Why I am moving from REITs to owning Rental Properties
Hi BiggerPockets community,
I’ve been investing in REITs for quite a while to generate passive income from real estate. Recently, however, my wife and I decided it’s time to start owning properties directly. I wanted to share our thoughts and get your perspective.
Let’s talk about the four types of returns when investing in rental properties:
1) Income return: REITs income returns are driven primarily by dividend yield. Dividend payments are determined by the board and can be adjusted over time (unless you invest in preferred shares, typically at the expense of appreciation). While you cannot control the dividend you receive, you can choose your entry point and potentially buy during market dips to lock in a higher yield.
The challenge is timing: you may wait for a correction that never comes and miss years of income. As Peter Lynch noted, investors often lose opportunities waiting for crashes during ongoing bull markets.
With rental properties, you can be more creative in increasing your cash-on-cash (CoC) return. You can negotiate better entry prices, structure seller financing, renovate to raise rents, or improve operations. Unlike REITs, you have more direct influence over the income side of the equation.
2) Appreciation (or price) return: Playing the devils advocate, Nareit All Equity REIT index has outperformed NCREIF Property Index for the last 30 years. In fact, FTSE Nareit Equity Single Family Homes grew 8.80% and Case-Shiller HPI grew 6.48% from Dec-2015 until Nov-2025 (I wish I could give a longer period for comparison). However, the repeat-sales method used in the HPI calculation attempts to measure pure market price appreciation. If a home undergoes a major renovation that significantly alters its value, that sale pair may be statistically adjusted or removed from the sample.
In other words, if you are relying purely on passive market appreciation, REITs have historically been competitive or superior over long horizons. Therefore, buy-and-hold rental strategies often need to outperform through stronger cash flow. However, direct ownership allows you to force appreciation through renovations, repositioning, BRRRR strategies, or redevelopment. That type of active value creation is not available to passive REIT shareholders. If you own a REIT you rely on the manager to take such an initiative, and they may raise funds in the market to do so and dilute your share in the process.
3) Loan paydown: One major advantage of rental properties is amortization. While margin lending exists in the stock market, it is typically short-term, callable, and requires dividend yields that rarely cover borrowing costs. It’s not comparable to long-term, fixed-rate mortgage financing.
With rental properties, tenants effectively help service the debt over time. This gradual loan paydown builds equity through long-term leverage (often at fixed rates), which is fundamentally different from margin-based investing.
That long-term leverage is one of the most powerful return drivers in direct real estate ownership.
4) Tax savings: I am not a tax advisor, so please don't use this as tax advice, but taxes are a meaningful differentiator. I believe owning your property is way better.
REITs have an advantage: they don't pay income tax at the corporate level, you only pay taxes for the dividends and certain capital gains (in the dividend itself or at a cost basis), which puts them at an advantage to other stocks. Moreover, you can always pick the kind of account where you'll hold your REITs to optimize: with a 401(k) or a traditional IRA account you will only pay taxes as ordinary income when withdrawing the money, and with Roth IRA you don't pay taxes on the withdrawal; but this is all meant for retirement, not for becoming financially free before you're 70.
With rental properties, the tax code provides additional tools. You have mortgage interest deductions and you can do 1031 exchanges to avoid taxes on capital gains. Moreover, if you own your properties through a coporation, you can deduct all expenses and depreciate your assets before calculating your income tax. That said, as Robert Kiyosaki has suggested, tax benefits should enhance a good deal, not justify a bad one.
To wrap up, I believe REITs are great passive investments that allow you to easily get exposure to commercial real estate before you have the financial muscle and experience to own the rental property yourself, specially in markets you think may outperform due to demographic or economic changes. However, being an owner puts you in the driver seat, which allows you to be creative, use leverage, get tax advantages and have some sort of predictability. Paraphrasing Warren Buffet, being an active investor comes with a greater reponsibility, but not necessarily with a greater risk if you operate within your circle of competence.
Let me know your thoughts!