REIT Investor Vs. Private Landlord


In past articles, we have often argued that REITs (VNQ, IYR) are better investments than private real estate:

  • Lower risk: They are much safer because they are well diversified, professionally managed, liquid and protect you from liability risks.
  • Higher returns: Despite the lower risk, they are able to generate higher returns thanks to significant economies of scale, better access to capital, and faster cash flow growth.

This is not just our opinion. It’s proven by extensive studies that show REITs have historically managed to generate up to 400 basis point higher annual returns than private real estate:

source

source

Therefore, most investors are much better off investing in REITs rather than in private real estate. It saves you all the hassle of having with the ugly three Ts (Tenants, Toilets, and Trash) and allows you to compound your returns at a faster rate in the long run.

At least, that’s what the theory would tell you.

However, in practice, we find that the results are often very different and private landlords still end up outperforming individual REIT investors. And there’s one main reason to that: Liquidity.

Liquidity Often Fails REIT Investors

REITs allow investors to invest in real estate, just like how you would invest in any other industry – through the purchase of stock.

The shares of REITs are traded on the stock market. They are liquid. You can buy or sell them any minute in a few clicks of mouse. And it costs you close to nothing to transact.

The idea comes from a great place and it clearly provides a lot of benefits if you know how to use it. Unfortunately, in practice, this liquidity often ends up causing more harm than good to investors:

  • You start fixating at daily quotes.
  • You become more short-term oriented.
  • You lose track of the bigger picture.
  • You trade way too much just because you can.
  • And you lose in compounding effect in the process.

You see… private landlords do so well in the long run because the lack of liquidity forces them to think long term.

They do not worry about the daily market value of their properties. They ignore volatility. And they remain invested for the long run.

As a result, they end up earning a lot of income and they reap the benefits of long-term appreciation and capital compounding.

If REIT investors had the same landlord mindset, they would be earning very attractive returns (15% annual average over past 20 years):

But because they think like traders, most of them fail to earn these lucrative returns.

Therefore, the one big lesson here is to only invest in REITs if you have the emotional discipline to ignore volatility and remain invested for the long run.

If you cannot do that, then you might be better off just investing in private real estate. You won’t enjoy the same scale advantages and professional management, but at least, it will force you to remain invested for the…



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