The cleanest way to see how REITs and a single rental property differ is to run them side by side as a worked example, holding the dollars invested equal. Consider two parallel real-estate positions held over the same six years: one a one-bedroom condo bought as a rental in a small US city, the other a small portfolio of US REITs — VNQ plus three individual names — built up over the same period. The numbers below are illustrative, but they are realistic for the kind of market this scenario describes, and they show where each approach wins.
Setup: the two positions
The condo: $112,000 purchase price, 20% down ($22,400), 30-year fixed mortgage at 4.625%, in a building with a HOA. Bought July 2018. Rented to a single tenant for the entire holding period through a property manager.
The REITs: A simple split — 60% in Vanguard's VNQ ETF, 40% across three individual names (one residential REIT, one industrial, one healthcare). Total invested at start: $22,400, deliberately matched to the condo down payment, with all distributions reinvested through DRIP — a choice worth questioning, as discussed in the DRIP piece.
Both are treated here as a six-year hold, with a separate ledger for each. REITs themselves are regulated investment products; the SEC's Investor.gov has a plain-English primer on how they work and what they must pay out.
The rental, all-in
| Line item | Year 1 | Year 6 | 6-yr total |
|---|---|---|---|
| Gross rent collected | $11,400 | $14,400 | $77,940 |
| Vacancy (1.2 mo total) | $0 | $0 | −$1,420 |
| Mortgage interest paid | −$4,090 | −$3,180 | −$22,470 |
| Property tax | −$1,720 | −$2,140 | −$11,580 |
| HOA | −$2,160 | −$2,640 | −$14,400 |
| Insurance | −$540 | −$720 | −$3,720 |
| Property management (8%) | −$912 | −$1,152 | −$6,235 |
| Repairs & capex | −$320 | −$2,840 | −$8,640 |
| Net cash flow | +$1,658 | +$1,728 | +$9,475 |
Capital appreciation: suppose the unit sells after six years for $148,000 — a $36,000 gross gain. Mortgage principal paid down over the holding period: roughly $12,400. So the equity at sale is the original $22,400 down + $12,400 principal pay-down + $36,000 appreciation = $70,800 of equity, against $22,400 originally put in. Subtract roughly $9,200 in closing/selling costs and capital gains tax of about $5,400 (a rental does not qualify for the primary-residence exclusion), and the cleanest after-tax exit is about $56,200.
Add the $9,475 of net rental cash, and the total six-year economics of the condo come to approximately $43,275 of gain on the original $22,400 — call it 13.5% annualized.
The REIT portfolio, all-in
The REIT portfolio is much easier to summarize because there are no operating expenses to deduct.
| Component | Amount |
|---|---|
| Initial investment, July 2018 | $22,400 |
| Distributions received, 2018–2024 | $7,930 |
| Distributions reinvested (DRIP) | $7,930 |
| Account value, Dec 2024 | $39,840 |
| Total return (incl. reinvested distributions) | +$17,440 |
That is a total return of 78% over 6.5 years, or roughly 9.4% annualized. In this scenario the figure is depressed by the weak REIT cohort of 2022–2023, when rising rates pressured the sector heavily. In a 2018–2021 window the same portfolio would have annualized closer to 11%.
The honest comparison
On annualized return, the condo wins — 13.5% vs. 9.4%. But that comparison is not fair without three adjustments.
Adjustment one: time. A rental like this realistically costs, conservatively, 80 hours over six years in property-manager coordination, tax-prep complexity, emergency repair calls, and the occasional tenant dispute. The REITs cost, generously, four hours — the time to read each year's 10-K for the three individual names. At even $30/hour, the condo's gain shrinks by $2,400 and its annualized return drops to about 12.5%.
Adjustment two: risk. The condo's return depends on one tenant in one unit in one building in one local market. The REIT portfolio holds thousands of properties across multiple sectors. The condo carries real concentration risk that the spreadsheet does not show.
Adjustment three: leverage. The condo's outperformance is, in large part, the leverage. With 20% down, every dollar of appreciation shows up at 5x on the equity. The same leverage works against you if the market goes the other way. The REITs are unlevered.
A leveraged property in a rising market beats an unlevered portfolio almost every time. The trick is that "rising" has to last longer than the mortgage.
What this implies
For many investors, a single rental is hard to justify. The cash-flow margin in a lot of today's markets is thin, and the time cost — even with a manager — is not zero. The financial outcome can be good; the experience is rarely as passive as the brochures suggest.
REITs are easier to hold. Inside an IRA or HSA, they are tax-efficient because the (largely non-qualified) distributions are sheltered. In a taxable account they are tax-inefficient, which is why this kind of exposure usually belongs in a Roth where possible.
The honest verdict: rental property can outperform REITs in a rising market with leverage, at a cost of time and concentration risk that most spreadsheets do not bother to charge. REITs underperform in the same window, with none of the operational drag. Which one is better depends less on the return and more on how passive you actually want your passive income to be.
