Recently, I saw an article arguing that REITs performed better than traditional real estate (RE) in terms of total returns:
- Jussi Askola, Don't buy real estate, buy REITs instead, Seeking Alpha, December 15, 2018.
However, I'm confused how this could be the case when considering the lower cost of capital investment home-buyers have access to to boost their ROE over someone buying REIT shares. Investment home-buyers can take out a mortgage loan at ~6% interest (which appears to be conservative relative to what I could find), whereas someone buying REIT shares would be borrowing on margin at around 8% (Schwab's baserate+margin, though there are some cheaper alternatives), ~30% greater than the investment property buyer.
To me it seems like RE would have the superior ROE when considering the leverage most people use to buy properties and a 2%/month rental charge (anecdotal example here). Though this study seems to quantify an added (il)liquidity-risk penalty for holding physical real estate, 20% down on a $100,000 rental with a 1%/month rent (and assuming a 6% loan APR and 50% maintenance cost on the monthly rent), you'd have
(($100000 x 0.02 x 12) x (1 - 0.5) x (1 - 0.06) ) / $20000 = 28% ROE
which seems to beat REITs (from this brief analysis you may be able to tell I don't actually know all the costs involved with investment property ownership). Could anyone explain how REITs would still beat physical RE in this case?
I know there are already several post here about REITs versus RE, but was curious specifically about the total return comparison between the two. Basically, I was hoping that someone could explain how the math actually averages out justifying (or refuting) REITs over real estate with a rough ROE analysis for each case.