I read an article recently where the author tried to make the point that investing in REITs (Real Estate Investment Trusts) was better than investing in Real Estate. I didn’t buy all of his arguments and believe his conclusions were flawed. Just so we are clear I own many REITs and I have owned and still own rental properties.
Which is better ? Investing in REITs or Real Estate. The answer – There is no simple answer. I love REITs. They have many advantages over Real Estate properties and they have many advantages over general equity stocks. While I will not discuss all the advantages and disadvantages of REITs here (Look for a future article – Why I love REITs) I will point out the number one advantage of owning a REIT – Its higher yield. Remember your two best friends? That’s right Mr. Time and Mr. Yield. Together you will probably find no better friends, at least in the investing world.
But let’s compare his arguments for REITs with that of Real Estate:
REITs are less risky, better diversified, liquid and cost-efficient
Less risky ? That is very subjective, Real Estate is not any more of a risk than REITs, in fact I would argue that Real Estate is in fact less risky of an investment when done by someone who knows what they are doing. Better Diversified? Again, this one just not make sense, but I believe I see what he is trying to say but comparing a basket of stocks with a real estate investment is comparing apples to oranges. He also states that unless you have a Hundred million dollars you cannot possibly be well diversified – I believe he pulled the figure out of a hat somewhere! Besides I know people that own dozens of properties in many locations and in some cases differing types of properties so again I do not agree. Cost efficient ? I don’t understand his argument here so I really don’t know how to respond except – ???? The one part of this statement I do agree with is that of Liquidity. It is generally much easier to buy and sell REITs than Real Estate.
REITs have historically outperformed private real estate
Pure Hogwash ! In fact in his supporting paragraph he compares the performance of REITS to the S&P 500, and Private Real Estate Funds, not to private real estate investors. Big difference here. I have personally known private investors that have made over 100% returns on real estate deals.
REITs provide REAL passive income
Well, okay. I’ll buy that unless you pay a property manager to manage your properties you will have to put in more work, but real estate investing is certainly no 9-5 job ! But this even tries to make an argument that you will end having to take on a second job. Totally ridiculous statement in my opinion.
REITs are not necessarily more volatile
Again he tries to compare REITs with Private Real Estate without even comparing the two. He uses various metrics to point out that REITs are not more volatile that Private Real Estate but does not show any examples of Private Real Estate volatility. The thing is I do agree that REITs are not that volatile but neither is real estate. Yes, real estate does fluctuate but very few of us look up the expected price of our home or real estate investment very often. The truth is though your home more than likely will not drop in value over night because the FED has stated they may raise interest rates or because of tensions with some foreign country, or just because the whole stock market is in a general decline that day. I have no hard core proof to present, but my own experience tells me that Real Estate for the most part holds its value very well.
Then of course we have his conclusion:
My conclusion is that if you are not a professional real estate investor, forget any form of private real estate investing including crowdfunding, limited partnerships and direct ownership (excludes home, and other exceptions). And even if you are a professional investor, you might still be better off investing in REITs.
Obviously there exist many exceptions to this conclusion, and I am sure that private real estate makes more sense for one investor than another. But REITs have so many advantages over private real estate that it is difficult to argue against it. REITs are less risky, better diversified and liquid, but they have still managed to outperform private benchmarks in the past.
Read his “conclusion” carefully. It just does not make sense. Only professional real estate investors should invest in private real estate? Really? Does one have to be born into the Professional Real Estate Investing profession?
And then – Even if you are a professional real estate investor you might be better off investing in REITs? Then he repeats his unsubstantiated arguments again to summarize his conclusion.
I personally invest in both REITs and in Investment Properties. Yes, real estate takes more time and effort and yes, real estate can be difficult to sell sometimes, with these I agree. But no, Real Estate is not any more volatile than REITs and it is not only for “Real Estate Professionals”.
REITs are great investments also. Many of my REIT investments make great returns for me and I enjoy collecting yields ranging from 5% to 10%. Some of my current REITs are APTS, VTR, WPC, O, CCP, OHI and I am happy to own them, but they are very different than owning actual investment properties. I have generally achieved much greater returns investing in real estate than I ever could investing in only REITs.
If you are up to it and in a financial position to do so I recommend not choosing between the two but investing in both. Then you can experience the best of both worlds, more diversity in your investments, higher returns and still maintain some liquidity for your needs.
Investing does not have to be complicated but it seems many of us want to make it so.
Your thoughts and comments are welcome !