Six Reasons Why REITs Are Safer Than Rentals

by Rachel Posted on


Recently, we shared “8 Reasons Why REITs Are More Rewarding Than Rentals.” In short, studies show that REITs earn 2% to 4% higher annual returns than private real estate. There are eight reasons for this:

  1. REITs enjoy huge economies of scale.
  2. They can grow externally. 
  3. They can develop their own properties. 
  4. They can earn additional profits by monetizing their platform.
  5. They enjoy stronger bargaining power with their tenants.
  6. They benefit from off-market deals on a much larger scale.
  7. They have the best talent. 
  8. They avoid disastrous outcomes. 
Private equity real estate compared to listed equity REITs as net total return per year over 25 years – Cambridge Associates
Private equity real estate compared to listed equity REITs as net total return per year over 25 years – Cambridge Associates

But higher returns also mean higher risk, right? That is why a lot of rental property investors stay away from REITs. They perceive them as being a lot riskier than rental properties because they trade in the form of stocks, and this comes with significant volatility. But I disagree.

I think that REITs are far safer investments than rental properties. Here are six reasons why. 

Concentration vs. Diversification

Rental properties are big-ticket investments. Therefore, most investors end up owning just one or a few.

As a result, you are highly concentrated on a limited number of individual properties, tenants, and markets. If you suffer bad luck, you could face significant losses because you aren’t diversified.

A tenant trashing your home, a leaking pipe, an insurance company failing to cover you, a big property tax hike, poor local market conditions, a tenant sues you: These things happen, and that is why diversification is key to mitigating risks.

REITs, on the other hand, own hundreds, if not thousands, of properties,