REITs vs. Stocks: Which One Produces a Better Return?

Whether you’re looking to invest from a retirement or a personal investment account, there are plenty of options to grow your money.

Knowing how you want to invest can make all the difference in your investment portfolio’s long-term growth. You can also consider exchange-traded funds (ETFs) and mutual funds in your quest to manage investments.

When it comes to the question of real investment trusts (REITs) vs. stocks, you may wonder which is more likely to produce higher returns.

Here, we will outline the returns for each as well as other factors that may impact your investment choice.

What is a REIT?

A REIT is a company that owns, finances, flips or leases income-producing commercial real estate properties for profit.

REITs allow non-accredited investors to profit from high-cost commercial real estate, such as retail spaces, multi-family properties or office buildings.

REITs will collect money from many investors in a method similar to crowdfunding and use that to finance real estate endeavors.

REITs can be private (only accessible to accredited investors, usually by invitation only), traded (shares of the company are bought and sold on the stock market as common stock) or non-traded (open to non-accredited investors, but not available on the stock market).

There are a few industries REITs operate in, including the following:

• Self-storage: Self-storage REITs primarily own real estate for leasing as personal storage spaces.
• Retail rentals: Some REITs own a large quantity of real estate that they rent out to retailers.
• Office Spaces: Though demand for offices has been on the decline since the move to working remotely, some REITs invest highly in office spaces.
• Residential: Some REITs work in the residential setting. This often includes multi-family homes, but they may also own and rent out single-family homes.
• Farmland: Farmland REITs invest in agricultural properties. Agriculture is one of the most reliable investments due to its consistency. This combined with the stability of real estate makes farmland one of the most popular REIT investment choices.

All types of equity REIT investments — except for traded REIT shares — are highly illiquid. You can only withdraw from these investments if the REIT buys you out after an agreed-upon length of time, usually at least several years.

REIT Returns

All types of REITs pay dividends to their investors. These dividends can either be reinvested and given to investors as additional stock or paid out in cash. Most REITs opt for the latter.

If the REIT is traded, investors can profit from their investment by selling their stocks at a higher share price. To encourage investors to stay longer, most non-traded and private REITs will only pay back the initial investment if you decide to pull out.

While some stocks have done better than REITs, on the whole, REITs have outperformed the S&P 500, according to data from The National Association of Real Estate Investment Trusts.

TIME PERIOD	S&P 500 (TOTAL ANNUAL RETURN)	FTSE NAREIT ALL EQUITY REITS (TOTAL ANNUAL RETURN)
1972 to 2021	10.7%	11.9%
Past 25 years	10.2%	11.5%
Past 20 years	9.5%	12.7%
Past 10 years	16.5%	12.9%
Past five years	18.5%	13.5%
Past year (2021)	28.7%	39.9%

The reasons for this are mainly speculative. It may be that real estate has seen unexpected growth in recent times or that too many stocks were over speculated.

In recent years, REIT stock value and dividends have climbed higher than ever due to unprecedented real estate expansion post-pandemic.

Whatever the reason, it seems unlikely the trend will stop, making REITs and other real estate options some of the smartest choices for investing.

Advantages of Investing in REITs

REITs have many advantages over other kinds of investments, including the following:

• Low investment minimums: Some REITs have higher investment minimums, but many are as low as a few hundred dollars.
• No experience required: You don’t need an in-depth understanding of stocks and real estate to invest in a REIT.
• Professionally managed: REITs are run by industry experts with insight that individual investors likely won’t possess.
• Passive investing: With most REITs, investors can put down the money they want to invest and collect dividends, meaning no extra work or monitoring of stock prices.
• High dividend yields: REITs allow investors to profit directly from the company’s success with high yields.
• Tax benefits: It is possible to avoid paying initial income tax on REIT investments by investing directly from your IRA.
• Consistent cash flow: Dividends allow investors to receive a cash flow before pulling out, while stocks and other investments only return money upon sale.
• Portfolio Diversification: REIT managers often invest in multiple types of real estate in multiple regions. A diversified portfolio provides a buffer if one or more markets suffer a downturn.

Disadvantages of Investing in REITs

REITs are one of the most reliable investment options, but there are some drawbacks you should consider before you commit.

These are the primary disadvantages that you should be aware of.

• Illiquid investments: In many cases, you cannot  withdraw from a REIT for several years following your initial investment.
• Volatility: REITs are less volatile than stocks. While this can be reassuring for some investors, it also makes it far less likely that you will make quick profits.
• Some REITs are open to non-accredited investors, but the REITs with the highest yields are often only open to accredited investors. Getting accredited can be a complicated process that involves a lot of capital and high wages.
• Less ownership: The lack of choice in a REIT makes it highly passive, which is beneficial for new investors, but if you’re looking for more autonomy in your investing, it can be a drawback.
• Dividends are taxable: While the cash flow from dividends can be a great benefit, you will have to pay taxes on them, though you can choose between income tax and capital gains tax in some cases.

What are Equities/Stocks?

Publicly traded companies have offerings that anyone can buy. These portions of a company are called shares or equities, and they are bought and sold on major stock exchanges.

You will most often see stock purchased and sold on the two biggest stock exchanges: the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

Owning a piece of stock means you own a portion of the company. The share price represents the estimated value of the company (or its potential future value).

Companies that hold public stocks operate in many industries, including retail, physical goods, distribution, technology and healthcare.

Stock Returns

Some stocks pay dividends, but not all. Whether or not a company opts to pay dividends is usually at the discretion of its board of directors.

Aside from dividends, the primary means investors make money on stocks is by selling their shares at a profit. An increase of approximately 10 percent is considered a good return on investment.

Year	Total Return
2022	-17.31
2021	28.71
2020	18.40
2019	31.49
2018	-4.38
2017	21.83
2016	11.96
2015	1.38
2014	13.69
2013	32.39

Over the last 30 years, the S&P 500 has seen an average return of 9.89 percent. When accounting for inflation, this figure is closer to 7 percent.

Total returns on stock are higher than average CD rates (about 1-5 percent) but much lower than REITs, which are about 13.3 percent when adjusted for inflation .

Advantages of Investing in Stocks

Stocks are not perfect and are considered high risk compared to most other forms of investments. Nevertheless, they have some significant benefits, including the following:

• Low investment minimum: Most stock prices are less than a few hundred dollars, and some cost as little as a few cents. Some brokers may also be able to purchase partial stock, which drives the minimum investment down even further.
• Potential for dividends: Some stocks pay their investors dividends, just like REITs. Most of these pay quarterly, either in cash or additional equity.
• Portfolio diversification: If you buy a single stock, you will not have a diversified portfolio, but because of the low cost of entry, most people are able to diversify by purchasing equity in many different industries.
• You can sell stock anytime the market is open. This liquidity makes it easy to pull out if you need to recoup your investment earlier than expected.

Buying and selling stocks and equity can be done easily in a few minutes once you have an account with a brokerage.

Disadvantages of Investing in Stocks

Stocks are some of the most common investments, but they carry some serious risks. These are the things you should consider before deciding to invest:

• Price volatility: Even outside of a financial crisis, stock prices can fluctuate wildly. Because of this, you may lose a significant amount of money rapidly if things go wrong.
• Bankruptcy risks: Even if a REIT is struggling, the company can liquidate land to pay off debts. Non-real estate companies are at a much higher risk of going under because they lack these securities.
• Capital gains taxes: All profits from the sale of stock and dividends received are considered taxable income and are subject to capital gains tax.

Stocks vs. REITs: How Do They Compare?

REITs	Stocks/Equities	Similarities
Passive investments	Active investments	Dividends
Illiquid	Liquid	Diversification
Less control	Easy to buy and sell	Volatility
Professionally managed	Capital appreciation	Low investment minimum

Which is the Better Investment?

Whether you should invest in a REIT or stock depends on your investment strategies overall. Historically, returns for REITs have been higher, but there is potential for much larger profit with stock investments.

Choose a REIT If

• You want a passive investment.
• You are looking for long-term returns.
• You desire high-yield cash payouts.
• You want to invest in the real estate market.

Choose Stock or Equities If 

• You want to be highly involved in your investing.
• You need short-term returns.
• You want to invest in asset classes aside from real estate.
• You understand Wall Street, interest rates and stock market dynamics.

FAQs

These are the most frequently asked questions about stock and REIT returns.

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