REITs vs. Private Real Estate: Which One Actually Wins?

My uncle called me last Thanksgiving with what he thought was a simple question.

"Andrew, I've got $200K sitting in a money market. Should I just buy a REIT ETF or invest in one of your deals?"

I gave him the honest answer. It took 45 minutes and a second helping of pumpkin pie.

The truth is, this is one of the most important questions in investing, and the answer is not as simple as "one is better than the other." I've invested in both. I've made money in both. I've lost sleep over both. And I can tell you that the right answer depends entirely on who you are, what you need, and how involved you want to be.

What a REIT Actually Is

Let me start here because I find that a lot of people use the word REIT without really understanding what it means.

A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate. To qualify as a REIT, the company must meet specific IRS requirements, the most important being:

• Distribute at least 90% of taxable income to shareholders as dividends.
• Invest at least 75% of total assets in real estate.
• Earn at least 75% of gross income from rents, mortgage interest, or real estate sales.

That 90% distribution requirement is why REITs have historically offered strong dividend yields. The company is essentially forced to pass its income through to you.

U.S. equity REITs collectively control approximately $4.5 trillion in gross real estate assets, according to NAREIT. That's enormous. And you can buy a slice of it for the cost of a single share on any brokerage.

The Numbers: REIT Performance

Let me give you the numbers, because this debate should always start with data.

U.S. equity REITs have delivered 11.6% annualized returns over the past 25 years, according to NAREIT. Over that same period, the S&P 500 returned 10.1%. In late June 2025, the S&P Global Property Index was actually outperforming the S&P 500 with a 14.1% one-year return.

But here's where it gets nuanced.

REITs trade on public exchanges. They trade like stocks. Which means they experience stock-like volatility. In 2022, the FTSE NAREIT All Equity REIT Index dropped 25% as the Fed hiked rates aggressively. Office REITs got crushed. Even well-performing sectors like student housing and senior housing saw their REIT valuations decline despite strong underlying fundamentals.

That's the paradox of REITs: the real estate might be performing beautifully, but the stock price reflects market sentiment, not property performance.

Private real estate, measured by the NCREIF Property Index, showed a much smaller drawdown during the same period because private assets are appraised periodically, not traded daily. This doesn't mean private assets didn't lose value. It means you just didn't see it in real time. There's a philosophical debate about whether that's a feature or a bug.

The Case for REITs

Here's why I told my uncle to seriously consider REITs as part of his portfolio:

Liquidity. You can buy and sell REIT shares any day the market is open. If you need your money back next Tuesday, you can have it. In a private real estate fund, your money is locked up for 7-10 years. That liquidity premium is real and valuable.

Diversification. A single REIT ETF gives you exposure to hundreds of properties across every sector: industrial, residential, healthcare, data centers, retail, and more. Building that kind of diversification through private equity real estate would take decades of deal-making and millions of dollars.

Professional management. REITs are run by experienced teams with deep sector expertise. You're getting institutional-quality management without lifting a finger.

Low minimums. You can start with $100. That's not a typo. Private real estate deals typically require $50K-$250K minimums. For my uncle with $200K, he could invest $50K in REITs today and still have $150K for other opportunities.

Income. The 90% distribution requirement means REITs consistently pay dividends. The average REIT dividend yield is roughly 4-5%, significantly higher than the S&P 500 average of ~1.3%.

The Case for Private Real Estate

And here's why I told my uncle to also consider investing alongside an experienced operator:

Control. When you invest in a private real estate deal, you (or your GP) control the asset. You decide when to renovate, when to raise rents, when to refinance, and when to sell. In a REIT, those decisions are made by a management team you'll never meet.

Tax advantages. This is the biggest edge private real estate has over REITs. In a private deal, you receive pass-through depreciation, which can offset your other income. You can defer capital gains through 1031 exchanges. You can use cost segregation studies to accelerate depreciation. In a REIT, dividends are taxed as ordinary income, which is the worst type of income from a tax perspective.

Less volatility. Yes, your private investment can lose value. But you won't see it drop 25% on a random Tuesday because the Fed chair said something at a press conference. The absence of daily pricing is psychologically powerful. Most private real estate investors hold through downturns simply because they don't have a ticker to stare at.

Higher potential returns. A well-executed value-add or opportunistic private deal can generate 15-25%+ net returns. REITs, while competitive over long periods, rarely deliver that kind of upside on an individual investment basis.

Direct asset ownership. You own real property. You can visit it. You can see the improvements. You can meet the tenants. There's something tangible about it that a stock symbol will never replicate.

The Honest Answer

So what did I tell my uncle?

I told him to split it. $50K into a diversified REIT ETF for liquidity and broad market exposure. $100K into a private deal with an operator he trusts, focused on an asset class with strong fundamentals like student or senior housing. And keep $50K in reserve for opportunities.

The smartest investors I know don't choose between REITs and private real estate. They use both, strategically, based on their liquidity needs, tax situation, and risk tolerance.

REITs are the baseline. They give you market exposure without the headache of active management. Private deals are the alpha. They give you control, tax benefits, and the opportunity to create value through operational excellence.

My Personal Take

I spend my career in the private real estate world. I love the direct connection to the asset, the ability to create value through good decisions, and the tax efficiency of direct ownership. But I'm honest about the downsides: illiquidity, concentration risk, and the sheer amount of work it takes to do it well.

If someone doesn't have the time, interest, or capital to evaluate LP-GP dynamics and monitor private investments, REITs are a perfectly legitimate way to access real estate returns. There's no shame in simplicity.

But if you want more control, better tax treatment, and the chance to participate in a specific asset you believe in, like a student housing portfolio near a growing campus or a senior housing property riding the silver tsunami, then private real estate is where the magic happens.

Either way, the data is clear: real estate, whether public or private, deserves a meaningful place in any serious investment portfolio.

If you want to talk through how to structure a real estate allocation that works for your situation, reach out. I've helped investors at every level figure out the right mix of public and private exposure.