I’M REASONABLY certain that Dante Alighieri’s Divine Comedy has a long-lost section where he details the 10th Ring of Hell: being a landlord. I’ve done so twice and, despite the glorification seen on HGTV and heard on BiggerPockets podcasts, I found no joy in either experience. Selling those properties felt better than I can possibly describe.
Being a remote landlord may be the worst of all worlds. Getting an 8 p.m. phone call to fix a broken toilet is annoying. But getting that call for the same issue at 4 a.m., because you moved and there’s now a time difference, means existing in a special kind of purgatory. Sure, you can pay a property manager to handle maintenance and upkeep, but that often eats up most—if not all—of the profit.
Instead, I favor owning a real estate investment trust (REIT) index fund. REITs are included in total market index funds, but their weighting is tiny relative to their role in the broader economy. REITs offer significant advantages over owning rental properties. A REIT index fund, such as Vanguard Real Estate ETF (symbol: VNQ), offers wide diversification. When the pandemic dealt a blow to shopping malls, commercial office space and college housing, those hits were offset by gains in sectors like data storage and single-family homes.
REITs are run by experienced real-estate operators who understand the cyclicality of their market far better than you or me. They’re able to take advantage of growth opportunities in ways that individual investors simply can’t. For instance, during the COVID-induced capitulation in the mall space, Simon Property Group pivoted from pure landlord to business owner by astutely picking up several iconic but bankrupt brands like Brooks Brothers and JCPenney for, err, pennies on the dollar.
REITs also operate with much less debt and are therefore less risky. While many individual landlords borrow 80% or more of a property’s price, REITs typically use just half that amount of leverage.
The notion of “passive income” seems to be wildly popular these days. But when you’re a landlord, especially one with several tenants, that’s not passive. It becomes a second fulltime job and an invitation from Virgil to join that special 10th Ring.