Real estate investment and real estate investment trusts (REITs) are both investment methods targeting real estate, but there are significant differences in their structures and features. This article explains the differences between real estate investment vs. REIT, and details the basics of each, a comparison of advantages and disadvantages, suitability for different types of investors, practical advice, and even the latest market trends (yield trends). For those who are interested in keywords such as " real estate investment differences," " REIT investment comparison," and " real estate investment vs. REIT," we provide professional explanations.
Real estate investment is an investment technique in which real estate properties such as condominiums, apartments, single-family homes, and office buildings are purchased, and profits are earned through rental operations and sales. For example, you can earn monthly rental income by renting the property to others, or aim for a capital gain by selling the property in the future. Since you own the real asset, real estate, you need to manage and maintain the property after purchase. Specifically, there are many operational tasks such as tenant recruitment, rent control, repairs and renovations, and tax payments, but the appeal of real estate investment is that it provides a stable monthly income gain (rental income).
Another feature of real estate investment is that loans can be used as leverage to make large investments. If you purchase a property not only with your own funds but also with a loan from a financial institution, you can acquire a more expensive property with less personal funds. Since rental income can be used to build assets while covering loan repayments, it is attracting attention as a source of income for long-term asset management and as a substitute for a pension in retirement. In fact, an increasing number of people in their 20s and 30s are starting to invest in real estate as a way to secure a stable income for retirement and as a measure against future inheritance.
There are two main sources of income from real estate investment. One is rental income called " income gain, " and the other is capital gain when properties are sold. During periods when the real estate market is strong, property prices rise, and you may be able to sell your property at a higher price than when you purchased it. However, if you hold a property for a long period of time, the value of the property may decline due to deterioration over time, so you need to keep in mind the risk of fluctuations in real estate prices.
A REIT (Real Estate Investment Trust, or REIT) is a financial instrument that collects funds from an unspecified number of investors, uses the funds to collectively acquire and manage multiple properties such as office buildings, commercial facilities, and residential properties, and distributes the rental income and profit on sales to investors. As the name implies, a REIT uses a trust structure to securitize real estate. Investors can indirectly become owners of various types of real estate by purchasing REIT units (securities).
There are two types of REITs: listed REITs (J-REITs) and non-listed REITs (private REITs). Listed REITs (J-REITs) are listed on the Tokyo Stock Exchange and can be freely traded on the market like stocks. They are characterized by the fact that they can be invested from a small amount, and even an ordinary individual investor can participate in a real estate portfolio with as little as several tens of thousands of yen. Since they invest in multiple properties in a diversified manner through an investment corporation, REITs offer the advantages of high diversification and expert management compared to direct investment in a single property. In addition, many REITs take advantage of the system under which no corporate tax is imposed if more than 90% of profits are distributed to investors (preferential tax treatment), and in fact, a high dividend yield is realized by distributing most of the profits as dividends. For this reason, REITs are also known as high dividend products.
On the other hand, unlisted REITs (privately placed REITs) are not listed on a stock exchange and are managed in a private placement format for specific institutional investors. Private REITs are mainly targeted at institutional investors, and the minimum investment amount is several hundred million yen, so they are not something that ordinary individuals can easily participate in. However, the base price is based on the appraised value of real estate holdings, and price fluctuations tend to be mild. In this article, we will compare the differences between real estate investment and REITs, focusing mainly on listed REITs (J-REITs) in which general individual investors can participate.
There are various differences between real estate investments and REITs, ranging from ownership structure toliquidity, initial costs, management effort, profitability, and risks. The main differences are listed below.
| Comparison Items | Physical real estate investment (direct purchase of real estate) | REIT investment (investment in a real estate investment trust) |
|---|---|---|
| Form of Ownership | Investors themselves own the real estate and become the registered owner. The property remains as his/her own asset. | The investment corporation (fund) owns the real estate, and the investor holds the equity. Investors do not become registered owners of individual properties. |
| Liquidity (liquidity) | Low (selling a property requires time and procedures). Real estate transactions are illiquid and difficult to convert into cash quickly. | High (can be bought and sold at any time on the securities market). Like stocks, market prices fluctuate constantly and can be redeemed in a short period of time if necessary. |
| Minimum investment | Large (requires funds in the tens of millions of yen to tens of millions of yen). Loans are available, but self-financing and credit are required. Example: A one-room apartment in Tokyo requires approximately 20 million yen or more. | Small (can be purchased for as little as several tens of thousands of yen). You can invest in units of one unit through a brokerage firm, allowing you to start investing in real estate with a small amount. |
| Time and effort required for management | Expensive (property management is required). In rental operation, you need to deal with tenants, property maintenance and management, tax procedures, etc. by yourself or outsource to a management company. | Very low (management is left to professionals). Investors only need to hold the securities, and the property management company handles all property management and operations on their behalf. |
| Revenue source/yield | Rental income + profit on sales. Yields vary depending on real estate market conditions and property selection. Many residential properties in central Tokyo have surface yields of less than 5%, and the residuals may be even lower when loans are utilized. | Distribution + gain on sale: J-REIT distribution yields are generally around 3-5%. While it fluctuates depending on the property type and the economy, it tends to converge to an average level due to the large, diversified portfolio. |
| Major Risks | Vacancy risk, rent delinquency risk, and disaster risk. In the case of a single property, there is a risk of zero income if a tenant vacates. Also, loan repayment burden increases when interest rates rise. Property price decline and low liquidity are also risks. | Market fluctuation risk, interest rate fluctuation risk; REIT prices fluctuate due to the stock market, and there is a possibility of loss of principal. If rents decline or vacancies increase due to economic recession, there is also the risk of a decrease in distributions. In addition, there is the credit risk of the fund itself, such as the risk of bankruptcy or delisting of the investment corporation. |
As can be seen from the above comparison, real estate investment and REITs each have different merits and demerits. While physical real estate "allows you to own real estate as your own asset" and "allows you to use loans for leverage , " it also has restrictions such as capital hurdles, management hassles, and low liquidity. On the other hand, REITs have the advantages of "investing in multiple properties with a small amount and without hassle" and "high liquidity and immediate trading." On the other hand, there is a risk of loss of principal due to market price fluctuations and the fact that you cannot control the management of the properties because you entrust them to others (professionals).
For example, in terms of initial costs, physical real estate requires several million yen of personal funds (plus a loan) to acquire properties, while REITs can be purchased with as little as tens of thousands of yen in a brokerage account, lowering the barrier to entry. In terms of liquidity, physical real estate can take months to years to sell, whereas REITs can be bought and sold daily on the stock market, making it easy to convert them into cash when needed. Also, with direct investment, you are the legal owner of the property and the assets remain with you, whereas a REIT investor owns an interest in the fund, not the property itself, and your name does not appear on the registry. Based on these differences, it is important to choose the method that best fits your financial resources and investment objectives.
Let's consider which type of investor is best suited for real estate investment and REITs from the perspectives of investment objectives and lifestyles. Below are some examples of general suitability.
Those who value long-term, stable income: Suitable for those who want to secure a stable source of income in the form of monthly rental income. In particular, for those who want to earn long-term unearned income as a " pension replacement" in their old age, rental income from a property can be a reassuring support.
For those who want to protect their assets against taxes: If real estate income is offset by expenses (e.g. depreciation), it can be used to reduce income tax and inhabitant tax. Real estate investment can be an effective tool for those with high incomes who have a large tax burden and those who are considering inheritance tax measures in the future.
People who aim for large asset building by utilizing leverage: The ability to take out loans is one of the strengths of physical real estate investment. It is also suitable for those who want to expand the size of their assets by acquiring properties that exceed their own funds, or who want to use a loan with group credit life insurance as a substitute for life insurance (if the loan holder dies, the real estate will be left to the surviving family with no remaining balance).
Those who want to manage their assets regardless of the hassle and cost: Property management is time-consuming, but on the other hand, there is room for you to exercise your own ingenuity and discretion. For those who want to use their own judgment in property management, from property selection to renovation and rent setting, investing in directly owned real estate can be a rewarding experience.
People who want to start real estate investment casually with a small amount of money: REITs are suitable as an introduction to real estate investment, as they can be purchased with as little as tens of thousands of yen, even if you do not have a large amount of personal funds. They are suitable for people who want to experience the real estate market with a small amount first, although buying real estate itself is a hurdle.
People who value liquidity and want to buy and sell at their preferred timing: Because they can buy and sell at market prices just like stocks, they can redeem their funds as soon as they need them. REITs are more suitable for those who aim for short-term gains or investors who want to flexibly reconfigure their portfolios according to market conditions.
Those who want to reduce risk by diversifying investments: REITs offer better risk diversification than individual property investments because one investment unit can be invested in multiple properties. They are suitable for those who want to reduce vacancy risk and geographic diversification risk by investing across a variety of real estate types, such as office, residential, retail, and logistics facilities.
People who want to avoid complicated management tasks: Since all operational management of properties is entrusted to professionals, investors themselves do not have to deal with the hassle of operations. REIT is a good fit for salaryman investors who are busy with their daily work and beginners who do not have specialized knowledge of real estate and want to enjoy only real estate income without the hassle.
The above are general trends, but ultimately the appropriate approach will depend on your investment objectives, acceptable risk, and the amount of time and effort you are willing to put in. For example, those who place primary emphasis on "long-term stable growth of assets" tend to prefer physical real estate, while those who value "liquidity and agile management" tend to prefer REITs. Consider the best choice for your individual situation.
When actually making an investment decision in a real estate investment or REIT, it is advisable to pay attention to the following points. It is important to base your strategy on differences in taxation, the economic environment, and real estate market trends.
In the case of direct real estate investment, the ability to take advantage of tax benefits should not be overlooked. Since depreciation and other expenses can be recorded at the time of property purchase, real estate income on paper can be reduced, thereby reducing income and inhabitant tax burdens. In particular, for properties with large depreciation expenses, such as newly built or RC condominiums, it is expected that expenses will exceed rental income for the first few years, resulting in a tax benefit from recording a loss. In addition, in the event of the death of a borrower during loan repayment, group credit insurance will reduce the loan balance to zero, and the remaining real estate will function as a death benefit, leaving the heirs with a debt-free asset (inheritance tax assessed value also tends to be lower than market value).
On the other hand, REIT distributions are taxed as dividend income from financial instruments. Basically, distributions from listed REITs in Japan are subject to withholding tax of 20.315% (income tax + inhabitant tax), and if you file an income tax return, you can also apply the dividend deduction and profit/loss adjustment. However, since you are not taking out a loan on your own, you cannot use tax schemes such as interest expenses and depreciation. Therefore, the motive of high-income earners to invest in real estate for tax benefits does not apply to REITs (in fact, since they are financial instruments, the risk of tax increases is the same as that of stock investments). In terms of the taxation system, the difference is that REITs are simply taxed on distributions, whereas physical real estate investments can take aggressive tax measures such as recording expenses and reducing inheritance assessments. Consider your own tax situation when choosing an investment approach.
Economic conditions and interest rate trends also have a significant impact on the performance of real estate investments and REITs. In general, rising interest rates can be a headwind for either approach, but the impact is manifested differently. In the case of physical real estate, if you have a floating-rate loan, the amount of repayment will increase as interest rates rise, putting pressure on your net income. Also, in the real estate market, if purchase demand declines due to rising interest rates, there is a possibility that prices will come under downward pressure. However, since rent prices fluctuate relatively slowly, changes in real estate prices and rents tend to be less drastic than in the financial markets.
In the case of REITs, rising interest rates affect prices in two ways. One is the concern that profits will decrease due to higher interest costs since REITs themselves acquire real estate through loans, and the other is that the relative attractiveness of yields will decrease from the investor's perspective, creating selling pressure. In fact, in recent years, when long-term interest rates rose in the U.S. and Japan, the J-REIT index fell and distribution yields rose. While an economic downturn can cause an increase in vacancies and a decline in rents in physical real estate, in the REIT market, there are cases where the deterioration of the economy-sensitive investment sentiment leads to selling and a marked decline in prices. In addition, the REIT market is easily affected by foreign investment money, and it is necessary to keep in mind that global financial trends (e.g., changes in U.S. interest rates and exchange rate movements) can have a ripple effect on J-REIT prices.
In light of the above, a flexible strategy in response to economic conditions could be to expand physical real estate by leveraging under low interest rates and to enjoy the high yield of REITs by refraining from taking out unreasonable loans under high interest rates. In times of economic uncertainty, it is also a good idea to diversify investments into both types of assets to achieve a balance.
There are similarities and differences between real estate investment and REITs in terms of resistance to inflation. In general, real estate is considered to be an asset that is resistant to inflation. This is because land and construction costs tend to rise when prices rise, and real estate prices themselves tend to rise along with prices. In addition, since rental contracts can be revised at the time of renewal in response to prices and the market, rental income can also increase if inflation is moderate. Therefore, holding physical real estate can be a means of hedging against the diminishing value of cash.
REITs are also inflation-resistant in that they are ultimately backed by real estate. If rental income from the properties they own increases, their distributions may also increase. It should be noted, however, that a simultaneous rise in interest rates accompanying inflation can have a negative effect on REIT prices, as mentioned above. In other words, even if the value of real estate itself increases due to inflation, the REIT market price may fall in a tug-of-war with interest rates. Therefore, when investing in REITs during the inflationary phase, it is necessary to keep an eye on the trend of interest rate hikes. In general, it can be said that physical real estate is more directly effective as an inflation hedge asset, while REITs are more indirect and dependent on market factors.
In both cases, when inflation is rising, borrowing can be expected to have the effect of reducing the real value of debt. If you own real estate with fixed-rate debt, inflation can reduce your real debt burden and increase the relative value of your assets. This is a major advantage of investing in physical real estate. On the other hand, extreme inflation and interest rate spikes may risk disrupting the real estate and REIT markets, so pay attention to economic indicators and central bank monetary policies.
Finally, we would like to mention the latest market trend in REIT yields. Looking at recent trends (early 2020s), yields in the J-REIT market have been on an upward trend. This is due to the softening of REIT prices against the backdrop of the Bank of Japan's negative interest rate policy modification and rising global interest rates. In fact, the TSE REIT Index slumped from around 2021, when it reached a temporary high after the Corona, and was down nearly -30% from its peak at the end of 2024. As a result, the average dividend yield has reached a high level of around 5% at the moment. This is much higher than the average dividend yield of TSE stocks during the same period (approximately 2% to 3%), and this has increased the relative earning potential of REITs.
However, the fact that yields are rising may also mean that the market is taking a cautious view of REITs. Uncertainty over the future due to rising interest rates and changes in office demand (e.g., concerns over rising vacancy rates due to the spread of telework) are affecting investor sentiment and putting pressure on selling. According to expert analysis, the distribution itself is on an increasing trend, but prices are falling and yields are rising, so from a medium- to long-term perspective, some see this as an undervalued investment opportunity. If the REIT market is reassessed depending on future interest rate trends and the economic environment, there is a possibility that prices will pick up.
On the other hand, looking at the physical real estate market, Japanese residential real estate still mainly consists of properties with yields of 3-5%, and it is difficult to expect significant fluctuations in yields. In fact, in urban areas, there are some cases where surface yields are declining due to rising real estate prices. When considering real estate investment, it is advisable to compare the yields of such direct investment properties with those of REITs and determine which is more suitable for your expected return and risk tolerance.
In summary, real estate investment and REITs are both investment methods with their advantages and disadvantages. It is important to correctly understand the differences between them and to choose a method that matches your own asset situation and objectives. While they share a common underlying asset in the form of real estate, the difference in approach between "directly holding and earning investment income" and "indirectly earning income through securitized products" is reflected in the difference in risk/return and the amount of time and effort required. We hope that the points of comparison, latest trends, and advice explained in this article will help you make wise investment decisions.