Buy REIT or Rental Property

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BoggledHead2
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Buy REIT or Rental Property

Post by BoggledHead2 » Mon Jan 21, 2019 3:20 pm

Considering further diversification, wondering if buying real estate or simply buying "real estate" in a fund would be more prudent?

I assume owning physical property is more demanding/time consuming, but also more lucrative than REITs? Maybe i'm missing something about REITs, but they sure do seam quite easy to "manage".

Thoughts BH? Interested in why some would choose to go 1 route over another.

Jack FFR1846
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Re: Buy REIT or Rental Property

Post by Jack FFR1846 » Mon Jan 21, 2019 3:23 pm

Post your phone number. The rest of us will call you between 2am and 5am tomorrow morning. It'll give you practice for when your tenants have a complaint.

If you think I'm saying that because I'm a big REIT fan.... I own no REITs either.
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arcticpineapplecorp.
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Re: Buy REIT or Rental Property

Post by arcticpineapplecorp. » Mon Jan 21, 2019 3:32 pm

First of all not all REITS are made equal. Understand there are non-publicly traded REITS. Why own something that's not publicly traded? Some of these are illiquid. Many REITS are not an index fund type variety. So they are not tracking any benchmark index.

Therefore, we need to make sure what REIT you're looking to invest in. Hopefully you're considering the Vanguard REIT index fund. I don't own it, but if I was interested in REITS that's the one I'd own. Low cost. Tracks an index. Widely diversified. Liquid. Publicly traded. Checks all the boxes. Also has a track record back to 1996.

That being said, if we're talking about that fund (the index one with Vanguard) then REITS seam [sic] easy to manage because it is, but only because it's an index fund which means it's "passively" not actively managed.

If you want to own physical real estate, you're in the business of active management. And you're a business owner. And your investment has legal issues (put it in an LLC, etc.) and tax issues (extra paperwork) and so on. Do you want a second job, if only a part-time job in addition to presumably your other full time job? I don't.

Even people like Clark Howard who sing the praises of real estate find themselves getting out of it when they're older and no longer want to manage it themselves. Sure you could get a property manager, but then goes part of your profits too.

There are some other things to consider with regards to REITS. I just wrote about some of them minutes ago here:

viewtopic.php?f=10&t=270398#p4334541
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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BoggledHead2
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Re: Buy REIT or Rental Property

Post by BoggledHead2 » Mon Jan 21, 2019 3:36 pm

Jack FFR1846 wrote:
Mon Jan 21, 2019 3:23 pm
Post your phone number. The rest of us will call you between 2am and 5am tomorrow morning. It'll give you practice for when your tenants have a complaint.

If you think I'm saying that because I'm a big REIT fan.... I own no REITs either.
This is literally my biggest concern. I place a lot of value on “convenience”, which it would appears makes REIT the choice for me.

Do REITs often align with the broader market(s) as a whole (Total US/SP500/Total International) or is there fairly significant variability (diversification)?

Not a “timing” question, simply wondering if REITs perform better under certain conditions and/or aren’t very closely linked to the major index performances

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BoggledHead2
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Re: Buy REIT or Rental Property

Post by BoggledHead2 » Mon Jan 21, 2019 3:37 pm

arcticpineapplecorp. wrote:
Mon Jan 21, 2019 3:32 pm
First of all not all REITS are made equal. Understand there are non-publicly traded REITS. Why own something that's not publicly traded? Some of these are illiquid. Many REITS are not an index fund type variety. So they are not tracking any benchmark index.

Therefore, we need to make sure what REIT you're looking to invest in. Hopefully you're considering the Vanguard REIT index fund. I don't own it, but if I was interested in REITS that's the one I'd own. Low cost. Tracks an index. Widely diversified. Liquid. Publicly traded. Checks all the boxes. Also has a track record back to 1996.

That being said, if we're talking about that fund (the index one with Vanguard) then REITS seam [sic] easy to manage because it is, but only because it's an index fund which means it's "passively" not actively managed.

If you want to own physical real estate, you're in the business of active management. And you're a business owner. And your investment has legal issues (put it in an LLC, etc.) and tax issues (extra paperwork) and so on. Do you want a second job, if only a part-time job in addition to presumably your other full time job? I don't.

Even people like Clark Howard who sing the praises of real estate find themselves getting out of it when they're older and no longer want to manage it themselves. Sure you could get a property manager, but then goes part of your profits too.

There are some other things to consider with regards to REITS. I just wrote about some of them minutes ago here:

viewtopic.php?f=10&t=270398#p4334541
Thank you, very much

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Watty
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Re: Buy REIT or Rental Property

Post by Watty » Mon Jan 21, 2019 4:17 pm

BoggledHead2 wrote:
Mon Jan 21, 2019 3:20 pm
Interested in why some would choose to go 1 route over another.
A couple of reasons that I do not own any individual investment properties;

1) I can't see myself managing it myself when I am 85 and in assisted living. If something happens to me my wife sure as heck does not want to deal with managing rental property. I also like to travel so being out of the country for a few weeks could be difficult if you have a rental property.

2) Even with a property manager you have to manage them and watch them closely. That is would be hard to do when you are older. A bad one may not just be bad, but they may also intentionally rip you off. Finding a new property manager when you are 85 could be difficult.

3) Diversification. I already own the house I live in so buying more property would give me too much real estate which would likely be in the same city. Putting a couple of hundred thousand dollars into an investment property would also be more than 5% of my net worth and I do not want to have more than that in any one investment.

4) I don't want to make things more difficult for my heirs. If you have an investment property they may not be able to sell it until the lease ends and then they may need to refurbish it to get it ready to sell. That could mean that it could take a couple of years to settle your estate and add lots to the legal fees. There have been posts by people that ended up inheriting half a dozen inexpensive properties that they had to deal with so settling the estate was practically a full time job for them.

I also don't own any REITS, other than any that are in index funds, since my paid off house already gives me a lot of real estate exposure and is a significant percentage of my net worth. Many of the non-REIT companies that are in my index funds also have real estate exposure.

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willthrill81
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Re: Buy REIT or Rental Property

Post by willthrill81 » Mon Jan 21, 2019 4:23 pm

From what I've heard from listening to actual real estate investors, I would personally be interested in real estate (if my DW was on board, which she isn't, and that's fine) only if I could make the numbers work (e.g. '1% rule', minimum expected return of 5% real) inclusive of paying a property manager in order to avoid having to deal with tenant issues. That can be done, but it's a higher hurdle than if you do the property management yourself. If you want to go that route (i.e. managing the properties yourself), I think that you need to be prepared to potentially have this become your full-time job unless you get lucky with your property and tenants.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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unclescrooge
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Re: Buy REIT or Rental Property

Post by unclescrooge » Mon Jan 21, 2019 6:07 pm

willthrill81 wrote:
Mon Jan 21, 2019 4:23 pm
From what I've heard from listening to actual real estate investors, I would personally be interested in real estate (if my DW was on board, which she isn't, and that's fine) only if I could make the numbers work (e.g. '1% rule', minimum expected return of 5% real) inclusive of paying a property manager in order to avoid having to deal with tenant issues. That can be done, but it's a higher hurdle than if you do the property management yourself. If you want to go that route (i.e. managing the properties yourself), I think that you need to be prepared to potentially have this become your full-time job unless you get lucky with your property and tenants.
You should be able to make the numbers work at 5% if you use leverage.

My threshold is 15% which I find much harder to achieve. This is after leverage, and my spreadsheet includes 1% maintenance, 8% vacancy, 10% property management, 2% appreciation and subsequent increase in property taxes, and 1% increase in rents.

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willthrill81
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Re: Buy REIT or Rental Property

Post by willthrill81 » Mon Jan 21, 2019 6:15 pm

unclescrooge wrote:
Mon Jan 21, 2019 6:07 pm
willthrill81 wrote:
Mon Jan 21, 2019 4:23 pm
From what I've heard from listening to actual real estate investors, I would personally be interested in real estate (if my DW was on board, which she isn't, and that's fine) only if I could make the numbers work (e.g. '1% rule', minimum expected return of 5% real) inclusive of paying a property manager in order to avoid having to deal with tenant issues. That can be done, but it's a higher hurdle than if you do the property management yourself. If you want to go that route (i.e. managing the properties yourself), I think that you need to be prepared to potentially have this become your full-time job unless you get lucky with your property and tenants.
You should be able to make the numbers work at 5% if you use leverage.

My threshold is 15% which I find much harder to achieve. This is after leverage, and my spreadsheet includes 1% maintenance, 8% vacancy, 10% property management, 2% appreciation and subsequent increase in property taxes, and 1% increase in rents.
I wouldn't personally factor leverage into my return calculations at all because I wouldn't want to depend on debt to make a 'bad deal seem good'. My minimum 5% real expected return would not be a 'cash on cash' return, but a return based on the purchase price. It's a conservative approach, I know, but there are many in the real estate community who use this type of approach. I've heard of many who favored the 'cash on cash' method but got themselves so over-leveraged that the house of cards eventually came crashing down.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

riverguy
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Re: Buy REIT or Rental Property

Post by riverguy » Mon Jan 21, 2019 7:53 pm

willthrill81 wrote:
Mon Jan 21, 2019 6:15 pm
unclescrooge wrote:
Mon Jan 21, 2019 6:07 pm
willthrill81 wrote:
Mon Jan 21, 2019 4:23 pm
From what I've heard from listening to actual real estate investors, I would personally be interested in real estate (if my DW was on board, which she isn't, and that's fine) only if I could make the numbers work (e.g. '1% rule', minimum expected return of 5% real) inclusive of paying a property manager in order to avoid having to deal with tenant issues. That can be done, but it's a higher hurdle than if you do the property management yourself. If you want to go that route (i.e. managing the properties yourself), I think that you need to be prepared to potentially have this become your full-time job unless you get lucky with your property and tenants.
You should be able to make the numbers work at 5% if you use leverage.

My threshold is 15% which I find much harder to achieve. This is after leverage, and my spreadsheet includes 1% maintenance, 8% vacancy, 10% property management, 2% appreciation and subsequent increase in property taxes, and 1% increase in rents.
I wouldn't personally factor leverage into my return calculations at all because I wouldn't want to depend on debt to make a 'bad deal seem good'. My minimum 5% real expected return would not be a 'cash on cash' return, but a return based on the purchase price. It's a conservative approach, I know, but there are many in the real estate community who use this type of approach. I've heard of many who favored the 'cash on cash' method but got themselves so over-leveraged that the house of cards eventually came crashing down.
5% cap rate is terrible. Leverage on a 5% cap rate will actually reduce your cash flow as investment interest rates are higher than that. There’s just no room for error on a 5% cap.

You need to be PICKY and get a good deal upfront. People who have failed at rentals usually failed because they paid way too much or tried to force a primary house into a rental. You want to use leverage and leveraged cash on cash should be minimum 15% and preferably 20% or I won’t even look at it. There’s better investments out there if you can’t find that.

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willthrill81
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Re: Buy REIT or Rental Property

Post by willthrill81 » Mon Jan 21, 2019 8:05 pm

riverguy wrote:
Mon Jan 21, 2019 7:53 pm
willthrill81 wrote:
Mon Jan 21, 2019 6:15 pm
unclescrooge wrote:
Mon Jan 21, 2019 6:07 pm
willthrill81 wrote:
Mon Jan 21, 2019 4:23 pm
From what I've heard from listening to actual real estate investors, I would personally be interested in real estate (if my DW was on board, which she isn't, and that's fine) only if I could make the numbers work (e.g. '1% rule', minimum expected return of 5% real) inclusive of paying a property manager in order to avoid having to deal with tenant issues. That can be done, but it's a higher hurdle than if you do the property management yourself. If you want to go that route (i.e. managing the properties yourself), I think that you need to be prepared to potentially have this become your full-time job unless you get lucky with your property and tenants.
You should be able to make the numbers work at 5% if you use leverage.

My threshold is 15% which I find much harder to achieve. This is after leverage, and my spreadsheet includes 1% maintenance, 8% vacancy, 10% property management, 2% appreciation and subsequent increase in property taxes, and 1% increase in rents.
I wouldn't personally factor leverage into my return calculations at all because I wouldn't want to depend on debt to make a 'bad deal seem good'. My minimum 5% real expected return would not be a 'cash on cash' return, but a return based on the purchase price. It's a conservative approach, I know, but there are many in the real estate community who use this type of approach. I've heard of many who favored the 'cash on cash' method but got themselves so over-leveraged that the house of cards eventually came crashing down.
5% cap rate is terrible. Leverage on a 5% cap rate will actually reduce your cash flow as investment interest rates are higher than that. There’s just no room for error on a 5% cap.
I wasn't suggesting a 5% cap rate. I was suggesting a 5% real return (i.e. after all expenses are accounted for). With the '1% rule', that implies a minimum cap rate of 12%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

riverguy
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Re: Buy REIT or Rental Property

Post by riverguy » Mon Jan 21, 2019 8:16 pm

You may want to look at your definitions again. Cap rate is revenue-expenses without debt service costs included. Cap rate is your cash on cash return for an all cash purchase.

The 1% rule is just a guideline for looking at properties that usually means you have a possible good deal. You could still have a 1% property but huge property taxes that crater the deal, etc.

A 12% cap rate will deliver far in excess of the 5% returns you are talking about.

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willthrill81
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Re: Buy REIT or Rental Property

Post by willthrill81 » Mon Jan 21, 2019 8:52 pm

riverguy wrote:
Mon Jan 21, 2019 8:16 pm
You may want to look at your definitions again. Cap rate is revenue-expenses without debt service costs included. Cap rate is your cash on cash return for an all cash purchase.

The 1% rule is just a guideline for looking at properties that usually means you have a possible good deal. You could still have a 1% property but huge property taxes that crater the deal, etc.

A 12% cap rate will deliver far in excess of the 5% returns you are talking about.
Sorry, I mis-typed. I meant that your gross rental income (i.e. revenue) would be a minimum of 12% if you followed the 1% rule.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

jb1
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Re: Buy REIT or Rental Property

Post by jb1 » Mon Jan 21, 2019 9:02 pm

Funny how the people that always complain all have the same problem of tenants calling them at 2am. Ironic..

I own a single family home that I rent out now. I live in 1 room and rent out the other 2. So far, so good, the other 2 roommates are paying $600 each (1200) which covers my mortgage.

My next piece of property Id like to get as a duplex personally. Still close enough and connected, but far enough from the tenant.

pkjr
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Re: Buy REIT or Rental Property

Post by pkjr » Mon Jan 21, 2019 9:48 pm

No question in my mind - if you are willing to manage tenants, buy a rental property. I like hearing people mentioning toilets/ issues/ calls at 2 am

In 20 years I have never unplugged toilets or got calls at 2 am. You need to manage tenants and not properties. Hire right tenants for the job and they will make you wealthy.

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arcticpineapplecorp.
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Re: Buy REIT or Rental Property

Post by arcticpineapplecorp. » Mon Jan 21, 2019 9:57 pm

BoggledHead2 wrote:
Mon Jan 21, 2019 3:36 pm
Jack FFR1846 wrote:
Mon Jan 21, 2019 3:23 pm
Post your phone number. The rest of us will call you between 2am and 5am tomorrow morning. It'll give you practice for when your tenants have a complaint.

If you think I'm saying that because I'm a big REIT fan.... I own no REITs either.
Do REITs often align with the broader market(s) as a whole (Total US/SP500/Total International) or is there fairly significant variability (diversification)?

Not a “timing” question, simply wondering if REITs perform better under certain conditions and/or aren’t very closely linked to the major index performances
this is how they aligned (or didn't) back to fund's inception 1996:

https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

This is what portfolio visualizer lists REITS as correlation with the market: 0.57

https://www.portfoliovisualizer.com/bac ... &REIT2=100
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

bluquark
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Re: Buy REIT or Rental Property

Post by bluquark » Mon Jan 21, 2019 10:12 pm

BoggledHead2 wrote:
Mon Jan 21, 2019 3:36 pm
Do REITs often align with the broader market(s) as a whole (Total US/SP500/Total International) or is there fairly significant variability (diversification)?

Not a “timing” question, simply wondering if REITs perform better under certain conditions and/or aren’t very closely linked to the major index performances
They've got a pretty average alignment with the market for a sector fund. The least correlated sector has recently been Utilities, not REIT. The supposed low-correlation pixie dust is not terribly apparent in the historical record, with the exception of one moment (the 2002 recession) that REIT boosters hyped to the heavens.

So in my opinion, buying a REIT fund is much more like buying any other stock fund than it is like buying a physical rental property. (Of course, physical rentals do not fully escape correlation either, as rental income can also disappear in a serious recession -- landlords were crushed even harder than stockholders in the Great Depression as renters stopped paying en masse. But it's at least less volatile and an excellent inflation hedge.)

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unclescrooge
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Re: Buy REIT or Rental Property

Post by unclescrooge » Mon Jan 21, 2019 11:17 pm

willthrill81 wrote:
Mon Jan 21, 2019 6:15 pm
unclescrooge wrote:
Mon Jan 21, 2019 6:07 pm
willthrill81 wrote:
Mon Jan 21, 2019 4:23 pm
From what I've heard from listening to actual real estate investors, I would personally be interested in real estate (if my DW was on board, which she isn't, and that's fine) only if I could make the numbers work (e.g. '1% rule', minimum expected return of 5% real) inclusive of paying a property manager in order to avoid having to deal with tenant issues. That can be done, but it's a higher hurdle than if you do the property management yourself. If you want to go that route (i.e. managing the properties yourself), I think that you need to be prepared to potentially have this become your full-time job unless you get lucky with your property and tenants.
You should be able to make the numbers work at 5% if you use leverage.

My threshold is 15% which I find much harder to achieve. This is after leverage, and my spreadsheet includes 1% maintenance, 8% vacancy, 10% property management, 2% appreciation and subsequent increase in property taxes, and 1% increase in rents.
I wouldn't personally factor leverage into my return calculations at all because I wouldn't want to depend on debt to make a 'bad deal seem good'. My minimum 5% real expected return would not be a 'cash on cash' return, but a return based on the purchase price. It's a conservative approach, I know, but there are many in the real estate community who use this type of approach. I've heard of many who favored the 'cash on cash' method but got themselves so over-leveraged that the house of cards eventually came crashing down.
I understand what you're saying, but leverage is what makes real estate such a good investment (when it works).

I didn't think I could find anything with a 5% cap rate based on my numbers. Pro forma yes, but based on actuals, it would be difficult.

WJW
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Re: Buy REIT or Rental Property

Post by WJW » Tue Jan 22, 2019 8:15 am

pkjr wrote:
Mon Jan 21, 2019 9:48 pm
No question in my mind - if you are willing to manage tenants, buy a rental property. I like hearing people mentioning toilets/ issues/ calls at 2 am

In 20 years I have never unplugged toilets or got calls at 2 am. You need to manage tenants and not properties. Hire right tenants for the job and they will make you wealthy.
+1 I've never had an emergency call after 9PM in 20+ years as a landlord. And never once for a clogged toilet. I like the monthly income and diversification I get from my properties. I am also a general contractor and take care of all the repairs wholesale. God willing, they will all be sold long before I am physically unable to manage them or whomever is left behind will do what they want with them.

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Re: Buy REIT or Rental Property

Post by carolinaman » Tue Jan 22, 2019 8:43 am

As others have stated, there are a lot of responsibilities that come with rental property. If you are real handy and willing to do minor repairs as needed this might work. Management companies can offload a lot of responsibilities but they take a big cut of your rental income. But even then, you have to be vigilant as some of these companies do lousy work. When you are absent from the site, these companies and trades people they use will do unnecessary work and charge exorbitantly for doing it. My son deals with some of these companies and tells me how bad they are.

IMO, doing research on REITS, and picking one that fits what you are looking for makes the most sense.

Tal-
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Re: Buy REIT or Rental Property

Post by Tal- » Tue Jan 22, 2019 9:22 am

I'm an experienced landlord. Here are my thoughts.

Assume that you'll use a property manager, at least for a while. That will cost 10%-15% of your rent each month.

Most complaints about owning a rental property aren't true in my opinion. There are no 3AM calls for a clogged toilet (to me or the property manager). I spend no more than an hour per month managing my properties (this is common). I've also never had an awful tenant, though given enough time in the game, this one will happen.

With that said, there are real concerns about owning a rental. The risk of owning a rental is huge, and the risk of having significant negative cash flow on a month will happen all the time, and the risk of having negative cash flow over a multi-year period is a very real risk. Unlike a REIT, these losses are not limited to your investment. It's not hard to imagine a realistic scenario where you could lose $30K more on a 20K investment. The financial risks are real.

Future risks of rentals are also somewhat hidden as property has been increasingly by leaps and bounds over the last decade. This makes rental returns look wonderful, but is not sustainable indefinitely. This means buying right is vital to it being a good investment, and buying right is a complicated task.

With that said, on average, I expect better returns from my rentals than from a REIT.
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Re: Buy REIT or Rental Property

Post by Boats day » Tue Jan 22, 2019 9:59 am

This was Jacks POST
post your phone number. The rest of us will call you between 2am and 5am tomorrow morning. It'll give you practice for when your tenants have a complaint.

No that FUNNY and TRUE


I cant stop laughing :D :D :D :D :D :D :D :D :D :D :D :D :D :D :D :D :D :D :D :D :
BOAT

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BoggledHead2
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Re: Buy REIT or Rental Property

Post by BoggledHead2 » Fri Jan 25, 2019 7:38 am

Sounds like REITs are the way (for me) to go ... thank you all

What overall % is recommended of one’s portfolio to be in REITs? Or is this another debate similar to how much US v INT’L?

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