Real Estate vs. REITs

[Bruinguy]

Can we talk about the pros and cons of investing directly in real estate (let's say by buying individual properties and renting them out) and just investing in a REIT?

It seems that owning real estate has a lot of risks and costs involved, Including concentrating the risk in a single property (or only a few properties), and the time and effort of locating, purchasing, preparing, and managing the investment. 

Are the expected returns of real estate significantly greater than REITs?

Some people have suggested that owning real estate is a way to accelerate your reaching your FIRE goals.  I guess what I am trying to explore is whether investing in REITs will have the same result as investing in real estate. 

Any thoughts?

[Financial.Velociraptor]

If you buy RE, you can used fixed interest rates.  If you go with REITs, you have a lot of interest rate risk built it. 

Also, you can use more leverage buying property to let.  Good and bad to that.

[mrpercentage]

Simple liquidity. You can sell the REIT on a dime. Will never be stuck fixing anything first for a few thousand. You will never have to deal with tenant issues. They do that.

I do REITs because they are easier. I am only on the line for what I have invested. I know I will not get stuck with loan payments because a tenant is gone. Because I am not leveraged at all-- let alone leveraged a couple hundred thousand dollars--- I will make a lot less with a REIT. Im okay with that.

[PhysicianOnFIRE]

I have been an accidental landlord in the past. I didn't enjoy it. Real money can be made that way, but you have to work for it.

REITs, as already stated, are bought and sold easily. I use Vanguard's REIT index fund as 10% of my portfolio.

A third class of real estate investment is crowdfunded real estate. MMM just wrote about it in this post yesterday.  I may explore this option as I get closer to an early retirement.

Best,
Pof

[BodegaHead]

Several years ago I was sold Redwood (home) Mortgage and Kbs (commercial) REITs, about $40K worth of each. For a time, they were really performing, even during the stock market downturn, but when real estate tanked, down they went wiping out ALL previous earnings plus about 1/3 of their original principal values and there was NO WAY out (maybe if I died).

Only recently have they started to pay dividends again and I've finally held them long enough or reached an age when I can start withdrawing principal as well as earnings. Offers to buy them still pop up, but only at a fraction of their stated value. Tons of equity in a home to live in, plus a second/vacation home is the best real estate scenario in my limited experience. Buy 'em, hold 'em and enjoy them.

[Bruinguy]

If you buy RE, you can used fixed interest rates.  If you go with REITs, you have a lot of interest rate risk built it. 

Also, you can use more leverage buying property to let.  Good and bad to that.

So, with a REIT, it will be issuing bonds or borrowing on an ongoing basis, so it will always be borrowing at the then current rates.  Thus, an ongoing interest rate risk.

As for leverage, I would assume that the REIT would use leverage as well, wouldn't that flow through on the returns?

[MustacheAndaHalf]

REITs generally own properties, or shares in real estate companies.  They pass through rents to you as income.  I could be wrong, but I don't think most REITs are involved in bonds at all.  When interest rates go up, people value the fixed payments from the REIT less, and they drive the price of the shares downward.  No buying of bonds is needed - just market pressure from buying and selling. 

If you think of investing as a portfolio that you view at home, then a REIT makes sense.  You can buy a REIT and not know anything about real estate.  If you instead buy a property and don't know anything about why credit checks are a good idea, you could wind up with problem tenants.

[YoungInvestor]

Several years ago I was sold Redwood (home) Mortgage and Kbs (commercial) REITs, about $40K worth of each. For a time, they were really performing, even during the stock market downturn, but when real estate tanked, down they went wiping out ALL previous earnings plus about 1/3 of their original principal values and there was NO WAY out (maybe if I died).

Only recently have they started to pay dividends again and I've finally held them long enough or reached an age when I can start withdrawing principal as well as earnings. Offers to buy them still pop up, but only at a fraction of their stated value. Tons of equity in a home to live in, plus a second/vacation home is the best real estate scenario in my limited experience. Buy 'em, hold 'em and enjoy them.

When people talk about REITS, they mostly refer to those traded on stock exchanges, not the kind you're describing.

[Beaker]

REITs generally own properties, or shares in real estate companies.  They pass through rents to you as income.  I could be wrong, but I don't think most REITs are involved in bonds at all.

Many are like that, but not all of them. For instance Annaly (NLY) just buys real estate backed debt (eg, mortgage backed securities). They don't collect any rents or hold any propertly - they mostly make money on the spread between short term and long term interest rates. Point being that you do need to look at what you're buying - REITs are not all the same kind of animal.