REITs and the case for not owning buildings

A real estate investment trust owns income-producing property and, under United States rules, must distribute the large majority of its taxable income to shareholders, which is why REITs generally carry high dividend yields.

Publicly traded REITs are bought and sold like shares.

What they offer that direct ownership does not

Liquidity. The largest difference. You can sell in seconds at a known price. Direct property takes months and costs a substantial percentage.

Diversification at any investment size. A modest investment buys exposure to hundreds of properties across markets and sectors. Achieving comparable diversification directly requires an enormous amount of capital.

Access to sectors individuals cannot reach. Data centres, cell towers, industrial logistics, healthcare facilities, self-storage at scale, timberland. These have been among the better-performing property sectors and are effectively unavailable to individual investors.

Professional management, with scale advantages in financing, procurement and operations.

No work. No tenants, no maintenance, no legal exposure, no midnight calls.

Transparency. Public companies file audited financials and disclose extensively. You know considerably more about a REIT's assets than about most private offerings.

What direct ownership offers that REITs do not

Leverage on your terms. An individual can borrow at seventy-five percent against a property at rates unavailable in any other asset class, with long fixed terms. REIT shareholders get the company's leverage, which is generally more conservative.

This is the strongest argument for direct ownership, and it is a genuine one — the ability to control an asset with a quarter of its value in cash, financed for thirty years at a fixed rate, has no equivalent elsewhere.

Control. You decide what to buy, how to improve it, when to sell.

Tax treatment. Depreciation shelters direct rental income. Section 1031 exchanges allow deferral on disposition. Step-up in basis at death applies to the property.

REIT dividends are generally taxed as ordinary income rather than at qualified dividend rates, though a deduction for qualified business income has applied to a portion of REIT dividends under recent law.

Inefficiency. Private real estate markets are inefficient in a way public markets are not. It is possible to buy a property below its value because the seller was motivated, the marketing was poor, or you saw something others did not. That is very difficult in public markets.

Local knowledge advantage, which is real and which does not transfer to a public market.

The volatility question

REITs trade daily and their prices move with equity markets, sometimes sharply, and sometimes without any change in the underlying property values.

Direct property is valued rarely, which makes it appear less volatile.

The honest position is that direct property's stability is partly an artifact of infrequent measurement. The underlying value does move; you simply do not observe it.

That said, the observational difference has a practical consequence: REIT investors sell in panics, and direct owners generally cannot. Whether that counts as an advantage depends on the investor.

The non-traded question

Non-traded REITs and similar private vehicles are marketed as offering REIT benefits without the volatility.

Worth approaching carefully. Historically many have carried high upfront fees, limited liquidity with redemption programs that can be suspended — and have been — and valuations that are estimated rather than market-determined.

The absence of price volatility is largely the absence of price discovery.

Using both

The reasonable position for most people is that these are complements rather than alternatives.

REITs provide diversified, liquid, sector-broad exposure with no operational burden, suitable for retirement accounts where the tax advantages of direct ownership are irrelevant anyway.

Direct ownership provides leverage, control, tax treatment and the possibility of buying below value, in a local market you understand.

An investor with rental property in their own city and REIT exposure to industrial, healthcare and infrastructure sectors has better diversification than one with six houses on the same side of town.

The question worth asking

Direct ownership requires substantial ongoing work. That work has value, and the honest test is whether your returns exceed what a REIT would have produced by enough to compensate for it.

Many small landlords, once they properly account for their time, management, capital expenditure and the transaction costs of buying and selling, find the margin narrower than expected.

Which is not an argument against direct ownership. It is an argument for underwriting properly, using leverage sensibly, and being honest about what the alternative would have returned.

General information about investment options, not investment advice. All investments carry risk of loss and past performance does not predict future results. Consult qualified professionals about your own circumstances.