Warren Buffett Says Rental Properties Can’t Compete With REITs: Why I Don’t Agree
As one of the most successful investors of our time, Warren Buffett is the sort of person whose advice I tend to agree with. For example, Buffett thinks getting a 30-year mortgage is a smart choice when buying a home, since it gives you flexibility. I can see where he’s coming from.
Buffett also believes that index funds are a great tool everyday investors can use to grow wealth. Again, solid advice.
But while I mostly tend to see Warren Buffett’s point on all things investing, there’s one topic I happen to disagree on. Warren Buffett is not one to invest in physical real estate. Rather, he tends to favor REITs, or real estate investment trusts, which are companies that own or operate different properties.
As someone who owns a number of REITs, I can definitely see the value of investing in them. REITs are a great way to secure passive income without doing the work involved in owning rental properties.
But that doesn’t mean rental properties don’t offer a host of moneymaking opportunities in their own right. In fact, I think it’s possible to grow just as much wealth with income properties as with REITs.
Multiple ways to profit
Both REITs and rental properties offer multiple avenues for generating revenue. With REITs, you can make money via the steady dividend payments they’re known to pay, and by having your REIT shares gain value over time. With rental properties, you can enjoy steady income via monthly rent payments, and you can sell your home at a profit down the line.
Now when you own a rental property, you’ll generally have to pump some money into it through the years, whereas with REITs, you don’t have to put down any cash aside from your initial share purchase. But when you buy a rental property, you might manage to command more than enough rent to cover your operating costs and still have money left over. That’s money you can put to work in the stock market, for example.
Plus, depending on how quickly home prices in your area appreciate in value, you might conceivably spend $300,000 on a home whose value doubles in 10 or 15 years. Granted, that won’t always happen, but it could.
That’s why you shouldn’t be too quick to assume that rental properties can’t compete with REITs. If you buy at the right price and in the right market, you could easily make a nice profit — the same way REITs might make it possible to grow a lot of wealth.
One piece of Buffett advice you should absolutely take
Whether you decide to invest in real estate by owning rental properties or buying REITs, one thing you ought to do is commit to holding your investment for many years. In doing so, you’ll maximize your chances of seeing it gain value.
In fact, Warren Buffett is a big fan of the “buy and hold” approach to owning stocks, which should extend to REITs and physical real estate as well. If you go in expecting to strike it rich within a few years, you may wind up unhappy. But if you’re willing to be patient and give your investment time to gain value, you might end up thrilled with the results — whether you decide to buy REITs, rental properties, or both.