REITS vs Direct Real Estate Investing

1 Reply

Dear Bigger Pockets Members,

Assuming one has a sizable amount of money (500K to $1mil) to invest in real estate; and one of the investment options is to buy rental properties,so basically that person becomes a landlord. My question is why should that person go through the learning process and make costly mistakes or pitfalls and maybe lose some of his capital to become an efficient landlord, while on the other hand that investor could invest his money in REITS (Real Estate Investment Trust).

To me the obvious advantages of REITS is that investors can economically and efficiently obtain exposure to real estate in publicly traded, liquid, transparent, daily valued, regulated, and audited securities.

While the obvious disadvantages of directly buying rental is that individual real estate properties meet none of the usual tests for market efficiency: Each parcel is unique, transaction costs are very large, sales occur only occasionally, and market knowledge is often local and restricted, making this an insider’s market. Most transactions are private, so detailed knowledge of rent rolls, replacement costs, deferred maintenance, and other critical data is not widely known. Liquidity can be nonexistent, and the smallest possible purchase unit can be above the means of many investors.

I would like to hear the other side of the argument and maybe convince me to do it myself.


For starter's I'd argue that an inefficient market is an advantage, not a disadvantage. In "theory" there are no good deals in an efficient market.

(Although it is worth noting that the efficient market hypothesis is completely false, and was simply made so that math models would work.)

I'd say the biggest disadvantage of direct ownership is the liquidity issue and the "stress" of ownership.

However, the returns for these should (if you buy right and manage well) yield much higher returns than through a REIT. So one must balance these factors.

Obviously there is no guarenteed right/wrong way to invest one's money.

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