Investment Face-Off: Rental Property With 6% Cap Rate vs. REIT With 8% Return


There are several options for how you can invest in real estate, as you well know, and a lot of them are so different from each other that you may not have a hard time choosing which to go with. But what about some of the less obvious differences between some of them? Or rather, what if two different options seem obvious as to which is better — are you sure you know which one is actually better?

To give you a better idea of weighing different options, I’m going to choose a battle between:

Rental Properties and Real Estate Investment Trusts (REITs)

More often discussions of different investment methods are comparing things like rental properties and flipping properties, which have a much more distinct difference between their work levels and return styles. Rental properties and REITs, though, often get grouped together because they are both methods of passive income and the return styles are similar (cash flow).

Related: The Ultimate Guide to Analyzing Rental Properties (+ Free PDF!)

The Basics of Rental Properties and REITs

To make sure everyone is on board with what we’re really talking about here, let me just clarify how both of these work.

  • Rental Property. This is when you own an actual piece of property that you rent out as a means of collecting income. The property itself is in your name, you own it, you can do whatever you want with it — live in it, rent it out, make improvements, sell it, refinance it, spray paint it. Whatever you want.
  • REITs. Think “mutual fund for real estate investments,” and you are thinking along the right track. It’s just like buying stocks, but instead of buying stock in a company that does whatever business, you are buying into a company that owns or finances real estate. If you buy into a REIT, you don’t personally own any of the properties; you own shares just as you would if you were buying stocks.

Which to Choose: Rental Property or REIT?

Well, as with any decision in life, there are pros and cons to going with either. Here is a list of the most basic pros and cons for both rental properties and investing in REITs:

Rental Properties


  • Sole control over any decisions, improvements, or changes to the asset
  • Major tax benefits, usually resulting in tax-free income or better
  • Ability to leverage capital invested (ability to buy a $100,000 property with only $20,000)
  • Hedge against inflation
  • Appreciation potential
  • Passive income


  • Income is directly tied to performance of the individual property
  • Requires more capital to purchase property
  • Less liquid



  • Ability to be part of a very large asset holding — better security typically (especially with publicly-traded REITs) due to strict oversight, professional large-scale management, and diversification of assets
  • Long-term growth potential and typically provides high dividends (from non-taxable pool of money)
  • Options for liquidity of money invested
  • Stable income generation — not tied to individual property performance
  • Low-entry costs to invest
  • Passive income


  • Income is fully taxable
  • No equity build
  • Value of shares often trend with the general stock market
  • Less flexible management of assets, if any flexibility

Related: REITs: Invest in Real Estate Without Leaving Your Computer

A Hidden Advantage to Rental Properties

It’s not hidden in the sense that it’s not in the above list (because it is), but the big picture idea of it isn’t blatantly stated up there. I also don’t emphasize this pro for rental properties to suggest rental properties are better; I just point it out as a major clarification point.

In looking at the list above, look at the pros and cons that specifically relate to the income received from each type of investment. What a lot of people don’t realize is that cash flow isn’t the only financial gain you receive if you own rental properties. In defense of that thought, though, cash flow is typically the only income that is really evaluated and measured when shopping for properties. This is because it is the easiest, if not the only, income stream that is really known — how much you pay for a property versus how much you collect in income.

Obviously, some unexpected expenses can come up on a rental property so that would affect your cash flow, but at least the general numbers are known. So when you see cap rates and cash-on-cash returns, those are only speaking to cash flow because those are known variables. You may also see people calculate in estimates for appreciation, but the fact is, appreciation isn’t guaranteed so those numbers are only guesses and can’t be relied on in calculating true returns. Because of this, cash flow is usually all that is conveyed as the return on a rental property, so people think cash flow is all the income you’re getting.

But here’s the thing: cash flow isn’t the only income you’re getting on a rental property. As you see in the list above, you are also getting major tax benefits, which put a surprising chunk of cash in your pocket, and you also have the potential for appreciation and equity build. These three things can put a substantial amount of cash in your pocket! Nevermind that you can also leverage, which is tied in with the equity building, so that’s yet another income benefit on rental properties that you wouldn’t experience by investing in something like a REIT.

Those additional income streams are arguably the biggest benefit of owning real property over things like notes or REIT shares. Anything on paper will not give you the same level of additional income streams.

Again, I don’t tell you this about rental properties to try to sway you one way or the other while you are deciding what to invest in, but I tell it to you so you can more accurately determine the returns on an investment. People quickly mistake an 8% return on a REIT investment as being a higher return than a rental property with a 6% cap rate. It’s fine if you decide to stick with the security of an 8% return REIT investment, but don’t just choose that because it sounds higher than a 6% return on a rental property.

So how about you—would you buy the 6% cap rate rental property or the 8% REIT return? Did I miss any important pros and cons?

Let me know in the comments section below!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.


  1. Joe Harper

    I also feel that depreciation is the most under-discussed aspect of owning rentals. It’s the gift that keeps on giving.

    And as you write, being able to control a $100,000 asset with only $20,000 out of pocket is truly magical if I inly paid $28,000 for the asset to begin with and I borrow $80,000 against it a few years later.

    I was an appraiser for many many years and was never taught those two aspects. That’s why I think more weekend warriors never close deals, much less make the effort to make an offer. The gurus don’t teach those two fundamentals. Both aspects reversed my net worth – literally.

    • Marco Santarelli

      Depreciation is a HUGE benefit provided by the direct ownership of income property.

      Direct ownership in real estate investments can be more attractive than REITs for several reasons, but at least some of the appeal lies in the inability of REITs to fully take advantage of the various tax shelter benefits available through direct ownership.

      These deductions creates a tax deferral since the tax basis of the property is reduced by the amount of the depreciation, increasing the gain (or decreasing the loss) recognized at the time you sell it.

      Thus, the depreciation deductions effectively creates a tax shelter!

      And, of course, leveraging your capital is a HUGE benefit too. 🙂

    • Ali Boone

      Joe, amazing comment! I totally agree for one, but for two, the way you write it really brings out the seriousness of how great those both can be. I’m with you… I love depreciation and leveraging too much to not go the rental property route 🙂

  2. Good posts. A couple of additional thoughts from someone who (currently) has no dog in this fight.

    1. You skipped over arguably the single biggest advantage in owning a REIT over a rental property — it is infinitely easier and simpler to manage. All it takes is a click of the mouse. With properties, you either have to manage them yourselves or at the very least, manage your property manager. You also have to go through the timely process of actually buying the property.

    2. Don’t overlook the appreciation aspect of REITs either. Take a look at O, arguably the best REIT on the market — it’s share price increases in value by ~35% for last year, and they paid you a 5%-6% dividend the whole way. And that’s truly 100% passive income.


    • Marco Santarelli

      Hey Mike… A few comments on your comments above:

      ( 1 ) Technically, you don’t and can’t manage a REIT. It is a security and therefore your involvement, much like stock and bonds, is virtually ZERO. On the other hand with real estate, we recommend “managing” your property managers which is rather simple and usually is less than 30 minutes per month.

      Remember that REITs (and securities in general) break my all-important 9th RULE of my 10 Rules of Successful Real Estate Investing:

      Regarding the “timely process of buying the property”… That’s the small “price” you pay to get the incredible returns and tax benefits offered by real estate versus less favorable investments like REITs.

      ( 2 ) That’s a nice gain on ‘O’, but past performance does not guarantee future performance. The other problem is that you cannot leverage your investment in a REIT like you can with investment real estate, and you are taxed at the highest capital gains tax when you liquidate. Our clients are typically average 25% or more total ROI on our properties with the key benefit of keeping their equity gains along with their cash-flow.

      Last but not least, “investing” in a REIT expecting (i.e. hoping) for capital appreciation is speculation — not investing. It’s what many people tried doing around 2005-2007 when they were flipping new construction homes in FL, CA, NV, AZ, etc.

      Continued success!

        • Marco Santarelli

          Margin accounts rarely offer more than 50% leverage and are always subject margin calls (cash calls). They are not stable like mortgage financing. It’s a tool for speculation.

          Yep, there is not guarantee with any investment. However, with real estate you can perform far more reliable due diligence on the market, neighborhood, property, property manager, etc. than any security. In other words, you can do a lot more to minimize your risk.

    • Ali Boone

      Mike, I absolutely did skip over that advantage of the REIT….good call. You’re very right on that point (not sure how I missed it actually). But yes, that is absolutely true, both about the management benefit and the appreciation benefit.

  3. Great article! I invest in REITs, but I consider them to be part of my stock portfolio. I use them to balance out other types of dividend earning investments. Your points are additional reasons to consider REITs more as stock investments than real estate investments. My biggest reasons are that REITs don’t provide tangible property and are controlled by a management team that I do not know. So I consider them good investments, but not real estate investments.

  4. I would say REIT’s are more stock investment as well vs real estate investment. Either way you can’t go wrong just depends on what your investment goals are. Me personally I feel everyone should have both rental properties and REIT’s a more balanced investment portfolio anyway.

    • Marco Santarelli

      Hey Lorenzo — I would argue that the BEST way to “balance” your investment portfolio is to forego the REIT and invest that cash into (more) income-producing rental real estate. They total benefits provided by the real estate out-way the more limited benefits of any REIT.

      If you pencil the numbers side-by-side, you’d have to have a stellar REIT every year in order to just keep up with the cash-on-cash and ROI returns provided by prudent well-selected investment real estate.

      Continued success!

  5. Roy N.


    You can get “surprises” owning REITs as well. There was a recent case here in Canada with League Financial Partners who ran several REITs which were marketed on their amazing returns. It turned out the entire thing was little more than a Ponzi scheme – purchases of new subscribers were being used to sustain the “amazing returns” to existing subscribers.

    Once upon a time {certain types of} REITs received favourable tax treatment, but that has gone away.

    Another alternative to REITS is to own shares (common or preferred) in companies such as Brookside Properties or Killam Properties which have large residential holdings.

    • Ali Boone

      Interesting Roy. Any idea how many REITs have turned out to be ponzis? I’m guessing it’s fewer and far between now due to regulation and such, but I wonder how often that has happened in the past. Interesting point. And any idea how the residential holdings do in comparison to the REITs with commercial holdings?

    • Marco Santarelli

      LOL. I completely agree. Anything LESS THAN a 10% cash-on-cash return is very disappointing!

      Of course you want to make sure you’re comparing apples-to-apples when looking at returns. For example, when comparing those returns to the levered cash-on-cash returns available in some of our markets, we see the following:

      Atlanta: 13% to 25%
      Houston: 11% to 15%
      Memphis: 10% to 20%
      Kansas City: 20% to 35%+
      Indianapolis: 15% to 30%

      And when you add in the other return factors generated by investment real estate, your Total Return-on-Investment (ROI) is usually in the range of 35% to 50%.

      • Marco, I would love to know your secret because I comb every public and real estate source (including auctions which here on the east coast sometimes winds up with the investor paying MORE than market value), and while I can find properties with okay cap rates, once debt service is deducted from NOI, you are lucky to break even (here). Sole gains MAY happen if you are able to buy, improve cosmetically and flip. In the Bmore/Washington D.C. area where I am located it is a highly overvalued market and lending is next to non-existent unless you are a big concern, even if you have over a million in capital and want to leverage some properties to the tune of 30%. Seriously, how are you getting these returns (I am very, very interested). Thanks for the great comment. There is hope!

        • Marco Santarelli

          Hi Ed — I don’t think there’s any big secret. The key is to buy right in the right areas. We comb the auctions every week and acquire the properties that make sense alla round.

          We have noticed markets becoming tighter across the country. Values have gone up and inventory has gone down. Cash on cash returns have also come down because of that, however we are still finding great deals.

          We have a rolling inventory that we post to our website. The best thing to do is check our website regularly for new inventory.

          We are a little short right now in Kansas City but expect a lot more inventory in the next week or two.

          Continued success!

  6. Paul Santos

    Great article! The biggest take-away I get from this is that either option has multiple dimensions beyond just the initial percentage gain. I am biased towards the investment rentals, there are multiple asset gains beyond just the cashflow. I personally prefer the rental investment and all of its potential earnings/benefits. But you can’t argue with the “golden rule” of investment diversification.

  7. Timothy Trewin


    Good article. I would have to look at REITs as more of a part of a stock portfolio than true real estate investments. To me having both would be wise as it allows for a more diverse portfolio which is always a smart use of money. If I can sock money away in a REIT (as well as other investments) while building my real estate business why wouldn’t I? Thank you for taking the time to write this article.

  8. I’m a newb so maybe I am incorrect. However, it seems to me the REIT also offers appreciation and equity build. Not for you individually, but for the company. The REIT has a chance for the properties they hold to appreciate and they are building equity in each property as they pay off debt. As the balance sheet improves it would be reasonable to expect your shares to increase in value. The price of the shares will follow the general market in the short term, but the same logic applies to the REIT shares increasing in value as to your individual property increasing in value.

  9. Matt R.

    Cool article Ali. I don’t think rental properties are passive though. There are ongoing cost and decisions associated – accounting, property taxes, insurance, vacancies, evictions, cap ex issues exist….Even if you hire a PM with the ongoing cost it is still not passive compared to a set and forget Reit. I have owned both and the difference is night and day. NNN might be closer to a Reit passively speaking. Reits also represent equity, it is just an easier form of equity to manage perhaps. You can cash out your equity in seconds.

    • Ali Boone

      Matt, you make good points. I will say though that my rentals are extremely passive. I have a PM working them and the most I ever do is take 30 seconds to glance at my statements in a month (maybe) and a couple minutes a month, sometimes, to approve a repair or answer a question via email from my PM. And that’s doesn’t even happen most months. I definitely do next to nothing on my properties, but I do see where you are coming from on that one. All depends in how it’s set up.

  10. Great article… Another pro of well managed REIT’s is when the real estate market has been beat down and lending is tight for the average Joe, the REIT has the ability to go in and buy properties at big discounts..

    On the last meltdown, had clients with some cash, bad credit and income not so transparent. Their best option for investing in real estate was in a REIT and they’ve done pretty well to date.

    Not sure if they did as well as some of us coming in buying undervalued properties with only 20% down with nice positive cash flows that have since doubled in value but they can certainly get out a lot faster if needed.

    Either way…

    • Ali Boone

      Paul, you have a really good point in there though….which is- for anyone who can’t qualify for a mortgage and still has cash to invest, but not enough to buy a property for all-cash, a REIT may be a great investment method that they can do. I wish I had added that to the pros list for the REITs!

  11. betty t.

    both rental property and REIT can have their specific roles in one’s real estate portfolio. When investing in both, it could provide some interesting diversification within real estate sector. For example, while I like SFHs as rental investments, I also like certain REITs that can give me exposure to hospitality-related, healthcare-related or retail real estate that I otherwise would not do on my own.

    • Susan Maneck

      I use an REIT to balance my 403B retirement portfolio which is mostly full of equity mutual funds. (I’m not going to buy bonds until interest rates rise.) I also have a solo401k with which I buy real estate, but of course, you lose the tax advantages of having real estate outside of retirement funds. By the time I did this I had already used up my personal funds on real estate.

    • Ali Boone

      That’s very true Betty, and a cool insight into the feeling of diversification…more than just mentioning diversification. I love the idea of being able to own hospitality or healthcare related things which, you’re right, I could doubtfully own otherwise. Great comment to help picture that one!

  12. John Jenkins

    Hi All – I work for a REIT and own rental properties. The advantage of a REIT is the low buy in, you can start with just a hundred dollars, but a rental property takes thousands and here in Denver, tens of thousands.
    Also depreciation has it bite in the end, when you sell ( unless it is a 1031 exchange) you pay depreciation recapture tax so the MAN gets his share in the end.

  13. Ed Gray

    Great article Marco and you are spot on with the tax implications of holding a REIT (Ordinary income tax rates). I believe holding a rental property for the leverage is a great path and if you want to own a REIT, hold it in a Roth IRA and avoid the taxes.

    • Ali Boone

      Haha, no worries Ed. You bring up an interesting point to about holding the REIT in retirement accounts versus just buying them normally. Definitely worth the consideration for anyone thinking about which funds to invest their retirement monies in.

  14. Chris Rosenberg

    I thought this was an article comparing a 6% cap vs 8% reit. All I read was a few simple facts about real estate and reits. Very misleading title. Mike, who commented above, hit the nail on the head. Much less work to manage a reit. Also, reits are taxed at a totally different level due to dividend income, capital gains, and return of capital. And don’t forget compound interest by reinvesting distributions in the reit.

  15. John Barnette

    Can’t beat a great real estate investment. Some golden eggs in my SF portfolio. 4 to 1 leverage ratio, combined with recent annual appreciation figures of 12% plus. So leveraged appreciation at about 50%. About 8% cash on cash annual cash flow from rental. Effectively becomes tax free with depreciation. And gotta love Calirornia… Depreciating the building at 75% of the value of the property…when in effect it probably is only 25-35%. So in whole, taking generous depreciation benefit to shield actual cash flow on an appreciating asset that is leveraged 4x.
    I will gladly do some property management, keep tenants happy, whatever. I want another golden egg!

  16. This post should clarify a few issues:

    Depreciation: while good during RE holding period, has to be recaptured when the property is sold, reducing your taxable base when you sell, i.e. more taxes on the way out.

    Leverage: REITs are leveraged. When you buy a REIT, for a dollar invested you get, say $2 of property. But because REITs are bigger, they can finance at lower rates.

    Risk: direct RE is immeasurably more risky. You ability to make management decisions is a liability, not an asset, as compared to professionally managed REITs.

    I think the major advantage of individual property is the way it forces savings on the owner. In many instances you will subsidize the property out of your personal funds. But these personal funds would be spent at Costco anyways, so you have a forced liquid position which should tern into something later one.

  17. Ruth Ann LAKE on

    I am a multi passport US citizen based in Nice, France living on the Cote d’Azur. Yesterday I spoke w my bankers at HSBC about getting a loan to buy a small rental property. This is a vacation area and many people do this. You can either rent to tourists all year long or, as others do OR as I am thinking of doing, rent to a student or professor during the academic year and to tourists during the summer season through an agency. The bankers tried to talk about their REIT (mainly invested in Paris corporate buildings and supposedly returning 4.38%). Tax situation is completely different than in the US, so need to investigate but whatever revenue , either from a REIT or a privately owned rental property must be declared on the French personal income tax, if the revenue pushes you up a bracket, that is your problem. I agree w an earlier comment that a big cost of getting your own property is the “hassle factor”, dealing w the agency, the plumber, time looking for furniture, etc. Even if you have an agency, you end up dealing w some of these issues and in my experience, at least here in France it is definitely more than 30 minutes per month!! The most enlightening comment I read was to consider REIT as just another form of stock market investments! And if the stock market crashes again, you loose. If you have a rental place at the minimum, you ride it out, you could allow your child or friend to stay there when visiting a beautiful corner of the world, you have something tangible diversified away from the markets, is this right?

    • Ali Boone

      All good points Ruth Ann! A couple quick responses…. 4.38% isn’t a very high return! And then for properties, how much time and effort they require completely depends on how you buy and run it. I get great returns and literally don’t spend more than an hour on my properties (if that) a YEAR. It’s all about structuring it hands-off.

  18. No, I don’t think you missed anything. Good article. The one thing with leveraging is that it takes a lot of digging to find properties that have 6% cash flow with only 20% down. The cap rate may be 6%, but that is before debt service. With high rate creative financing, any cash flow can be negated by debt service. Of course, one knows this going in but in order to have NOI=cash flow the property has to be owned free and clear, otherwise debt service is deducted from NOI, and on a 100k property with a 6% cap rate, that is 6,000 income a year. The debt service on 80,000 on a fixed 2.628% loan 15 years (pretty much unattainable for investment property) would be 8460 a for P+I. Depreciation would be 2,500 (assuming 40 year schedule), which means you would be in the hold at least 2,460 a year on that property, but get to deduct 2,500 from other income for tax purposes. You can’t hold an entity more than a certain number of years at a loss without tax consequences. There is also 20k tied up in such a property. That is the only problem I see with leveraging small properties. But, you are making it work and I want to read more of your secrets to success because I had a disastrous outcome in a 50% equity position and lost approaching 2M on premium property. Good luck and keep investing and writing. Can you give an illustration of a deal that is cash flow positive with a 6% cap rate? I am not being sarcastic – truly curious about how you make it work. Thanks! Ed S

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