Everybody knows that they should invest in real estate; but most investors do not know what is the best approach. Put simply, the best approach should provide

What are the pros and cons of investing in real estate vs. REITs vs. REIT index funds?

I can give you an answer that will not go too long, but it will be misleading.  The truth is that real estate have many different categories and so are REITs, and REIT index funds can be designed based on very different formulas. So there is actually not an answer to your question which will be both concise and precise.

If you really desire for an easy solution to a complex investment puzzle, here it is:  Real estates have higher potential of valuation growth, while REITs will generally yield higher short-term cash return as dividends but have little or negative growth of equityREITs are also securitized so that they have better liquidity.