Author Topic: Rentals vs REITs  (Read 3853 times)

DWW

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Rentals vs REITs
« on: December 15, 2016, 09:00:34 AM »
I'm new to the forum and attempted to search for an answer to this question, but was unable to find it. If there is a thread that already answers my question, then please point me toward it. I'm currently trying to decide between buying rental properties vs simply buying a REIT. If I bought a rental it would be outside of my home market and be run by a property manager. At this point I think REIT investing might be best for me since some of the REITs I'm looking at have a monthly dividend of 7 percent or more. What would be the advantage/disadvantage of REITs vs Real Estate?

Thanks.

LuckyOwl

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Re: Rentals vs REITs
« Reply #1 on: December 15, 2016, 09:20:46 AM »
Some obvious differences come to mind:

- REITs will be far more liquid than an actual rental property that you own.
- With a rental property you will be responsible for property taxes (huge range depending on where you live) and insurance. These both tend to increase over time. With a rental your insurance premiums will also be higher for the same coverage vs a primary residence.
- An out of market rental property will automatically come with a built in drag on returns because you will need to pay a management company (no DIY repairs or maintenance).
- Would there be a mortgage on the rental? If so this could limit borrowing in the future due to the extra debt load.
- Do you have a suitable buffer to cover expenses (mortgage, insurance, taxes, repairs, etc) if there is no rental income coming in (vacancies or problematic remnants)?

SeattleCPA

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Re: Rentals vs REITs
« Reply #2 on: December 15, 2016, 02:21:31 PM »
It's hard to find the study online, but there's a Green Street Advisors study that concludes direct real estate investments over time match REITs over time.

Logically that makes sense to me... with the qualification that you'll experience way more variability if you have one or two properties than if you own a REIT owning dozens or hundreds of properties.

Here's a JP Morgan paper which references the Green Street study:

https://www.jpmorgan.com/cm/BlobServer?blobkey=id&blobwhere=1158630206182&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs

LuckyOwl

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Re: Rentals vs REITs
« Reply #3 on: December 15, 2016, 02:47:49 PM »

Mighty-Dollar

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Re: Rentals vs REITs
« Reply #4 on: December 15, 2016, 07:52:15 PM »
I'm new to the forum and attempted to search for an answer to this question, but was unable to find it. If there is a thread that already answers my question, then please point me toward it. I'm currently trying to decide between buying rental properties vs simply buying a REIT. If I bought a rental it would be outside of my home market and be run by a property manager. At this point I think REIT investing might be best for me since some of the REITs I'm looking at have a monthly dividend of 7 percent or more. What would be the advantage/disadvantage of REITs vs Real Estate?

Thanks.
7%? I hope you're not considering a non-traded REIT. You want to avoid those like the plague. Stick with publicly traded REIT's or REIT index funds like VNQ. If it's a publicly traded REIT stock then ANYTHING that pays a 7% dividend is more risky than something that pays the usual 2 to 3%. It's as simple as that.
Why would you want to deal with the headaches of owning real estate on your own? And you're definitely taking on more risk when you invest in individual property.

DWW

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Re: Rentals vs REITs
« Reply #5 on: December 15, 2016, 09:33:08 PM »
They are both publicly traded. One is SNH, which MMM mentioned in one of his posts. Another is a new REIT that it is a small cap. Obviously the small cap has more risk.

GodlessCommie

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Re: Rentals vs REITs
« Reply #6 on: December 16, 2016, 08:02:16 AM »
A big factor here is availability of cheap and tax-deductible loans to fund your own rental property. If a market crashes you can theoretically walk away from a mortgage and let a bank deal with a depreciated property. With a REIT you either only invest your own money, or use leverage on much less favorable conditions.

The Mobile Mustachian

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Re: Rentals vs REITs
« Reply #7 on: December 17, 2016, 02:02:49 AM »
I don't see a strong case for REITs over rental properties. I can buy a duplex for 200k (leveraged) with 50k down plus closing and fix up costs. Let's assume that's another  15k for a total of 65k. My net of expenses and maintenance is 8.4k per year or a 13% cash-on cash return. This is a mediocre deal in my market. How do I compare that to an unleveraged investment with 3 - 4% dividend through a REIT ETF that is strongly correlated to the stock market and also carries interest rate risk as rates rise? The property investment comes out well ahead even before considering the tax advantages of owning property.

zazpowered

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Re: Rentals vs REITs
« Reply #8 on: December 17, 2016, 06:22:48 PM »
Something like Realty Income (O) has average annual returns of about 12%

cincystache

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Re: Rentals vs REITs
« Reply #9 on: December 18, 2016, 12:18:31 PM »
I don't see a strong case for REITs over rental properties. I can buy a duplex for 200k (leveraged) with 50k down plus closing and fix up costs. Let's assume that's another  15k for a total of 65k. My net of expenses and maintenance is 8.4k per year or a 13% cash-on cash return. This is a mediocre deal in my market. How do I compare that to an unleveraged investment with 3 - 4% dividend through a REIT ETF that is strongly correlated to the stock market and also carries interest rate risk as rates rise? The property investment comes out well ahead even before considering the tax advantages of owning property.

I agree with some of your assessments but you are painting a pretty one-sided picture. You aren't factoring in any of the time or effort required to manage the property, fill vacancies, risk associated with being a property owner (potential for lawsuits etc.). You also have locality risk, meaning, what if the major employer in the area move and your tenant pool shrinks considerably? You also have to think about property taxes, even though you can deduct them, you still have to pay them and they could go up over time if you buy in a high demand area. There are a lot of factors to consider between REITs and rental properties. Not nearly as black and white as you portray
 

chasesfish

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Re: Rentals vs REITs
« Reply #10 on: December 18, 2016, 04:05:02 PM »
I'm a big fan of EPR when it comes to REITs....

As for returns, I don't think it's fair to compare a liquid stock owning 100+ large properties to a duplex.  They're very different investments

zazpowered

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Re: Rentals vs REITs
« Reply #11 on: December 18, 2016, 04:07:08 PM »
I'm a big fan of EPR when it comes to REITs....

As for returns, I don't think it's fair to compare a liquid stock owning 100+ large properties to a duplex.  They're very different investments

Why EPR

Retire-Canada

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Re: Rentals vs REITs
« Reply #12 on: December 18, 2016, 05:31:00 PM »
The last thing I want to do is deal with tenants, repairs or any of the other hassles of managing rental properties. Being able to click a button and start earning a return while I ride my bike on the trails is far more appealing. As is the ability to not pay attention to a REIT for a year when I am busy with more important things in my life.

Bateaux

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Re: Rentals vs REITs
« Reply #13 on: December 18, 2016, 05:50:21 PM »
We've got about an equal amount in Rental and REIT.  Rental is flood damaged and has no flood insurance.   Wish I'd bought all REIT.   Even if the rental property was in perfect condition.

chasesfish

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Re: Rentals vs REITs
« Reply #14 on: December 19, 2016, 06:07:47 AM »
I'm a big fan of EPR when it comes to REITs....

As for returns, I don't think it's fair to compare a liquid stock owning 100+ large properties to a duplex.  They're very different investments

Why EPR

I've owned it on and off for 15 years and work in banking.   EPR owns and leases back properties that banks struggle to finance with due to the type of property (not due to tenants).   They started by doing Cinemark and AMC's Theatre anchored retail centers.   Now the portfolio includes some more diversity with ski resorts, water parks, and charter schools.   They tend to buy recreational properties that are drivable from urban areas, not destination resorts.

The biggest risk of REITs (office, retail, industrial) is when the economy tanks, vacancies go up.   The movie business and water parks still do okay during recessions.   I think they also keep debt down below 40%

http://www.the-numbers.com/market/

2009 was the highest year ever for movie tickets sold in the depths of a recession.   Now the industry is slowly trimming the # of seats in theaters and increasing the price point, so the theatres depend less on box office revenue and more on concessions and games.    There are a lot more dine-in movies and reserved seating than compared to 10 years ago.

I get almost a 6% yield and they increase the dividend by mid single digits each year.

It'll be a 5-20% holding in my portfolio when I stop working.  The only reason I don't own more is almost all of my individual stock holdings are in a taxable account and REIT income is fully taxable.

DWW

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Re: Rentals vs REITs
« Reply #15 on: December 19, 2016, 09:39:55 AM »
I think you all have hit on my internal debate between lack of hassle vs. potential better returns on physical real estate. In my current situation I lean toward lack of hassle since I think my time can be better spent in producing revenue in other ways.

Scandium

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Re: Rentals vs REITs
« Reply #16 on: December 19, 2016, 12:10:14 PM »
I don't see a strong case for REITs over rental properties. I can buy a duplex for 200k (leveraged) with 50k down plus closing and fix up costs. Let's assume that's another  15k for a total of 65k. My net of expenses and maintenance is 8.4k per year or a 13% cash-on cash return. This is a mediocre deal in my market. How do I compare that to an unleveraged investment with 3 - 4% dividend through a REIT ETF that is strongly correlated to the stock market and also carries interest rate risk as rates rise? The property investment comes out well ahead even before considering the tax advantages of owning property.

Buying a REIT is passive. Being a landlord is a job. Nothing wrong with it, but I don't consider them comparable.