To answer succinctly, you can earn both a higher absolute rate of return and better tax advantages buying individual rental properties directly. But you’d likely get more diversification and perhaps safety with the relative stability of income through REITs. Some discussion of each… Individual rental properties offer you the opportunity of buying at a discount if purchased at certain times. It also affords the tragedy of overpaying at other times. You get deductions for expenses and depreciation (which can be a huge benefit), and the tax code allows you to deduct losses (even paper depreciation losses) from the rest of your income up to a point. You can also add value to your property with upgrades and improvements. This can help to increase its yield and resale value. Moreover, in the US at least, you have a historically inflation-protected asset. REITs can also be cheap or expensive - with values not only affected by individuals needing places to live or work, but also affected by the vagaries of the stock market. You are continually marked to market. Expenses are not passed through as deductible losses to you, and growth of your principal is based on the market’s appetite for the stock as well as the performance of the REIT. REITs come in many types - so don’t forget that you might be looking at a commercial property REIT or an industrial property REIT (or a mortgage REIT!). Yes, there are REITs that invest in residential rental unit. So if you want to be exposed to the residential market make sure you aren’t buying a REIT that invests in warehouses or malls. Here's the potential of each For REITs, look at their dividend and research past stock price swings. That might give you an idea of the risk-reward though the past is not always indicative of the current business. For individual properties - after considering LOCATION, LOCATION, LOCATION - look at the purchase price, figure out annual rent, assume some vacancy time, factor in expenses including maintenance, insurance, interest, homeowners association fees, and property taxes to get net income. And factor in non-cash expenses like depreciation which can add considerably to your return. Lastly, assume a long term 2–3% price appreciation on the value of the house. This will give you your total estimated return. And this leads to the biggest advantage (and potential killer?) of direct real estate investing: LEVERAGE When you factor return on investment, remember you are not dividing net rent plus deprecation by the value of the property. you are dividing it by YOUR DOWN PAYMENT! If you buy a $ 1 million property and: net rent is $ 12000 anddepreciation is $ 15000, andexpected appreciation is $ 20000 (at 2% growth) That would be a solid $ 47000 or 4.7% expected return if you divided that by the house value. HOWEVER, if you put 25% down, then you must factor these numbers based on your $ 250000 investment which would quadruple your return on equity percentage to 19%! But don’t forget those mortgage expenses. Note of caution: With house prices elevated in many cities, people are relying less on rental cash flow and more on depreciation deductions and value appreciation to get returns. Market dynamics could change and if they do, return expectations could change with it. Before You Start Drooling… The one thing I notice about prospective real estate investors however, through the heavy breathing over potential returns, is that many are oblivious to the actual work involved. It helps to have skills that cut your expenses and increase the value of your properties. For many successful real estate investors, they were generally already immersed in real estate in one form or another before becoming an investor. Some are/were realtors. Realtors tend to know trends very well in their local market. Some are attorneys who specialize in real estate. This keeps legal expenses low on some of the crummy parts of real estate, like tenant evictions, contracts, and so forth. Others are contractors who save thousands on property upgrades, which gives the investor a higher cash return on cash investment. The returns can be excellent on real estate. But it takes time and work. REITs offer nice income but don't offer direct control and may not compound wealth the way that direct real estate investing might be able to. == Related: $AMT $PLD $CCI $EQIX $SPG $WELL $PSA $EQR $AVB $SBAC $DLR $O $WY $BXP $VTR $ESS $ARE $CBRE $PEAK $MAA $NLY $AGNC $MITT $IVR $NRZ