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 valuations to result in higher returns in the coming years.
Unfortunately, it would seem that many readers miss the point of investing in REITs due to misconceptions. I saw several people in the comment section claim that REITs should be less rewarding investments because:
- You don’t enjoy the benefits of leverage.
- They are not tax-efficient.
- You are paying managers instead of getting your hands dirty.
But these statements are just plain wrong, and I am going to prove it.
The Studies Bear It Out
Studies show very clearly that REITs are more rewarding investments than private real estate in most cases, and there are good reasons for this. This may seem surprising to some of you, but it really shouldn’t be. Here are three examples.
Study 1
FTSE Equity REIT Index compared to NCREIF Property Index as an annual return percentage (1977-2010) – EPRA
Study 2
Private Equity Real Estate compared to Listed Equity REITs as net total return per year over 25 years – Cambridge Associates
Study 3
Performance of U.S. REITs and Private Real Estate Returns (1980-2019) – NAREIT
Three Misconceptions and Why They’re False
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:
Misconception 1: You don’t enjoy the benefits of leverage.
This is nothing more than a misunderstanding. Investors seem to think that just because you cannot take a mortgage to REITs, you won’t enjoy the benefits of leverage, but this is incorrect.
What they ignore is that REITs are already leveraged. You don’t need to take a mortgage because REITs take care of that for you.
When you buy shares of a…