Swap Bricks for Better Returns: Why REITs Outperform Rental Properties in 2025

The rental property game is tough. You're juggling repairs, vacancies, and tenants while earning a meager 6.5% return—taxed as ordinary income and tied to a single asset. Meanwhile, REITs like Vanguard Real Estate Index Fund (VGSIX) and American Healthcare REIT (AHR) are delivering superior returns with none of the hassle. Let's crunch the numbers and reveal why reallocating to REITs is a no-brainer for 2025 investors.

Rental Properties: A Taxing, Risky Gamble

Owning rental properties feels like running a small business. Your 6.5% net return (after maintenance, vacancies, and property taxes) is taxed at your marginal income tax rate—potentially 37% for high earners. Plus, you're exposed to concentrated risk: a single property's loss or disaster could wipe out years of gains. The liquidity? Horrible. Selling real estate takes months, and you'll pay capital gains tax (up to 20%) on profits.

Vanguard REIT (VGSIX): The Steady Earnings Machine

Vanguard's REIT fund (VGSIX) offers 10.13% annual returns over the past year (as of July 2025) and an 8.75% average since inception. It tracks over 100 REITs, diversifying across sectors like healthcare, telecom towers, and residential real estate. Key advantages:
- Low fees: 0.27% expense ratio (0.13% for its ETF sibling, VNQ).
- No operational headaches: Vanguard manages it all—no vacancies or leaky roofs.
- Tax efficiency: Capital gains are taxed at lower long-term rates if held over a year, unlike rental income's ordinary tax bracket.

Even better, VGSIX's market-cap weighting prioritizes telecom tower REITs (e.g., Crown Castle), which outperformed underperforming sectors like self-storage during 2018–2020.

American Healthcare REIT (AHR): The High-Risk, High-Return Play

AHR is the poster child for REIT growth in 2025. Its Q1 2025 results show 15.1% Same-Store NOI growth, fueled by its 85% leased portfolio to credit-rated healthcare tenants. Analysts upgraded price targets to $39.50 (18% upside from June levels), while its inclusion in the Russell Small Cap Growth Index triggered a 66% stake increase by Golden State Wealth Management.

While its 132.88% one-year stock return (not 150%, but still stellar) makes it a growth darling, risks exist:
- Profitability lags: Negative net margins (-1.26%) and weak ROE (-0.3%) as of March 2025.
- Sector-specific headwinds: Medicare policy changes or occupancy declines could dent cash flows.

Tax Efficiency: REITs Win Hands-Down

Rentals:
- Income taxed at ordinary rates (up to 37%).
- Capital gains tax on property sales (up to 20%).

REITs:
- Dividends taxed as ordinary income, but…
- Capital gains taxed at preferential rates if held long-term.
- No property taxes or maintenance costs—you're a passive investor.

Liquidity and Compounding Power

Sell a rental property? You'll wait 6–12 months and pay a 15% real estate agent commission. Sell a REIT? Done in seconds, with proceeds instantly reinvested. AHR's liquidity, combined with VGSIX's stability, lets you compound gains faster, especially if you reinvest dividends.

Risk-Adjusted Returns: REITs Are a Better Bet

VGSIX's 8.75% average return since inception with lower volatility beats rentals' 6.5% return. AHR's 132%+ stock surge over a year is unmatched—but only if you stomach the risks. A balanced portfolio could split 70% into VGSIX (for diversification) and 30% into AHR (for growth), capitalizing on both stability and momentum.

The Bottom Line: Sell Bricks, Buy REITs

The math is clear:
- Tax efficiency: REITs win.
- Liquidity: REITs win.
- Risk-adjusted returns: REITs win.

Sell your rentals, pocket the capital gains, and reinvest in a VGSIX + AHR combo. You'll free yourself from operational stress, cut taxes, and let compounding do the heavy lifting. This isn't just a trade—it's a lifestyle upgrade.

Action Steps for 2025:
1. List rental properties to capture gains (use 1031 exchanges if holding).
2. Allocate 70% to VGSIX (ETF VNQ for lower fees).
3. Deploy 30% to AHR, but monitor its debt-to-EBITDA ratio (4.5x as of March 啐).
4. Reinvest dividends and hold for the long term.

The future belongs to investors who trade sweat equity for strategic assets. Your nest egg will thank you.