REIT vs Rental Properties

[footenote]

As DH and I continue to transition into ER, I asked him recently about his interest in owning rental properties. (He is very handy.)

Although he is a near-ideal Mustachian spouse, he was uninterested in landlording (and sensibly said "what's the point?" when I suggested the option of hiring a property management company).

Today I looked at our REIT* dividends and realized that was the functional equivalent from an asset allocation POV anyway. I recognize that (if you're younger and talented with DIY) insourcing, buying crummy properties and fixing them up is a great return-on-your-time-invested that you can't add to a REIT.

I couldn't find any references to REITs on the boards. What say you - good real estate sector alternative for those of us who (for whatever reasons) aren't interested in landlording?

*Real Estate Investment Trust

[arebelspy]

Although he is a near-ideal Mustachian spouse, he was uninterested in landlording (and sensibly said "what's the point?" when I suggested the option of hiring a property management company).

The point would be diversification and higher returns.

Today I looked at our REIT* dividends and realized that was the functional equivalent from an asset allocation POV anyway.

What are your REIT returns?

I couldn't find any references to REITs on the boards.

REITs have been discussed multiple times, did you try the "search" function?

Here's a few, I'm sure there's more:
www.mrmoneymustache.com/2011/08/15/become-a-lazy-landlord-with-reits/
www.mrmoneymustache.com/forum/real-estate-and-landlording/physical-property-vs-reit/
www.mrmoneymustache.com/forum/investor-alley/is-investing-in-individual-reits-a-good-idea/
www.mrmoneymustache.com/forum/ask-a-mustachian/what-is-reit-all-about-and-where-to-buy/
www.mrmoneymustache.com/forum/investor-alley/how-to-buy-reits/

[footenote]

I did search on REIT and got no results found. I think you must have to be in the forum (sub-forum?) for it to work..? Anyway, I did find many discussions a bit later (insert embarrassed face here) - thanks as always arebelspy!

[arebelspy]

Ah, okay, I wasn't sure if you had tried the search or had just been poking around hoping to find them, that's why I was suggesting it.  Feel free to chime in on those (or here) with your thoughts!  :)

[Joet]

I also am worried that REITs NAVs track/follow and are highly correlated to underlying real estate prices [commercial, primarily, although I guess there are some residential REITs as well], making it less of a dividend play [in my eyes] and more of a gamble on real-estate upward price movements. Which tend to blowup, ginormously, especially in the scale of some of the referenced REITs referenced in the links above [quasi-diversified, location/sector specific, EG Healthcare in XYZ state]

Not that landlording isn't highly exposed to underlying property values either: of course they are.

That said, I am totally for the diversification benefits of a [small] allocation to REITs in ones portfolio, such as 5-15%

[footenote]

Joet - I agree. 16% of my non-residential-equity portfolio is in commercial REITs. The REITs are diversified geographically and in building type. They have been steady dividend generators for nine years. (Not like Bernie Madoff "steady" I hasten to add. ; )

Like any other investment, not a panacea. But "part of this complete breakfast."

[tylerherman]

If you're already holding REITs have been doing really well. Over on the Boglehead forums there has been talk that US REITs are seriously overvalued right now but if you're already holding...

[footenote]

To reiterate tylerherman's comment - this is probably not an investment to get into today. As a long-time REIT investor, I did well. But our (closed) REIT may now be overvalued and I will be happy to rebalance out of it relatively soon. My OP was just noodling about long-term balance and whether REITs were (generically) a decent alternative to landlording.

[arebelspy]

My OP was just noodling about long-term balance and whether REITs were (generically) a decent alternative to landlording.

They're less related than you'd think.  REITs behave much more like (and move with) equities than physical real estate.

[nktokyo]

I'm seriously considering working out how to start a REIT.

I like buying properties undervalue, being a landlord and doing all that stuff. Most other people just want a hassle-free income and for Everything To Be Okay. It could work.


Back to the original question... Arebespy nailed it - REITS go up and down with the rest of the markets. The thing I like about property is that if you're patient and do your homework you can get huge bargains (30-50% discounts, even more), which makes it a fun game.

[Joet]

perhaps more of a limited partnership?

[nktokyo]

I actually run a limited partnership that focusses on renovations. "Management" splits profits 50/50 with "investment" and also covers half of any loss. It's a good model with solid accountability.

We've done well so far, hence my off-the-cuff comment about starting a REIT. That seems like something interesting and new although I'm pretty sure the red tape involved would drive me nuts.

[footenote]

Arebelspy - Thank you - that makes sense, commercial REITs being servicers / creatures of big companies. (One of my REIT's biggest tenants is Shell. Hmmm...)

nktokyo - I worked in an annuity / MF company for three years. Your intuition is correct: the red tape required to start a REIT would make you clinically insane.  : (

[nktokyo]

Thought so. I'll stick to my 4HWW thank you very much

[CorpRaider]

What kind of cap rates do the landlords on the board get on their residential rentals?  I've read some reports of net cap rates of ~ 4% in residential rentals experienced by some of the large private investment funds and even the couple of REITS formed to buy and rent houses.  Is that consistent with your net rents in your rentals?  One upside I suppose is the favorable leverage you get via a mortgage versus say an equivalent 80% LTV margin loan and potential margin calls...then again the REIT would be a lot more liquid.  I probably would expect deals to be scarce in either area really given all the money that has been flowing into rentals, of course it would likely depend a lot more on the market and home particulars as opposed to REITS generally.