* Mr. Bogle did say the above quote regarding Sam Zell. However, he also conducted an interview with NAREIT a few years back where he stated he did not like the other sector funds (i.e. healthcare, metals, energy, technology, etc.) but could see a 10% of equity allocation to REITS. This interview is available online.
* Read "Unconventional Success" by David Swensen. He has an excellent section on REITS and why he recommends a 20% of the total portfolio allocation. I have been increasing our % of equity allocation to 20% and am quite aware of the potential rewards and risks.
* Excluding section 1031, it is difficult to compare taxes between REITS and direct ownership. If the direct ownership is during the early years (i.e. debt present and potential future depreciation), you may be operating at a "loss" for tax purposes. You are able to deduct passive losses against ordinary income, and depending on your AGI, up to $25,000. However, I have many clients that have owned real estate for a long time, are debt and depreciation free, and are incurring the tax bite. This is not a concern, but rather the cost of "doing business". The properties produce a very nice cash flow that the clients retired early from and live off of.
* I have also posted numerous times on this forum, that I have other clients with substantial and very material REIT investments, that have retired early and are living off of the cash flow.
* REITS also have favorable tax implications regardless of many folks opinions on this forum. For starters, approximately 50% of the REITS "dividend" is taxed as ordinary income, much like direct ownership. If qualified dividends are gone in one year, and that is looking like a high probability, all income is taxed at the same rate again. About 25% of a REITS "dividend" is taxed at the 15% capital gains rate, and the remaining 25% of the "dividend" is a return of capital (i.e. not taxed, but a reduction of your cost basis - when you sell, depending on the holding period, at favorable long term capital gains rates). Any additional return of capital that exceeds your cost basis is taxed as income. Read Random Walk Down Wall Street where these tax benefits are also explained.
* REITS have their days in the sun and the doghouse just like any asset class. I have been a REIT investor for many years in all types of markets and am very happy with the return, diversification, and nice income stream.
* Vanguard produced a research paper a few years back comparing REITS to direct ownership with a much more favorable few of REITS due to better liquidity, diversification, much lower costs, etc.
* David Swensen recommends the separate REIT allocation. The theory is the REIT percentage in the Total Stock Market fund of 1% - 3% is not representative of the broader economy due to the huge amount of properties that are privately owned (i.e. not on the stock exchange).
* If you go with REITS or increase your allocations, I recommend that you read many books, reports, etc. just to be aware of this asset class and the advantages and disadvantages. A great resource is http://www.reit.com
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs