---
id: "concept-reit-inefficiency"
type: "concept"
source_timestamps: ["00:48:00", "00:51:00"]
tags: ["investment-vehicles", "reits", "tax-strategy"]
related: ["concept-infinite-return"]
definition: "The view that public Real Estate Investment Trusts are inferior to direct ownership because they strip away investor control and fail to pass through crucial real estate tax benefits."
sources: ["mcelroy"]
sourceVaultSlug: "mcelroy-multifamily-distress-playbook-2026Jun25"
originDay: 9
---
# The Inefficiency of Public REITs

## Summary

When asked about Real Estate Investment Trusts (REITs), [[entity-ken-mcelroy]] expresses a strong preference for direct real estate ownership. He views public REITs essentially as **paper assets or ETFs**, rather than true real estate investments.

## The Tax-Benefit Argument

The primary drawback, according to McElroy, is the **loss of control** and the **dilution of tax benefits**:

- In a direct syndication or private partnership, depreciation and **cost segregation** benefits flow through to Limited Partners via K-1s, allowing them to offset passive income.
- In a public REIT, these tax benefits are absorbed at the corporate level. The investor receives a *dividend* (a *coupon*) typically taxed at ordinary income rates.

This is why direct ownership pairs so well with the [[concept-infinite-return]] mechanic — the depreciation shield amplifies the after-tax cash flow that investors keep collecting after their capital is returned.

## Nuance from the Enrichment

The enrichment significantly tempers McElroy's framing:

- REITs distribute at least 90% of taxable income; dividends often qualify for the **20% QBI deduction under Section 199A**.
- Distributions may include **return of capital**, which defers tax by reducing basis.
- REITs offer **liquidity, diversification, regulatory oversight, and low minimums** that retail investors cannot access through opaque private syndications.
- Academic comparisons show **public REITs and private real estate funds deliver similar long-term returns** with different volatility/liquidity profiles.

**Bottom line:** REITs are less powerful as *tax shelters* than well-structured private deals, but they can be efficient on a risk-adjusted, diversified basis — especially for less sophisticated investors. *Inefficient* is a value judgment, not a universal truth.