Author Topic: New Investor: REITS?  (Read 14902 times)

stoic0515

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New Investor: REITS?
« on: May 04, 2014, 12:39:24 PM »
Hello there! I am married and in my mid-twenties and we are beginning to look at different ways of investing money with a goal of an early retirement. The stock market and financial terminology are all new to me. We have maxed out our 401ks and are contributing $200 per month to a Fidelity Roth IRA. We have a rental property that makes a decent amount monthly but I am wondering about investing in  REIT such as Vanguard's REIT Index Fund (VGSIX). My concern is the taxes that we will pay on the money. We are currently taxed in a pretty high bracket and am wondering if our gains will be subject to these same taxes. Is there a better idea? A different place we should invest money?

Someone mentioned maxing our our Roth IRA contributions yearly but my concern with doing this is that, although you can withdraw your initial contributions, you cannot withdraw your investments without penalty before a certain age and if we are able to retire early, this may effect us. Thoughts?

Frankies Girl

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Re: New Investor: REITS?
« Reply #1 on: May 04, 2014, 01:46:10 PM »
If you're with Fidelity, the Fid version of the REIT index is FSRVX. It is perfectly possible to use Fid to replicate most Vanguard funds if you're happy with Fid. Just stay away from professional management and the high expense ratio funds. (I like Fid and have my accounts there).

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
As long as you have any tax inefficient funds like that one in a tax deferred account (so like your 401k or Roth), not in a taxable account, then you don't have to worry about any taxes or cap gains now (possibly ever depending on your tax brackets when you're in ER). If you're expecting to FIRE and be in a lower tax bracket, there's a good chance you'll owe less taxes then anyway.

http://jlcollinsnh.com/stock-series/
^ Read the whole series - it is awesome.

Do some searching for "Roth Pipeline" around here as there are probably a dozen threads that have discussed the process of tapping retirement accounts before retirement age with no penalty or taxes. There are several methods to access retirement accounts, but the Roth Pipeline is a pretty popular one and really easy to do.


wtjbatman

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Re: New Investor: REITS?
« Reply #2 on: May 04, 2014, 03:13:05 PM »
FG did a great job of covering everything, but I'll just throw in my 2 cents.

There are a good number of investors who put 10-20% of their portfolio into REITs, just so they are diversified into real estate. Obviously if you have your own real estate you may want to factor that into your portfolio (and reduce your exposure to REIT's accordingly). Also, like FG said, you probably want to keep any REIT holdings in tax advantaged accounts. Unlike regular qualified dividends (say, from Exxon or McDonalds) which are taxed at your capital gains rate, REIT distributions are taxed at your marginal tax rate, which may be higher depending on your income.

matchewed

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Re: New Investor: REITS?
« Reply #3 on: May 04, 2014, 03:39:53 PM »
I'll chime in on the Roth IRA. Yes you can take your contributions back at any time. You cannot take your gains though. So if you put in 5k and it earns 200 and you now have a balance of 5200 you can take out 5k penalty free. This is regardless of the actual investment.

TomTX

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Re: New Investor: REITS?
« Reply #4 on: May 04, 2014, 04:26:34 PM »
Hello there! I am married and in my mid-twenties and we are beginning to look at different ways of investing money with a goal of an early retirement. The stock market and financial terminology are all new to me. We have maxed out our 401ks and are contributing $200 per month to a Fidelity Roth IRA.

You appear to be displaying one of the major issues for new investors: Conflating tax-advantaged accounts with actual investments.

A 401(k) is not an investment. It is a tax advantaged account. You can think of it as a container for your money, where you have a limited choice of investments. You still have to select the investments.

Hopefully you pick something with low expenses and a good likelihood of returns.

RapmasterD

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Re: New Investor: REITS?
« Reply #5 on: May 04, 2014, 04:55:42 PM »
With the exception of the period between 1998 and 2002, the performance of the Vanguard REIT ETF (VGSIX) has been pretty highly correlated with the S&P 500 ETF (SPY) that I invest in...so at the curent relatively low yield for VGSIX I don't bother. But when stuff is in the crapper again and VGSIX is yielding more than 4% -- ideally 5%, I'm gonna buy some (5-10% of total portfolio max) in tax advantaged accounts. I'm a homeowner in an expensive area -- with more than 15% of our TOTAL (not liquid) net worth tied up in home equity.
« Last Edit: May 04, 2014, 04:58:19 PM by RapmasterD »

tj

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Re: New Investor: REITS?
« Reply #6 on: May 04, 2014, 07:06:28 PM »
I'm not sure how owning one rental property in one specific location is going to make a difference to your allocation with regards to choosing REIT's or not....

RapmasterD

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Re: New Investor: REITS?
« Reply #7 on: May 05, 2014, 01:21:35 AM »
I'm not sure how owning one rental property in one specific location is going to make a difference to your allocation with regards to choosing REIT's or not....

Read wtjbatman's perspective, which I agree with.

dragoncar

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Re: New Investor: REITS?
« Reply #8 on: May 05, 2014, 08:52:55 AM »
Yes, Roth is a great place for REITS since you can skip all the taxes hassle.

Make sure you understand them, though, because they may not behave the way you expect.

foobar

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Re: New Investor: REITS?
« Reply #9 on: May 05, 2014, 10:11:00 AM »
REITs and the S&P 500 have roughly the same return for the past 60 years  but they both often have periods of over/underperformance compare to others. From the start of the bull market in 82 to the mid 90s, the S&p 500 drastically outperformed REITSs. Since 2000, the reverse is true

Buying REITS (and small caps for that matter)  is a bit tricky for me right now in that we are at the end of a nice run for both of them where they returned about 10% versus ~7.5% for the S&P 500. You would probably be better of buying the under performancing assets  classes but that is really hard to do psychologically. You don't see a lot of people pimping international or emerging these days because they have been underperforming a while.

With the exception of the period between 1998 and 2002, the performance of the Vanguard REIT ETF (VGSIX) has been pretty highly correlated with the S&P 500 ETF (SPY) that I invest in...so at the curent relatively low yield for VGSIX I don't bother. But when stuff is in the crapper again and VGSIX is yielding more than 4% -- ideally 5%, I'm gonna buy some (5-10% of total portfolio max) in tax advantaged accounts. I'm a homeowner in an expensive area -- with more than 15% of our TOTAL (not liquid) net worth tied up in home equity.

hs

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Re: New Investor: REITS?
« Reply #10 on: May 10, 2014, 08:21:44 PM »
I'd love to get into Reits, but not with a 3% return.

foobar

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Re: New Investor: REITS?
« Reply #11 on: May 10, 2014, 08:44:32 PM »
REITs have a 3% yield not return. Now yield does make up a good chunk of REIT return. Personally I think buying REITs now is buying high (REITs get a lot of love these days. In the 90s nobody wanted them) based on the last 15 years of performance. Chasing last decades hot idea rarely works out.

I'd love to get into Reits, but not with a 3% return.

diesel15

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Re: New Investor: REITS?
« Reply #12 on: May 12, 2014, 05:36:06 PM »
REITs have a 3% yield not return. Now yield does make up a good chunk of REIT return. Personally I think buying REITs now is buying high (REITs get a lot of love these days. In the 90s nobody wanted them) based on the last 15 years of performance. Chasing last decades hot idea rarely works out.

I'd love to get into Reits, but not with a 3% return.

I'm not sure where this 3% number comes from.  Maybe I'm missing something but I can't agree with this statement.  Also, most REIT's are coming off 52 week lows so I'm not sure about the "REITs get a lot of love these days" statement either.  Realty Income (O) is currently yielding over 5% and has a consistent track record of increasing dividends.  W.P. Carey (WPC) is another rock solid REIT yielding almost 6% with a stellar history.  If your appetite for risk is a bit higher you can currently pick up American Realty Capital Properties (ARCP) at a yield of 7%+.

wtjbatman

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Re: New Investor: REITS?
« Reply #13 on: May 12, 2014, 06:31:28 PM »
There are many great REIT's with yields of 5%+. And not just flash in the pan REITs with unsustainable yields, but REITs with years of consistent high single digit/lower teens growth and dividend increases. Past performance may not guarantee future results, but it doesn't hurt to start your research there :)

Keep in mind those are individual REITs. You should either understand them already or be willing to step outside of your comfort zone (if you're traditionally an index investor) to learn more, before investing in them. If you want to stick with a REIT index like VNQ, yeah, your yield is going to hover around 3%. One of the prices you pay for being "diversified".

foobar

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Re: New Investor: REITS?
« Reply #14 on: May 12, 2014, 06:38:59 PM »
http://etfs.morningstar.com/quote?t=VNQ .  You will always find REITs that have much higher numbers than the index. Pretty much all of the time it is because the REIT has lost 50% of its market price in the past 6 months.:) Or it isn't growing fast. 6% of 10 is good. But 2% of 100 i3 years is better. You look back 52 weeks of a minor correction (i.e. we are talking 10% not 30%). I look back 5 years and see 2x historical performance.

That being said. Its the early 80s again: http://quotes.morningstar.com/stock/s?t=PMT&region=usa&culture=en-US   Occasionally you see one up around 20%. I am always tempted to buy.....


REITs have a 3% yield not return. Now yield does make up a good chunk of REIT return. Personally I think buying REITs now is buying high (REITs get a lot of love these days. In the 90s nobody wanted them) based on the last 15 years of performance. Chasing last decades hot idea rarely works out.

I'd love to get into Reits, but not with a 3% return.

I'm not sure where this 3% number comes from.  Maybe I'm missing something but I can't agree with this statement.  Also, most REIT's are coming off 52 week lows so I'm not sure about the "REITs get a lot of love these days" statement either.  Realty Income (O) is currently yielding over 5% and has a consistent track record of increasing dividends.  W.P. Carey (WPC) is another rock solid REIT yielding almost 6% with a stellar history.  If your appetite for risk is a bit higher you can currently pick up American Realty Capital Properties (ARCP) at a yield of 7%+.

diesel15

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Re: New Investor: REITS?
« Reply #15 on: May 12, 2014, 07:12:51 PM »
http://etfs.morningstar.com/quote?t=VNQ .  You will always find REITs that have much higher numbers than the index. Pretty much all of the time it is because the REIT has lost 50% of its market price in the past 6 months.:) Or it isn't growing fast. 6% of 10 is good. But 2% of 100 i3 years is better. You look back 52 weeks of a minor correction (i.e. we are talking 10% not 30%). I look back 5 years and see 2x historical performance.

That being said. Its the early 80s again: http://quotes.morningstar.com/stock/s?t=PMT&region=usa&culture=en-US   Occasionally you see one up around 20%. I am always tempted to buy.....

Fair points and thanks for the links.  This is definitely a sector where I don't think buying an index fund makes any sense.  It's not that difficult to separate the better companies from the chaff.  O in particular has NEVER yielded less than 4.5% in any year as a percentage of share price so the worst you could have done buying it and holding is 4.5% yield on cost.  This is especially relevant now that the share price has dropped significantly over the past year.  This to me is an opportunity to lock in future income at a substantial discount.  Locking in a cost basis now at a lower share price will increase yield on cost going forward as dividends are increased regardless of share price ( check out the dividend history here http://www.dividendchannel.com/history/?symbol=o).  This is an important consideration for this type of investment as it is primarily geared toward income (at least for me).

pdxvandal

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Re: New Investor: REITS?
« Reply #16 on: May 12, 2014, 11:23:34 PM »
I've earned 13.5%+ on VGSLX (REIT index) since January ... REITs are at 52-week lows?

Davids

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Re: New Investor: REITS?
« Reply #17 on: May 13, 2014, 12:06:02 PM »
OP you are doing very well, for someone who is new you seem to have your head on straight. One item I would say however is to bump up your monthly Roth IRA contribution so you get to the max $5,500 for you and $5,500 for your wife.

soccerluvof4

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Re: New Investor: REITS?
« Reply #18 on: May 13, 2014, 02:30:48 PM »
Long: ARCP 

wtjbatman

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Re: New Investor: REITS?
« Reply #19 on: May 13, 2014, 07:05:26 PM »
Long: ARCP

I want some of that. Need more scratch in my IRA. I've become a big fan of Brad Thomas of http://www.ireitinvestor.com/, and he thinks pretty highly of it.

soccerluvof4

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Re: New Investor: REITS?
« Reply #20 on: May 14, 2014, 07:14:31 AM »
Long: ARCP

I want some of that. Need more scratch in my IRA. I've become a big fan of Brad Thomas of http://www.ireitinvestor.com/, and he thinks pretty highly of it.


other favorites of mine that i am long: EDR,SNH,INN,IRT
« Last Edit: May 14, 2014, 07:33:53 AM by soccerluvof4 »

foobar

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Re: New Investor: REITS?
« Reply #21 on: May 14, 2014, 01:25:36 PM »
Maybe. But I have looked a ton of reit mutual funds and those managers who spend 12 hours a day researching seem to have a problem picking out the wheat from the chaff.

And I am not going to touch the idea that income is better than returns.:)

http://etfs.morningstar.com/quote?t=VNQ .  You will always find REITs that have much higher numbers than the index. Pretty much all of the time it is because the REIT has lost 50% of its market price in the past 6 months.:) Or it isn't growing fast. 6% of 10 is good. But 2% of 100 i3 years is better. You look back 52 weeks of a minor correction (i.e. we are talking 10% not 30%). I look back 5 years and see 2x historical performance.

That being said. Its the early 80s again: http://quotes.morningstar.com/stock/s?t=PMT&region=usa&culture=en-US   Occasionally you see one up around 20%. I am always tempted to buy.....

Fair points and thanks for the links.  This is definitely a sector where I don't think buying an index fund makes any sense.  It's not that difficult to separate the better companies from the chaff.  O in particular has NEVER yielded less than 4.5% in any year as a percentage of share price so the worst you could have done buying it and holding is 4.5% yield on cost.  This is especially relevant now that the share price has dropped significantly over the past year.  This to me is an opportunity to lock in future income at a substantial discount.  Locking in a cost basis now at a lower share price will increase yield on cost going forward as dividends are increased regardless of share price ( check out the dividend history here http://www.dividendchannel.com/history/?symbol=o).  This is an important consideration for this type of investment as it is primarily geared toward income (at least for me).

tj

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Re: New Investor: REITS?
« Reply #22 on: May 25, 2014, 03:51:12 PM »
I'm not sure how owning one rental property in one specific location is going to make a difference to your allocation with regards to choosing REIT's or not....

Read wtjbatman's perspective, which I agree with.

I didn't really see what his perspective was, other than suggest one not hold REIT's if they have a rental property. I think it's a very different investment class, my diversified reit fund has no overlap with my single rental property.

wtjbatman

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Re: New Investor: REITS?
« Reply #23 on: May 25, 2014, 06:18:53 PM »
I'm not sure how owning one rental property in one specific location is going to make a difference to your allocation with regards to choosing REIT's or not....

Read wtjbatman's perspective, which I agree with.

I didn't really see what his perspective was, other than suggest one not hold REIT's if they have a rental property. I think it's a very different investment class, my diversified reit fund has no overlap with my single rental property.

That's not what I said. I said you may want to reduce your exposure accordingly. As in, you should probably consider how much of your net worth is tied up in traditional real estate when looking at investing in REITs.

There can be a lot of differences between REITs and traditional real estate investing. That doesn't mean you should ignore the risks of investing a significant amount of your portfolio in real estate overall.

tj

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Re: New Investor: REITS?
« Reply #24 on: May 25, 2014, 06:41:14 PM »
I'm not sure how owning one rental property in one specific location is going to make a difference to your allocation with regards to choosing REIT's or not....

Read wtjbatman's perspective, which I agree with.

I didn't really see what his perspective was, other than suggest one not hold REIT's if they have a rental property. I think it's a very different investment class, my diversified reit fund has no overlap with my single rental property.

That's not what I said. I said you may want to reduce your exposure accordingly. As in, you should probably consider how much of your net worth is tied up in traditional real estate when looking at investing in REITs.

There can be a lot of differences between REITs and traditional real estate investing. That doesn't mean you should ignore the risks of investing a significant amount of your portfolio in real estate overall.

I would agree with this. I'm just not sure that my rental property has any relevance on how much of my equities are in REIT's or not...if I sold my rental property, I would not invest all the proceeds in a REIT fund.

wtjbatman

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Re: New Investor: REITS?
« Reply #25 on: May 25, 2014, 06:53:36 PM »
I'm not sure how owning one rental property in one specific location is going to make a difference to your allocation with regards to choosing REIT's or not....

Read wtjbatman's perspective, which I agree with.

I didn't really see what his perspective was, other than suggest one not hold REIT's if they have a rental property. I think it's a very different investment class, my diversified reit fund has no overlap with my single rental property.

That's not what I said. I said you may want to reduce your exposure accordingly. As in, you should probably consider how much of your net worth is tied up in traditional real estate when looking at investing in REITs.

There can be a lot of differences between REITs and traditional real estate investing. That doesn't mean you should ignore the risks of investing a significant amount of your portfolio in real estate overall.

I would agree with this. I'm just not sure that my rental property has any relevance on how much of my equities are in REIT's or not...if I sold my rental property, I would not invest all the proceeds in a REIT fund.

Obviously it depends on each investor. Some people may decide to keep their money in real estate by putting the proceeds from any real estate sale into REIT funds, especially if they are switching to an entirely passive strategy. Or, like you, they may choose another asset class for their money.

Personally I'm starting to really like some of the blue chip and growth REITs out there, but I'm also investing primarily in my IRA, where taxes aren't an issue.

RapmasterD

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Re: New Investor: REITS?
« Reply #26 on: May 25, 2014, 09:28:27 PM »
Yeah...I may DEFINITELY be in need of some education about REITs, but here is how I see it.

If I want real estate exposure I'll buy real estate to rent out (not live in).

To me, REIT ETFs give me STOCK exposure. They may be more in favor or out of favor than SPY, for example, during certain periods...but overall...REITs and the overall market go up and down together. So for me, I don't really see the "diversified into real estate" angle. I may be getting a few more points of return when REITS are in favor, but I equate that with a sector play in general versus truly 'diversifying into real estate.' On the other hand, if I buy a rental property in a highly desirable area (EX: a) filled with high income professionals ; b) nice weather ; c) land-locked -- nowhere to build ; d) growing population), the price of that underlying property will typically not tank by 38% during a market downturn like what we had in 2008-9. Half of that? Yeah perhaps.

I don't own REITs right now. And I don't own rental properties right now.

But again, I'll buy into REITs when the overall stock market is smelling like a chicken coop....because it can be an attractive sector play when held in a retirement account.
« Last Edit: May 25, 2014, 09:35:50 PM by RapmasterD »

frugalecon

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Re: New Investor: REITS?
« Reply #27 on: May 26, 2014, 06:06:43 AM »
Vanguard has an international REIT index ETF (VNQI) that is a way to get international real estate exposure.

TheFrugalFox

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Re: New Investor: REITS?
« Reply #28 on: May 28, 2014, 11:15:21 PM »
I also use a few REITs to get international exposure and companies paying dividends in Euro's and Pounds - a Rand hedge. That said, the divi yields are pretty good over here (6 - 10%) and as I am in such a low tax bracket I actually pay more tax on normal dividends (15% here in South Africa) - so good for me on the tax. I prefer the retail REITs and out of them prefer companies with the big Super Regional Malls these days.

I treat REIT companies the same way as normal,defensive stocks as they pretty much act the same way, besides being a bit more stable on the whole and usually pay a higher dividend at the outset.  For me it's an important sector but not an asset class on it's own.
« Last Edit: May 29, 2014, 12:19:59 AM by TheFrugalFox »