Can buying REIT's be compared to investing in Real Estate?
"A couple of distinctions. First, if you were to ""invest in real estate"" were you planning to buy a home to live in, or buy a home to rent out to someone else?  Buying a home as a primary residence really isn't ""investing in real estate"" per se.  It's buying a place to live rather than renting one.  Unless you rent a room out or get a multi-family unit, your primary residence won't be income-producing.  It will be income-draining, for the most part.  I speak as a homeowner. Second, if you are buying to rent out to someone else, buying a single home is quite a bit different than buying an REIT.  The home is a lot less liquid, the transaction costs are higher, and all of your eggs are in one basket.  Having said that, though, if you buy one right and do your homework it can set you on the road for a very comfortable retirement." well yes but you should also begin to understand the sectoral component of real estate as a market too in that there can be commercial property;  industrial property and retail property; each of which is capable of having slightly (tho usually similar of course) different returns, yields, and risks.  Whereas you are saving to buy and enter into the residential property market which is different again and valuation principles are often out of kilter here because Buying a home although exposing your asset base to real estate risk isnt usually considered an investment as it is often made on emotional grounds not strict investment criteria.
Besides the long-term concern about which is cheaper, which has already been addressed by other answers, consider your risk exposure. Owning property has financial risks associated with it, just like owning stocks or bonds. The risk-related downsides of owning a home as an asset include: The risk-related upsides of owning a home as an asset include: Taking on some risk can save you (or earn you) money in the long run (that's why people buy risky stocks, after all) but consider how well you're equipped to handle that risk before you rush out to buy on a naive analysis of what's cheaper. To round out something that @Chris W. Rea pointed out, the business that a REIT is in will be either A) Equity REIT... property management, B) mortgage REIT... lending, or C) hybrid REIT (both).  A very key point about why REITs broadly have been struggling lately, (and this would show up in the REIT indices/ETFs you've linked to,) is linked to the REIT business models.  For an Equity REIT, they borrow money at the going rate (let's say ~4.5% for commercial-scale loans), and use that to take out mortgages on physical properties. If a property rents for $15K per month, and they can take out a $1.8 million loan at $9,000 per month, then their business is around managing maintenance, operating expenses, and taxes on that $6,000 per month margin. For a mortgage REIT, they borrow funds as a highly qualified borrower, (again let's say ~4.5%), and lend those funds back out at a higher rate. The basic concept is that if you borrow $10 million at 4.5% for 30 years, you need to pay it back at $50,668 per month. If you can lend it out reliably at 5%, you collect $53,682 per month... a handy $3,000 per month. The cheaper you can get money at (below 4.5%) and the higher you can lend it at (above 5%), the better your margin is.  The worry is that both REIT business models are very highly dependent on the cost of borrowing money. With the US Fed changing its bond-buying/QE/stimulus activity, the prevailing interest rates are likely to go up. While this has its benefits (inflation), it also will make it more expensive for these types of companies to do business. As other answers have pointed out, professional real estate investors do own residential investment properties. However, small residential units typically are not owned by professional real estate investors as your experience confirms. This has a fairly natural cause. The size of the investment opportunity is insufficient to warrant the proper research/due diligence to which a large investment firm would have to commit if it wanted to properly assess the potential of a property. For a small real estate fund managing, say, $50 MM, it would take 100 properties at a $500K valuation in order to fully invest the funds. This number grows quickly as we decrease the average valuation to reflect even smaller individual units. Analogously, it is unlikely that you will find large institutional investors buying stocks with market caps of $20 MM. They simply cannot invest a large enough portion of total AUM to make the diligence make economic sense.  As such, institutional real estate money tends to find its way into large multi-family units that provide a more convenient purchase size for a fund. would buying the stock of a REIT qualify as a 'Like-Kind' exchange? Short answer, no. Long answer, a 1031 (Starker) exchange only applies to real estate.  From the Wikipedia page on the topic: To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business, or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code, although securitized properties are not excluded. A REIT, being stock in a real estate company, is excluded from Section 1031. With out a doubt: commercial real estate.  Those that have significant amounts of money, and want to make lots more usually end up investing a chunk of their portfolio in commercial real estate.  Everyone finds a way to make money elsewhere, but there’s no comparison to the incentives and returns in real estate when you have tens or hundreds of millions of $ at your disposal.  Have money, make money. Have you considered a self-directed IRA to invest, rather than the stock market or publicly traded assets? Your IRA can actually own direct title to real estate, loan money via secured or unsecured promissory notes much like a hard money loan or invest into shares of an entity that invests in real estate. The only nuance is that the IRA holder is responsible for finding and deciding upon the investment vehicle.  Just an option outside of the normal parameters, if you have an existing IRA or old 401(k) or other qualified plan, this might be an option for you. "Okay. An ETF is an ""Exchange Traded Fund"". It trades like a stock, on the stock market.  Basically by buying one ETF, you can have ownership in the underlying companies that make up the ETF. So, if you buy QCLN, a green energy ETF, you own Tesla, First Solar Inc, SunPower Corporation, Vivint Solar, Advanced energy industries and a bunch of other companies that are involved in clean energy.   It allows you to gain exposure to a sector without having to buy individual companies.  There are ETFs for lots of different things. Technology ETFs, Healthcare ETFs, Consumer Staples ETFs, Utilities ETFs, etc.  REITS are essentially the same thing, except they own real estate." It's not an easy calculation so I made this demonstration that compares a fixed investment with a 100% mortgage, for a simple case.  (Obviously if you lessen the mortgage with a deposit it's somewhere between the extremes.)  The demonstrations shows some definite differences at higher interest rates.  You can probably decipher the calculations in the code if you're interested.  It's intended to be legible. http://demonstrations.wolfram.com/BuyOrRentInvestmentReturnCalculator/ I plotted your figures in my Buy or Rent app.  It compares the equity of buying or renting by calculating what your mortgage payment would be and comparing the alternative case if you rented and invested an equivalent amount. Clearly for the amounts you specified it is better to buy, but if you change the amounts and interest or property appreciation you can see the equity effects. "You're ""onto"" something. Investing in real estate was not a bad idea about 10-15 years ago, when stocks were high, and real estate was not. On the other hand, by about 2006, BOTH stocks and real estate were high, and should have been avoided. And around 1980, both were LOW, and should have been bought. I expand this construct to include gold and oil. Around 2005, these were relatively low, and should have been bought over stocks and real estate. On the other hand, ALL FOUR are high right now, and offer comparable dangers." Your experience is anecdotal (outside Australia things are different). There are many companies and real estate investment trusts (REITs) that own residential properties (as well as commercial in many cases to have a balanced portfolio). They are probably more common in higher-density housing like condos, apartment buildings, flats, or whatever you like to call them, but they are certainly part of the market for single family units in the suburbs as well. What follows is all my own opinion. I have managed and rented a couple of properties that I had lived in but wasn't ready to sell yet when I moved out. In most cases, I wish I would have sold sooner, rather than renting them out. I think that there are easier/less risky ways to get a good return on your money. Sometimes the market isn't robust enough to quickly sell when it's time to move, and some people like the flexibility of having a property that a child could occupy instead of moving back in at home. I understand those points of view even if I disagree with them. "I work for an international real estate consulting firm in Shanghai. After graduation I worked in their Research Department for two years before switching to Commercial Brokerage 3 months ago.  Since my background was in Economics, I had to learn a lot about how the industry worked. I found this book to be very helpful:  ""Commercial Real Estate Analysis &amp; Investments"" by David Geltner.  I will admit that it's probably more than what you want to know, but it seriously gives an in depth breakdown of the entire industry.   About one year into starting, a major Real Estate iBank commissioned our company to due diligence on an office building acquisition in Shanghai. I was the only person capable of doing it as everyone else was either busy or couldn't speak English properly. With 1 year under my belt in Research and that book, I took the entire thing on. Had to walk into that meeting by myself with all the big wigs from New York, London, Hong Kong and Shanghai questioning every single number and assumption. I fucking nailed it. While credit towards understanding the market through work is deserved, a lot of the development of that report came from constantly consulting that book. It's worth every penny if your interested in commercial real estate investment.  That being said, if you want to track deals, the best place is called Real Estate Capital Analytics. Unfortunately you have to fork over a decent amount of cash to get access. For your situation I would recommend the following:  - ""The Urban Land Institute &amp; PwC Emerging Trends in Real Estate"": I believe you need to be a member but I can always find it online for free.  - Brokerage firms: I work in one and we cover residential, commercial and retail reports on cities throughout the world (I actually wrote the ones for China for two years). You can find a wealth of information in them. If you are seriously looking at buying with capital, call up the research department and ask if they have some time to discuss the market face to face; if you don't have capital, they won't talk to you. Fortunately however, most let you download their reports for free from their website so here's the list of the major ones in the US: CBRE, Colliers, CRESA, Cushman &amp; Wakefield, Jones Lang LaSalle, etc.  - The Loop - www.loopnet.com has a wealth of information from Commercial properties on the market to previous deals.  Please let me know if I can further advise." "If you're trying to hedge the ups and downs of your local residential real estate market, a REIT fund holding commercial properties across the country is not the ideal match. Here's a comparison of an index tracking single-family home prices in one region (Los Angeles) and VNQ (another popular REIT fund).  There's some correlation but there's clearly different magnitudes and sometimes different directions. With a national home price index, the correlation is only 68%, and it would be lower for individual cities. You could still use it for hedging, but there's significant ""tracker error"" risk to be considered. Unfortunately, I'm not familiar with any investment that would be a better match for individual residential markets. So, if you decide to use this, I'd also adjust the level of exposure to get a closer result. E.g. using approx. 50% VNQ and 50% cash results in a closer result after 2 years (compared to national single-family home price changes) than either 0% VNQ and 100% cash, or 100% VNQ and 0% cash." Buying a property and renting it out can be a good investment if it matches your long term goals.  Buying an investment property is a long term investment.  A large chunk of your money will be tied up with the property and difficult to access.  If you put your money into dividend producing stocks you can always sell the stock and have your money back in a matter of days this is not so with a property. (But you can always do a Home equity line of credit (HELOC)) I would also like to point out landlording is not a passive endeavor as JohnFx stated dealing with a tenant can be a lot of work.  This is not work you necessarily have to deal with, it is possible to contract with a property management company that would place tenants and take care of those late night calls.  Property management companies often charge 10% of your monthly rent and will eat a large portion of your profits.  It could be worth the time and headache of tenant relations.  You should build property management into you expenses anyway in case you decide to go that route in the future. There are good things about owning an investment property.  It can produce returns in a couple of ways. If you choose this route it can be lucrative but be sure to do your homework.  You must know the area you are investing very well.  Know the rent, and vacancy rates for Single family homes, look at multifamily homes as a way of mitigating risk(if one unit is vacant the others are still paying). "Other individuals answered how owning an REIT compares to an individual real estate investment, but did not answer your second question as readily, ""are REITs a good option to generate passive income for awhile?"". The ""awhile"" part is quite important in answering this question. If your intentions are to invest for a relatively short time period (say, 7 years or less), it may be especially advantageous to invest in a REIT. The foremost advantage comes from significantly lower transaction fees (stock/ETF trades are practically/potentially free today) compared to purchasing real estate, which involves inspection+titling fees/taxes/broker fees, which in a round-trip transaction (purchase and sale) would come to ~10%. The secondary advantage to owning a REIT is they are much more liquid than a property. If you wanted to sell your investment at a given point in time, you can easily log into your brokerage and execute your transaction, while liquidating an investment property will take time on market/potentially tossing tenants/fixing up place, etc. On the other hand, illiquid investments have generally yielded higher historical returns according to past research."