{"id":178240,"date":"2024-10-14T15:15:41","date_gmt":"2024-10-14T21:15:41","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=178240"},"modified":"2024-10-14T15:23:21","modified_gmt":"2024-10-14T21:23:21","slug":"8-reasons-for-why-reits-are-better-than-rentals","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/8-reasons-for-why-reits-are-better-than-rentals","title":{"rendered":"8 Reasons Why REITs Are More Rewarding Than Rentals"},"content":{"rendered":"\n<p><span data-preserver-spaces=\"true\">I wrote an <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/why-im-buying-reits-instead-of-rental-properties\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">article<\/span><\/a><span data-preserver-spaces=\"true\"> explaining why I <\/span><span data-preserver-spaces=\"true\">am investing<\/span><span data-preserver-spaces=\"true\"> in real estate investment trusts (REITs) instead of rental properties. In short, REITs <\/span><span data-preserver-spaces=\"true\">are still discounted<\/span><span data-preserver-spaces=\"true\">, and I expect their lower valuations to result in higher returns in the coming years.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Unfortunately, <\/span><span data-preserver-spaces=\"true\">it would seem that<\/span><span data-preserver-spaces=\"true\"> many readers miss the point of investing in REITs due to misconceptions.<\/span><span data-preserver-spaces=\"true\"> I saw several people in the comment section claim that REITs should be less rewarding investments because:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">You don&#8217;t enjoy the benefits of leverage.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">They are not tax-efficient.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">You are paying managers instead of getting your hands dirty.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">But these statements are just plain wrong, and I <\/span><span data-preserver-spaces=\"true\">am going to<\/span><span data-preserver-spaces=\"true\"> prove it.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Studies Bear It Out<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Studies show very clearly that REITs are more rewarding investments than private real estate in most cases, and there are good reasons for this. <\/span><span data-preserver-spaces=\"true\">This<\/span><span data-preserver-spaces=\"true\"> may seem surprising to some of you, but it <\/span><span data-preserver-spaces=\"true\">really<\/span><span data-preserver-spaces=\"true\"> shouldn&#8217;t be. Here are three examples.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Study 1<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">FTSE Equity REIT Index compared to NCREIF Property Index as an annual return percentage (1977-2010) \u2013 <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.epra.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">EPRA<\/span><\/a><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"374\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image2.jpeg\" alt=\"\" class=\"wp-image-178244\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image2.jpeg 640w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image2-300x175.jpeg 300w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Study 2<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Private Equity Real Estate compared to Listed Equity REITs as net total return per year over 25 years \u2013 <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cambridgeassociates.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Cambridge Associates<\/span><\/a><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"360\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image3.jpeg\" alt=\"\" class=\"wp-image-178245\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image3.jpeg 640w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image3-300x169.jpeg 300w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Study 3<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Performance of U.S. REITs and Private Real Estate Returns (1980-2019) \u2013 <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.reit.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">NAREIT<\/span><\/a><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"239\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image1.jpeg\" alt=\"\" class=\"wp-image-178243\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image1.jpeg 640w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/10\/image1-300x112.jpeg 300w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Three Misconceptions and Why They\u2019re False<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I will give you eight reasons why REITs should be more rewarding investments than private real estate in most cases. But before that, I will quickly correct the three misconceptions that I keep hearing over and over again:&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Misconception 1:<\/span><span data-preserver-spaces=\"true\"> You don&#8217;t enjoy the benefits of leverage.<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">This<\/span><span data-preserver-spaces=\"true\"> is nothing more than a misunderstanding. Investors seem to think that just because you cannot take a mortgage to REITs, you won&#8217;t enjoy the benefits of leverage, but this is incorrect.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">What they ignore is that REITs <\/span><span data-preserver-spaces=\"true\">are already leveraged<\/span><span data-preserver-spaces=\"true\">. You don&#8217;t need to take a mortgage because REITs take care of that for you.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">When you buy shares of a REIT, you are providing the equity, and the REIT adds debt on top of it. <\/span><span data-preserver-spaces=\"true\">As such, your<\/span><span data-preserver-spaces=\"true\"> $50,000 investment in the equity of a REIT may well represent $100,000 worth of properties.<\/span> <span data-preserver-spaces=\"true\">You <\/span><span data-preserver-spaces=\"true\">just<\/span><span data-preserver-spaces=\"true\"> don\u2019t see it because what&#8217;s traded in the stock market is the equity, not the total asset value, but the benefits are the same.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Misconception 2:<\/span><span data-preserver-spaces=\"true\"> They are not tax-efficient.<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">This misconception stems from the fact that REIT dividend payments <\/span><span data-preserver-spaces=\"true\">are often classified<\/span><span data-preserver-spaces=\"true\"> as ordinary income. But this is very short-sighted because <\/span><span data-preserver-spaces=\"true\">there are many other factors that improve<\/span><span data-preserver-spaces=\"true\"> their tax efficiency\u2014to the point that I pay less taxes investing in REITs than in rentals:&nbsp;<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">REITs pay zero corporate taxes, so there is no double taxation.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">REITs retain 30% to 40% of their cash flow for growth<\/span><span data-preserver-spaces=\"true\">. All of that<\/span><span data-preserver-spaces=\"true\"> is fully tax-deferred.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">A portion of the dividend income <\/span><span data-preserver-spaces=\"true\">is commonly classified<\/span><span data-preserver-spaces=\"true\"> as \u201creturn of capital.\u201d That\u2019s tax-deferred as well.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">The portion of the <\/span><span data-preserver-spaces=\"true\">dividend income that\u2019s taxed<\/span><span data-preserver-spaces=\"true\"> enjoys a 20% deduction.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">REITs generate a <\/span><span data-preserver-spaces=\"true\">larger<\/span><span data-preserver-spaces=\"true\"> portion of their total returns from growth because they focus on lower-yielding class A properties. The appreciation is fully tax-deferred.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Finally, if all that still isn\u2019t enough, you can hold REITs in a tax-deferred account and pay zero taxes <\/span><span data-preserver-spaces=\"true\">with great flexibility<\/span><span data-preserver-spaces=\"true\">.<\/span><\/li>\n<\/ol>\n\n\n\n<p><span data-preserver-spaces=\"true\">Beyond that, REITs <\/span><span data-preserver-spaces=\"true\">also<\/span><span data-preserver-spaces=\"true\"> have enough scale to have in-house lawyers to fight off property tax increases and optimize their impact.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">All in all, REITs can be very tax-efficient.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Misconception 3:<\/span><span data-preserver-spaces=\"true\"> You are paying managers instead of getting your hands dirty.<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Yes, you are paying managers, but the management costs of REITs are still far lower than <\/span><span data-preserver-spaces=\"true\">that of<\/span><span data-preserver-spaces=\"true\"> private rental properties because they enjoy <\/span><span data-preserver-spaces=\"true\">huge<\/span><span data-preserver-spaces=\"true\"> economies of scale.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Taking the example of<\/span><span data-preserver-spaces=\"true\"> Realty Income (O), its annual management cost is just 0.28% of total assets.<\/span> <span data-preserver-spaces=\"true\">There are <\/span><span data-preserver-spaces=\"true\">huge<\/span><span data-preserver-spaces=\"true\"> cost advantages when you own billions of dollars worth of real estate<\/span><span data-preserver-spaces=\"true\">, and REIT<\/span><span data-preserver-spaces=\"true\"> investors benefit from this.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now that we have these misconceptions out of the way, here are the eight reasons why REITs are typically more rewarding than rental properties:&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 1: REITs Enjoy Huge Economies of Scale<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">It goes far beyond just management <\/span><span data-preserver-spaces=\"true\">cost<\/span><span data-preserver-spaces=\"true\">. Real estate is a low-margin business<\/span><span data-preserver-spaces=\"true\">, <\/span><span data-preserver-spaces=\"true\">with low barriers to entry. Therefore, scale is a major advantage <\/span><span data-preserver-spaces=\"true\">to lower costs and improve<\/span><span data-preserver-spaces=\"true\"> margins.<\/span><span data-preserver-spaces=\"true\"> REITs excel at this.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Take the example of AvalonBay Communities (AVB). The REIT owns nearly 100,000 apartment units, resulting in significant economies of scale at every level, from leasing to maintenance and everything else <\/span><span data-preserver-spaces=\"true\">in between<\/span><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let&#8217;s assume that AVB owns 500 apartment units in one specific market<\/span><span data-preserver-spaces=\"true\">, and it<\/span><span data-preserver-spaces=\"true\"> strikes a deal with a local contractor to change 100 carpets each year. <\/span><span data-preserver-spaces=\"true\">It will of<\/span><span data-preserver-spaces=\"true\"> course get a much better rate for each carpet than what <\/span><span data-preserver-spaces=\"true\">you<\/span><span data-preserver-spaces=\"true\"> could get if <\/span><span data-preserver-spaces=\"true\">you<\/span><span data-preserver-spaces=\"true\"> made a deal to change just one.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Another good example <\/span><span data-preserver-spaces=\"true\">would be if<\/span><span data-preserver-spaces=\"true\"> you need to hire a lawyer to evict a tenant.<\/span><span data-preserver-spaces=\"true\"> AVB has in-house lawyers working for them, which <\/span><span data-preserver-spaces=\"true\">greatly<\/span><span data-preserver-spaces=\"true\"> reduces the cost.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Such economies of scale apply everywhere, <\/span><span data-preserver-spaces=\"true\">and it makes<\/span><span data-preserver-spaces=\"true\"> a big difference in the end.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 2: REITs Can Grow Externally&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Private real estate investors are <\/span><span data-preserver-spaces=\"true\">mostly<\/span><span data-preserver-spaces=\"true\"> limited to rent increases to grow their cash flow over time. <\/span><span data-preserver-spaces=\"true\">We<\/span><span data-preserver-spaces=\"true\"> call this &#8220;internal growth<\/span><span data-preserver-spaces=\"true\">&#8221; in the REIT sector<\/span><span data-preserver-spaces=\"true\">. But REITs can also supplement their internal growth with what we call &#8220;external growth,&#8221; which is when they raise more capital to reinvest it at a positive spread.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That&#8217;s how REITs like Realty Income have historically managed to grow their cash flow and dividends at 5%+ annually, <\/span><span data-preserver-spaces=\"true\">even<\/span><span data-preserver-spaces=\"true\"> despite only enjoying annual 1% to 2% <\/span><span data-preserver-spaces=\"true\">annual<\/span><span data-preserver-spaces=\"true\"> rent increases. The difference comes from external growth.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It sells shares in the public open market to raise equity <\/span><span data-preserver-spaces=\"true\">and then<\/span><span data-preserver-spaces=\"true\"> adds debt on top of it and buys more properties. As long as it can raise capital at a cost <\/span><span data-preserver-spaces=\"true\">that&#8217;s<\/span><span data-preserver-spaces=\"true\"> inferior to the <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/cap-rate-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cap rates<\/span><\/a><span data-preserver-spaces=\"true\"> of its new acquisitions, there is a positive spread that will expand its cash flow and dividend on a per-share basis.<\/span><span data-preserver-spaces=\"true\"> It is not dilutive. It is accretive and creates further value for shareholders.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Private real estate investors <\/span><span data-preserver-spaces=\"true\">cannot<\/span><span data-preserver-spaces=\"true\"> do that <\/span><span data-preserver-spaces=\"true\">because<\/span><span data-preserver-spaces=\"true\"> they <\/span><span data-preserver-spaces=\"true\">don&#8217;t<\/span><span data-preserver-spaces=\"true\"> have access to the public equity markets, putting them at a significant disadvantage <\/span><span data-preserver-spaces=\"true\">right off the bat<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 3: REITs Can Develop Their <\/span><span data-preserver-spaces=\"true\">Own<\/span><span data-preserver-spaces=\"true\"> Properties&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Most private real estate investors <\/span><span data-preserver-spaces=\"true\">will<\/span><span data-preserver-spaces=\"true\"> buy stabilized properties and rent them out. <\/span><span data-preserver-spaces=\"true\">At most, they<\/span><span data-preserver-spaces=\"true\"> may do some light renovations <\/span><span data-preserver-spaces=\"true\">in an attempt to increase the<\/span><span data-preserver-spaces=\"true\"> value and rent.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But REITs go far beyond that. They are very active in their investment approach and will commonly buy raw land, seek permits, and build their <\/span><span data-preserver-spaces=\"true\">own<\/span><span data-preserver-spaces=\"true\"> properties to maximize value.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It is not uncommon for REITs like First Industrial (FR) to build new class A industrial properties at a 7%+ cap rate, but if <\/span><span data-preserver-spaces=\"true\">it<\/span><span data-preserver-spaces=\"true\"> bought such stabilized assets, <\/span><span data-preserver-spaces=\"true\">it<\/span><span data-preserver-spaces=\"true\"> would only get a 5% cap rate. That puts <\/span><span data-preserver-spaces=\"true\">it<\/span><span data-preserver-spaces=\"true\"> at a huge advantage. Not only will <\/span><span data-preserver-spaces=\"true\">it<\/span><span data-preserver-spaces=\"true\"> earn a higher yield from newer properties, but <\/span><span data-preserver-spaces=\"true\">it<\/span><span data-preserver-spaces=\"true\"> will also create significant value by raising capital and developing these assets.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">REITs can do this because of their scale. They can afford to hire the best talent and tend to have great relationships with city officials, tenants, and contractors.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 4: REITs Can Earn Additional Profits by Monetizing Their Platform<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">REITs will commonly also earn additional profits by offering services to other investors, and you participate in these profits as a shareholder of the REIT.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many REITs will manage capital for other investors and earn asset management fees. <\/span><span data-preserver-spaces=\"true\">As an<\/span><span data-preserver-spaces=\"true\"> example, they may create joint ventures when acquiring properties and let other investors ride their investments, charging them fees for managing them, boosting the return that the REIT earns on its <\/span><span data-preserver-spaces=\"true\">own<\/span><span data-preserver-spaces=\"true\"> capital. Healthcare Realty (HR) commonly does that.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Alternatively, the REIT may offer brokerage or property management services. Some are so active in developing properties that they have their <\/span><span data-preserver-spaces=\"true\">own<\/span><span data-preserver-spaces=\"true\"> construction crew and <\/span><span data-preserver-spaces=\"true\">offer<\/span><span data-preserver-spaces=\"true\"> construction services to earn additional profits. Naturally, this also boosts returns for REIT shareholders.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 5: REITs Enjoy Stronger Bargaining Power With Their Tenants<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">REITs are large and well-diversified, <\/span><span data-preserver-spaces=\"true\">and this puts<\/span><span data-preserver-spaces=\"true\"> them in a stronger position when negotiating with tenants. <\/span><span data-preserver-spaces=\"true\">This<\/span><span data-preserver-spaces=\"true\"> is key to earning <\/span><span data-preserver-spaces=\"true\">stronger<\/span><span data-preserver-spaces=\"true\"> returns over time because it commonly allows the REIT to achieve faster rent growth.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you <\/span><span data-preserver-spaces=\"true\">only own just<\/span><span data-preserver-spaces=\"true\"> one or a few properties, you will be reluctant to raise the rent out of fear that your tenant will move out. You are not well-diversified<\/span><span data-preserver-spaces=\"true\">, so<\/span><span data-preserver-spaces=\"true\"> a vacancy would be very costly.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, REITs can enforce rent increases because they know <\/span><span data-preserver-spaces=\"true\">that they will be just<\/span><span data-preserver-spaces=\"true\"> fine if the tenant moves away.<\/span> <span data-preserver-spaces=\"true\">It <\/span><span data-preserver-spaces=\"true\">won&#8217;t<\/span><span data-preserver-spaces=\"true\"> have a <\/span><span data-preserver-spaces=\"true\">big<\/span><span data-preserver-spaces=\"true\"> impact on their bottom line, and they have the resources <\/span><span data-preserver-spaces=\"true\">to quickly release the property at a minimal cost<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 6: REITs Benefit from Off-Market Deals on a Much Larger Scale<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Most often, when private real estate investors buy a property, they <\/span><span data-preserver-spaces=\"true\">will<\/span><span data-preserver-spaces=\"true\"> do so via the brokerage market. The properties <\/span><span data-preserver-spaces=\"true\">are advertised<\/span><span data-preserver-spaces=\"true\"> for sale, <\/span><span data-preserver-spaces=\"true\">they <\/span><span data-preserver-spaces=\"true\">are<\/span><span data-preserver-spaces=\"true\"> priced<\/span><span data-preserver-spaces=\"true\"> competitively, and you also end up paying high transaction costs.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Again, <\/span><span data-preserver-spaces=\"true\">the scale of REITs<\/span><span data-preserver-spaces=\"true\"> gives them a major advantage, as they <\/span><span data-preserver-spaces=\"true\">will<\/span><span data-preserver-spaces=\"true\"> commonly skip the brokerage market and structure their own off-market deals.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Some REITs, like Essential Properties Realty Trust (EPRT), will <\/span><span data-preserver-spaces=\"true\">reach out to<\/span><span data-preserver-spaces=\"true\"> property owners via cold-calling efforts and offer to buy their real estate. <\/span><span data-preserver-spaces=\"true\">They will then structure their <\/span><span data-preserver-spaces=\"true\">own<\/span> <span data-preserver-spaces=\"true\">leases<\/span><span data-preserver-spaces=\"true\"> with landlord-friendly terms and typically close the deal at a higher cap rate than <\/span><span data-preserver-spaces=\"true\">what<\/span><span data-preserver-spaces=\"true\"> they would have gotten in a more competitive bidding environment.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 7: REITs Have the Best Talent&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I briefly mentioned this earlier, but it is worth mentioning <\/span><span data-preserver-spaces=\"true\">it<\/span><span data-preserver-spaces=\"true\"> again: REITs can afford to hire the best real estate talent because of their large scale.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Even despite paying them handsomely, their management cost is still far lower as a percentage of assets than what it typically is for private properties. And there&#8217;s no doubt that better skills will result in better returns over time.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">These people go to the top schools, gain the best private equity experience, and eventually dedicate their lives to working long hours <\/span><span data-preserver-spaces=\"true\">for the benefit of<\/span><span data-preserver-spaces=\"true\"> REIT shareholders. You cannot compete with them, especially <\/span><span data-preserver-spaces=\"true\">if you are just<\/span><span data-preserver-spaces=\"true\"> a part-time landlord.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reason 8: REITs Avoid Disastrous Outcomes&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Finally, another important reason <\/span><span data-preserver-spaces=\"true\">why<\/span><span data-preserver-spaces=\"true\"> REITs outperform on average is that they <\/span><span data-preserver-spaces=\"true\">avoid disastrous results for the most part<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\"> The distribution of results is much <\/span><span data-preserver-spaces=\"true\">wider<\/span><span data-preserver-spaces=\"true\"> for private real estate owners.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Some will succeed. Others will lose it all. They are highly concentrated, leveraged private investments with liability risk and a social component. <\/span><span data-preserver-spaces=\"true\">Not surprisingly, <\/span><span data-preserver-spaces=\"true\">there are<\/span><span data-preserver-spaces=\"true\"> countless real estate investors <\/span><span data-preserver-spaces=\"true\">filing<\/span><span data-preserver-spaces=\"true\"> for bankruptcy each year, and these disastrous results hurt the average performance of private real estate investors.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But REIT bankruptcies are extremely rare. <\/span><span data-preserver-spaces=\"true\">There have only been a handful of them<\/span><span data-preserver-spaces=\"true\"> over the past few decades, and most <\/span><span data-preserver-spaces=\"true\">of them<\/span><span data-preserver-spaces=\"true\"> were REITs that owned lower-quality malls.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This<\/span><span data-preserver-spaces=\"true\"> shouldn&#8217;t <\/span><span data-preserver-spaces=\"true\">come as<\/span><span data-preserver-spaces=\"true\"> a surprise, given that most REITs use reasonable leverage, are well diversified, and own <\/span><span data-preserver-spaces=\"true\">mostly<\/span><span data-preserver-spaces=\"true\"> Class A properties. It is <\/span><span data-preserver-spaces=\"true\">really hard<\/span> <span data-preserver-spaces=\"true\">to then mess it<\/span><span data-preserver-spaces=\"true\"> up.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">REITs are typically more rewarding than private real estate investments. Studies prove this, and there is a strong rationale as to why this would make sense. <\/span><span data-preserver-spaces=\"true\">In fact,<\/span><span data-preserver-spaces=\"true\"> it would be surprising if it were the opposite, given all the advantages that REITs enjoy.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, this doesn\u2019t imply that private real estate is a poor investment; <\/span><span data-preserver-spaces=\"true\">rather<\/span><span data-preserver-spaces=\"true\">, it highlights the importance of not overlooking REITs and including them in your real estate portfolio.<\/span><\/p>\n\n\n\n<div id=\"hero-block_5152b2eb24cb09b773d4e05664b3170e\" class=\"first:mt-0 hero-block py-4  alignfull   has-background has-slate-50-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Invest Smarter with PassivePockets<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Access education, private investor forums, and sponsor &amp; deal directories \u2014 so you can confidently find, vet, and invest in syndications.<\/p>\n\n\n\n<div id=button-custom-event-block_3285be37c479d8ddb3e5cf27355ca446 class='button-custom-event'>\n      <a href=\"https:\/\/passivepockets.com\/\" x-on:click=\"window.analytics.track(&#039;Blog Block | Deal Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/8-reasons-for-why-reits-are-better-than-rentals&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\" rel=\"noopener\">Start your 7-Day Free Trial<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/09\/PassivePockets-BP-Blog-Ad-1.png\" alt=\"passivepockets logo\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>I wrote an article explaining why I am investing in real estate investment trusts (REITs) instead of rental properties. In short, REITs are still discounted, and I expect their lower [&hellip;]<\/p>\n","protected":false},"author":613706,"featured_media":175266,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433,7363],"tags":[],"class_list":["post-178240","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion","category-reits-passive-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/178240","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613706"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=178240"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/178240\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/175266"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=178240"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=178240"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=178240"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}