I come from a family of real estate entrepreneurs, and from a very early age, I have been touring investment properties and going to construction sites with my father.

As I grew up, I knew that I wanted to also become a real estate investor and so I studied accordingly, passed the CFA exams, completed two bachelor's degrees in real estate, and eventually landed a job in private equity. We managed hundreds of millions worth of property investments and it taught me a lot.

With this background, I was very well prepared to become a real estate investor, and so I did. I bought one property... a second... but eventually, I came to the conclusion that it wasn't worth it and stopped investing in private real estate.

I discovered REITs and came to the conclusion that they were better investments in most cases. I quit my private equity career to become a full-time REIT analyst, and that's what eventually landed me here on Seeking Alpha to discuss some of my investment ideas.

In today's article, I take a step back to present the five reasons why I stopped buying private properties to instead focus on REIT investing. If you are still undecided between the two, I hope that this article will help you gain a fuller picture to make your own decision.

Exceptions always exist, but on average, REITs have historically generated higher returns than private real estate.

According to NAREIT, REITs have outperformed on average by about 4% per year:

Another study conducted by Cambridge comes to the same conclusion:

There are two main reasons why REITs outperform private real estate:

1) They enjoy significant economies of scale. When you own 100s of properties, you enjoy savings on many levels: Bank financing, maintenance, property management, etc. Imagine changing the carpet of one house versus the carpet in 20 apartments.

2) They can grow externally via spread investing. Private real estate investors only rely on rent increases to grow their cash flow. REITs are able to grow faster by also growing externally. What this means is that they will issue new shares at cost X, and reinvest the proceeds at return Y - earning a positive spread that benefits all shareholders. That's how REITs commonly grow cash flow per share at 5%-10% per year. Rental investors are satisfied with just 1%-2% per year.

So with REITs, you have three return components:

Whereas with private real estate, you only have two return components:

With that in mind, it's not surprising that REITs outperform in the long run.

This point will be going to be contested by many rental investors. If you check the comment section below, I'm sure that some people will claim that they are able to earn 20%, 25%, or even 30% annual returns with ease by buying rentals. In comparison, REITs are boring with their ~12% annual returns, right?

But don't let them lure you with these unrealistic results. Warren Buffett became the richest man on earth by compounding at about 20% per year. I can guarantee you that rental investors are not consistently compounding at a greater rate than Buffett. Instead, they ignore many costs and only look at returns in their best years.

REITs are not only more rewarding but also much safer investments.

That's another point that will be contested by rental investors because they get a false sense of safety by not seeing a daily quotation of their property.

But the reality is that rental properties are just as volatile, if not more than REITs. Think about it:

Which is the riskier and more volatile investment?

It's the rental. Without a doubt.

Try to put your rental on the market, and you will find that you get different offers all the time. Since your equity is often only 20% of the capital stack, the volatility is enormous. A 1% deviation results in 5% volatility in the value of your equity.

Investors often imagine that rentals are great investments to earn high and passive income. They get sold into this idea of "passive income" by YouTube channels that pitch their get-rich-quick courses to real state investing.

The reality is very different.

There's nothing passive about real estate. If you want to earn good returns, you will need to work very hard to first find the right deal, secure financing, find the right contractors to renovate the property, market it to find a tenant, set up the right legal structure, etc.

You get my point. This is a second job. Not a passive investment.

Of course, you could just buy the first property that you find and delegate all the work to a property manager. But if you are going to do that, why not just invest in REITs, save yourself from all the hassle, and most likely earn higher returns with less risk in the long run?

If you invest in private real estate, you are cutting yourself short.

You are limited by your capital, geographical reach, relationships, and expertise.

Most often, this means that you will only invest in a few rental properties in a single city.

Even if assume that everything works out great, your risk-to-reward is questionable because you are putting all eggs in one basket. You only invest in one property type in one location.

With REITs, you can greatly improve your risk-to-reward by investing in different locations and property types. This includes:

You also can invest abroad with international REITs (VNQI). This superior diversification greatly improves your risk to reward - something that's not possible for most private real estate investors.

Finally, we think that too many investors only focus on returns and forget to consider risks and the efforts needed to manage investments.

Sure, a private property may pay off handsomely and do even better than REITs.

But what's the cost of that?

Especially today as we go through the COVID crisis, it makes much more sense to invest in REITs with professionals handling all the issues.

REITs are today also priced at historically low valuations and high yields, which makes the decision even easier.

I used to be a private equity real estate investor.

But today, I favor REITs and believe that they are better investments in most cases.

Only in exceptional cases, I still invest in private real estate. As an example, recently, I invested in a property in Tallinn, Estonia, which is a great market that lacks REITs. In other cases, I invest in REITs nine times out of 10.

This would be a good time to examine your own real estate investments. Would REITs also make more sense for your situation? Share your thoughts below.

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This article was written by

Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more! 

Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.

DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.