Quote:
Originally Posted by stinkypete
You're paying someone to manage everything in a REIT. The reward is much, much smaller in a REIT, and depending on how you define risk, that might be greater as well.
There's huge inefficiencies in smaller housing markets that can be exploited fairly easily on a small scale, but not by a REIT. Real Estate is slow to adjust. Trends can be seen and predicted. "Timing the market" is probably easier in real estate than any other asset class. REITs are too big and illiquid to fully take advantage of these trends.
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Actually REIT's are pretty horrible investment vehicles. You're paying someone a lot of money to manage that thing... It's just hidden on the income statement because it's paid out in salaries.
You're also depending on those very expensive people to be smart. Your investment will succeed or fail based on how good at Real Estate they are and how well aligned their incentives are with yours. Lots of REIT's have either had terrible returns or gone under completely because of bad management.
Compare all of that to owning rental properties which is a good old fashioned business. It can be either really good or really bad depending on how good of a real estate person the person running the business is. The leverage is cheap, plentiful, and as long as the mortgage payments keep coming there are no margin calls. It's not something you should be comparing to financial instruments. An apples to apples comparison for real estate would be owning a concrete company or a trucking company. This explains why everyone knows some idiot who has generated terrible returns on rental property--they thought that all they needed to make money was enough cash/credit to get the property under their name and it would start earning a profit 'passively'.
EDIT: I'll also bet that collectively we all know a ****load of people who lost money in restaurants, and a bunch of people who made money doing other stuff. I've known a guy who made 6 figures running a janitorial company, a guy who made 6 figures landscaping, and a guy who makes a hell of a lot more than that selling yearbooks in north central Indiana. Being willing to go out and do something on your own is RICHLY rewarded in this economy if done with a little bit of cleverness.