Purchasing rental property vs. REITs

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khalestorm
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Purchasing rental property vs. REITs

Post by khalestorm »

Looking to purchase a bank owned home for $30k (listed at 25k, I'm offering more due to multiple bids). Property is in good shape and pretty much ready to rent. About 5 min from my current home. Will command about $700 in rent. I'm looking at a return of about 24% annually on this investment. I haven't won the bid, but I'm also considering just throwing this $30k into an REIT instead. Pros/cons?
Twins Fan
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Re: Purchasing rental property vs. REITs

Post by Twins Fan »

Thought you were going to pay down your mortgage?! :D

That's a pretty good return you would be looking at buying that rental property. I don't think REITs can guarantee that kind of return. No contest there.
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khalestorm
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Re: Purchasing rental property vs. REITs

Post by khalestorm »

Twins Fan wrote:Thought you were going to pay down your mortgage?! :D

That's a pretty good return you would be looking at buying that rental property. I don't think REITs can guarantee that kind of return. No contest there.
Haha! You remember me and my story :) I'm not paying down a underwater mortgage, it's just not a good investment, esp when I want to generate more money.
I'm investing in VTSAX and purchasing this rental or REITs. Looking for passive income and I think a rental will provide that.
Twins Fan
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Re: Purchasing rental property vs. REITs

Post by Twins Fan »

Yep, I remember. You would pay cash for the rental then? If I recall, you had a nice chunk saved up.
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khalestorm
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Re: Purchasing rental property vs. REITs

Post by khalestorm »

Twins Fan wrote:Yep, I remember. You would pay cash for the rental then? If I recall, you had a nice chunk saved up.
Yea cash for rental, so pretty much immediate passive income minus property taxes ($20 a year, didnt miss a zero, insurance, trash collection, etc), I have even more $ saved up. Probably buy another rental home. Looking to create passive income for early retirement :)
Twins Fan
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Re: Purchasing rental property vs. REITs

Post by Twins Fan »

Sounds good to me!

I think you were looking at possibly turning your current home into a rental someday also? You could have a few rentals all in the same area. That could make for a nice little income stream!
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Re: Purchasing rental property vs. REITs

Post by stan1 »

With a REIT you are paying 0.10% ($1 for every $1K invested) in expenses, and Vanguard won't call you at 2 am to tell you the toilet is clogged.

If you don't mind the people side it sounds like you are in a LCOL area where it is possible to generate a decent income stream. Just have to be able to take late rent payments, evictions, repairs, damage, law enforcement visits, weather damage, etc. all in stride. Put another way, you have to be all-in as the owner of a small business.
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Re: Purchasing rental property vs. REITs

Post by SpaceCommander »

Consider all expenses in your analysis. Even if you pay cash, you've got:
Taxes, Insurance, Maintenance, Management, Utilities, Vacancy allowance. Plus the time factor. Real estate can certainly get you there, but if you haven't been a real estate investor before, be sure to go into the deal with eyes wide open.
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Re: Purchasing rental property vs. REITs

Post by JDPowerhouse »

You should probably check out a real estate forum for more info about getting started with rental properties.

That said, a huge mistake that many people make when buying rental properties is significantly underestimating costs and assuming 100% occupancy rate. Be sure you account for all costs and run realistic numbers before jumping in to something like this.
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Re: Purchasing rental property vs. REITs

Post by travellight »

If you are okay with doing a little work, your returns should be much higher with your rental than a reit. You are eliminating all the middle men; rental income goes directly to you, minus all these typical costs, without administrative levels of management to pay in a reit.

the more you are prepared and savvy you are, the less work and cost the process is for you. I have 6 rental properties now, SFRs, and they generate over 150k of rental income per year. My last vacancy was 23 months ago and it was 18 days; I just did the math: that is a 0.8% vacancy rate. I bought prepared for 100% vacancy rate but realistically projecting for 10%.

Your deal sounds amazing; I would do it if it comes through for you.
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Re: Purchasing rental property vs. REITs

Post by Lynxville »

I like the cash flow, but is the location good? I made the big money on appreciating property values. (location, location, location) It may be a while until property values rise, but eventually they will. In the last 6 month's I have noticed some appreciation in my area. With the new mortgage rules starting in January 2014, I believe many buyers will not qualify for mortgages, so the rental market may be a good business to be in.
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Re: Purchasing rental property vs. REITs

Post by White Coat Investor »

Where are you at that a $25K property rents for $700? Why don't you buy them all? Using John T. Reed's 55% rule the cap rate on that property is 18.5%. That's not a bad property at 3 times the price. (Assuming your numbers are right, which I'd be skeptical of.)
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Re: Purchasing rental property vs. REITs

Post by denovo »

EmergDoc wrote:Where are you at that a $25K property rents for $700? Why don't you buy them all? Using John T. Reed's 55% rule the cap rate on that property is 18.5%. That's not a bad property at 3 times the price. (Assuming your numbers are right, which I'd be skeptical of.)
I can't believe a 25k property would rent for $700.00
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khalestorm
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Re: Purchasing rental property vs. REITs

Post by khalestorm »

denovo wrote:
EmergDoc wrote:Where are you at that a $25K property rents for $700? Why don't you buy them all? Using John T. Reed's 55% rule the cap rate on that property is 18.5%. That's not a bad property at 3 times the price. (Assuming your numbers are right, which I'd be skeptical of.)
I can't believe a 25k property would rent for $700.00
Downtown Atlanta. Rent isn't cheap in many parts of Atlanta. There are a lot of upcoming neighborhoods, and some great deals to be had. This is bank owned. $700 for a 2/1 isn't unreasonable in this area. $8400/year minus estimated $300 insurance, $20 property tax (didn't miss a zero), $300 trash collection, $1000 yearly repairs = $6780
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khalestorm
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Re: Purchasing rental property vs. REITs

Post by khalestorm »

EmergDoc wrote:Where are you at that a $25K property rents for $700? Why don't you buy them all? Using John T. Reed's 55% rule the cap rate on that property is 18.5%. That's not a bad property at 3 times the price. (Assuming your numbers are right, which I'd be skeptical of.)

I'm trying :wink:
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Re: Purchasing rental property vs. REITs

Post by MN Finance »

Not sure how anyone can actually compare these two choices as though they're equivalent.
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Re: Purchasing rental property vs. REITs

Post by denovo »

khalestorm wrote:
denovo wrote:
EmergDoc wrote:Where are you at that a $25K property rents for $700? Why don't you buy them all? Using John T. Reed's 55% rule the cap rate on that property is 18.5%. That's not a bad property at 3 times the price. (Assuming your numbers are right, which I'd be skeptical of.)
I can't believe a 25k property would rent for $700.00
Downtown Atlanta. Rent isn't cheap in many parts of Atlanta. There are a lot of upcoming neighborhoods, and some great deals to be had. This is bank owned. $700 for a 2/1 isn't unreasonable in this area. $8400/year minus estimated $300 insurance, $20 property tax (didn't miss a zero), $300 trash collection, $1000 yearly repairs = $6780
I assume you know your backyard better than me, but when real estate folks usually use the term up and coming neighborhood, it is usually a euphemism for poor and dangerous neighborhoods.
Last edited by denovo on Thu Nov 28, 2013 11:27 pm, edited 1 time in total.
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Re: Purchasing rental property vs. REITs

Post by LFKB »

I don't understand why a $30k house would rent for $8400 per year. Why would anyone pay rent at a rate where they could own the house in less than 4 years? Also, it's not like a $6k downpayment is preventing buyers from participating. Sounds skeptical but if your math is right you could buy 50 of these houses with 20% down for $300k and be a multiple-millionaire in no time. Your cash flow from rent would be $420k (before expense) and you'd have the mortgages paid off within 4 years. Seems too good to be true. Have other similar houses in the area sold for the same price per foot and generated the same rent per foot?
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Re: Purchasing rental property vs. REITs

Post by boggler »

What did you end up deciding? If you bought, how has it been working out for you? Pros/cons?
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Re: Purchasing rental property vs. REITs

Post by 3CT_Paddler »

As a fellow Atlanta resident, I can tell you those kind of deals while not common, were available over the last couple of years. That probably is not as much the case now with the improvement in housing around Atlanta.
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Re: Purchasing rental property vs. REITs

Post by JonnyDVM »

denovo wrote:
khalestorm wrote:
denovo wrote:
EmergDoc wrote:Where are you at that a $25K property rents for $700? Why don't you buy them all? Using John T. Reed's 55% rule the cap rate on that property is 18.5%. That's not a bad property at 3 times the price. (Assuming your numbers are right, which I'd be skeptical of.)
I can't believe a 25k property would rent for $700.00
Downtown Atlanta. Rent isn't cheap in many parts of Atlanta. There are a lot of upcoming neighborhoods, and some great deals to be had. This is bank owned. $700 for a 2/1 isn't unreasonable in this area. $8400/year minus estimated $300 insurance, $20 property tax (didn't miss a zero), $300 trash collection, $1000 yearly repairs = $6780
I assume you know your backyard better than me, but when real estate folks usually use the term up and coming neighborhood, it is usually a euphemism for poor and dangerous neighborhoods.
As someone that lives in Brookhaven I would say that's a correct statement. Especially with regards to Atlanta. When we moved to Atlanta I was struck by how odd the pattern of neighborhoods were. Nice ones with monster houses next to neighborhoods filled with terrible ramshackle little dumps. It was explained to me that due to traffic people started moving back towards the city from outside the perimeter. They buy lots with little old houses and swallow them up with big mega houses often using the same walls. What was formally a small house with a yard becomes massive house sans yard. It's amazing. Right next to me is a street has many large $1 million + mansions interspersed with little old ranch houses. It's a unique street to walk down. Always take out of town guests that way to show them. The thing is, it takes neighborhoods varying lengths of time to turn over. Our realtor told us it usually takes 10+ years. No offense OP but you won't be getting the best tenants there. If the real estate market crashes again development might be be stunted for another decade. Combine that with the prospect of dealing with bad tenants and I'm not sure Id go for it.

My favorite story when looking for a house- we found a super nice little modern home in a neighborhood that had just finished its "come-up". It was priced right too. Too good to be true! Leaving the neighborhood realtor turns the wrong way and.... Heads strait towards the high barbed wire topped wall of a penitentiary. Seriously, it was a mile away. My wife was still talking about how nice the house was and the realtor tried to talk us into it. My response- I'm no real estate expert, but I'm pretty sure close proximity to a prison isn't great for resale value.
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khalestorm
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Re: Purchasing rental property vs. REITs

Post by khalestorm »

I'm just sticking with a small allocation of REITs. I decided I didn't have the time or energy to put up with potentially shitty tenants. Thanks for the advice and input everyone
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Re: Purchasing rental property vs. REITs

Post by abuss368 »

I would rather invest in US and International REIT index funds from Vanguard. Continue to invest in these funds, and the dividend income will fund a large part of retirement or possibly early retirement. I have seen this with friends and family.

REITs offer a low cost and diversified real estate investment that direct property investment can not. Most of all, it is a very liquid investment. David Swensen discusses this in his excellent book "Unconventional Success".

REITs are required to pay out 90% of the rental income to the shareholders. REITs do not pay taxes at the entity level either.
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Re: Purchasing rental property vs. REITs

Post by Slowmaha »

abuss368 wrote:I would rather invest in US and International REIT index funds from Vanguard. Continue to invest in these funds, and the dividend income will fund a large part of retirement or possibly early retirement. I have seen this with friends and family.

REITs offer a low cost and diversified real estate investment that direct property investment can not. Most of all, it is a very liquid investment. David Swensen discusses this in his excellent book "Unconventional Success".

REITs are required to pay out 90% of the rental income to the shareholders. REITs do not pay taxes at the entity level either.
True, but you do not realize any of the tax benefits owning a REIT. As some have stated before, though both are real estate vehicles, it's kind of an apples and oranges comparison.
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Re: Purchasing rental property vs. REITs

Post by denovo »

Slowmaha wrote:
abuss368 wrote:I would rather invest in US and International REIT index funds from Vanguard. Continue to invest in these funds, and the dividend income will fund a large part of retirement or possibly early retirement. I have seen this with friends and family.

REITs offer a low cost and diversified real estate investment that direct property investment can not. Most of all, it is a very liquid investment. David Swensen discusses this in his excellent book "Unconventional Success".

REITs are required to pay out 90% of the rental income to the shareholders. REITs do not pay taxes at the entity level either.
True, but you do not realize any of the tax benefits owning a REIT. As some have stated before, though both are real estate vehicles, it's kind of an apples and oranges comparison.
What tax benefits do you refer to? Whether or not, you own real estate as an investment personally or through a REIT, the tax advantages are the same. They can deduct depreciation, interest, etc.
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Re: Purchasing rental property vs. REITs

Post by Slowmaha »

Depreciation, operating expenses, etc.. Yes, in theory a REIT is realizing all this and passing it along to "owners", but as mentioned earlier, there are a lot of middle-men nibbling away at your return. VNQ's yield is barely above 3%. Not an apples to apples comparison IMO.
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Re: Purchasing rental property vs. REITs

Post by denovo »

Slowmaha wrote:Depreciation, operating expenses, etc.. Yes, in theory a REIT is realizing all this and passing it along to "owners", but as mentioned earlier, there are a lot of middle-men nibbling away at your return. VNQ's yield is barely above 3%. Not an apples to apples comparison IMO.

No one disagrees that there are middle men involved when investing in REIT. But it is not a "theory" that REIT'S deduct depreciation and operating expenses. It's a fact and there are no tax advantages to owning it personally in that regards.
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Re: Purchasing rental property vs. REITs

Post by abuss368 »

If anyone is interesting in a really neat REIT story and information, read the financials for the Empire State Building, which is now a REIT.

Very interesting.
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