returns depending on your chosen strategy. 

In this blog, we examine the differences between the two property investment types and how you can decide between a REIT vs a Buy-to-Let Investment. We’ll examine the pro’s and con’s of both assets, as well as examining how they can be used in tandem to make up a diverse portfolio providing varying returns from different channels.

What is a REIT?

A real estate investment trust (REIT) is, fundamentally, a company that owns, manages and finances real estate. Modelled after mutual funds – very similar to a collection of shares – a REIT allows investors to invest in a ‘collection’ of property and earn dividends from the real estate investments without having to finance or manage the property themselves.

REITs represent a low-risk, low-return way of investing and typically deliver a steady income stream for investors, although they don’t offer much in the way of capital appreciation. Unlike physical real estate investments, they’re usually highly liquid and composed of multiple property types including residential, hospitality, commercial and service assets. 

What is a Buy-to-Let Investment?

On the other side of the argument, Buy-to-Let investments represent a much simpler traditional investment and are one of the most common investment vehicles in the market. At the most basic level, a Buy-to-Let investment involves purchasing a property with the intention of letting it out. 

While this obviously comes with a higher upfront cost – as well as the need to manage the property itself  (or find a suitable partner to help) – these types of investment assets can offer much higher potential growth and flexibility when it comes to generating returns, providing both capital growth and rental returns. 

Investing in Buy-to-Let versus a Real Estate Investment Trust (REIT)

As always, whatever asset you opt for depends on your chosen strategy, end goals and aversion to investment risk. 

All of these factors will determine whether a Buy-to-Let property or REIT is right for you, especially if you need a certain amount to reach your end goals.

First, let’s cover what both assets can offer investors. Both Buy-to-Let properties and REITs can provide diversification across a portfolio in the form of a property investment.

As one of the most reliable markets to invest in, property is a tangible investment that has shown its ability to weather external factors and challenges. Whether you’re opting for a single-let or a REIT investment, property can provide security during unprecedented times.

Similarly, while some investors will highlight passive income as a primary reason for investing into a REIT, there’s no doubt that a fully-managed Buy-to-Let investment can do just as good a job at delivering income with little to no input necessary from the investor.

Flexibility and Diversity

Both Buy-to-Let investments and REITs offer varying levels of flexibility and diversity, although there’s no surprise that a traditional single-let is more flexible in the long-term. While REITs are relatively diverse, meaning they’re easy to implement into a portfolio, the nature of the asset means you can only invest in whatever property is included.

With this in mind, if you invest in a ‘commercial REIT’ for example, you won’t be able to add a residential property or something similar later down the line. 

Similarly, while the dividends they provide are consistent, this is typically the only form of return you’ll experience. Capital appreciation is usually low on this asset class. In contrast, single-let investments are yours to control from the start – important if you’re looking to invest in a certain area or property type. 

Single-let investments also allow you to benefit from both rental income and capital growth, building value across two different channels. Over the long-term, this can vastly increase your overall returns and also makes it much easier to scale into a larger portfolio.

While the importance of flexibility is largely dependent on how much control you’re looking for, single-let’s are definitely more flexible across a long-term strategy, allowing you to reinvest and scale more effectively.

Liquidity and Returns

One of the major cons of any property investment is that it’s a relatively illiquid asset. Once you’ve invested, you’re in until you sell. 

This is one thing that REITs can offer which a single-let can’t – liquidity. Because of the nature of the asset, REITs are traded like traditional stocks and shares, which means that they’re easier to manage. Because they’re largely traded in heavy volumes, this makes it much easier to get into or out of your favoured position. 

That said, property is best utilised in a long-term strategy. It’s rare to find short-term property investors these days, especially when the potential to maximise returns only increases the longer you’re in the market. 

If you’re looking to generate both strong rental income and capital appreciation, a long-term single-let investment is the way to go, as the returns from REITs will struggle to reach similar heights due to the nature of having multiple shareholders.

The Importance of Diversification

One thing to consider around this argument is that both a REIT and a Buy-to-Let investment can easily co-exist within a portfolio. 

REITs can offer a stable and consistent annual dividend, with past performance showing total performance over the last 20 years has outperformed the S&P 500 Index alongside the rate of inflation. This makes it a low-risk, low-return alternative to a more traditional Buy-to-Let investment. 

A traditional single-let, on the other hand, can provide long-term capital growth and established rental returns through one asset. It’s flexible enough to suit any portfolio and has some of the highest growth potential of any investment vehicle.

When paired together, you can get the best of both worlds while still receiving the security and reliability that comes with a property investment. 

While it’s not always possible to have both, the question investors should be asking themselves is: what property investment suits me? Am I looking for long-term returns and have the capital upfront? Or am I looking for a short-term trading investment within the property space? 

Depending on your answer, there’s something out there to suit each and every strategy.

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