Most investors think that rental properties are more rewarding investments than real estate investment trusts (“REITs”) (VNQ). They think that this is the case because:
- You can buy rental properties with debt.
- You don’t need to pay managers.
- You may enjoy tax benefits from depreciation.
- The yield is typically higher.
- And after all, you are putting in a lot of work and taking more risks, so naturally, you would expect to earn higher returns.
And yet, the reality is the opposite.
Many studies have been conducted on this topic, and they all say that REITs are more rewarding than rental properties or even private equity real estate funds such as those managed by firms like Brookfield (BAM) and Blackstone (BX).
Here are the results of three of those studies:
Study 1: REITs outperform by ~4%:
Study 2: REITs outperform by ~4%:
Study 3: REITs outperform by ~3%:
How could this be?
The results seem so improbable that most people won’t seek to understand them. Rental investors are especially quick to dismiss the results because they would hate to admit that all their hard work might have gone to waste.
But in today’s article, I will explain to you why these results are actually logical and expected. In fact, I would say that it would illogical if REITs didn’t outperform rental properties.
Here are 10 reasons why:
Reason #1: REITs have better access to capital
Let’s start by correcting a big misconception about REITs, which is that you cannot use leverage when investing in them.
Rental investors think that they can earn higher returns because they can use a mortgage to leverage their equity. But what they ignore is that REITs are doing exactly the same thing and you enjoy the same benefits as shareholders.
What’s traded on the stock market is the “equity value”, not the total asset value. This is why it is volatile. It is leveraged by additional debt that REITs use to make their real estate investments.
As such, you enjoy the same …….