REITs vs. rental property

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Kelly
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REITs vs. rental property

Post by Kelly »

Folks,

One question I've heard made is that there is no need for REITs if you own a rental property. To investigate I calculated the correlation of the REIT index with the Case Shiller Composite 10 Home Price Index (HPI) since 1987 and found there's only a 19% correlation between the two. The correlation of the HPI and REIT over the same period is -0.5%.

It appears that REITs should still be added if you own rental property.

Any thoughts??

Kelly.
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JDaniels
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Re: REITs vs. rental property

Post by JDaniels »

I was always under the impression that REIT's invested primarily in commercial real estate? Therefor, if you also own investment property that is residential, you were still diversified. Am i wrong?
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dbr
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Re: REITs vs. rental property

Post by dbr »

REITs and actual property are two different things, not just residential vs commercial.

There is a reasonable case that REIT stocks (they are stocks) behave enough differently from the stock market as a whole to function as a diversifier, but I don't think it is the same diversifier as owning property outright.

Note that a huge difference is that outright ownership of investment real estate would inevitably be concentrated in a few properties in one or a small number of locations and operating in a certain narrow market. Outright ownership is also effectively a business with costs and management burden very different from holding a REIT position.
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SnapShots
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Re: REITs vs. rental property

Post by SnapShots »

dbr wrote:REITs and actual property are two different things, not just residential vs commercial.

There is a reasonable case that REIT stocks (they are stocks) behave enough differently from the stock market as a whole to function as a diversifier, but I don't think it is the same diversifier as owning property outright.

Note that a huge difference is that outright ownership of investment real estate would inevitably be concentrated in a few properties in one or a small number of locations and operating in a certain narrow market. Outright ownership is also effectively a business with costs and management burden very different from holding a REIT position.
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Topic Author
Kelly
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Re: REITs vs. rental property

Post by Kelly »

Kelly wrote:Folks,

One question I've heard made is that there is no need for REITs if you own a rental property. To investigate I calculated the correlation of the REIT index with the Case Shiller Composite 10 Home Price Index (HPI) since 1987 and found there's only a 19% correlation between the two. The correlation of the HPI and REIT over the same period is -0.5%.

It appears that REITs should still be added if you own rental property.

Any thoughts??

Kelly.
I meant to say that the correlation between REITs and SP 500 since 1987 was 0.5%.
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Re: REITs vs. rental property

Post by abuss368 »

Go with REITs. Domestic and maybe International.
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fidelio
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Re: REITs vs. rental property

Post by fidelio »

i own both (a little reit in a roth and an income property), and i think it's obvious that the two are vastly different. it's like owning a car vs. owning gm stock, to present a clunky simile. as far as reits diversifying a portfolio, my understanding / experience is that they can twist a little differently than conventional equities and f.i., but i'm no expert on the numbers. rather pricey today, just like the greater stock market. the one great thing that a rental property does (one hopes) is provide monthly income that can generally be kept away from the taxman.
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Re: REITs vs. rental property

Post by abuss368 »

fidelio wrote:i own both (a little reit in a roth and an income property), and i think it's obvious that the two are vastly different. it's like owning a car vs. owning gm stock, to present a clunky simile. as far as reits diversifying a portfolio, my understanding / experience is that they can twist a little differently than conventional equities and f.i., but i'm no expert on the numbers. rather pricey today, just like the greater stock market. the one great thing that a rental property does (one hopes) is provide monthly income that can generally be kept away from the taxman.
This is not true in terms of the "taxman". I have many clients were the depreciation benefit is long gone and the income is taxed as ordinary. I have seen the depreciation recapture rules as well. Same as REITs in a taxable account.

REITs should follow the broader property market adjusted for the timing differences in valuations, etc. Rick Ferri had an excellent post on the big differences between REITs and common stock.
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