It’s one of the most common things I hear when I talk with investors:
“Oh, I’m already in real estate. I own some REITs in my brokerage account.”
I understand why. It’s often what a financial advisor suggests when a client asks about real estate: a ticker symbol they can buy in the same account as everything else. It’s easy. It’s liquid. It says “real estate” right on the label.
But here’s the truth I wish more investors heard:
A public REIT is not real estate. It’s a real estate flavored stock.
You don’t own property. You own shares in a company that owns property. It’s a paper asset that trades on the same exchange, moves with the same headlines, and gets marked up and down by the same fear and greed as the rest of your portfolio.
That distinction isn’t semantics. It changes three things that matter enormously to your wealth: how it behaves, how it’s taxed, and what you actually own.
1. The Diversification Illusion
The main reason investors buy REITs is diversification. And on paper, real estate should diversify a stock portfolio, because property values and rents don’t swing with daily market sentiment.
The problem is that public REITs don’t behave like property. They behave like stocks. Because they trade on an exchange, their prices are set minute-by-minute by the public market, and when markets panic, correlation spikes. In 2008, in March 2020, and again in 2022, public REIT indexes sold off hard right alongside the S&P 500, even where the underlying buildings kept collecting rent. Research comparing public REIT indexes to private property indexes consistently shows the same pattern: in the short run, REITs track the stock market far more closely than they track real estate itself, and the correlation is highest exactly when you need diversification most.
So if your goal is to reduce your exposure to stock market volatility, buying a real estate flavored stock doesn’t get you there. And this is where most portfolios have a blind spot. Real diversification is not owning more stocks in more sectors. A total-market index fund already spreads you across technology, healthcare, energy, financials, and, yes, publicly traded real estate. That’s genuine diversification, but all of it lives inside a single asset class: public equities that ultimately rise and fall together with the same market. True diversification means adding an asset class that is driven by different forces and does not move in lockstep with your stock portfolio. A REIT is another slice of that same stock market. You’ve added a new sector, not a new asset class.
Private real estate, whether owned directly or through a private syndication, is valued on the property’s actual performance: occupancy, rents, expenses, net operating income. No ticker. No algorithm-driven selloffs. That’s what non-correlated actually means, and it’s the diversification most investors think they already have but don’t.
2. The Tax Treatment Isn’t Even Close
This is the part most REIT investors have never been shown.
REITs are required to pay out at least 90% of taxable income as dividends, and those dividends are mostly taxed as ordinary income, your highest rate. (Current law allows a 20% deduction on qualified REIT dividends, which softens the blow, but it’s still ordinary income treatment, not the favorable treatment direct real estate receives.)
More importantly, here’s what a REIT cannot pass through to you:
- Depreciation you can actually use. When you own real estate directly or through a syndication, depreciation, often accelerated through cost segregation and bonus depreciation, flows to you on a K-1 and can shelter much or all of your passive cash flow from current taxes. In a REIT, that depreciation is absorbed inside the company. You never touch it.
- 1031 exchanges. Direct and syndicated real estate can allow gains to be deferred by exchanging into the next property. Sell REIT shares at a gain and you owe capital gains tax, period.
- Return-of-capital treatment on distributions. In many private deals, distributions are largely sheltered in the years you receive them.
Both real estate based, but completely different tax outcomes. One reason the wealthiest families in America have held real estate directly for generations is that the tax code rewards ownership, not shares of ownership of a company that owns.
3. A Different Risk-Return Profile
Public REITs also carry structural costs that quietly work against the investor: the expenses of being a publicly traded company, layers of management compensation, and that same 90% payout requirement, which sounds investor-friendly but means the company retains little capital to improve its properties and must constantly issue new shares or debt to grow.
Private real estate operates differently. A value-add multifamily operator buys a specific property with a specific plan: renovate units, improve management, raise the property’s income, and force appreciation, creating value through execution rather than by hoping the market re-rates a ticker. Investors know exactly which property they own, who is operating it, and what the business plan is. And in well-structured private deals, the operator invests alongside investors and doesn’t participate in the upside until investors receive their preferred return first. Alignment is built into the structure.
To be fair, this is a trade, not a free lunch. Public REITs offer instant liquidity, low minimums, and daily pricing. Private real estate asks you to commit capital for years, typically requires accreditation, and puts real weight on choosing the right operator. That’s precisely why the market has historically compensated private real estate investors differently: you’re being paid for patience and for owning something real, rather than paying for the convenience of a ticker symbol.
For money you may need next month, liquidity is a feature. For wealth you’re building over decades, liquidity is often just volatility with better marketing.
Paper Assets vs. Real Assets
Here’s the simplest way I know to frame it:
- A public REIT gives you stock market convenience with stock market behavior, and strips out most of what makes real estate exceptional: the tax treatment, the non-correlation, and true ownership.
- Private real estate gives you the full package (cash flow, depreciation, leverage, forced appreciation, an inflation hedge, and a tangible asset) in exchange for patience.
At Oak Street Assets, this is the core of our thesis: freedom is built on assets, real ones. We partner with experienced operators on actual properties, primarily multifamily communities, where we invest right alongside our investors. Not real estate flavored paper. Real buildings, real residents, real income.
Retirement isn’t bought on Wall Street. It’s built on Oak Street.
If you’ve been “in real estate” through REITs and you’re curious what owning the real thing looks like, let’s connect. A 20-minute conversation is usually all it takes to see whether private real estate fits your goals.
Related reading
New to syndications? Start with our field guide to real estate syndication.
Not sure what “passive” really means? Read Can You Really Invest Passively in Real Estate?
Curious how public and private REITs compare? Read Public vs. Private REITs.
Tim Fergestad, PhD, is the founder of Oak Street Assets, a boutique alternative investment firm in Scottsdale, Arizona that helps investors build wealth through private real estate. This article is for educational purposes only and is not investment, tax, or legal advice. All investments involve risk, including possible loss of principal. Consult your own advisors before investing.
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