Author Topic: Real estate or REIT?  (Read 9795 times)

Softwaredude

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Real estate or REIT?
« on: April 24, 2015, 12:47:46 PM »
Long time reader of the forum, first time poster. Learned a bunch through the forum posts, so thank you all.

I have about $100K sitting in cash accounts at the moment with no debt.
Yearly single income of $220K or so.

Having been burned by individual stocks, I am maxing out the 401K and investing in a betterment account for taxable investments. I want to do something with the money that's in the cash accounts and I don't think being in stocks (ETFs, Funds, etc) 100% is a good strategy. I want to create a diversified portfolio.

For the short term (5-years) I want to create a small passive income stream in case I want to scale back and leave this job for a less paying, less demanding job.

Work involves travel and long hours so I want to either:
- Get a condo for about $200-$220K and put a tenant in it such that I have to occasionally stop by to check on things. Let it pay for itself and generate a few hundred dollars a month.
- Invest in REITs with dividends

I am looking to buy in the greater NYC area (since I am close by) but none of the houses/condos match the 1% rule. I also read about buying in different states and get a property manager to handle the needs of the tenants/collections etc. I read that from a reduction of taxes perspective, getting a second mortgage for a rental would help.

What would you recommend?

Jaguar Paw

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Re: Real estate or REIT?
« Reply #1 on: April 24, 2015, 01:37:59 PM »
My super vague and possibly unhelpful answer is that I just put 40K into a non traded reit that has a yearly dividend of 6.9% paid monthly. I was also looking into real estate, but like the laziness available through a reit.. The biggest catch is that my money is locked up with near zero chance of me getting to it if I need it for the next 4 years or so.

waltworks

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Re: Real estate or REIT?
« Reply #2 on: April 24, 2015, 10:32:42 PM »
What do you want a passive income stream for, and how much? At $220k/year earned income, I'd be investing for the long term at some aggressive 90/10 or 80/20 or so stock/bond ratio, not trying to eke out some dividends or other "income stream" (and of course, yes, there's no functional difference between those dividends and capital gains).

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Softwaredude

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Re: Real estate or REIT?
« Reply #3 on: April 25, 2015, 06:34:08 AM »
Jaguar Paw - that sounds like a decent return on the investment. I am pretty much in the same situation. I am out of state about half of the time. The idea of having to be there when a tenant needs me seems overwhelming when I may be a couple thousand miles away. However, the 4-year locking of the money is not appealing. I was thinking REITs are also a liquid asset that you can re-allocate at any time.

Softwaredude

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Re: Real estate or REIT?
« Reply #4 on: April 25, 2015, 06:37:20 AM »
waltworks - Interesting take on the situation. I was thinking that getting into real-estate or REIT would be a smart way of hedging my risks.

WhiteSwan101

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Re: Real estate or REIT?
« Reply #5 on: April 25, 2015, 07:32:58 AM »
According to morningstar.com:

Vanguard REIT Index is one of the cheapest ways for investors to gain broad market-capitalization-weighted exposure to REITs.

Minimum is only $3000

zephyr911

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Re: Real estate or REIT?
« Reply #6 on: April 27, 2015, 11:26:56 AM »
The REIT has all the overhead costs already subtracted from the dividend. Those of us who directly own and actively manage our own income properties are generally trying to squeeze out higher returns through careful selection and DIY management/maintenance (which it sounds like you probably can't do anyway). So, it may be a wash for your situation.
However, since you are a high earner, consider the tax benefits of owning the rental. I can't say how it would work out for you, but quite often rentals end up helping with the tax situation, even when they're profitable and building equity, because of depreciation and all the other deductions. With the REIT, you don't get that.

sammybiker

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Re: Real estate or REIT?
« Reply #7 on: April 27, 2015, 02:40:52 PM »
Oh and take a hard look (and post here first) on your potential deals.

I'd be willing to bet $220k that your proposed condo will be very negative cashflow and defeat the entire purpose of this action.

Softwaredude

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Re: Real estate or REIT?
« Reply #8 on: May 01, 2015, 07:51:44 AM »
Thanks for the additional words of wisdom. The condo I was considering for $220k would rent out for $1650 and there was a maintenance fee of $350. assuming 90% occupancy the deal would have been cash flow negative.

I am convinced that with the capital at hand it makes no sense to invest in a condo. Instead I will move some of the cash into REITs over a few months and wait until I can buy a 2-family house and do the property management and DIY fixes. Getting a condo with monthly maintenance equaling 1/5 of rent is not making sense now.

I am also stupefied that in other parts of the country houses that are worth $100K are able to generate $1K rent. Maybe I am looking at the wrong part of the country!

iamlindoro

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Re: Real estate or REIT?
« Reply #9 on: May 01, 2015, 10:59:08 AM »
I am also stupefied that in other parts of the country houses that are worth $100K are able to generate $1K rent. Maybe I am looking at the wrong part of the country!

And even that would be a low, low standard-- barely 1%.  There are many areas of the country where 100K in real estate will get you 2K in rents per month.  And more.

Softwaredude

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Re: Real estate or REIT?
« Reply #10 on: May 01, 2015, 12:01:18 PM »
iamlindoro - That's amazing. Is there a tool that helps you identify these or are you going through the listings for rentals/sales and figuring out what makes sense? Being a software guy, I would hope there is some automation :)

iamlindoro

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Re: Real estate or REIT?
« Reply #11 on: May 01, 2015, 04:43:54 PM »
You have to find the deals yourself, but think of the lack of convenience as an exploitable weakness in the system rather than a hassle.

The key is to find the right market (many medium sized cities in the midwest and south) and then finding someone trustworthy in that market to give you honest assessments of individual properties. 

There are places where it's possible to find retail listings hitting 2%.  Of course, it's often better financially to be able to score an off-market listing or perform some rehab, but it's not necessary by any means.

Mighty-Dollar

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Re: Real estate or REIT?
« Reply #12 on: May 02, 2015, 05:15:59 AM »
Having been burned by individual stocks, I am maxing out the 401K and investing in a betterment account for taxable investments. I want to do something with the money that's in the cash accounts and I don't think being in stocks (ETFs, Funds, etc) 100% is a good strategy. I want to create a diversified portfolio.
Have you ever heard of bonds? Bonds smooth out stock volatility. It seems like there's so many people who think that their choices are 1) Stocks 2) CD's 3) Real Estate and / or 4) Gold.
Just invest in VOO (the S&P 500 index) and AGG (the total bond market). The lowest risk allocation would be about 30% stocks and 70% bonds, although that's about what a 75 year old would do. Younger people take more risk and stay the course.
Real Estate can be risky too. Real Estate has it's own cycles that can be volatile.

forummm

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Re: Real estate or REIT?
« Reply #13 on: May 03, 2015, 01:29:31 PM »
If you're looking for an "income stream" that doesn't have to mean dividends or rents. It's super easy just to buy VTSAX or some other diversified portfolio. You can spend the dividends if you want. You can also sell some shares if you need more money than that. Keep in mind that having a set of stocks that pay out a high percentage of their value in dividends is typically the same in the long run as having a set of stocks that never pay out a dividend but you just sell shares whenever you need the money. The stocks without dividends have greater price appreciation than those that pay out the dividends.

Bicycle_B

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Re: Real estate or REIT?
« Reply #14 on: May 03, 2015, 04:59:37 PM »
Real estate is a business, it's not as passive as it sounds.  It depends on how it goes. 

One tenant can be great, another terrible.  You might never have repair problems (unlikely - start reading on Bigger Pockets website and see how often landlords have to solve problems), or you might have pipes bursting one month after you buy.  Do you have time to learn a new business and invest time in black swan events that occur during busy periods of your work projects, or is that time better spent in your lucrative existing career?  Which is a better return on your time investment, the tax savings or your job income?  Are you interested in real estate for fun, or would it feel like work to you?

REITS are actually a passive investment, therefore their time cost is low. 

BTW, the posters explaining different real estate costs in different areas are right.  If you want to hedge in case of lower job income, decide whether you'd move or not.  A cheaper area would cut your cost your costs quick.  If you intend to stay in an expensive place, you could hedge by learning to be an Airbnb host - no investment of capital, but you cut your housing cost.  Or study other forms of house hacking.  Anyway, not to get too far afield; best of luck whatever you decide.

Softwaredude

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Re: Real estate or REIT?
« Reply #15 on: May 03, 2015, 09:58:17 PM »
Thanks everyone for being helpful, I truly appreciate your replies.

Since I already have a primary residence and I enjoy working on my career rather than having to do property management, I decided to create a portfolio with a mix of REITs and Vanguard dividend funds. I will eventually get an income property but I will do that a few years down the road when I have the mental and physical bandwidth to my own propert management and DIY fixes.

.

NoNonsenseLandlord

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Re: Real estate or REIT?
« Reply #16 on: May 04, 2015, 06:31:49 AM »
You can always go with a syndicated deal.  Small partnerships, with a limited number of investors.  Like a $10M 250+ unit complex, with 20% down, across 25 investors.  10% returns are generally projected,

There are plenty of those out there.

Franklin

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Re: Real estate or REIT?
« Reply #17 on: May 04, 2015, 09:08:27 AM »
And if you want to diversify within the REIT space, you could look at something like Crown Castle who leases cell tower space.  It's much more predictable because they only have about ten insatiable customers.

sammybiker

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Re: Real estate or REIT?
« Reply #18 on: May 04, 2015, 10:18:05 AM »
Great posts with good leads in this thread.  @softwaredude, I'd definitely recommend hopping on BiggerPockets and reading as much as you can.  Even though you may be a few years out from getting more hands on involved, reading through threads at BP (careful not to step in the bullshit - more if it as of late) will provide a lot of value and when you're ready, you'll have clear direction on where you want to head.  And you may find that action date not as far off as you think right now.

There are lots of hard working idiots making good money in real estate.  Obviously, there is a good bit of spread there for the hard working smart ones.

Good luck!

waltworks

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Re: Real estate or REIT?
« Reply #19 on: May 04, 2015, 10:56:02 AM »
Yes, BP is great, but recently (since house prices have been going up steadily, or skyrocketing in some places) it's full of people who think they are geniuses but are really just lucky. You can identify the intelligent contributors after a little reading time, but the signal/noise ratio has gotten pretty bad there.

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OracleOfAtown

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Re: Real estate or REIT?
« Reply #20 on: May 04, 2015, 11:27:03 AM »
Take a look at REIT SNH.  Its a Senior Housing and Medical office trust. Mr. Moeny even wrote about it a while back. Right now would be a great time to buy since its been down a little bit. It pays over a 7% dividend. I own it in my roth ira so I dont have to pay taxes on dividends or gains. Its a solid payout and a nice play on the aging population.

Saradunrossil

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Re: Real estate or REIT?
« Reply #21 on: May 11, 2015, 11:07:57 PM »


The U.S. real estate market is finally starting to fire on most, if not all, cylinders, with investors’ enthusiasm gathering steam seemingly each passing month.

According to a study from the Urban Land Institute and PwC,expectations on profitability from the U.S. real estate sector are on the upside going forward. “In 2010, only 18% of respondents felt the prospects for profitability were at a good or better level,” the ULI reports. “This has improved steadily each year, with 68% of respondents now feeling that profitability will be at least good in 2014.”

The study reports that myriad investment demographics are pouring into the market, including foreign investors, institutional investors and private equity funds, as well as leveraged debt from insurance companies, mezzanine lenders, and issuers of commercial mortgage-backed securities.

Read more: http://www.investopedia.com/articles/investing/072314/investing-real-estate-versus-reits.asp#ixzz3ZtjGYmCz
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Thedudeabides

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Re: Real estate or REIT?
« Reply #22 on: May 11, 2015, 11:58:00 PM »

You can always go with a syndicated deal.  Small partnerships, with a limited number of investors.  Like a $10M 250+ unit complex, with 20% down, across 25 investors.  10% returns are generally projected,

There are plenty of those out there.

Where would one typically find these syndication deals?

Bjorn

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Re: Real estate or REIT?
« Reply #23 on: May 12, 2015, 04:53:46 AM »

You can always go with a syndicated deal.  Small partnerships, with a limited number of investors.  Like a $10M 250+ unit complex, with 20% down, across 25 investors.  10% returns are generally projected,

There are plenty of those out there.

Where would one typically find these syndication deals?
Banks, funds and brokers. The same people who sell stocks.

We had alot of these in Norway in the past 5-15 years and many of them proved to be financial disasters for the investors. Some of the potential downsides:
- Syndicates tend to rise in popularity when markets are on the rise. You don't want to buy on the top (as with anything). Many investors who got into this in 2006-07 were left with only 10% of their initial investment after a few years.
- Whoever is in practical charge of the syndicate (banks, funds) typically gets a fat management fee and they are good at hiding this fee, e.g. it could be hidden under "maintenance" and "other costs" in the fiscal reports. Syndicates are a great cash cow for everyone involved in the work around it.
- Owning a share in a syndicate is like owning a stock with bad liquidity, meaning it can prove hard to sell if you need the cash or want to cash out. Its either keep the share or sell at a big discount.
- Syndicates often operate with a span of 4-10 years: 1) Gather investors 2) Buy a bunch of properties 3) Manage the properties and possibly do upgrades 4) Sell with profit. Basically its like buying and selling a property, but someone else takes care of managing the property (and gets paid for it) and you have little saying in when you want to sell it.
- You don't get to decide when/if doing maintenance or upgrades. Basically, you give up alot of power and control in exchange for having others do the work for you, and sharing the risk with other investors.

I'd rather invest in real estate stocks or buying real estate myself than being part of a syndicate. There are alot of rubbish deals with unrealistic projections out there. The only clear upside I see is that you get to work with big commercial properties, but you can get this exposure through RE stocks.

Maybe there are more success stories in the US?

math-ya

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Re: Real estate or REIT?
« Reply #24 on: May 12, 2015, 05:55:35 AM »
I think it's important to figure out the risk level in reits. I used to work as the controller for a local reit. Peoples money went towards individual projects, so they made money depending on what project they invested in. The owner was VERY highly leveraged and he custom built every building for each clients needs. For example he built a grocery store for a big chain. Then they moved out after 3 years and the place now sits empty and it's a totally custom building so no one else really wants it. I assume the place is foreclosed on now (don't work there anymore) but I know a lot of the people that invested in this project did not fully understand the risks, b/c the returns were nothing special.