REITs vs. Real Estate Investments: What's the Difference? (2024)

Wondering how to invest in real estate? Many investors who want to tap into the real estate sector compare REITs to actual, tangible real estate. REITs—or real estate investment trusts—are corporations that act like mutual funds for real estate investing. You can invest in a REIT without having to own or manage any property yourself. Alternatively, you can go the direct real estate investing route and buy residential or commercial properties.

Key Takeaways

  • REITs allow individual investors to make money on real estate without having to own or manage physical properties.
  • Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.
  • Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.

Direct Real Estate

With a direct real estate investment, you buy a specific property or a stake in one, such as an apartment complex (residential) or a shopping center (commercial). Direct real estate investors make money through rental income, appreciation, and profits generated from any business activities that depend on the real estate.

Pros of Direct Real Estate Investing

One benefit of investing in physical properties is the potential to generate substantial cash flow—as well as the ability to take advantage of numerous tax breaks to offset that income. For example, you can deduct the ordinary and necessary costs to manage, conserve, and maintain the property. Another large tax break is for depreciation, in which you deduct the costs of buying and improving a property over its useful life (and lower your taxable income in the process).

Of course, there's also the prospect of price appreciation. While the real estate market fluctuates as the stock market does, property prices generally increase over time, so you may be able to sell later at a higher price.

Another perks of direct real estate is that you have more control over decision making than you would with REITs. For example, you can select only properties that match your preferences for location, property type, and financing structure. You can set rental prices, choose tenants, and decide how many properties to buy. You can also refinance your mortgage when interest rates drop, or tap into your home equity through loans or credit lines for other purposes.

Cons of Direct Real Estate Investing

One of the main disadvantages of direct investing is that it requires a significant amount of time and energy (sweat equity) if you plan to be successful. You have to deal with tenant issues, maintenance emergencies, and your liability if there are any accidents on the property.

Financing can be another disadvantage. Many investors need to take on a mortgage or some other type of financing to pay for investments. If the market tanks or you have difficulty finding quality tenants, there's the chance you could default on the loan.

Another negative is that real estate is not a liquid asset. That means you probably won't be able to sell it quickly if you need cash in an emergency.


  • Positive cash flow and appreciation

  • Tax advantages

  • Control over decisions


  • Requires time and energy

  • Risk of financing default

  • Illiquid (not easy to buy and sell)


A REIT is a corporation that owns, operates, or finances income-producing real estate or real estate-related assets. Modeled after mutual funds, REITs pool the capital of numerous investors.

Today, there are more than 225 REITs in the U.S. that trade on major stock exchanges, and that are registered with the Securities and Exchange Commission (SEC). These REITs have a combined equity market capitalization of more than $1 trillion. Worldwide, more than 35 countries currently offer REITs.

REITs can be appropriatefor new investors with limited experience in real estate who want to diversify their portfolio without a ton of risk.

Pros of REITs

Perhaps the biggest advantage of REITs is that individual investors can access profits from real estate without the need to own, operate, or directly finance properties. They offer a low-costway to invest in the real estate market. You can invest in a fund with as little as $500—a much lower entry point than direct real estate investing.

Another benefit is that REITs offer enticing total return potential. By law, REITs have to pay at least 90% of taxable income to shareholders, and it's not uncommon to have a 5% dividend yield—or more. REITs also have the potential for capital appreciation as the value of the underlying assets increases.

Another important perk is liquidity. Like stocks, you can buy and sellREITshares on an exchange. In general, REITs trade under heavy volume, which means you can get into or out of a position when you want (or need) to.

Cons of REITs

Of course, there are some drawbacks to REITs. For starters, most REIT dividends aren't considered "qualified dividends," so they're taxed at a higher rate. This is something to pay extra attention to if you own REITs in a taxable brokerage account. Keep in mind that you can hold REITs in a tax-advantaged Roth IRA account.

Another con is that REITs can be very sensitive to interest rate fluctuations, and rising interest rates are bad for REIT prices. In general, REIT prices and Treasury yields have an inverse relationship: when one goes up, the other goes down, and vice versa.

One other drawback is that while REITs can help you diversify your overall investment portfolio, most individual REITs aren't diversified at all. That's because they focus on a specific property type—such as offices or shopping centers. If a REIT invests solely in hotels, for example, and the economy tanks or people stop traveling, you can be exposed to property-specific risks.


  • Real estate profits without having to own, manage, or finance property

  • Higher than average dividends and potential for appreciation

  • Liquid (easy to buy and sell)


  • No tax advantages

  • Sensitive to interest rate fluctuations

  • Property-specific risks

The Bottom Line

Direct real estate investing may be a better choice if you want cash flow, tax breaks to offset that income, and great potential for appreciation. It's also good if you want more control over your investments and like a boots-on-the-ground approach.

REITsmake sense for investors who don't want tooperate and manage real estate, as well as for those who don't have the money or can't get the financing to buy real estate. REITs are also a good way for beginner real estate investors to gain some experience with the industry.

REITs vs. Real Estate Investments: What's the Difference? (2024)


REITs vs. Real Estate Investments: What's the Difference? ›

A REIT is traded like a stock and can own a variety of types of commercial real estate, such as medical clinics, retail shopping centers, office and apartment buildings, hotels, warehouses, and more. A real estate fund is typically a mutual fund that invests in public real estate companies (which can include REITs).

Is it better to invest in REITs or real property? ›

Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.

What is the difference between a real estate fund and a REIT? ›

REITs invest directly in real estate and own, operate, or finance income-producing properties. Real estate funds typically invest in REITs and real estate-related stocks. REITs trade on major exchanges the same way stocks that do, and their prices fluctuate throughout the trading session.

What is the downside of REITs? ›

Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Are REITs a good investment now? ›

Real estate investment trusts, also known as REITs, typically offer high yields, making them appealing choices for income investors. The real estate stocks that Morningstar covers, as a group, look 12% undervalued as of May 10, 2024.

Can REITs lose value? ›

Well-managed REITs may contribute to a diversified portfolio and can deliver stable dividends with attractive tax benefits. However, REITs can drop in value and cause investor losses if they are not managed well.

What is the average return on REITs? ›

Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.

Is REIT safer than stocks? ›

If you are interested in a real estate investment that is reliable, hands-off and offers dividends, REITs could be the answer. If you're looking for a higher-risk – but high-potential – investment or want to be able to invest in specific companies you admire, buying individual stocks could be the answer.

Is REIT better than bonds? ›

REITs are perpetual investments that have no maturity date and can theoretically continue to exist and grow their asset bases for decades. Unlike bonds, REITs tend to pay rising dividends over time as their cash flow grows, and thus tend to have offer better capital appreciation potential than bonds.

Is a REIT equity or debt? ›

Equity real estate investment trusts are the most common type of REIT. They acquire, manage, build, renovate, and sell income-producing real estate. Their revenues are mainly generated through rental incomes on their real estate holdings. An equity REIT may invest broadly, or it may focus on a particular segment.

Do REITs do well in a recession? ›

The FTSE Nareit All Equity index, consisting of REITs that exclude mortgages, generated a 15.9% annualized return during recessions and 22.7% in the year following the end of a downturn, according to the National Association of Real Estate Investment Trusts.

What are the dangers of REITs? ›

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

What happens to REITs when interest rates go down? ›

REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.

Can I invest $1000 in a REIT? ›

It's possible to find REITs that allow you to invest with as little as $1,000 and some may have a minimum investment that's even lower. Keep in mind, however, that private or non-traded REITs may require much larger minimum investments of $10,000 or even $50,000 to buy in.

What is the most successful REIT? ›

Best REITs by total return
Company (ticker)5-year total return5-year dividend growth
Equinix (EQIX)125.0%9.5%
Prologis (PLD)121.8%12.4%
Eastgroup Properties (EGP)107.9%13.3%
Gaming and Leisure Properties (GLPI)99.7%1.1%
4 more rows
Jan 16, 2024

How long should you invest in REITs? ›

"Both public and non-public REIT investments should be considered long-term, and that could mean different things to different folks, but in general, investors who typically invest in REITs look to hold them for a minimum of three years, and some of them could hold them for 10+ years," Jhangiani explained.

Do REITs outperform the market? ›

REITs are also attractive thanks to their market-beating returns. During the past 25 years, REITs have delivered an 11.4% annual return, crushing the S&P 500's 7.6% annualized total return in the same period.

What advantages do REITs offer investors over direct investments in real estate properties? ›

REITs are easy to buy or sell as they trade on a public market. Low-Cost Real Estate Access: The low transaction cost to purchase the units on the stock market is much lower than direct investing. Diversification: Provides a quick and efficient way to invest in a well-diversified portfolio of properties.

Do REITs do better with higher interest rates? ›

The Bottom Line

After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.

Are REITs safer than rentals? ›

But especially today, REITs offer far better return prospects and much lower risk because their valuations are so heavily discounted. Investing in REITs provides both a margin of safety and future upside potential. This explains why I am buying REITs instead of rental properties.

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