Are Apartment REITS a better diversifier than VG REIT Index?

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docneil88
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Are Apartment REITS a better diversifier than VG REIT Index?

Post by docneil88 » Thu Apr 24, 2008 9:31 pm

In other words, is a (US) Apartment REIT Index Fund like iShares REZ a better diversifier when added to a portfolio than the Vanguard (US) REIT Index Fund, VGSIX?

My hunch is that the answer is yes, because VGSIX's 85% non-apartment REIT allocation has a high correlation to the value of real property and mortgages owned by US public corporations. And the value of that corporate real property and those mortgages is a major chunk of the value of US public corporations. Also, US public corporations (excluding REITs) own few, if any, rental apartments, but they do own a heckuva a lot of other commercial property in the same categories that make up 85% of VGSIX.

However, VGSIX owns 97 REITS, while REZ only owns 20 REITs. That might tip the balance and require a "no" answer to my original question. To better answer that question I would like to know if any of you know the answers to the following questions:

(1) What has been the long-term correlation of any US residential REIT index you know of and the US Stock Market?

(2) What is the approximate value of real property owned by listed US corporations in comparison to the approximately $15 trillion in market cap of US listed corporations?

Here is an article and table from it that shows there has been wide dispersion of returns between the various REIT sub-sectors; the Real Estate 50 Index referred to in the table is an index of the fifty largest REITs in the U.S.: http://seekingalpha.com/article/35055-t ... ctor-reits .

Image

The expense ratio for VGSIX is 0.21%, and for the fund's ETF class, VNQ, it is 0.12%. The expense ratio for REZ is .48%. Here are some links to info about REZ:
http://www.ishares.com/product_info/fun ... htm?qt=REZ
http://www.etfconnect.com/select/fundpa ... FID=176907

Thanks. Best, Neil

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Post by Bigfoothunter » Thu Apr 24, 2008 9:52 pm

I have considered the same point. I looked at the index, and was not impressed with the financials of some of the larger holdings, and purchased some individuals shares instead of the index, and very comfortable with that move. I am less comfortable making a single sector call on REITS like apartments, but like those in certain markets like Washington DC where WRE has demonstrated an ability to raise rent over inflation. I also own PCL, AIV, and BWEL (pink sheet stock, thinly traded, not REIT), and some timber property outright. I owned in the past retail center REITS and was not happy with them as they are too cyclical with the economy, thus more careful review of individual selections. At the end of the day it is like buying real estate, so location and sector very important. Best of luck to you, Bigfoot.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Wed Mar 21, 2018 9:59 am

Interesting thread.
I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Pajamas » Wed Mar 21, 2018 10:03 am

The problem with any single REIT sector is volatility. Sector returns in 2017 varied from roughly -11% to +35%.

https://www.reit.com/data-research/reit ... -subsector

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Wed Mar 21, 2018 10:20 am

Pajamas wrote:
Wed Mar 21, 2018 10:03 am
The problem with any single REIT sector is volatility. Sector returns in 2017 varied from roughly -11% to +35%.

https://www.reit.com/data-research/reit ... -subsector
thanks for your response.
I understand what you say.
Do you know international non - US residential REITs ?
I am invested in VONOVIA from Germany.
What do you think about my above issue ?

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Pajamas » Wed Mar 21, 2018 10:31 am

I don't dabble in international REITs although I am certainly aware that many countries have them and some of the US REITs that I own have some international holdings or joint ventures.

I was not familiar with Vonovia and they don't seem to emphasize the fact that it is a REIT on their website. The yield is not particularly exciting at 3.X%. Based on its size, it probably is similar to a bond in many ways. I don't see any big red flags from a few minutes of cursory research that would prevent me from investigating further.

However, you might prefer to go with a REIT index fund rather than a single REIT.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by GibsonL6s » Wed Mar 21, 2018 10:42 am

Generally speaking there is some concern that rents have moved up considerably and can only do that for so long. Additionally, Cap Rates which is the way apartments are valued are seeing some upward pressure due to rising interest rates. Some markets are also seeing a lot of new supply. Not saying to totally avoid, however there is some caution needed.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Wed Mar 21, 2018 11:02 am

Pajamas wrote:
Wed Mar 21, 2018 10:31 am
I don't dabble in international REITs although I am certainly aware that many countries have them and some of the US REITs that I own have some international holdings or joint ventures.

I was not familiar with Vonovia and they don't seem to emphasize the fact that it is a REIT on their website. The yield is not particularly exciting at 3.X%. Based on its size, it probably is similar to a bond in many ways. I don't see any big red flags from a few minutes of cursory research that would prevent me from investigating further.

However, you might prefer to go with a REIT index fund rather than a single REIT.
I was also not familiar with Vonovia. I think that non-US maybe more attractive from a value point of view. On the other hand, also dollar cost averaging is good.
AVB in the US is also interesting. I think that very high yield REITs maybe problematic.. what do you think ?
The case of VONOVIA is 3.X % yield as you said, is low ..but someone told me is investing on them and renting a property in Berlin. He said this (dividend/invested money) is relatively higher than the (rent/property value) ratio he is living on ,renting.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Wed Mar 21, 2018 11:04 am

Pajamas wrote:
Wed Mar 21, 2018 10:31 am


However, you might prefer to go with a REIT index fund rather than a single REIT.
i agree with you, but i prefer now to look for specific companies instead of Index.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Pajamas » Wed Mar 21, 2018 11:10 am

With 350,000+ units, Vonovia is much larger by that measure than any similar U.S. REITs, as far as I know. I agree that unusually high yields can be a red flag of danger for REITs.

REITs are basically a corporate structure that takes advantage of tax codes. Their financial success is ultimately based on their access to, and cost of, capital. The S&P credit rating for Vonovia is BBB+, investment grade but near the lower end of the investment grade range.

I don't know enough about the company to evaluate the credit rating or anything else.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Wed Mar 21, 2018 11:28 am

Pajamas wrote:
Wed Mar 21, 2018 11:10 am
With 350,000+ units, Vonovia is much larger by that measure than any similar U.S. REITs, as far as I know. I agree that unusually high yields can be a red flag of danger for REITs.

REITs are basically a corporate structure that takes advantage of tax codes. Their financial success is ultimately based on their access to, and cost of, capital. The S&P credit rating for Vonovia is BBB+, investment grade but near the lower end of the investment grade range.

I don't know enough about the company to evaluate the credit rating or anything else.
Very interesting .. i also don't know to evaluate their credit rating.
I hold "O" "WPC" "IRON" from US.
I always look also for non-US ... different and rare equities.. the US market is over-informed today in the web...i think is more a disadvantage than advantage...lot of analysis ..lot of noise..

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by abuss368 » Wed Mar 21, 2018 8:39 pm

Pajamas wrote:
Wed Mar 21, 2018 11:10 am
With 350,000+ units, Vonovia is much larger by that measure than any similar U.S. REITs, as far as I know. I agree that unusually high yields can be a red flag of danger for REITs.

REITs are basically a corporate structure that takes advantage of tax codes. Their financial success is ultimately based on their access to, and cost of, capital. The S&P credit rating for Vonovia is BBB+, investment grade but near the lower end of the investment grade range.

I don't know enough about the company to evaluate the credit rating or anything else.
REITs are taxed different, legally structured different, are investment trusts, and their "dividends" are comprised of a dividend, capital gains, and return of capital. REITs are completely different than common stock.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by abuss368 » Wed Mar 21, 2018 8:41 pm

If you are not interested in the Vanguard U.S. REIT Index Fund and the Vanguard International REIT/RE Index Fund and really want to look into individual REITs and specifically apartment REITs as a subsection, review the biggest: Equity Residential - Sam Zell otherwise known as "The REIT King" and making a huge impact on the REIT industry.

More and more real estate is going the REIT way.
Last edited by abuss368 on Thu Mar 22, 2018 6:47 am, edited 1 time in total.
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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by ChinchillaWhiplash » Wed Mar 21, 2018 9:16 pm

katon wrote:
Wed Mar 21, 2018 11:28 am
Pajamas wrote:
Wed Mar 21, 2018 11:10 am
With 350,000+ units, Vonovia is much larger by that measure than any similar U.S. REITs, as far as I know. I agree that unusually high yields can be a red flag of danger for REITs.

REITs are basically a corporate structure that takes advantage of tax codes. Their financial success is ultimately based on their access to, and cost of, capital. The S&P credit rating for Vonovia is BBB+, investment grade but near the lower end of the investment grade range.

I don't know enough about the company to evaluate the credit rating or anything else.
Very interesting .. i also don't know to evaluate their credit rating.
I hold "O" "WPC" "IRON" from US.
I always look also for non-US ... different and rare equities.. the US market is over-informed today in the web...i think is more a disadvantage than advantage...lot of analysis ..lot of noise..
Take a look at MPW, a medical REIT. They have a large % of holdings in the EU/UK.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Thu Mar 22, 2018 1:46 am

abuss368 wrote:
Wed Mar 21, 2018 8:41 pm
If you are not interest in the Vanguard U.S. REIT Index Fund and the Vanguard International REIT/RE Index Fund and really want to look into individual REITs and specifically apartment REITs as a subsection, review the biggest: Equity Residential - Sam Zell otherwise known as "The REIT King" and making a huge impact on the REIT industry.

More and more real estate is going the REIT way.
very interesting, thanks.
I don't understand if Equity Residential is renting. I look for REITs that rent ..not only buying and selling properties.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Thu Mar 22, 2018 1:56 am

ChinchillaWhiplash wrote:
Wed Mar 21, 2018 9:16 pm
katon wrote:
Wed Mar 21, 2018 11:28 am
Pajamas wrote:
Wed Mar 21, 2018 11:10 am
With 350,000+ units, Vonovia is much larger by that measure than any similar U.S. REITs, as far as I know. I agree that unusually high yields can be a red flag of danger for REITs.

REITs are basically a corporate structure that takes advantage of tax codes. Their financial success is ultimately based on their access to, and cost of, capital. The S&P credit rating for Vonovia is BBB+, investment grade but near the lower end of the investment grade range.

I don't know enough about the company to evaluate the credit rating or anything else.
Very interesting .. i also don't know to evaluate their credit rating.
I hold "O" "WPC" "IRON" from US.
I always look also for non-US ... different and rare equities.. the US market is over-informed today in the web...i think is more a disadvantage than advantage...lot of analysis ..lot of noise..
Take a look at MPW, a medical REIT. They have a large % of holdings in the EU/UK.
thanks

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Valuethinker » Thu Mar 22, 2018 6:24 am

katon wrote:
Thu Mar 22, 2018 1:46 am
abuss368 wrote:
Wed Mar 21, 2018 8:41 pm
If you are not interest in the Vanguard U.S. REIT Index Fund and the Vanguard International REIT/RE Index Fund and really want to look into individual REITs and specifically apartment REITs as a subsection, review the biggest: Equity Residential - Sam Zell otherwise known as "The REIT King" and making a huge impact on the REIT industry.

More and more real estate is going the REIT way.
very interesting, thanks.
I don't understand if Equity Residential is renting. I look for REITs that rent ..not only buying and selling properties.
It is. An apartment REIT has to pay out 90% of its profits (an adjusted measure, they use something different from profit) to qualify for REIT tax status.
One could check, but I would be almost 100% certain most of Zell's profits are coming from rents.

Basically they own and manage apartment buildings. Americans, when they rent in big cities, tend to live in big apartment blocks, professionally managed. You often see the names of the company (often family owned companies) on the doors of the building in NYC. Thus for example the current president's father's company in Queens, his son in law's family firm in New Jersey, the disgraced politician Eliot Spitzer's family firm is also in that business, I believe.

Post crash, a number of private equity backed outfits bought up large numbers of surplus single family homes and rented them out. Those have also floated of late. This is a new development in US housing, and I shall be interested to see if it is sustainable. You get greater economies of scale of management and administration with large apartment complexes than SFHs which are more spread out.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by abuss368 » Thu Mar 22, 2018 6:48 am

katon wrote:
Thu Mar 22, 2018 1:46 am
abuss368 wrote:
Wed Mar 21, 2018 8:41 pm
If you are not interest in the Vanguard U.S. REIT Index Fund and the Vanguard International REIT/RE Index Fund and really want to look into individual REITs and specifically apartment REITs as a subsection, review the biggest: Equity Residential - Sam Zell otherwise known as "The REIT King" and making a huge impact on the REIT industry.

More and more real estate is going the REIT way.
very interesting, thanks.
I don't understand if Equity Residential is renting. I look for REITs that rent ..not only buying and selling properties.
Yes. They are the largest owner of apartment REITs (and rent them). Simple and straightforward business model.
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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by KyleAAA » Thu Mar 22, 2018 6:53 am

According to portfoliovisualizer it is marginally less correlated to VTSMX than the REIT index. But it's still fairly highly correlated in absolute terms and, as you noted, holds significantly fewer stocks. I wouldn't be comfortable taking that much narrow sector risk for such a tiny potential diversification benefit.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Thu Mar 22, 2018 11:12 am

Valuethinker wrote:
Thu Mar 22, 2018 6:24 am

Post crash, a number of private equity backed outfits bought up large numbers of surplus single family homes and rented them out. Those have also floated of late. This is a new development in US housing, and I shall be interested to see if it is sustainable. You get greater economies of scale of management and administration with large apartment complexes than SFHs which are more spread out.
what do you mean here about the economies and SFH ? what is SFH (sorry :) )



I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.


What do you think about this strategy ?

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Pajamas » Thu Mar 22, 2018 11:44 am

katon wrote:
Thu Mar 22, 2018 11:12 am
what is SFH (sorry :) )
Single Family Home(s) or House(s)

I think what Valuethinker is referring to occurred during and after the financial crisis of 2008-2009 which in the U.S. involved mortgages and a huge decrease in housing prices. Private investment firms bought large numbers of single family houses and REITs that owned single family houses were created as a way to sell these pools of housing to the public. Previously, housing REITs only owned other forms of housing such as apartments.

The economies of scale Valuethinker is referring to consist of administrative and operational expenses. It is easier and cheaper to manage and maintain 500 apartments in ten buildings in one apartment complex than it would be to manage and maintain 500 single family houses spread out over a large geographic area.

I believe in German it is referred to as "skaleneffekt".

https://de.wikipedia.org/wiki/Skaleneffekt

In this case, it is more of a density or concentration effect, but the same general idea, efficiency.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by not4me » Thu Mar 22, 2018 12:45 pm

katon wrote:
Wed Mar 21, 2018 9:59 am
Interesting thread.
I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.
Are you thinking about something that would be long term or short? The original post -- a decade ago -- talked about whether it was a better diversifier or not. I take it that is not your main objective

A number of years ago I bought an apartment REIT, mainly because I knew some of the key folks & thought I'd follow it more closely that way. I held it for multiple years & sporadically checked to see how it did compared to broader index. Over the long term, it was about the same. Another REIT offered to buy it, the stock price popped & I got out -- so at that point it was better thanks to the buyout premium.

I would expect that its performance over the long term relative to the index will fluctuate as housing market bobs up & down. You mentioned US market being "over-informed" & that does carry both good & bad depending upon your objective. But to get around that, you'll really be targeting a narrower market & I'd expect that performance to vary based on your skill in picking your target

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by rj49 » Thu Mar 22, 2018 1:07 pm

You might look at Fundrise, a crowdsourcing site that invests primarily in residential housing around the US, with primary emphasis in the LA and DC areas. It's structured as something called an ereit, with a price that they try to keep stable, so it doesn't have the ups and downs of a traded REIT, and you can automatically invest depending on your interest in income vs growth. Currently it's income fund is yielding 7.5%, and their 5-year returns has been around 10%. You get single-company and manager risks, and it's not as liquid as REITs--I think they only allow share sales during quarterly windows. But I'm in it for long-term income and don't invest more than I could handle losing, so for me it's a reasonable trade-off, and they've been around since 2012 so they at least have a decent track record.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Thu Mar 22, 2018 2:10 pm

Pajamas wrote:
Thu Mar 22, 2018 11:44 am
katon wrote:
Thu Mar 22, 2018 11:12 am
what is SFH (sorry :) )
Single Family Home(s) or House(s)

I think what Valuethinker is referring to occurred during and after the financial crisis of 2008-2009 which in the U.S. involved mortgages and a huge decrease in housing prices. Private investment firms bought large numbers of single family houses and REITs that owned single family houses were created as a way to sell these pools of housing to the public. Previously, housing REITs only owned other forms of housing such as apartments.

The economies of scale Valuethinker is referring to consist of administrative and operational expenses. It is easier and cheaper to manage and maintain 500 apartments in ten buildings in one apartment complex than it would be to manage and maintain 500 single family houses spread out over a large geographic area.

I believe in German it is referred to as "skaleneffekt".

https://de.wikipedia.org/wiki/Skaleneffekt

In this case, it is more of a density or concentration effect, but the same general idea, efficiency.
okey thanks for the clarification.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Thu Mar 22, 2018 2:43 pm

not4me wrote:
Thu Mar 22, 2018 12:45 pm
katon wrote:
Wed Mar 21, 2018 9:59 am
Interesting thread.
I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.
Are you thinking about something that would be long term or short? The original post -- a decade ago -- talked about whether it was a better diversifier or not. I take it that is not your main objective

A number of years ago I bought an apartment REIT, mainly because I knew some of the key folks & thought I'd follow it more closely that way. I held it for multiple years & sporadically checked to see how it did compared to broader index. Over the long term, it was about the same. Another REIT offered to buy it, the stock price popped & I got out -- so at that point it was better thanks to the buyout premium.

I would expect that its performance over the long term relative to the index will fluctuate as housing market bobs up & down. You mentioned US market being "over-informed" & that does carry both good & bad depending upon your objective. But to get around that, you'll really be targeting a narrower market & I'd expect that performance to vary based on your skill in picking your target
Good question. Some details :)
I am 33 years old, electrical engineer from Israel and started learning investing through index investing Israeli blog.
Me and my wife don't know yet, when an where we are going to buy a house to live in. It could be 3-7 next years or maybe more. Sometimes we think that the only reason to buy a property is because is confortable and we love "our" space, sentimentally, without tenants and their issues.
We don't enthusiasm from mortgage, specifically because today we don't feel high stability in the High Tech or engineering work field, i don't know maybe is a thought of our generation.
4-5 years ago we started investing primarily in dividend growth stocks or stable dividend stocks. Although there is a possibility that we will need to sell part of the portfolio in order to purchase a future house, we decided to take the risk (short-mid term is risky in the stock markets, theoretically less than ~15 years - i know).
I try to enhance and invest in "income engines", for the long term, but i also would like to use sometimes this cash, maybe in a couple of years. Not only at retirement. I also think how to enhance this dividend growth investing, maybe adding some value investing coming from small stocks that are less informed or below the radar. Then use this cash to enhance my income traditionally investing.
In parallel i rent a property and i hate to pay rent, it feels sometimes that i throw the money and i hate tenants, here in Israel they feel like power people , don't invest in the house and in parallel hike the rent.
So i like to try to receive "similar" income from a correlative investment. So here i arrived to REITs, and specifically to apartments REITs.

I don't want to invest in direct real estate. I don't love to be tenant and have all that headaches. On the other hand, i am aware that people use mortgages and credits to invest in direct real estate. Also in Israel there is an illogical law: you don't pay taxes for the rent you receive up to ~2000 $ per month!!!
But, if you receive dividend from any kind of stock or REIT, you pay ~25 % tax !!!

thanks for reading

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Sun Mar 25, 2018 2:45 am

I would like to receive some opinions on my "strategy" regarding income and residential properties.

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Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Valuethinker » Sun Mar 25, 2018 9:07 am

katon wrote:
Thu Mar 22, 2018 11:12 am
Valuethinker wrote:
Thu Mar 22, 2018 6:24 am

Post crash, a number of private equity backed outfits bought up large numbers of surplus single family homes and rented them out. Those have also floated of late. This is a new development in US housing, and I shall be interested to see if it is sustainable. You get greater economies of scale of management and administration with large apartment complexes than SFHs which are more spread out.
what do you mean here about the economies and SFH ? what is SFH (sorry :) )
See underlined text.

Economies of scale and management are about what it costs to look after a portfolio of residential properties.

https://en.wikipedia.org/wiki/Economies_of_scale

Economies of management - easier to manage 100 units in 1 building than 100 scattered homes.
I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.


What do you think about this strategy ?
Cap rate = net operating income / value of property ("Yield" in British property investing)

So you have a personal cap rate, and then you have a dividend yield that you might obtain from REITs.

But in US taxes at least, REIT dividends are a bit of a pain-- as I understand it, REITs need to be in tax advantaged accounts.

Also REITs can utilize leverage-- borrowing against the asset. In fact that's the whole point with property, you take a fairly dull asset (low risk) and then you increase the returns to equity (but also the risk) by borrowing against those assets.

My own view is that if you have at least a 5, and probably a 10, year horizon you own where you live. Unless the market is so grossly inflated that it's not worth it/ you cannot get on the ladder. There are enough tax advantages (in most countries) to justify doing that.

My advice would be to diversify your risk across types of REIT as broadly as possible, by owning a REIT index fund, like the Vanguard one. The downside is that apartment REITs are generally among the lowest risk REITs, right now retail REITs are among the highest risk (the structural effect of Amazon etc. on shopping malls). The upside is maximum diversification e.g. new sectors emerging providing distribution centres for the likes of Amazon.

I am agnostic on US v. International split in this, but REITs are much newer investment vehicles outside the USA, and the market is much thinner. Most of the companies in international RE indices are actually companies (pay normal taxes) rather than REITs.

Dave55
Posts: 368
Joined: Tue Sep 03, 2013 2:51 pm
Location: Colorado

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Dave55 » Sun Mar 25, 2018 9:33 am

REZ returns are very close to VNQ (Vanguard Reit Index ETF) for the past 3, 5 and 10 years periods. (Morningstar Data).

Dave

katon
Posts: 72
Joined: Thu Jul 14, 2016 2:59 am

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Sun Mar 25, 2018 3:21 pm

Dave55 wrote:
Sun Mar 25, 2018 9:33 am
REZ returns are very close to VNQ (Vanguard Reit Index ETF) for the past 3, 5 and 10 years periods. (Morningstar Data).

Dave
interesting..

katon
Posts: 72
Joined: Thu Jul 14, 2016 2:59 am

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Sun Mar 25, 2018 3:24 pm

Valuethinker wrote:
Sun Mar 25, 2018 9:07 am
katon wrote:
Thu Mar 22, 2018 11:12 am
Valuethinker wrote:
Thu Mar 22, 2018 6:24 am

Post crash, a number of private equity backed outfits bought up large numbers of surplus single family homes and rented them out. Those have also floated of late. This is a new development in US housing, and I shall be interested to see if it is sustainable. You get greater economies of scale of management and administration with large apartment complexes than SFHs which are more spread out.
what do you mean here about the economies and SFH ? what is SFH (sorry :) )
See underlined text.

Economies of scale and management are about what it costs to look after a portfolio of residential properties.

https://en.wikipedia.org/wiki/Economies_of_scale

Economies of management - easier to manage 100 units in 1 building than 100 scattered homes.
I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.


What do you think about this strategy ?
Cap rate = net operating income / value of property ("Yield" in British property investing)

So you have a personal cap rate, and then you have a dividend yield that you might obtain from REITs.

But in US taxes at least, REIT dividends are a bit of a pain-- as I understand it, REITs need to be in tax advantaged accounts.

Also REITs can utilize leverage-- borrowing against the asset. In fact that's the whole point with property, you take a fairly dull asset (low risk) and then you increase the returns to equity (but also the risk) by borrowing against those assets.

My own view is that if you have at least a 5, and probably a 10, year horizon you own where you live. Unless the market is so grossly inflated that it's not worth it/ you cannot get on the ladder. There are enough tax advantages (in most countries) to justify doing that.

My advice would be to diversify your risk across types of REIT as broadly as possible, by owning a REIT index fund, like the Vanguard one. The downside is that apartment REITs are generally among the lowest risk REITs, right now retail REITs are among the highest risk (the structural effect of Amazon etc. on shopping malls). The upside is maximum diversification e.g. new sectors emerging providing distribution centres for the likes of Amazon.

I am agnostic on US v. International split in this, but REITs are much newer investment vehicles outside the USA, and the market is much thinner. Most of the companies in international RE indices are actually companies (pay normal taxes) rather than REITs.
I need to digest your opinion.. thanks !
I understand the tax pain... here in Israel i pay ~25% tax no matter is REIT or other stock from USA. I can't put it on tax advantaged account.

manusnd1
Posts: 5
Joined: Tue Dec 12, 2017 1:17 am

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by manusnd1 » Sun Mar 25, 2018 3:26 pm

Are there any reits that focus on certain hot geographic locations. I.e. austin, nashville, denver etc. How do we finding reits with high concentration in those areas?

Valuethinker
Posts: 36004
Joined: Fri May 11, 2007 11:07 am

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Valuethinker » Mon Mar 26, 2018 11:53 am

katon wrote:
Sun Mar 25, 2018 3:24 pm
Valuethinker wrote:
Sun Mar 25, 2018 9:07 am
katon wrote:
Thu Mar 22, 2018 11:12 am
Valuethinker wrote:
Thu Mar 22, 2018 6:24 am

Post crash, a number of private equity backed outfits bought up large numbers of surplus single family homes and rented them out. Those have also floated of late. This is a new development in US housing, and I shall be interested to see if it is sustainable. You get greater economies of scale of management and administration with large apartment complexes than SFHs which are more spread out.
what do you mean here about the economies and SFH ? what is SFH (sorry :) )
See underlined text.

Economies of scale and management are about what it costs to look after a portfolio of residential properties.

https://en.wikipedia.org/wiki/Economies_of_scale

Economies of management - easier to manage 100 units in 1 building than 100 scattered homes.
I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.


What do you think about this strategy ?
Cap rate = net operating income / value of property ("Yield" in British property investing)

So you have a personal cap rate, and then you have a dividend yield that you might obtain from REITs.

But in US taxes at least, REIT dividends are a bit of a pain-- as I understand it, REITs need to be in tax advantaged accounts.

Also REITs can utilize leverage-- borrowing against the asset. In fact that's the whole point with property, you take a fairly dull asset (low risk) and then you increase the returns to equity (but also the risk) by borrowing against those assets.

My own view is that if you have at least a 5, and probably a 10, year horizon you own where you live. Unless the market is so grossly inflated that it's not worth it/ you cannot get on the ladder. There are enough tax advantages (in most countries) to justify doing that.

My advice would be to diversify your risk across types of REIT as broadly as possible, by owning a REIT index fund, like the Vanguard one. The downside is that apartment REITs are generally among the lowest risk REITs, right now retail REITs are among the highest risk (the structural effect of Amazon etc. on shopping malls). The upside is maximum diversification e.g. new sectors emerging providing distribution centres for the likes of Amazon.

I am agnostic on US v. International split in this, but REITs are much newer investment vehicles outside the USA, and the market is much thinner. Most of the companies in international RE indices are actually companies (pay normal taxes) rather than REITs.
I need to digest your opinion.. thanks !
I understand the tax pain... here in Israel i pay ~25% tax no matter is REIT or other stock from USA. I can't put it on tax advantaged account.
Hi then I would avoid high dividend stocks like REITs, totally. The gain in diversification is marginal compared to the tax drag you are inflicting upon yourself. The US market as a whole has a yield of say 2.0% so 25% of that is about 0.5% of return every year as a tax drag*. REITs are more like 4% so 1.0%: the main source of return in REITs is their income.

* SEC Yield of Vanguard Total Stock Market is actually 1.68%. I am not totally clear how that compares to the actual dividend yield you get from owning a fund, but as a rough guide, 2%.

Holding US REITs will not in any case hedge well against the cost of housing in Israel-- or do you plan to move to the USA? It's not even a great strategy vis a vis USA housing (hedging the cost of that) to be honest.

Since you only pay capital gains when you actually realize an investment, your objective should be to minimize taxable distributions.

A general problem w US funds (& ETFs I believe) is that from time to time they make distributions of capital gains -- which you want to avoid.

Dave55
Posts: 368
Joined: Tue Sep 03, 2013 2:51 pm
Location: Colorado

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by Dave55 » Mon Mar 26, 2018 6:19 pm

manusnd1 wrote:
Sun Mar 25, 2018 3:26 pm
Are there any reits that focus on certain hot geographic locations. I.e. austin, nashville, denver etc. How do we finding reits with high concentration in those areas?
Not aware of regionalized REIT'S, only private partnerships that invest in individual cities and or locations. However, Commercial RE in these hot markets have record cap rates - little or no upside at this stage of the cycle.

Dave

katon
Posts: 72
Joined: Thu Jul 14, 2016 2:59 am

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by katon » Sat Apr 07, 2018 3:32 am

Valuethinker wrote:
Mon Mar 26, 2018 11:53 am
katon wrote:
Sun Mar 25, 2018 3:24 pm
Valuethinker wrote:
Sun Mar 25, 2018 9:07 am
katon wrote:
Thu Mar 22, 2018 11:12 am
Valuethinker wrote:
Thu Mar 22, 2018 6:24 am

Post crash, a number of private equity backed outfits bought up large numbers of surplus single family homes and rented them out. Those have also floated of late. This is a new development in US housing, and I shall be interested to see if it is sustainable. You get greater economies of scale of management and administration with large apartment complexes than SFHs which are more spread out.
what do you mean here about the economies and SFH ? what is SFH (sorry :) )
See underlined text.

Economies of scale and management are about what it costs to look after a portfolio of residential properties.

https://en.wikipedia.org/wiki/Economies_of_scale

Economies of management - easier to manage 100 units in 1 building than 100 scattered homes.
I am looking both for US and international exposure to residential REITs with long term dividend growth.

I would like to receive dividend to investment ratio greater than my own rent to property value ratio.
I mean, i rent for the last 8 years, and i am not sure i would like to buy a property to live on in the near future.
In the meantime i would like to receive relatively high dividend from this type of investments.
Another issue is the following, i am from Israel and here we don't have residential REITs.


What do you think about this strategy ?
Cap rate = net operating income / value of property ("Yield" in British property investing)

So you have a personal cap rate, and then you have a dividend yield that you might obtain from REITs.

But in US taxes at least, REIT dividends are a bit of a pain-- as I understand it, REITs need to be in tax advantaged accounts.

Also REITs can utilize leverage-- borrowing against the asset. In fact that's the whole point with property, you take a fairly dull asset (low risk) and then you increase the returns to equity (but also the risk) by borrowing against those assets.

My own view is that if you have at least a 5, and probably a 10, year horizon you own where you live. Unless the market is so grossly inflated that it's not worth it/ you cannot get on the ladder. There are enough tax advantages (in most countries) to justify doing that.

My advice would be to diversify your risk across types of REIT as broadly as possible, by owning a REIT index fund, like the Vanguard one. The downside is that apartment REITs are generally among the lowest risk REITs, right now retail REITs are among the highest risk (the structural effect of Amazon etc. on shopping malls). The upside is maximum diversification e.g. new sectors emerging providing distribution centres for the likes of Amazon.

I am agnostic on US v. International split in this, but REITs are much newer investment vehicles outside the USA, and the market is much thinner. Most of the companies in international RE indices are actually companies (pay normal taxes) rather than REITs.
I need to digest your opinion.. thanks !
I understand the tax pain... here in Israel i pay ~25% tax no matter is REIT or other stock from USA. I can't put it on tax advantaged account.
Hi then I would avoid high dividend stocks like REITs, totally. The gain in diversification is marginal compared to the tax drag you are inflicting upon yourself. The US market as a whole has a yield of say 2.0% so 25% of that is about 0.5% of return every year as a tax drag*. REITs are more like 4% so 1.0%: the main source of return in REITs is their income.

* SEC Yield of Vanguard Total Stock Market is actually 1.68%. I am not totally clear how that compares to the actual dividend yield you get from owning a fund, but as a rough guide, 2%.

Holding US REITs will not in any case hedge well against the cost of housing in Israel-- or do you plan to move to the USA? It's not even a great strategy vis a vis USA housing (hedging the cost of that) to be honest.

Since you only pay capital gains when you actually realize an investment, your objective should be to minimize taxable distributions.

A general problem w US funds (& ETFs I believe) is that from time to time they make distributions of capital gains -- which you want to avoid.
thanks for your response.
I have checked, and investing in US REIT for me is better than investing in Israeli Reits. I don't understand why specifically, but i pay ~35 or more tax on Israeli REITs dividends. I think that is because of the US Israel tax treaty.

Regarding MPW,
What do you think about the relatively high dividend yield ? Is this risky?
Thoretically, if the yield is above ~4-5 % so the institutional investors "don't believe" this is a strong long term investment . So they sell lot of shares and the yield goes up.
It seem that MPW price is almost flat from 2006 (around 17% gain up to day.). So if i understand okey, REIT like this are some kind of bonds that the share price trend tends to be horizontal, and the yield is high so it compensates?
I am very interested in this REIT , specially because i rent a property to live, so i would like to "receive back" some kind of rent-dividend.

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JoMoney
Posts: 5869
Joined: Tue Jul 23, 2013 5:31 am

Re: Are Apartment REITS a better diversifier than VG REIT Index?

Post by JoMoney » Sat Apr 07, 2018 4:12 am

docneil88 wrote:
Thu Apr 24, 2008 9:31 pm
...
(2) What is the approximate value of real property owned by listed US corporations in comparison to the approximately $15 trillion in market cap of US listed corporations? ...
I would be interested as well if anyone has info on this. I think it's likely a very difficult component to disentangle.
On one hand, you have studies on 'intangible assets' like this one:
http://www.oceantomo.com/intangible-ass ... lue-study/
which suggest 84% of the market value is intangible assets, which would leave less than 14% to things like property and plant.
On the other hand, real estate quite often is depreciated for tax purposes and the 'book value' it's carried it is frequently much lower than what its market value is. There's also the matter of how you account for all the liens/mortgages owned by banks who treat the mortgage note as an asset, but if they reposes the property it's a liability.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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