When it comes to building wealth through real estate, investors in Maryland have more options than ever before. Some choose to own property directly—buying single-family homes, duplexes, or commercial buildings. Others prefer a more passive approach, and that’s where Real Estate Investment Trusts (REITs) come in.
REITs are investment vehicles that allow individuals to earn income from real estate without the headaches of being a landlord. They pool capital from many investors to purchase, manage, and often develop income-generating properties across different sectors. These can include residential buildings, shopping centers, warehouses, hotels, and healthcare facilities. For Maryland investors who want exposure to real estate but aren’t ready to deal with tenants, contractors, or property taxes directly, REITs can seem like a very appealing option.
But are REITs the best path for long-term success? Like all investments, they have advantages and disadvantages. In this guide, we’ll break down the pros and cons of REITs, examine how they compare to direct real estate investments, and show you how working with experienced professionals like Simple Homebuyers can help you choose the right strategy for your financial goals.
Understanding the Basics: What Are REITs?
A Real Estate Investment Trust is a company that owns, operates, or finances income-producing real estate. Established by Congress in 1960 to give average investors access to real estate markets, REITs function much like mutual funds. Instead of purchasing a physical property, you buy shares in a company that manages a portfolio of properties.
There are two primary types:
- Equity REITs – These own and operate income-producing properties, such as apartment complexes, office buildings, or shopping malls.
- Mortgage REITs – These don’t own physical real estate but instead invest in mortgages or mortgage-backed securities, profiting from the interest.
Many REITs are publicly traded, meaning you can buy and sell shares on stock exchanges just like you would with a company like Apple or Amazon. This makes them much more liquid than direct property ownership.
Why Investors in Maryland Turn to REITs
Maryland has one of the most diverse real estate markets in the country, ranging from upscale properties in Bethesda and Chevy Chase to more affordable rentals in Prince George’s County and development opportunities in Capitol Heights. Investors often want a way to participate in these markets without tying up all their money in a single house or commercial property.
This is where REITs come into play. With one investment, you gain exposure to dozens, if not hundreds, of properties, spreading your risk. You also don’t have to worry about selling a house with mold problems or managing difficult tenants. For many, that convenience is worth the trade-offs.
The Pros of Real Estate Investment Trusts
1. Regular Dividend Income
One of the biggest selling points of REITs is that they are legally required to distribute at least 90% of their taxable income to shareholders. This makes them a reliable source of dividend income. For retirees or investors seeking passive cash flow, this is a major benefit. According to Nareit, the average dividend yield for equity REITs often surpasses that of the S&P 500.
2. Liquidity Compared to Direct Real Estate
Unlike owning a house or commercial building, which can take months to sell, REITs can be bought or sold in minutes on public exchanges. This liquidity allows investors to adjust their portfolios quickly in response to market conditions—something that isn’t possible when you’re stuck trying to offload a distressed property in Maryland’s slower months.
(See our blog on 5 reasons why you shouldn’t list your house in the winter in Washington DC to understand how seasonality impacts direct real estate sales.)
3. Diversification Across Property Types
REITs spread investor money across multiple property types and geographic areas. Instead of tying up $300,000 in a single Maryland rental home, you can be part of a portfolio that owns shopping centers in California, office buildings in New York, and industrial warehouses in Texas. This diversification helps mitigate risk if one sector underperforms.
4. Professional Management
Managing tenants, repairs, and legal compliance is one of the hardest parts of being a landlord. REITs eliminate that headache. Professional managers handle everything from leasing to maintenance, allowing you to collect dividends without ever fixing a leaky faucet.
5. Accessibility
You don’t need a large down payment, a strong credit score, or approval from a lender. Many REITs can be purchased with just a few hundred dollars, making them accessible to beginner investors who aren’t ready for direct property ownership.
The Cons of Real Estate Investment Trusts
1. No Equity Growth
When you own property directly, you build equity over time. If your $250,000 Maryland home appreciates to $350,000, that gain goes straight to you. With REITs, you’re essentially a shareholder—you don’t own the property itself. That means you miss out on the long-term equity appreciation that real estate investors rely on to build generational wealth.
2. Sensitive to Interest Rates
REITs tend to underperform when interest rates rise. Higher borrowing costs cut into profits and make dividend yields less attractive compared to bonds or savings accounts. This can create volatility in your portfolio.
3. Tax Disadvantages
While REITs generate consistent income, their dividends are often taxed as ordinary income rather than at the lower capital gains tax rate. This can result in a larger tax bill compared to direct ownership of rental properties, where deductions for mortgage interest, depreciation, and property taxes lower your liability.
4. Sector Concentration Risk
Some REITs specialize heavily in one sector, such as office buildings or retail. This can expose investors to sharp downturns if that sector struggles. For example, the COVID-19 pandemic devastated office REITs as remote work surged.
5. Limited Growth Potential
Because REITs must distribute 90% of taxable income to shareholders, they retain little capital for reinvestment. This slows their ability to grow and expand portfolios compared to private real estate investors who can reinvest rental income into more properties.
Comparing REITs to Direct Real Estate in Maryland
Let’s say you’re deciding between investing $50,000 in a REIT or putting that money toward a down payment on a Maryland rental property. Here’s how they compare:
| Factor | REIT Investment | Direct Real Estate |
|---|---|---|
| Liquidity | High – sell anytime | Low – selling can take months |
| Equity Growth | None | Builds equity over time |
| Taxes | Dividends taxed as income | Mortgage interest & depreciation deductions |
| Management | Passive – handled by professionals | Active – landlord responsibilities |
| Risk Diversification | Spread across properties nationwide | Tied to one property/location |
| Entry Costs | Low – can start with a few hundred dollars | High – down payment, closing costs, repairs |
While REITs are great for passive income, direct property ownership can often provide higher long-term returns if managed well.
Where REITs Fit Into a Maryland Investor’s Portfolio
The smartest investors don’t think of REITs as a replacement for direct real estate—they use them as a complement. For example, you might own a single-family rental in Silver Spring while also holding shares in a healthcare REIT. This way, you benefit from both equity growth and dividend income while protecting yourself from market swings.
For Maryland investors who are already stretched thin managing properties, REITs can provide balance and stability in their portfolios.
Internal & External Factors to Consider
When building your strategy, keep these factors in mind:
- Seasonality: Maryland’s real estate market slows in winter months, affecting direct property sales. (See our post on why you shouldn’t list in winter in DC).
- Diversification: Some investors prefer adding land opportunities to balance out risk. (5 reasons you should be adding vacant land in Capitol Heights).
- Alternative Strategies: Beyond REITs, some choose creative financing, like rent-to-own agreements. (5 reasons you should sell your house using a rent-to-own agreement in DC).
- Rental Restrictions: Policies and zoning laws can impact direct ownership returns. (5 rental restrictions investors should know in Capitol Heights).
And on the external side:
- Learn more about how REITs are structured from Investopedia.
- See data from the National Association of Realtors on how REITs influence commercial markets.
- Explore real investor experiences at BiggerPockets for practical insights.
Conclusion: Should You Invest in REITs?
For Maryland investors, REITs offer an accessible way to diversify portfolios, generate passive income, and participate in real estate markets without the headaches of property management. However, they’re not without drawbacks. You won’t build equity, your dividends are taxed at higher rates, and growth potential is limited compared to direct ownership.
The best strategy often combines both approaches. A balanced portfolio might include REITs for stability and liquidity, alongside direct ownership of rental properties for equity and appreciation.
At Simple Homebuyers, we work with local investors to help them weigh the pros and cons of every option. Whether you’re considering REITs, rental properties, land investments, or creative sales strategies, our team can guide you through the numbers and help you build a plan tailored to your goals.
If you’re ready to explore your options, give us a call at (240) 776-2887. Let’s build your real estate portfolio the smart way.