{"id":180426,"date":"2025-01-11T10:15:20","date_gmt":"2025-01-11T17:15:20","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=180426"},"modified":"2025-01-11T10:16:32","modified_gmt":"2025-01-11T17:16:32","slug":"the-risk-of-reits-and-why-rentals-can-be-better","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/the-risk-of-reits-and-why-rentals-can-be-better","title":{"rendered":"The Risks of REITs vs. Private Real Estate"},"content":{"rendered":"\n

I<\/span>f you\u2019re reading this, you\u2019re probably just as curious about the risks of <\/span>investing in REITs<\/span><\/a>, or real estate investment trusts, as I am. But why invest in REITs at all?<\/span><\/p>\n\n\n\n

REITs offer benefits that private real estate investments cannot, such as liquidity and a lower barrier to entry. <\/span>Let\u2019s <\/span>take a look at<\/span> the real estate market today to see why this matters.<\/span><\/p>\n\n\n\n

Real Estate Investing Today<\/span><\/h2>\n\n\n\n

With the national median home price hovering <\/span>at $420,400<\/span><\/a> as of the third quarter of 2024 and mortgage rates stubbornly remaining <\/span>above 6%<\/span><\/a>, barriers to entry in real estate investing have never been higher (and likely will <\/span>remain<\/span> this way; <\/span>this is the new normal for our industry<\/span><\/a>, and we all should get used to it). <\/span><\/p>\n\n\n\n

\"monthly
Average monthly mortgage payment over time (assuming a 25% down payment)<\/span><\/em><\/figcaption><\/figure>\n\n\n\n

So unless you have at least $100,000 for a 25% down payment into an investment property (assuming the price is the national median) or are willing and able to <\/span>house hack<\/span><\/a> a primary residence, it can seem like your options to get started in real estate are limited.<\/span><\/p>\n\n\n\n

Note: <\/span>There are some <\/span>affordable markets<\/span><\/a> that have<\/span> seen relatively strong growth in jobs, price, rents, and population<\/span>, such as <\/span>Oklahoma City<\/span><\/a>, <\/span>Indianapolis<\/span><\/a>, and <\/span>Columbus, Ohio<\/span><\/a>.<\/span> According to<\/span> Redfin<\/span>, <\/span>their median home prices remain below $300,000 as of November 2024.<\/span> These metropolitan areas may be the best places for investors to get started if <\/span>they\u2019re<\/span> priced<\/span> out of their local market.<\/span><\/em><\/p>\n\n\n\n

REITs may be a solution for those looking to benefit from real estate indirectly while they build their savings.<\/span><\/p>\n\n\n\n

But<\/span> private real estate investing is still one of the best <\/span>wealth-creation vehicles<\/span><\/a> out there<\/span>, so let\u2019s briefly discuss the difference (and why it may be unfair to compare the two).<\/span><\/p>\n\n\n\n

Active vs. Passive: An Unfair Comparison<\/span><\/h2>\n\n\n\n

Privately owning a rental property can be <\/span>thought of as owning<\/span> a low-activity business. <\/span>You <\/span>are ultimately in charge of ensuring<\/span> revenue is being earned (regardless of whether you use a property manager, the responsibility is yours).<\/span> <\/span><\/p>\n\n\n\n

You are also in charge of expense management. If an appliance needs to <\/span>be replaced<\/span>, your roof needs repair or a new foundation issue has appeared, money will need to exit your business account to cover these costs, and it\u2019s your responsibility to ensure these expenses are <\/span>being<\/span> managed<\/span> correctly.<\/span><\/p>\n\n\n\n

However, because asset management is <\/span>completely<\/span> under your control, so <\/span>too<\/span> is the lever of returns (or losses) you could <\/span>potentially<\/span> earn over time.<\/span> (Private real estate income is also taxed as passive income, while REIT income <\/span>is taxed<\/span> as ordinary income.)<\/span><\/p>\n\n\n\n

Because private real estate ownership is an active business activity, we should end this comparison to REITs on this basis alone. <\/span><\/em><\/p>\n\n\n\n

One investor may prefer to be more \u201cactive\u201d and reap the rewards (and risks) <\/span>that come with<\/span> private real estate asset management. Another investor may not want to manage their own physical asset-based business (a rental property). Or they may not have enough capital (savings) to lower their monthly debt obligation (loan payment<\/span>),<\/span> but would still like to put their dollars to work and earn a risk-adjusted return higher than U.S. Treasuries (bonds). <\/span><\/p>\n\n\n\n

Or an investor might <\/span>just<\/span> want exposure to growing sectors, such as industrial or data center properties.<\/span><\/p>\n\n\n\n

Now, for <\/span>the investor who is<\/span> just as willing to invest in private real estate as they are in REITs, let\u2019s move on from this disclaimer.<\/span><\/p>\n\n\n\n

Risk of Losing Money<\/span><\/h2>\n\n\n\n

So, let\u2019s get down to the real question here: What are your risks as an investor by asset class?\u00a0<\/span><\/p>\n\n\n\n

Private real estate<\/span><\/h3>\n\n\n\n

What is the risk of your private property declining in price? First, let\u2019s look at the U.S. Federal Housing Finance Agency\u2019s (FHFA) House Price Index (HPI) over time:<\/span><\/p>\n\n\n