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REITs vs. Rental Properties: How They Compare
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Digby's Field Note
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REITs and rental properties both put money into real estate, in different ways. A REIT is a company that owns or finances property and pays out most of its taxable income as dividends; a listed REIT trades on a stock exchange. A rental means owning the building, with its mortgage, tenants and upkeep.
The trade-off is liquidity and simplicity against leverage and control.
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What Is REIT Investing, and How Is It Different From Owning a Rental?
A REIT (real estate investment trust) is a company that owns, operates or finances income-producing property and passes most of its taxable income to shareholders as dividends. Held inside a child's custodial account, those payouts are unearned income like any other dividend, so the kiddie tax thresholds apply to them. Under 26 U.S.C. §857(a), a REIT must distribute at least 90% of its taxable income to keep REIT tax treatment, so more of its return arrives as dividends than at a company that retains earnings. If you want payout-first income from ordinary shares held in a brokerage or custodial account rather than from property, see the family dividend investing guide.
Owning a rental works differently because you, not a distribution rule, decide what happens to the cash flow. You collect rent, pay the mortgage and repairs, and keep what's left — and either handle the repair calls yourself or pay a property manager a fee set in the management agreement. The guide to outsourcing rental property management covers vetting a firm and reading its fee schedule. With a listed REIT, you buy shares on an exchange the way you'd buy an index fund, and the REIT's management runs the buildings.
How Do REITs and Rental Properties Compare on Cost, Liquidity and Tax?
A mortgage lets a rental owner control a property worth several times the cash put down — four times, at 25% down — and that leverage magnifies gains and losses in both directions.
| Factor | Publicly traded REITs | Non-traded REITs | Self-owned rental property |
|---|---|---|---|
| Getting in | Share price through a brokerage | Set by each offering (Fundrise lists $10) | Down payment plus closing costs |
| Ongoing costs | Fund expense ratio if held through a fund (VNQ lists 0.13%) | Fees set in the offering; upfront fees up to 15% (SEC) | Repairs, insurance, property tax and any manager's fee |
| Getting out | Trades on national stock exchanges | Illiquid; redemption programs limited | Sell the property |
| Who does the work | REIT management | REIT management | You or a property manager |
| Tax treatment | Mostly ordinary dividends; 20% deduction for qualified REIT dividends (§199A) | Same REIT rules | Depreciation over 27.5 years; passive-loss rules; §1031 exchange |
REITs are easier to get into and, when listed, to get out of; a rental adds leverage and depreciation, along with a down payment and ongoing work.
How Do Listed and Non-Traded REITs Differ?
A listed REIT index fund trades on an exchange and can be sold on any trading day. Vanguard lists a 0.13% expense ratio for its Real Estate ETF (VNQ), which is $13 a year on a $10,000 position.
A non-traded REIT doesn't trade on an exchange. Platforms such as Fundrise list a $10 minimum for a taxable account — Real Estate Crowdfunding Platforms Compared lines platforms up — and the SEC's non-traded REIT bulletin says these REITs are illiquid, their redemption programs may be discontinued without notice, upfront fees can reach 15% of the offering price, and a liquidity event may not come until more than 10 years after you invest.
Some private real estate offerings are open only to accredited investors. The SEC's definition includes net worth over $1 million excluding a primary residence, or income over $200,000 ($300,000 with a spouse or spousal equivalent) in each of the prior two years, or certain professional licenses. For other hands-off options, see low-maintenance real estate income, the guide to fractional real estate investing, and Turnkey Real Estate Investing: Is It Worth It?.
What Balance Would REIT Dividends Need to Match a Monthly Rent Check?
Matching $1,000 a month ($12,000 a year) in REIT dividends takes $300,000 at an illustrative 4% yield ($12,000 ÷ 0.04) or $400,000 at 3% ($12,000 ÷ 0.03). Yields move with prices and payouts, so the balance needed moves too.
A rental's cash flow is rent minus operating costs and the mortgage payment, so it depends on local rents, vacancy and the loan rate — What a Rental Property Actually Nets: Income After Every Expense works through an example, and Landlord Insurance: Costs and Coverage covers the insurance line. A leveraged rental puts the money into one property, one tenant base and one local market.
What Are the Tax Differences Between REIT Dividends and Rental Income?
REIT dividends are taxed mostly as ordinary income, but 26 U.S.C. §199A allows a deduction of 20% of qualified REIT dividends, and Public Law 119-21 (July 4, 2025) removed the rule that would have ended the deduction after 2025 (§199A amendment notes). Qualified REIT dividends are reported in Box 5 of Form 1099-DIV (IRS Form 1099-DIV instructions), and the deduction is figured on Form 8995, the qualified business income deduction form. This section covers only the tax difference between the two; household tax planning in its own right belongs to the family tax guide.
Rental income gets a different shelter: a residential rental building is depreciated straight-line over 27.5 years (IRS Publication 946), which can offset part or all of the reported rental profit even while cash flow stays positive — the Cost Segregation: Worth It for Passive Investors? guide covers speeding that up. Landlords who actively participate can deduct up to $25,000 of rental losses against other income under 26 U.S.C. §469(i), reduced by 50% of adjusted gross income over $100,000, so it's gone at $150,000. REIT shareholders don't get that loss offset, because they don't own the property directly.
What Are the Steps to Buy a REIT Fund?
- Set an allocation. Decide what share of your investments goes to real estate before buying; that number depends on the rest of your savings.
- Pick the vehicle. A listed REIT fund can be sold on any trading day; a non-traded REIT may limit or stop redemptions, per the SEC's investor bulletin.
- Open or use a brokerage account. Publicly traded REIT funds trade like any stock or ETF, so an existing taxable brokerage account or IRA can hold them.
- Automate payouts. A DRIP (dividend reinvestment plan) uses each distribution to buy more shares without manual trades.
- Review the mix. The issuer's page lists a fund's holdings and sector mix; a sector-focused REIT holds a narrower slice of real estate than a broad index fund.
What Does Direct Rental Ownership Add, and What Does It Require?
A rental bought with 25% down — $62,500 on an illustrative $250,000 property — controls the whole asset, so changes in its price and rent hit the owner's equity about four times over, in both directions. How to Finance an Investment Property: Down Payment, Rates, and DSCR Loans covers how lenders qualify that purchase, and Cash-Out Refinance or HELOC? Using Home Equity as the Down Payment on a Rental covers using home equity for it.
Rentals also allow a tax deferral REIT shares can't: 26 U.S.C. §1031 lets you exchange real property held for investment for like-kind real property and defer the gain — tied to owning real property directly, not shares of a trust, and covered in 1031 Exchange Rules: Deadlines, Costs, Exceptions. California adds landlord rules: Civil Code §1947.12 caps annual rent increases for many units at 5% plus the change in the cost of living, or 10%, whichever is lower, and Civil Code §1950.5 generally limits security deposits to one month's rent, while letting a small landlord (a natural person, or an LLC of natural persons, owning no more than two properties with four or fewer units in total) collect up to two months. Vacancy is the other cost: the U.S. Census Bureau's Housing Vacancy Survey reported a 7.6% national rental vacancy rate for the third quarter of 2026, and an empty unit still carries its full mortgage payment.
Frequently asked questions
Why do REITs pay out so much of their income?
To keep REIT tax treatment, a REIT generally has to distribute at least 90% of its taxable income to shareholders each year (26 U.S.C. §857(a); Investor.gov). Distributions can still change, and listed REIT share prices move with the market.
How much do you need to invest in REITs to make $1,000 a month?
It depends on the yield. $1,000 a month is $12,000 a year, so at an illustrative 4% yield it takes $300,000 ($12,000 ÷ 0.04), and at 3% it takes $400,000 ($12,000 ÷ 0.03). Yields move with share prices and payouts, and REIT dividends aren't guaranteed.
What is the downside of a REIT?
Listed REIT shares trade like stocks, so their price can fall even while the buildings keep collecting rent. Non-traded REITs add more: the SEC's investor bulletin says they're illiquid, their redemption programs may be discontinued without notice, and upfront fees can be up to 15% of the offering price.
Can you invest $1,000 in a REIT?
Yes. Listed REITs and REIT ETFs trade like stocks through a brokerage account. Vanguard lists a 0.13% expense ratio for its Real Estate ETF (VNQ), which works out to $1.30 a year on $1,000. Fundrise's help center lists a $10 minimum for a taxable account.