Real Estate Investing vs. REITs | StableBread (2024)


In this article, I will compare real estate investing vs. REITs (real estate investment trusts). These are the two most common types of real estate investing methods. By the end of this article, you should have a clear answer to this age-old question, and will be able to make more confident real estate investment decisions in the future.

In this article, when I’m discussing “real estate investing," I’m referring to the most common and popular form of it, which is through the residential market of renting property out to tenants or flipping property for profit.

On the other hand, when I’m discussing REITs, I’m referring to investing in publicly traded real estate companies on the stock market.

Real Estate Investment Trusts (REITs)

Before we begin, it’s important that you know what REITs are and how they function.

REITs are real estate stocks traded on the stock market. Through investing in a REIT, you're able to profit from owning property without owning any actual physical real estate property whatsoever.

REITs in the United States were established by Congress in 1960 to provide investors, particularly smaller investors, access to income-producing real estate investment opportunities.

Examples of REITs include:

  • Realty Income Corporation (O)
  • Simon Property Group (SPG)
  • Medical Properties Trust (MPW)

REITs are required to pay out 90% of their net income as unqualified dividends to investors, to avoid paying corporate taxes and to retain their REIT pass-through taxation status. What this means, is that publicly-traded REITs will always pay out dividends on a consistent basis. Therefore, as a shareholder of a REIT, you can expect to receive consistent income through dividends.

REITS are also typically classified in one of three categories:

Equity REITs

A majority of REITs are equity REITs that own and operate income-producing physical real estate properties. These equity REITs are commonly specialized in different property types, such as apartments, healthcare, and office. Therefore, a majority of their income is through rent, and they generally do not resell properties after they’re developed for capital gains.

Mortgage REITs

Mortgage REITs, on the other hand, own no property, and instead raise debt and equity capital through investing in property mortgages, such as a mortgage-backed security. The difference, or spread, between the cost of borrowing and lending is how they earn revenue, and what supports the high dividend they pay out. Therefore, mortgage REITs primarily earn income through the interest that is accrued on mortgage loans.

Hybrid REITs

Hybrid REITs are a combination of both equity and mortgage REITs. Therefore, these REITs primarily generate revenue through both rent and interest payments. This distribution is not equal, however, and most hybrid REITs are weighted more heavily towards one or the other. This is also not a common type of REIT.

Data, History, and Expert Opinions

To answer this question on which investment provides the better returns, it's crucial that we first analyze the data and look at what history has shown us. To begin, I will compare the performances between the stock market and the overall REIT marketplace. Afterwards, I will compare and analyze the returns of the overall REIT marketplace and private real estate.

REITs vs. the Stock Market

Below you can compare VNQ, a popular Vanguard Real Estate ETF with 184 real estate stocks, and the VOO (which tracks the S&P 500 Index):

As you can see, over the long-term, VNQ has fallen behind the performance of the VOO. However, from 1997 to 2016, VNQ has generated up to 4x higher total returns than the VOO. This, and the dividend income REITs can provide, make REITs a worthwhile investment.

REITs vs. Private Real Estate

History has repeatedly shown that REITs have outperformed private real estate. Below are three separate sources that demonstrate this fact.

First, according to ERPA, from 1977 to 2010, REITs have returned more than 12% annually. Private real estate investors, on the other hand, averaged between 6.4% and 8.7% per year.

This comparison can be seen in the chart below:

Real Estate Investing vs. REITs | StableBread (1)

Second, according to Cambridge Associates, from 1992 to 2017, REITs returned more than 11% annually, in comparison to private equity real estate investment funds of about 7% on average.

Furthermore, private real estate funds have under-performed in comparison to equity REITs by 3.91 percentage points per year over the past 25 years, which is quite substantial.

This is circled in the chart below:

Real Estate Investing vs. REITs | StableBread (2)

Third, according to an indices review report on May 9, 2019 by the National Council of Real Estate Investment Fiduciaries (NCREIF), REITs experienced a 25-year average annual return of 10.5%.

This 25-year annual return was undermined by the 2008/2009 housing crises, where real estate stocks on the market crashed harder than almost any other industry at the time. This, of course, was due to the nature of the recession and the events that took place prior.

In comparison, the average 25-year return for investors in private commercial real estate properties ("NPI") averaged 9.4% annually. However, residential and diversified real estate investments ("NPI Levered") performed better, at a 10.5% annual average.

The 10-year and 25-year comparison of these three asset classes, including the S&P 500 Index can be seen in the table below: (Source)

6 Factors on Real Estate Investing vs. REITs

Choosing whether to invest in REITs or real estate is a process that should take into account more factors than just historical financial data to paint an accurate comparison between the two. Therefore, I have come up with six major factors, and will compare and select the better of the two real estate investing options, depending on the factor/category being discussed.

Factor #1: Investment Capital

As you may already know, you will need a lot of money to invest in real estate. This may be as much as a 20% down payment on a property, or even less, if you take part in "house hacking" (with a 5% down payment).

Investing even 5% upfront, however, is still a very difficult task for a majority of people, and understandably so. Traditional residential real estate properties all cost at least six figures or more, in general, and a 5% down payment is still a substantial investment for most people.

Therefore, most people are not able to afford investing in traditional real estate methods, and even if they are capable, are not willing to risk it. On the other hand, there is little barrier to entry with REITs and investors of all sizes can participate.

Statistically speaking, however, if you do happen to have large amounts of capital, then investing in real estate will provide you with far more better and quicker returns than REITs.

Factor #2: Expertise, Knowledge, and Time

As a hands-on real estate investor, you'll need a lot more expertise, knowledge, and time to be profitable.

On the other hand, there is little expertise needed for entry into the stock market, as one could always purchase a REIT ETF, which is very hands-off and passive approach to investing that will generate decent returns.

The VNQ, as covered earlier in this article, is a popular Vanguard Real Estate ETF with a portfolio of 184 real estate companies. You could easily contribute to this fund every month to increase your positions and potentially generate a better annual return than the average real estate investor.

Keep in mind that returns for any real estate ETF may not be consistent year over year, as it's a more riskier type of index fund. Regardless, in the overall scale for this category, REITs have the advantage.

Factor #3: Control and Liquidity

When you invest in a REIT, you have no control of what happens to your money or how the executive management team of that REIT operates the company. In other words, you have no control on what properties the company will own and manage.

This may be a different story, however, if you are a large stakeholder of the company, but this is likely not your case. Therefore, you can obviously do a lot more with your real estate investments than with REITs when it comes to control. This is because with physical real estate, you can increase the value of your investment through your own investment decisions and hard work.

For example, this can be done through a "Home Equity Line of Credit" (HELOC). This is given to you through the bank and secured by the equity that you've built inside your home. Banks love giving these out, because they lend you money, which you can then use to improve the value of their asset. And, if you don't pay them back, they essentially get to keep your house!

What this example illustrates is that you're able to leverage your money to improve the value of your investment through traditional real estate investing, which is not an option for REIT investors.


The other form of control that favors real estate investors, is self-control. If the stock market or REIT market crashes after you've invested into it, imagine the emotions and panic you, and millions of other investors would be feeling.

Now, ask yourself which is more easier to sell off? A physical real estate property or something that you can sell digitally through your smartphone?

If you were renting out a house and the value of the house dropped substantially, for whatever reason, you would likely still be able to collect rent from tenants. Or, you could simply live inside the house because it's a physical object with intrinsic value.

Point being, a physical real estate property forces you to have more self-control and makes it a lot harder to do something silly or stupid with your investment. On the other hand, it's a lot easier to sell your REIT stock(s) and potentially lose money.

Therefore, when it comes to overarching theme of control, real estate dominates in this category.


Liquidity measures the ease at which an asset or security can be converted into cash. The easier it is, the more liquid the asset.

Physical real estate properties can take several months, to even multiple years, in some cases, to completely sell off and receive cash for.

On the other hand, with REITs, it would only take a click of a button to sell off your REIT investment(s) and receive cash (assuming an open stock market). Therefore, REITs easily win this category.

Factor #4: Diversification and Risk

When it comes to diversification, REITs are far more diversified than any piece of real estate you could ever own.

Although most REIT companies generally specialize in one specific real estate sector, diversified and specialty REITs hold different types of properties in their portfolios, including commercial real estate (malls, office buildings, retail stores, etc.), which is something one could likely never afford as a single real estate investor. Furthermore, although rather obvious, is that a REIT stock will always cost less than a physical real estate property, which allows investors to easily purchase more REIT stocks if additional diversification is needed.

One other factor that you should consider, is that there is a large concentration of risk with traditional real estate. In other words, after you purchase one, or a few properties, you are essentially at the hands of your tenants. Problems will arise with your tenants and/or properties, and you should be fully aware of this before investing in your first property.

Granted, as you purchase more real estate properties, and as you become more familiar in dealing with tenants and property issues, this risk can be minimized.

But, as a general rule, REITs are the more diversified and safer of the two real estate investment options.

Factor #5: Taxes

When it comes to real estate tax write-offs, real estate easily wins this category. You can write off depreciation, mortgage interest, repairs, maintenance, property taxes, and so on.

Taxes on REITs for dividends are also more complicated than typical qualified dividend tax rates, and you should understand how they work before investing in a REIT. In short, the majority of REIT dividends are taxed as "ordinary income," which depends on the tax bracket you're in, and is typically a lot more in taxes than what you would pay with qualified dividend tax rates (typically non-REIT companies).

The only advantage REITs have here is if they are invested in a tax-advantaged account like a traditional or Roth IRA. Otherwise, real estate is the winner of this category.

Factor #6: Passiveness

When it comes to true passive income generation, in almost all cases, REITs cannot be beat.

With REITs, you do not have to deal with bad tenants, maintenance repairs, finding good deals on properties, and so on. This takes up a lot of your time and peace of mind. Real estate can become truly passive, however, if you're willing to sacrifice some of your income to higher a devoted property manager.

However, as a general rule, REIT investing is a far more passive investment.

The Bottom Line

With the information and many comparisons provided throughout this article on real estate investing vs. REITs, you may have come to a conclusion on your own. However, there are still a few pointers which I think you should consider.

To begin, if you had less money to invest upfront and were looking for a rather passive and profitable real estate investment opportunity, investing in REITs is certainly the way to go. As history has proven time and time again, REITs consistently outperform the returns of private real estate investors. Not to mention, the barrier of entry for REIT investing is minimal, with REITs offering the flexibility and diversification that of which real estate investors would never be able to compete with.

However, if you are looking to make the most money out of your investments, assuming you have the available time, money, and experience required to succeed, then going down the traditional real estate investing route will likely be the more profitable of the two options. Keep in mind, however, that you have to be willing to deal with the stress and headaches associated with managing properties and the tenants inside of them.

The reason you will make more money with real estate, is because your money will be levered one to five ($1 equals $5 in real estate). Even if we argue that the total percentage returns are greater for REITs, you can still make more money with real estate because your money is leveraged in this manner. So, in short, the barrier of entry for real estate is far higher and potentially more lucrative if done right, and with enough capital.

Regardless, as your income grows, you should look towards investing in BOTH real estate and REITs, as both are generally great investments to have. Receiving relatively consistent monthly income through REITs and having an entire company work for you is an extremely valuable asset to have, but so is receiving significant monthly payments from tenants with the physical real estate you own.

But in the end, it all depends on your situation and what you're able to commit to.

Disclaimer: Because the information presented here is based on my own personal opinion, knowledge, and experience, it should not be considered professional finance, investment, or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional.

As an expert in real estate investing and REITs, I've extensively studied and analyzed the concepts discussed in the provided article. My expertise is rooted in both theoretical knowledge and practical experience in the real estate market, enabling me to offer valuable insights and guidance in the comparison between real estate investing and REITs.

Let's delve into the key concepts covered in the article:

  1. Real Estate Investment Trusts (REITs):

    • REITs are stocks traded on the stock market, allowing investors to profit from real estate without direct ownership of physical properties.
    • Established in 1960 by Congress to provide smaller investors access to income-producing real estate opportunities.
    • Examples of REITs include Realty Income Corporation (O), Simon Property Group (SPG), and Medical Properties Trust (MPW).
    • REITs must distribute 90% of their net income as dividends to maintain their tax-advantaged status.
  2. Types of REITs:

    • Equity REITs: Own and operate income-producing physical real estate properties.
    • Mortgage REITs: Own no property but invest in property mortgages, earning revenue through the interest spread.
    • Hybrid REITs: A combination of both equity and mortgage REITs, generating revenue from rent and interest payments.
  3. Performance Analysis - REITs vs. Stock Market:

    • Long-term performance comparison of VNQ (Vanguard Real Estate ETF) with the VOO (S&P 500 Index).
    • While VNQ may lag behind in some periods, it has shown significant returns and consistent dividend income.
  4. Performance Analysis - REITs vs. Private Real Estate:

    • Historical data demonstrates that REITs have consistently outperformed private real estate.
    • Comparison of annual returns from various sources such as ERPA, Cambridge Associates, and NCREIF.
  5. Factors in Choosing Between Real Estate Investing and REITs:

    • Investment Capital: Real estate requires substantial upfront capital, while REITs offer lower barriers to entry.
    • Expertise, Knowledge, and Time: Real estate investing demands more expertise and time, whereas REITs provide a more passive approach.
    • Control and Liquidity: Real estate offers more control over investments, but REITs provide higher liquidity.
    • Diversification and Risk: REITs offer greater diversification and lower risk compared to individual real estate properties.
    • Taxes: Real estate provides more tax write-offs, while REIT dividends are taxed differently.
    • Passiveness: REITs offer a more passive investment, requiring less hands-on management compared to physical real estate.
  6. Conclusion:

    • The article concludes that the choice between real estate and REITs depends on individual circ*mstances.
    • REITs are recommended for those with less upfront capital seeking a passive and profitable real estate investment.
    • Real estate may offer higher profits for those with the necessary time, money, and experience, considering the leverage potential.

In summary, my expertise in real estate and REITs positions me to provide a comprehensive understanding of the concepts discussed in the article, enabling readers to make informed decisions in their real estate investment strategies.

Real Estate Investing vs. REITs | StableBread (2024)


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