Pick one: $135,000 rental property or $110,000 in REITs

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teelainen
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Pick one: $135,000 rental property or $110,000 in REITs

Post by teelainen » Tue Jul 02, 2019 11:23 pm

Let's say there is a rental property that is worth about $135,000 in its current as-is condition. Right now, this rental property brings in about $6,500 in net profit per year after all expenses are paid for.

Is it better to keep this rental property? Or sell it and buy VNQ (Vanguard Real Estate REIT ETF) ?

If the rental property was sold for $135,000 this person would have about $110,000 in cash after paying long term capital gains taxes and depreciation recapture.

So basically, is it better to own this rental property or $110,000 in VNQ ?

Thanks.

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willthrill81
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by willthrill81 » Tue Jul 02, 2019 11:33 pm

So the effective yield on the property is 4.84%, whereas the yield on VNQ is 3.96%.

It's an apples to oranges comparison, however, because the property will require effort on your part, disposition costs are much higher, and it's only a single property, whereas VNQ is broadly diversified. Yes, you would have to pay LTCG on the real estate, but that would have to be paid eventually anyway because the property's depreciation will run out. Also, I suspect that the $6,500 of net income does not include 100% of all future maintenance on the home.

Unless you're trying to build a real estate portfolio and are very comfortable with being a landlord, I'd move into VNQ without a second thought.
Last edited by willthrill81 on Tue Jul 02, 2019 11:36 pm, edited 2 times in total.
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by KyleAAA » Tue Jul 02, 2019 11:34 pm

$135k > $110k

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JoMoney
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by JoMoney » Tue Jul 02, 2019 11:40 pm

I have less than no desire to be a landlord. Give me a broad market index fund, if that's not an option, and i feel compelled to put the money into real estate... sure, Vanguard's REIT fund...

I have no idea about the particulars of real estate in your area. It may very well have good growth prospects, but it still wouldn't be something that would interest me. I might suggest talking to a real estate professional in your area, but I have a suspicion that if you already own a Realtor would suggest you sell, and if you're considering buying they'd suggest you buy.
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wootwoot
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by wootwoot » Tue Jul 02, 2019 11:41 pm

VNQ requires no upkeep, no hassles with tenants, and you can easily sell VNQ any day the market is open and for only a few $.
Last edited by wootwoot on Wed Jul 03, 2019 1:49 am, edited 1 time in total.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by MotoTrojan » Tue Jul 02, 2019 11:44 pm

No one is going to mention tax efficiency of VNQ?

NativeTxn
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by NativeTxn » Tue Jul 02, 2019 11:49 pm

I would say a lot of it depends on whether you want a second, part-time job (or maybe less part-time that you might like depending on the house, tenant, etc.).

The current yield on VNQ would mean about $4,300 to $4,400 a year (3.98% on $110,000), so roughly $2,000 less than the net you're talking about on the rental house. Though I am assuming that most, if not all the $110,000 would have to go into a taxable account, and REITs are generally tax-inefficient, so there is that.

So, you have to figure out whether that $2,000 a year is worth the added headache and hassle of being a landlord. There are some benefits you get from owning real estate as a business that you don't get with REITs, but those benefits can vary based on everything else related to your tax situation.

But you also have to figure out what your profit will be in years where you might have a big cap ex cost (e.g. new AC unit, new roof, etc.) and factor that in over the long-term, as it may not be $6,500 every year (whereas, you know that the REITs will be paying out a certain minimum amount of profits every year, though the amount of profit could obviously vary over time).

If it were me, and given the fact that I don't want a second job, I'd probably just buy VNQ, set it to reinvest the dividends, and let it run without having to worry about getting called in the middle of the night because the toilet it backing up, or the AC went out in the middle of August (I'm in Dallas, so that would require immediate attention), etc.

I've strongly considered entering the real estate world and building up a rental portfolio, but ultimately, I don't want a second job, and I'd rather spend the extra time I do have with my wife and kids rather than dealing with tenants, maintenance, and what not.

That said, to each his/her own, so what I would do might not be what you should, or want to, do.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by StealthRabbit » Wed Jul 03, 2019 3:19 am

further explanations here: (Brick-n-mortar vs. REIT)
http://fifighter.com/real-estate/real-e ... o-oranges/

I prefer NNN commercial income props, tho at the moment have SFR rural view homes... Lots of work / risk, but really good equity appreciation while tenants are paying off your leveraged investments.

Works best (Only...) if you can dig up your own deals and buy "under-market" ...wealth building (add value to the property).
34 properties so far (in my free time). Used a realtor 2x due to other party wanting their hand held. (Very lengthy and costly transactions)

Do what you know and are interested in. Best to not try to 'out-play' the pros

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Wiggums
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Wiggums » Wed Jul 03, 2019 4:33 am

I would prefer to hold the VNQ fund, because it it more diversified and takes no effort.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by UpperNwGuy » Wed Jul 03, 2019 4:35 am

REITs.

mrc
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by mrc » Wed Jul 03, 2019 5:10 am

willthrill81 wrote:
Tue Jul 02, 2019 11:33 pm
So the effective yield on the property is 4.84%, whereas the yield on VNQ is 3.96%.
All that work being a landlord, for 0.88%? I would move to VNQ. Another way to consider, if you had an extra $180K to invest, would you rather buy another property, or VNQ?
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by mikemikemike » Wed Jul 03, 2019 5:52 am

REITS seem like a no brainer here:

More diversification in geography and property type, so appreciation in value is less sensitive to the specific house you have.

Less risk of a single huge maintenance bill or extended vacancy.

Less work on your part.

Much more liquid.

Not that much lower rent / distribution return.

Writing this out reminds me why I chose to invest in stocks + REITs instead of a rental property.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Nate79 » Wed Jul 03, 2019 6:18 am

Either the rent rate is way low or your expenses are very high because that is a very poor performing rental house.

nguy44
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by nguy44 » Wed Jul 03, 2019 6:25 am

I do not have the time, patience, or mentality required to be a landlord. I go with REITs.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by A440 » Wed Jul 03, 2019 6:28 am

FWIW, I've had both, rentals and REIT's. If you can get the REIT in a ROTH, that might be the best choice.
The rentals were a second job and a constant source of stress. However, they did what they were intended to do: Brought in another source of income (when fully rented) and helped lowered our taxes when we were DINKS (Dual-income no kids). I structured the business as an LLC and it always had a loss (due to expenses/depreciation) which could be reported on our 1040. We held them for 5 years. Thanks to forced appreciation, sweat equity, hard work and more than a little providence, it was a wonderful investment. I walked out of closing with a six figure check (minus Federal and State taxes). We sold them when we started a family.

The REIT's (individual stock and Vanguard's REIT index) also provided income through dividends. I held the Vanguard REIT index in my Roth until I moved to the 3-fund model. The individual stock was held in our brokerage account. If I recall, it had a dividend yield of around 14%. It was not tax "friendly", but paid for modest annual vacations. I enjoyed getting the dividends and not having to spend anytime working for it. My investment was working for me. The share price would fluctuate, but I would still get the dividend (which also would fluctuate).
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by msk » Wed Jul 03, 2019 6:42 am

Better than a single property. Just use the screener in your brokerage account and buy the over 100 large companies that pay dividend yields higher than 5% or whatever is your cut-off. E.g. BP pays 5.8%, Ford pays 5.9%, MO (cigarettes!) pays 6.7%, T pays 6.1%, etc. Personally I'd rather put 20% into each of those than persist with an indecision regarding a so-so rental property. As they say, there are many ways to skin a cat, but personally I do not wish to skin one...

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by WingsFan4Life » Wed Jul 03, 2019 6:52 am

If you have $110K in cash, you can own more than $135K in rental property using the magic known as financial leverage :D

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Sandtrap » Wed Jul 03, 2019 8:12 am

teelainen wrote:
Tue Jul 02, 2019 11:23 pm
Let's say there is a rental property that is worth about $135,000 in its current as-is condition. Right now, this rental property brings in about $6,500 in net profit per year after all expenses are paid for.

Is it better to keep this rental property? Or sell it and buy VNQ (Vanguard Real Estate REIT ETF) ?

If the rental property was sold for $135,000 this person would have about $110,000 in cash after paying long term capital gains taxes and depreciation recapture.

So basically, is it better to own this rental property or $110,000 in VNQ ?

Thanks.
Based on a mere 4.84% which is very low.
VNQ Vanguard REIT
or, better yet.
VTSAX Vanguard Total Stock

Unless. . . you want to go into the R/E income property "business" and expand and grow and "do it".

*if the property was your primary residence it may qualify for the capital gains tax exemption.
j
Last edited by Sandtrap on Sat Jul 27, 2019 9:11 am, edited 1 time in total.
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Admiral
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Admiral » Wed Jul 03, 2019 8:17 am

Rental property = headache + work. For that tiny profit, it's lots of sweat for almost no profit, or even less profit if you farm it out to a prop manager.

REIT = passive income with zero effort. Depending on your other holdings TSM might be more appropriate but if you want (more) r.e. exposure, a think in this case the REIT wins hands down. Just be aware that for tax reasons it may be best to hold the REIT in tax-sheltered account.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Sandtrap » Wed Jul 03, 2019 8:37 am

msk wrote:
Wed Jul 03, 2019 6:42 am
Better than a single property. Just use the screener in your brokerage account and buy the over 100 large companies that pay dividend yields higher than 5% or whatever is your cut-off. E.g. BP pays 5.8%, Ford pays 5.9%, MO (cigarettes!) pays 6.7%, T pays 6.1%, etc. Personally I'd rather put 20% into each of those than persist with an indecision regarding a so-so rental property. As they say, there are many ways to skin a cat, but personally I do not wish to skin one...
Dividend Aristocrat listings, earnings, etc, at "Seeking Alpha".
https://seekingalpha.com/article/427165 ... dogcatcher
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by willthrill81 » Wed Jul 03, 2019 9:23 am

MotoTrojan wrote:
Tue Jul 02, 2019 11:44 pm
No one is going to mention tax efficiency of VNQ?
It's certainly not as tax efficient as something like VTI, but it's still not bad. Over the last 10 years, the pre-tax return of VNQ was 15.46%, and at the highest marginal tax rates, the return after taxes on distributions was 14.11%, not quite a 9% reduction in the return. Compare that to VBTLX, where the returns were reduced due to taxes by a whopping 31%.
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by strcmp » Wed Jul 03, 2019 9:30 am

Sell + buy REIT.

9-10% is my threshold for minimum returns for Real Estate.
If you aren't earning at least 9-10% on a rental it is not worth your time (I actually aim for much more than that).

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by pennylane » Wed Jul 03, 2019 9:32 am

Take out a 80-50% LTV mortgage for the rental and use the rest for VNQ

Real estates biggest strength is the ability to leverage.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Coburn » Wed Jul 03, 2019 9:34 am

If the choices are 135K rental property or 110K cash, I'll take the cash.

The cash could be then dumped to REITs. But I'd choose differently.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Smk18 » Wed Jul 03, 2019 9:42 am

How about putting it in crowdfunding like fundrise, realty mogul etc?

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by NYC_Guy » Wed Jul 03, 2019 9:43 am

As others have said, owning real estate is more work (and can be a lot more work) than owning a diversified fund. What do you value your leisure time at on a marginal basis? I value my first lost hour of leisure time at well over $100. For example, I pay nearly $75 per week to have my pool serviced. It’s about 45 min of work by me that I pay $75 to avoid. I would, in fact, pay more. That should be part of the calculation. And a call at night? I’d pay well in excess of $100 to avoid a clustermess during dinner with my family. YMMV.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by willthrill81 » Wed Jul 03, 2019 9:57 am

Smk18 wrote:
Wed Jul 03, 2019 9:42 am
How about putting it in crowdfunding like fundrise, realty mogul etc?
The OP might be able to double his returns if he took that route. FundThatFlip seems very interesting to me; I don't believe that any of their investors have every lost money.
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Vanguard Fan 1367 » Wed Jul 03, 2019 9:57 am

willthrill81 wrote:
Wed Jul 03, 2019 9:23 am
MotoTrojan wrote:
Tue Jul 02, 2019 11:44 pm
No one is going to mention tax efficiency of VNQ?
It's certainly not as tax efficient as something like VTI, but it's still not bad. Over the last 10 years, the pre-tax return of VNQ was 15.46%, and at the highest marginal tax rates, the return after taxes on distributions was 14.11%, not quite a 9% reduction in the return. Compare that to VBTLX, where the returns were reduced due to taxes by a whopping 31%.
After setting up my bond funds in the wrong area (non taxable accounts) I appreciate the advice I read on here to if possible put the bonds into something like an IRA or a 401K rather than a taxable account. I was able to correct my mistake of putting bonds in taxable without too much capital gains issues and other troubles

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by dalbright » Wed Jul 03, 2019 10:19 am

The number crunching above is excellent for the data portion. My thoughts however on such an issue would be do you like the property? If this is not purely hypothetical, a better questions is the value of the specific property compared to expectations in the future for the area and if you actually like it. Would you consider renting the property out only to want to live in said property in maybe 20 years for retirement? In pure simplicity the REIT would be easier and less headaches, unless you feel the price of the property makes it a good value to offset the additional headaches or if you would like to rent the property in order to use it in the future in some manner.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Watty » Wed Jul 03, 2019 10:47 am

teelainen wrote:
Tue Jul 02, 2019 11:23 pm
Let's say there is a rental property that is worth about $135,000 in its current as-is condition.
Even in a low cost of living area that is likely sort of a low end property.

The problem with that is that managing a $135K rental takes just about the same amount of time and money as a $270K rental but you only get half the return.

Getting good tenants with good credit will be more of a challenge too since someone with good credit could buy a $135K house and only have a mortage payment of around $600 a month. Someone that could afford to pay an extra $100 a month in rent could also likely rent a much nicer place.

Maybe your area is a lot different than mine but if $135K would only get you a low income rental property, and all the associated drama, I would be glad to have the REIT instead.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by mhalley » Wed Jul 03, 2019 11:00 am

I was listening to a podcast the other day ( I think it was afford anything) and I think Paula Pant said a good RE property ends up giving a 6% return vs the 4% safe withdrawal rate on your investments. I thought that was an interesting way to look at it, 2% more income for all the headaches of having a “job” vs 10 minutes of rebalancing a year.

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teelainen
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by teelainen » Wed Jul 03, 2019 11:10 am

NativeTxn wrote:
Tue Jul 02, 2019 11:49 pm
I would say a lot of it depends on whether you want a second, part-time job (or maybe less part-time that you might like depending on the house, tenant, etc.).

The current yield on VNQ would mean about $4,300 to $4,400 a year (3.98% on $110,000), so roughly $2,000 less than the net you're talking about on the rental house. Though I am assuming that most, if not all the $110,000 would have to go into a taxable account, and REITs are generally tax-inefficient, so there is that.

So, you have to figure out whether that $2,000 a year is worth the added headache and hassle of being a landlord. There are some benefits you get from owning real estate as a business that you don't get with REITs, but those benefits can vary based on everything else related to your tax situation.

But you also have to figure out what your profit will be in years where you might have a big cap ex cost (e.g. new AC unit, new roof, etc.) and factor that in over the long-term, as it may not be $6,500 every year (whereas, you know that the REITs will be paying out a certain minimum amount of profits every year, though the amount of profit could obviously vary over time).

If it were me, and given the fact that I don't want a second job, I'd probably just buy VNQ, set it to reinvest the dividends, and let it run without having to worry about getting called in the middle of the night because the toilet it backing up, or the AC went out in the middle of August (I'm in Dallas, so that would require immediate attention), etc.

I've strongly considered entering the real estate world and building up a rental portfolio, but ultimately, I don't want a second job, and I'd rather spend the extra time I do have with my wife and kids rather than dealing with tenants, maintenance, and what not.

That said, to each his/her own, so what I would do might not be what you should, or want to, do.
NativeTxn, thank you for your thoughts. I really enjoyed your responses and feedback.

Yes, all of the $110,000 would have to go into a taxable account and I understand that REITs are generally tax-inefficient.

But wouldn't the $6,500 in net profit from the rental property be taxed just as much as the dividend payments from a REIT ? Or do you think that the net profit from a rental property is taxed less than the dividends from a REIT ?

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by NativeTxn » Wed Jul 03, 2019 2:51 pm

teelainen wrote:
Wed Jul 03, 2019 11:10 am
NativeTxn wrote:
Tue Jul 02, 2019 11:49 pm
I would say a lot of it depends on whether you want a second, part-time job (or maybe less part-time that you might like depending on the house, tenant, etc.).

The current yield on VNQ would mean about $4,300 to $4,400 a year (3.98% on $110,000), so roughly $2,000 less than the net you're talking about on the rental house. Though I am assuming that most, if not all the $110,000 would have to go into a taxable account, and REITs are generally tax-inefficient, so there is that.

So, you have to figure out whether that $2,000 a year is worth the added headache and hassle of being a landlord. There are some benefits you get from owning real estate as a business that you don't get with REITs, but those benefits can vary based on everything else related to your tax situation.

But you also have to figure out what your profit will be in years where you might have a big cap ex cost (e.g. new AC unit, new roof, etc.) and factor that in over the long-term, as it may not be $6,500 every year (whereas, you know that the REITs will be paying out a certain minimum amount of profits every year, though the amount of profit could obviously vary over time).

If it were me, and given the fact that I don't want a second job, I'd probably just buy VNQ, set it to reinvest the dividends, and let it run without having to worry about getting called in the middle of the night because the toilet it backing up, or the AC went out in the middle of August (I'm in Dallas, so that would require immediate attention), etc.

I've strongly considered entering the real estate world and building up a rental portfolio, but ultimately, I don't want a second job, and I'd rather spend the extra time I do have with my wife and kids rather than dealing with tenants, maintenance, and what not.

That said, to each his/her own, so what I would do might not be what you should, or want to, do.
NativeTxn, thank you for your thoughts. I really enjoyed your responses and feedback.

Yes, all of the $110,000 would have to go into a taxable account and I understand that REITs are generally tax-inefficient.

But wouldn't the $6,500 in net profit from the rental property be taxed just as much as the dividend payments from a REIT ? Or do you think that the net profit from a rental property is taxed less than the dividends from a REIT ?
Yes, any net profit should be taxed at ordinary income tax rates. REIT income will be at dividend rates, and that rate will depend on whether they are qualified or non-qualified dividends.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by KyleAAA » Wed Jul 03, 2019 5:29 pm

Why is everyone fixated on comparing the yields on cost? That’s probably the least relevant metric to look at. What if OP earns $6500 net profit but only has 25% equity? Suddennly that becomes a 19% cash yield not including appreciation or tax benefits. Yeah, people who don’t know how to properly evaluate an investment opportunity should probably stick with REITs. If that $135k is unleveraged then that may represent a low cap rate, but it may not. It depends on the market. But either way, basing this on a simple comparison of the yield is flat out wrong.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by KyleAAA » Wed Jul 03, 2019 5:31 pm

NativeTxn wrote:
Wed Jul 03, 2019 2:51 pm
teelainen wrote:
Wed Jul 03, 2019 11:10 am
NativeTxn wrote:
Tue Jul 02, 2019 11:49 pm
I would say a lot of it depends on whether you want a second, part-time job (or maybe less part-time that you might like depending on the house, tenant, etc.).

The current yield on VNQ would mean about $4,300 to $4,400 a year (3.98% on $110,000), so roughly $2,000 less than the net you're talking about on the rental house. Though I am assuming that most, if not all the $110,000 would have to go into a taxable account, and REITs are generally tax-inefficient, so there is that.

So, you have to figure out whether that $2,000 a year is worth the added headache and hassle of being a landlord. There are some benefits you get from owning real estate as a business that you don't get with REITs, but those benefits can vary based on everything else related to your tax situation.

But you also have to figure out what your profit will be in years where you might have a big cap ex cost (e.g. new AC unit, new roof, etc.) and factor that in over the long-term, as it may not be $6,500 every year (whereas, you know that the REITs will be paying out a certain minimum amount of profits every year, though the amount of profit could obviously vary over time).

If it were me, and given the fact that I don't want a second job, I'd probably just buy VNQ, set it to reinvest the dividends, and let it run without having to worry about getting called in the middle of the night because the toilet it backing up, or the AC went out in the middle of August (I'm in Dallas, so that would require immediate attention), etc.

I've strongly considered entering the real estate world and building up a rental portfolio, but ultimately, I don't want a second job, and I'd rather spend the extra time I do have with my wife and kids rather than dealing with tenants, maintenance, and what not.

That said, to each his/her own, so what I would do might not be what you should, or want to, do.
NativeTxn, thank you for your thoughts. I really enjoyed your responses and feedback.

Yes, all of the $110,000 would have to go into a taxable account and I understand that REITs are generally tax-inefficient.

But wouldn't the $6,500 in net profit from the rental property be taxed just as much as the dividend payments from a REIT ? Or do you think that the net profit from a rental property is taxed less than the dividends from a REIT ?
Yes, any net profit should be taxed at ordinary income tax rates. REIT income will be at dividend rates, and that rate will depend on whether they are qualified or non-qualified dividends.
No it won’t. REITs are pass through entities. The new tax law makes REITs somewhat more tax friendly, but still relatively inefficient.

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knpstr
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by knpstr » Wed Jul 03, 2019 5:41 pm

Exchange into a higher cap rate property 8-10%.
If you have a large equity position, refinance to increase return on equity to ~20%
Invest the balance into index funds if you want
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by ThisJustIn » Wed Jul 03, 2019 5:46 pm

Keep REIT stocks / funds in tax-advantaged accounts only, not in taxable accounts.
In your case, RE requires work, and REIT is a bad choice for taxable account investment.
So, I would sell RE, and diversify it into 3-fund portfolio gradually (some will say lump-sum, but that depends on risk aversion).

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Jack FFR1846 » Wed Jul 03, 2019 5:54 pm

To make the comparison more fair, compare that rental to the ETF plus you work at a gas station every Saturday. That'll simulate your time and aggravation dealing with all the landlording duties.
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teelainen
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by teelainen » Wed Jul 03, 2019 6:08 pm

KyleAAA wrote:
Wed Jul 03, 2019 5:29 pm
Why is everyone fixated on comparing the yields on cost? That’s probably the least relevant metric to look at. What if OP earns $6500 net profit but only has 25% equity? Suddennly that becomes a 19% cash yield not including appreciation or tax benefits. Yeah, people who don’t know how to properly evaluate an investment opportunity should probably stick with REITs. If that $135k is unleveraged then that may represent a low cap rate, but it may not. It depends on the market. But either way, basing this on a simple comparison of the yield is flat out wrong.
For the situation described in the OP (opening post), the rental property is owned free and clear. In its current as-is condition with no repairs, it can sell for $135,000.

What are your thoughts about owning this $135,000 free and clear rental property vs. $110,000 in VNQ ?

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by KyleAAA » Wed Jul 03, 2019 6:12 pm

teelainen wrote:
Wed Jul 03, 2019 6:08 pm
KyleAAA wrote:
Wed Jul 03, 2019 5:29 pm
Why is everyone fixated on comparing the yields on cost? That’s probably the least relevant metric to look at. What if OP earns $6500 net profit but only has 25% equity? Suddennly that becomes a 19% cash yield not including appreciation or tax benefits. Yeah, people who don’t know how to properly evaluate an investment opportunity should probably stick with REITs. If that $135k is unleveraged then that may represent a low cap rate, but it may not. It depends on the market. But either way, basing this on a simple comparison of the yield is flat out wrong.
For the situation described in the OP (opening post), the rental property is owned free and clear. In its current as-is condition with no repairs, it can sell for $135,000.

What are your thoughts about owning this $135,000 free and clear rental property vs. $110,000 in VNQ ?
$135k > $110k

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by gougou » Wed Jul 03, 2019 6:13 pm

teelainen wrote:
Tue Jul 02, 2019 11:23 pm
Let's say there is a rental property that is worth about $135,000 in its current as-is condition. Right now, this rental property brings in about $6,500 in net profit per year after all expenses are paid for.

Is it better to keep this rental property? Or sell it and buy VNQ (Vanguard Real Estate REIT ETF) ?

If the rental property was sold for $135,000 this person would have about $110,000 in cash after paying long term capital gains taxes and depreciation recapture.

So basically, is it better to own this rental property or $110,000 in VNQ ?

Thanks.
Is that $6500 per year in Net Profit or Net Operating Income? If you got $6500 net profit and claimed $3500 depreciation, your NOI is $10K which is cash in your hand that you can invest.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Trader Joe » Wed Jul 03, 2019 6:14 pm

teelainen wrote:
Tue Jul 02, 2019 11:23 pm
Let's say there is a rental property that is worth about $135,000 in its current as-is condition. Right now, this rental property brings in about $6,500 in net profit per year after all expenses are paid for.

Is it better to keep this rental property? Or sell it and buy VNQ (Vanguard Real Estate REIT ETF) ?

If the rental property was sold for $135,000 this person would have about $110,000 in cash after paying long term capital gains taxes and depreciation recapture.

So basically, is it better to own this rental property or $110,000 in VNQ ?

Thanks.
Neither. I choose to invest in the Vanguard 500 Index Fund Admiral Shares (VFIAX). Best of luck.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by RetireSomeday5 » Wed Jul 03, 2019 6:21 pm

Didn't read in full, but did a quick ctrl+f and didn't see reference to a like kind exchange.

If you did decide REIT's a "1031 like kinda exchange" can kick the can on the tax if you choose an approved REIT. But from memory, once you like kind into REIT's you can NOT like kind back in to a property.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by sergeant » Wed Jul 03, 2019 6:43 pm

REIT. I swore to never own a rental. My dad owned dozens of SFH's and I was his handyman for a handful of years. As a cop I handled hundreds of tenant/landlord disputes.
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by Glasgow » Wed Jul 03, 2019 7:11 pm

Maybe. Maybe not.
If housing market is going up consistently due to jobs and supply-and-demand, and net income is positive, then, yes, leveraging that $135K would be good for 1 or 2 houses. Assuming the gain in the next 5 years beats the heck out of REIT.
If the housing market is pretty much flat, then, no, and net income is a less than $1K, then REIT would help ones sleep well at night.
I owned a few properties in the Silicon Valley and the last gig was a few years ago. Put all proceeds in SP&500; best move ever made although those houses are still appreciating, but not at a crazy rate due to schools assigned to the area. Living with "Simplicity" in mind has made my life wonderful - thanks Taylor for his signature "The Majesty of Simplicity."
The gem is reading Sandtrap's responses to someone's query on rental property, and see if you've the skin to get into residential rental.
My BIL has been pitching me to get into commercial property, but I haven't bitten; need to study more on this subject.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by willthrill81 » Wed Jul 03, 2019 7:20 pm

KyleAAA wrote:
Wed Jul 03, 2019 6:12 pm
teelainen wrote:
Wed Jul 03, 2019 6:08 pm
KyleAAA wrote:
Wed Jul 03, 2019 5:29 pm
Why is everyone fixated on comparing the yields on cost? That’s probably the least relevant metric to look at. What if OP earns $6500 net profit but only has 25% equity? Suddennly that becomes a 19% cash yield not including appreciation or tax benefits. Yeah, people who don’t know how to properly evaluate an investment opportunity should probably stick with REITs. If that $135k is unleveraged then that may represent a low cap rate, but it may not. It depends on the market. But either way, basing this on a simple comparison of the yield is flat out wrong.
For the situation described in the OP (opening post), the rental property is owned free and clear. In its current as-is condition with no repairs, it can sell for $135,000.

What are your thoughts about owning this $135,000 free and clear rental property vs. $110,000 in VNQ ?
$135k > $110k
Pre-tax money is not equivalent to post-tax money.
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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by bikechuck » Wed Jul 03, 2019 8:07 pm

A440 wrote:
Wed Jul 03, 2019 6:28 am
FWIW, I've had both, rentals and REIT's. If you can get the REIT in a ROTH, that might be the best choice.
I have seen others give this advice also and I keep wondering why is it better to hold REITS in a Roth vs an IRA? I am not challenging it, just trying to understand the advice.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by AKsuited » Wed Jul 03, 2019 8:40 pm

bikechuck wrote:
Wed Jul 03, 2019 8:07 pm
A440 wrote:
Wed Jul 03, 2019 6:28 am
FWIW, I've had both, rentals and REIT's. If you can get the REIT in a ROTH, that might be the best choice.
I have seen others give this advice also and I keep wondering why is it better to hold REITS in a Roth vs an IRA? I am not challenging it, just trying to understand the advice.
Roth is after tax wheres IRA is tax deferred, which can make it a challenge later when you do withdrawals.

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by AKsuited » Wed Jul 03, 2019 8:43 pm

As for the OP; yea stick that baby into the VNQ and go relax and drink some margaritas. I have two rentals and they aren't bad; but I don't like the drawbacks of owning real estate

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Re: Pick one: $135,000 rental property or $110,000 in REITs

Post by honduranhurricane » Wed Jul 03, 2019 9:43 pm

For me, REITS if this was the choice I had to make. For similar reasons already mentioned, no effort, diversification etc.

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