Edit: I suppose one reason would be if you want to rent, but you like a house that's not on the rental market. Any others?

You are not incorrect per sé. REITs exists in an awful large number of varieties in every possible flavor and indeed broadly reflect what you describe, i.e. an exposure to a Real Estate. You get paid a dividend (which would be similar to the cashflow you receive from a rental property you own). There are a number of upsides of investing in REITs over buying a property and renting it out: - less work (no need to manage tenants) - less risk (it's a diverse set of properties across multiple locations vs a single property in one location). - highly liquid (you can buy any amount and sell virtually whenever you want you need to liquidity)

there is some downside: - it is not tangible as a property (sometimes that means that if you don't understand exactly what you bought under what conditions it can mean you have some unknown exposure/risk you were not aware of). - it has less upside generally (in terms of risk/reward, it is a much safer investment but with that there is also upside as if you were to own a single property in the right neighborhood). - less leverage (generally you get more leverage on your mortgage than on your investment account)

Particularly the last points is what catches people often. I.e. if you are renting a property and everyone else is owning, and the properties go up, you will feel 'stupid'. People love bragging how they got rich by buying and 'flipping' and ofcourse this happens and has happened in the past. But for all those great stories you don't hear the people that bought and were stuck with the house, had to sell at 'firesale price' because they lost a job/got divorced/etc etc. In the end, buying and owning property with leverage is a choice that fits a certain lifestyle and SHOULD not be for everyone. There are a lot of other investment opportunities in the set for any individual that would be better suited but are often considered 'complex'. Owning a house is simple and has been pushed for decades to 'build' wealth.

The reality is that for most people their housing cost is by far the largest fraction of their cost of living. Owning alleviates this costs to a certain extend if only psychologically, but it does not come risk free (the number of times I heard people say 'house prices only go up'). The leverage factor aside (which is a real thing), looking from a person investing their savings, an appropriate allocation would be something dependent on their age but in any case not much over 10% in Real Estate. About as much on commodities (GOLD/precious metals/etc), Fixed Income depending on age but somewhere between 20% percent earlier in career with little commitments and up to 70% in retirement, with the rest in stocks ideally globally diversified. That all being loosely based on the highest risk-adjusted return models (or how any active manager would run your fund from a top level).

Obviously, this is boring and it is way more smarter to buy this sexy property and flip it a couple times and those tenants are not an issue cause 'you love dealing with them anyways and have nothing better to do'. Basically risk-free money and you didn't even work for it. /s

The downside for tenants is not being able to renovate. The upside is not being responsible for maintenance.

Disclosure: I own several rental properties to round out my investment portfolio.

I have also invested in vehicles (private offerings) that fund residential construction especially in housing constrained markets. Very nice reliable returns

While some of us might not believe this, there are enough people who see real estate as such a safe investment. Some of them are from other countries and they're looking for a place to park their money that's not a bank or volatile like the stock market.

Real estate isn't risk free, but even in down cycles you don't lose all your value, e.g. a $200k house doesn't become worth $0. The key wealth generator (not get rich quick scheme) in the history of the US and most Countries is real estate (land/property etc). This means finding and buying in the right areas and not being afraid to cross state lines etc. Leveraging the $500k in California won't get you really far, but doing it most other places will let you really do quite well and you can have passive income coming in within a few months.

Also, done right, you'll still have a significant amount of the money to invest into other things like the stock market to diversify yourself.

The net result is you're relying on increasing demand to make money, which only works for location, location, location.

1. Taxes - There are tax breaks to owning 2. Property Management - For an REIT you pay a property manager. If you own, no need to manage your property. Free +1.2% return on asset! 3. Loans are heavily subsidized by the government, REITs cannot get 30 year loans at 3-4% interest. 4. Occupancy - You live here. Occupancy rate 100% so take an +.6% to returns!

If the government stopped 1 and 3, technology completely automated 2, and leases were 4 years long. Then no one would recommend buying your own house as an investment.

However as you move away from owning being an investment, the same homeowner based wealth will deteriorate and you'd likely own where it's convenient rather than trying to make money.

I don't think that's a terrible situation if your goal is to take the teeth out of the property market, rather than trying to destroy wealth in general.