Comparing the average returns between investing in REITs and direct real estate investment over the long haul can be challenging due to various factors, including market conditions, location, property type, and individual investment strategies. Here are some general insights on the historical performance of these investment approaches.
This comes down to smoother returns and less work/risk vs. potentially greater returns with higher risk. If I put $1,000,000 into REITS (maybe a basket of 50 different public ones) it is not likely that it double in a few years and it is not likely that it gets cut in half in a few years. It probably steadily grows over time.
If I put $1,000,000 into a couple properties (self-storage, multi-family apartments, retail strip malls, or what have you) it could easily double or triple in 5 years with the right entry point and exit point. But, it could also be worth nothing depending on the leverage used and external factors that make the properties undesirable.
- REITs: REITs have historically delivered competitive long-term returns to investors. According to the National Association of Real Estate Investment Trusts (NAREIT), over the past few decades, REITs have generated average annual returns of around 9% to 11%, including both dividends and capital appreciation. These returns can vary significantly from year to year, depending on market conditions and other factors.
- Direct Real Estate Investment: Direct real estate investment involves purchasing properties outright or through partnerships, and it offers potential advantages such as control over property selection, management, and customization. However, the returns from direct real estate investment can vary widely based on factors such as location, property type, market cycles, and the investor's skills and expertise.
It's important to note that both REITs and direct real estate investment carry their own set of risks and considerations. REITs offer liquidity, diversification, and professional management, but they are subject to market volatility and may not provide the same level of control as direct ownership. Direct real estate investment requires more active management, potentially higher transaction costs, and may have higher barriers to entry.
As with any investment, it's crucial to conduct thorough research, consider your risk tolerance, and seek professional advice before making any investment decisions.
If you want to perform IRR sensitivity analysis to see how various long-term occupancy assumptions effect IRR check out this underwriting model.
