Why use a REIT over a rental property?

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jb1
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Why use a REIT over a rental property?

Post by jb1 »

Been thinking about this for a while. I have VGSIX in my Roth IRA, but what is the purpose of it? Its extremely volatile, one housing bubble and can drop 50-75%. All for a 4% dividend? I have 8k in it.

Rental properties on the other hand require a downpayment. (Can use 8k from VGSIX) and can bring me in 800-1000 a month if done properly. Housing prices can crash, but at the end of the day, people always need a place to live.

So, can anyone explain the true point of a REIT?
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Re: Why use a REIT over a rental property?

Post by Senti »

1. REIT is less work. Do you want to deal with finding property? Managing tenants? Middle of the night phone calls?
2. I don't know where you live, but I am not aware of any place where you can invest 8K and get 800-1000. Usually for investment property you have to put 25% down. Can you buy a property for $32K that provides 800 in rent. What will your take home be?
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Re: Why use a REIT over a rental property?

Post by jb1 »

Senti wrote: Sat Sep 23, 2017 10:47 am 1. REIT is less work. Do you want to deal with finding property? Managing tenants? Middle of the night phone calls?
2. I don't know where you live, but I am not aware of any place where you can invest 8K and get 800-1000. Usually for investment property you have to put 25% down. Can you buy a property for $32K that provides 800 in rent. What will your take home be?
Im 27, dont mind the risk personally. I live in NC, housing is cheap. Was figuring getting a FHA loan for 8k down, or putting 20k down. Just an idea.

My biggest thing is when there is a bubble, REITs will drop dramatically in a bubble, Rentals will drop in value yes, but still bring cash flow in.

Is having a REIT in a Roth smart?
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Re: Why use a REIT over a rental property?

Post by sailaway »

jb1 wrote: Sat Sep 23, 2017 11:09 am
Senti wrote: Sat Sep 23, 2017 10:47 am 1. REIT is less work. Do you want to deal with finding property? Managing tenants? Middle of the night phone calls?
2. I don't know where you live, but I am not aware of any place where you can invest 8K and get 800-1000. Usually for investment property you have to put 25% down. Can you buy a property for $32K that provides 800 in rent. What will your take home be?
Im 27, dont mind the risk personally. I live in NC, housing is cheap. Was figuring getting a FHA loan for 8k down, or putting 20k down. Just an idea.

My biggest thing is when there is a bubble, REITs will drop dramatically in a bubble, Rentals will drop in value yes, but still bring cash flow in.

Not necessarily. In a downturn, people lose their jobs, can't pay rent, have to be evicted. They may even trash the place as a way of taking out their frustrations. I am not familiar with NC landlord laws, but a recession can eat into your rental profits pretty significantly.
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Re: Why use a REIT over a rental property?

Post by oldcomputerguy »

jb1 wrote: Sat Sep 23, 2017 10:40 am Been thinking about this for a while. I have VGSIX in my Roth IRA, but what is the purpose of it? Its extremely volatile, one housing bubble and can drop 50-75%. All for a 4% dividend? I have 8k in it.

Rental properties on the other hand require a downpayment. (Can use 8k from VGSIX) and can bring me in 800-1000 a month if done properly. Housing prices can crash, but at the end of the day, people always need a place to live.

So, can anyone explain the true point of a REIT?
I don't want to be a landlord. I have enough to do keeping repairs and such done around my own domicile.
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Re: Why use a REIT over a rental property?

Post by nisiprius »

1) REITs are commercial real estate, rental properties as you describe them sound like residential real estate. I don't know why you'd want commercial real estate over residential real estate, but but if you did, you'd want a REIT.

2) VGSIX holds 158 REITs. I don't know just what diversification does for you, compared to holding a small number of individual REITs, but if I were interested in the asset class as such I'd be uneasy just holding one or to REITs, and managing 158 REITs is not something I could do myself.
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Re: Why use a REIT over a rental property?

Post by Northern Flicker »

Im 27, dont mind the risk personally. I live in NC, housing is cheap. Was figuring getting a FHA loan for 8k down,
You can't use an FHA loan to acquire an investment property. After living in the property for a while, there are some restricted cases where renting it out for investment purposes is allowed, but one restriction seems to be that you need to be at 75% LTV. Why would you want to pay mortgage insurance if LTV qualifies for a conventional investor mortgage?
Last edited by Northern Flicker on Sat Sep 23, 2017 12:57 pm, edited 1 time in total.
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Re: Why use a REIT over a rental property?

Post by Senti »

jb1 wrote: Sat Sep 23, 2017 11:09 am
Senti wrote: Sat Sep 23, 2017 10:47 am 1. REIT is less work. Do you want to deal with finding property? Managing tenants? Middle of the night phone calls?
2. I don't know where you live, but I am not aware of any place where you can invest 8K and get 800-1000. Usually for investment property you have to put 25% down. Can you buy a property for $32K that provides 800 in rent. What will your take home be?
Im 27, dont mind the risk personally. I live in NC, housing is cheap. Was figuring getting a FHA loan for 8k down, or putting 20k down. Just an idea.

My biggest thing is when there is a bubble, REITs will drop dramatically in a bubble, Rentals will drop in value yes, but still bring cash flow in.

Is having a REIT in a Roth smart?
I think the suggestion is that REITs need to be in tax advantaged accounts such as ROTH, IRA or 401K.

I own one rental property and I would recommend it. Please do more research at biggerpockets.com and understand all the risks. E.g. account for routine maintenance, capital expenditure (roofs, furnace, etc.), vacancy, insurance, tax, etc.
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Re: Why use a REIT over a rental property?

Post by livesoft »

1. REIT fund does not require me to be a landlord.

2. It is trivial to notice that REIT fund has dropped and needs rebalancing.

3. It is trivial to notice that REIT fund has gone way up and needs rebalancing.

4. It is trivial to then do that rebalancing.

If you are buy-and-hold, then a REIT fund is not for you. If you are buy, hold, and rebalance, then a REIT fund may be for you.
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Re: Why use a REIT over a rental property?

Post by jb1 »

livesoft wrote: Sat Sep 23, 2017 11:34 am 1. REIT fund does not require me to be a landlord.

2. It is trivial to notice that REIT fund has dropped and needs rebalancing.

3. It is trivial to notice that REIT fund has gone way up and needs rebalancing.

4. It is trivial to then do that rebalancing.

If you are buy-and-hold, then a REIT fund is not for you. If you are buy, hold, and rebalance, then a REIT fund may be for you.
Thank you all for the responses.

Why would REIT not be buy and hold?
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Re: Why use a REIT over a rental property?

Post by abuss368 »

nisiprius wrote: Sat Sep 23, 2017 11:16 am 1) REITs are commercial real estate, rental properties as you describe them sound like residential real estate. I don't know why you'd want commercial real estate over residential real estate, but but if you did, you'd want a REIT.

2) VGSIX holds 158 REITs. I don't know just what diversification does for you, compared to holding a small number of individual REITs, but if I were interested in the asset class as such I'd be uneasy just holding one or to REITs, and managing 158 REITs is not something I could do myself.
REITs have a lot of commercial property however they have a lot (and increasing) residential property. The largest apartment is Equity Residential headed by San Zell. Avalon Bay is another. In addition, there are other classes.

I would not invest in individual REITs (although we did at one time and did well) but rather the Vanguard U.S. and International REIT Index funds.
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Re: Why use a REIT over a rental property?

Post by livesoft »

jb1 wrote: Sat Sep 23, 2017 11:37 amWhy would REIT not be buy and hold?
Because
Its extremely volatile, one housing bubble and can drop 50-75%. All for a 4% dividend? I have 8k in it.
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Re: Why use a REIT over a rental property?

Post by jb1 »

livesoft wrote: Sat Sep 23, 2017 11:41 am
jb1 wrote: Sat Sep 23, 2017 11:37 amWhy would REIT not be buy and hold?
Because
Its extremely volatile, one housing bubble and can drop 50-75%. All for a 4% dividend? I have 8k in it.
haha touche
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Re: Why use a REIT over a rental property?

Post by abuss368 »

jb1 wrote: Sat Sep 23, 2017 10:40 am Been thinking about this for a while. I have VGSIX in my Roth IRA, but what is the purpose of it? Its extremely volatile, one housing bubble and can drop 50-75%. All for a 4% dividend? I have 8k in it.

Rental properties on the other hand require a downpayment. (Can use 8k from VGSIX) and can bring me in 800-1000 a month if done properly. Housing prices can crash, but at the end of the day, people always need a place to live.

So, can anyone explain the true point of a REIT?
Apples and oranges! There is a great and well informed thread running about direct real estate investment. Read it!

Real estate is hard to invest in and there is no perfect way.

* Direct Ownership
* REITs
* Private Equity / Partnership

Read Ralph Blocks "Investing in REITs" to understand the differences as it is a great book.

As for a 50% - 75% downturn like the financial crisis a decade ago. We stayed the course and rebalanced considering the amazing opportunity that was in front of us. In hindsight, it turned out to be a very good decision and we would do it again with another opportunity. This may not be for everyone so any invest has to pass the sleep test. This is key with any investment however.
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Re: Why use a REIT over a rental property?

Post by livesoft »

jb1 wrote: Sat Sep 23, 2017 11:44 amhaha touche
My current holding in a REIT fund is zero (0%) of portfolio. My IPS says I can own 0% to 10%. I will buy REIT fund shares on a day that it drops at least 2.5% and a few other days. I will sell REIT fund shares on other days. I like to own it when it has a good chance of going up. I don't like to own it when it has a good chance of going down. I don't even have to watch as I have set an Alert with my broker (i.e. Vanguard) to send me an e-mail when it goes up or down by 2.5% since the previous closing price. It is almost that easy.
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Re: Why use a REIT over a rental property?

Post by abuss368 »

You may want to consider adding the Vanguard International REIT/RE Index Fund as a compliment to the U.S. REIT Index Fund. The additional diversification is a positive and I have noticed that the two funds compliment each other. The International REIT/RE Index funds holds approximately 677 companies as of the most recent report in April 2017.
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Re: Why use a REIT over a rental property?

Post by dcprogrammer »

REIT allows you to get real estate exposure even with small amount of money.
I hold VNQ in my HSA so that I pay no tax on dividends.
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Re: Why use a REIT over a rental property?

Post by Northern Flicker »

A REIT index fund has a moderately high correlation to small-cap stocks because it holds real estate across many business sectors (residential, office space, mini-storage, retail, etc).

The Ishares ETF REZ focuses specifically on residential real estate. It has a lower correlation to equities, and is a better proxy for residential investment property. It avoids retail and office sectors, but still is only about 50% residential.
Last edited by Northern Flicker on Sat Sep 23, 2017 7:21 pm, edited 1 time in total.
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Re: Why use a REIT over a rental property?

Post by Pajamas »

A REIT is a liquid investment and you know what it is worth at any time if you want to sell it. Low or no transaction costs and you can sell it in less than a minute. If you go with a REIT fund then there is really other effort involved beyond buying and selling and reporting the income and capital gains on your taxes. Owning a rental property is a business with all that entails and with much more concentrated risk.
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