For about two years, between my second rental purchase and my third, I spent a lot of time reading about REITs. The question I was trying to answer was whether I should put my next chunk of investment capital into another rental door or into a diversified REIT index fund. The two options looked almost nothing alike on the surface and almost identical when I ran the long-term math.
I chose direct ownership. But the decision was closer than most landlord-investors will admit, and the reasons I chose direct ownership are not the reasons most people would choose it.
What a REIT actually is (without the jargon)
A real estate investment trust is a company that owns income-producing real estate and is required by law to distribute at least 90% of its taxable income to shareholders as dividends. When you buy a share of a REIT, you own a tiny fraction of whatever properties that trust holds. When you buy a share of a REIT index fund (like one tracking the FTSE Nareit All Equity REITs Index), you own fractional interests across hundreds of REITs, which collectively own thousands of properties across dozens of property types and markets.
That is a lot of diversification for a single stock trade.
The FTSE Nareit All Equity REITs Index has delivered roughly 8.3% annualized total returns over the last ten years. That includes the 2022 rate-shock drawdown, which was the worst year for REITs since 2008. Over longer periods, the return has historically landed in the mid-to-high single digits annualized, which is competitive with broad equity indexes depending on which time window you pick.
The three advantages REITs have over direct ownership
I went into my REIT research expecting to confirm that direct ownership was better. Instead I found three advantages that are genuinely hard to argue with.
Liquidity. You can sell a REIT position in seconds during market hours. You cannot sell a rental property in seconds. Selling a rental takes weeks or months, costs 5-8% of the sale price in agent commissions and closing costs, and sometimes you cannot sell at all because a tenant’s lease runs past your desired exit date. If you have any chance of needing the capital within five years, REITs win on this dimension and it is not close.
Diversification. My four rental doors are in two zip codes in one metro area. If my local economy softens or my city overbuilds apartments, all four doors feel it. A REIT index fund spreads that risk across thousands of properties in office, retail, industrial, residential, healthcare, data center, and cell tower sectors. The concentration risk in direct ownership is real and it is the thing most landlord-investors are worst at acknowledging.
No management. A REIT index fund does not call me at 11pm about a broken pipe. It does not need a CapEx reserve column in my spreadsheet. It does not require me to screen tenants, handle turnover, or maintain a relationship with a plumber. The management burden of direct ownership is non-trivial, and every honest landlord I know has thought about selling at least once because of it.
The two advantages direct ownership has over REITs
Tax treatment. This is the big one. Rental property depreciation under IRS Publication 527 creates a paper loss that reduces your taxable rental income, sometimes to zero, even when the property is cash-flow positive. REITs cannot do this for you. REIT dividends are taxed as ordinary income (not at the lower qualified-dividend rate), and while REITs benefit from depreciation internally, the tax advantage does not pass through to you in the same direct way. If you have high W-2 income and your CPA is recommending real estate specifically for the tax benefits, direct ownership is the path that delivers them.
Control and value-add. You can renovate a rental unit, raise the rent, and directly increase the property’s value. You cannot do this with a REIT. The control dimension matters most to investors who enjoy the process and have the skills (or willingness to learn them) to manage property actively. If you are not that person, control is not an advantage, it is a liability.
Why I chose direct ownership, and why the reason is personal
I chose direct ownership because I enjoy the spreadsheet. I enjoy the management challenge in the same way some people enjoy running a small business, which is exactly what it is. I am not better off financially than I would have been in a REIT index fund. I might be slightly better off because of the tax advantages and the leverage, but the difference is small enough that I cannot honestly attribute it to strategy rather than luck and timing.
The investors I know who chose REITs are not doing worse. They are sleeping better. They have no tenants, no CapEx surprises, no vacancy months, and no Sunday-morning spreadsheets. They also have no control and no depreciation, and they are fine with both of those tradeoffs.
The version that does not require choosing
There is a third option that most articles about REITs vs rental property do not mention, which is doing both. Two of my four doors are direct ownership. My IRA holds a REIT index position that I do not think about or manage. The two buckets serve different purposes, one for tax-advantaged cash flow and one for diversified real estate exposure with zero friction, and they do not compete with each other in my portfolio.
If you are trying to decide between the two, the question to ask yourself is not which one returns more. Over long periods, the answer is “approximately the same, depending on execution.” The question is which version of the management burden you are willing to carry, and whether you are honest with yourself about the answer.
What the decision actually was
I sometimes wonder what my net worth would look like if I had put the same capital into a REIT index fund and gone to sleep. It is not a hypothetical I can actually answer. What I can tell you is that the rentals taught me things about money, property, and tenants that the index fund never would have, and whether that education is worth the difference is a calculation I have stopped trying to run.