Private Lending vs. REITs vs. Owning Rental Property
Three ways to have real estate in a plan, with very different levels of work, liquidity and exposure. Here is how they compare.
Key Financial Group
The short version: A REIT is liquid, hands off, and moves with markets. Private lending is illiquid for a fixed term, secured by property, and depends on one borrower. Owning rentals gives you control and ongoing work. They are three different propositions.
Different exposures, not different flavours
People sometimes treat these as three routes to the same thing. They are not.
With a rental you own property. With a REIT you own shares in a company that owns property. With private lending you own neither, you hold a loan secured against property.
Those are genuinely different positions with different risks, and the comparison is only useful once that is clear.
Owning rental property
What you have. Title to a specific property, the rent it produces, and any change in its value.
Liquidity. Poor. Selling takes months, involves cost, and depends on market conditions.
Work. Substantial and ongoing. Tenants, maintenance, insurance, taxes, vacancies, regulation. A management company reduces the work and reduces the return.
Upside. You keep everything: rent and appreciation. You control decisions.
Downside. You also keep everything: a bad tenant, a roof, a vacancy, a market decline. Concentration is high, since most people own one or two properties rather than many.
Who it suits. People who want control, who have the temperament for the responsibility, and who have the reserves to handle an empty month or a large repair.
Publicly traded REITs
What you have. Shares in a company that owns income producing property.
Liquidity. Good. Generally sellable on any trading day, at whatever price the market offers that day.
Work. Almost none.
Upside. Diversification across many properties, professional management, easy access, and typically regular distributions.
Downside. The share price moves with markets, sometimes sharply and sometimes for reasons unrelated to the underlying buildings. For someone who came to real estate hoping to avoid market volatility, that can be an unpleasant discovery.
Who it suits. People who want property exposure with liquidity and no involvement, and who can tolerate a fluctuating value.
Private lending secured by real estate
What you have. A loan, secured by a recorded instrument against a specific property. Not ownership.
Liquidity. Poor by design. Committed for the term, which under the Private Lending program runs two to five years.
Work. Significant upfront in evaluating the borrower and the structure, then very little.
Upside. A fixed rate agreed at the outset rather than a fluctuating value. You are not exposed to the ordinary ups and downs of a share price, and you have security recorded against real property.
Downside. No deposit insurance. No participation in property appreciation. Dependence on one borrower. And no way out during the term other than a hardship liquidation at a market discount, which means receiving less than you lent.
Who it suits. People who want a fixed return over a defined period, who have already covered liquid and insured needs elsewhere, and who are comfortable with an uninsured position.
Comparing them on what actually matters
Predictability of the return
Private lending is fixed by agreement. REIT total return is not predictable. Rental income is somewhat predictable and rental profit less so, because expenses arrive unevenly.
Access to your money
REIT best, rental slow, private lending effectively locked for the term.
Work required
REIT lowest, private lending low after the outset, rental highest by a distance.
What can go wrong
REIT: the market reprices your holding. Rental: vacancy, damage, a bad tenant, a market decline, or a large unplanned expense. Private lending: the borrower fails to pay, and your recovery depends on the security, your lien position and the property's value.
The risks of private lending, stated plainly
Since that is the option we are involved with, it deserves its own list rather than a summary:
- Your funds are not liquid during the term.
- This is not a bank product and is not FDIC insured.
- Real estate values can change.
- Interest rates can change at renewal.
- Past performance does not indicate future results.
A developer's history is worth knowing, but it is a record rather than a promise about the future. The full picture is in the real risks of private lending.
Where this sits for the people we work with
Most of the retirees we advise hold the large majority of their money in insured and guaranteed accounts: certificates of deposit, savings and money market accounts, and fixed annuities. That is the core, and it is deliberate.
Real estate exposure, in whatever form, is a portion rather than a foundation. Among the three, private lending is the one that fits our approach best, because the return is fixed by agreement rather than dependent on markets. It is still not insured, and we say so every time.
A useful question to ask yourself
Not which one produces the most. Ask instead: which of these could I live with during a bad stretch.
Could you hold a REIT through a year when its price fell a long way. Could you handle three months of vacancy and a failed air conditioning unit. Could you go two more years without touching money you had committed.
Whichever you can genuinely answer yes to is the more honest guide than any comparison of returns.
If you would like help thinking through where, if anywhere, real estate belongs in your plan, schedule a free consultation. There is no obligation.
This article is for general education and is not financial, tax, or legal advice. Please speak with a licensed professional about your situation.
