Are REITs better to purchase when interest rates are high or low?

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Jesteroftheswamp
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Are REITs better to purchase when interest rates are high or low?

Post by Jesteroftheswamp » Thu Jan 10, 2019 9:56 pm

I have a friend who said not to purchase REITs right now because interest rates are too high. It begs the question is there a better time to buy based on interest rates? When they are high or low? When are rates considered high vs. low? When is best? I know most will say do not time the market, but certainly REITs will behave differently based on interest rates. What are some things to keep in mind?

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Re: Are REITs better to purchase when interest rates are high or low?

Post by Kenkat » Thu Jan 10, 2019 10:15 pm

My observation having owned REITs since 2000 is that they benefit when rates are falling and struggle when rates are rising. The “yield” paid out as distributions competes to some degree with other investments. As rates fall, that yield becomes more attractive, driving REIT prices up.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Fri Jan 11, 2019 1:22 am

My advice - own real property. Better returns, second to none tax incentives, more control, wealth building legacy. REITs aren't worth the paper they are printed on IMHO.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by KyleAAA » Fri Jan 11, 2019 1:46 am

fire4fun wrote:
Fri Jan 11, 2019 1:22 am
My advice - own real property. Better returns, second to none tax incentives, more control, wealth building legacy. REITs aren't worth the paper they are printed on IMHO.
The numbers in my brokerage account beg to differ.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by JoMoney » Fri Jan 11, 2019 3:26 am

Real estate is very capital intensive, requiring huge investments in property and building, to earn better returns on that investment it's typical to use a large amount of leverage/borrowed money.
When interest rates are high, the cost to carry that leverage is high and reduces the margins/profitability. It's much easier to earn money at low interest rates, it takes a leaner more efficient operation to earn a profit on borrowed money at higher interest rates.
So in that sense, when interest rates are low, and as long as they stay lower, REITs may be more profitable ... but if interest rates rise, having a lot of leverage will make it more difficult environment to operate in... but they'll likely be cheaper to buy.
So is it better to buy them when they're more profitable and more expensive, or less profitable and cheaper?
It depends... There are a multitude of factors, not the least of which is what direction are future interest rates going?
And when we say "better", better than what? What are the other options you're comparing it to, and how are interest rates impacting those investments?
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Re: Are REITs better to purchase when interest rates are high or low?

Post by sleepysurf » Fri Jan 11, 2019 8:16 am

Here's a nice analysis of the affect of interest rates on REIT performance (my apologies if behind a pay wall)... https://www.forbes.com/sites/greatspecu ... 952ae86260

Here's an excerpt that summarizes the relationship...
REITs tend to sell off in the early stages of an interest rate rise cycle or in event-driven spikes in rates, but over a full economic cycle it is the fundamentals that drive returns, just as they do in the direct ownership of real estate.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by Top99% » Fri Jan 11, 2019 8:39 am

Kenkat wrote:
Thu Jan 10, 2019 10:15 pm
My observation having owned REITs since 2000 is that they benefit when rates are falling and struggle when rates are rising. The “yield” paid out as distributions competes to some degree with other investments. As rates fall, that yield becomes more attractive, driving REIT prices up.
This is my experience as well. REITs were also a screaming deal during the tech bubble as all the hot money was chasing stocks and REITs weren't really well known. After the GFC (Great Financial Crisis) yield chasing became in vogue and drove the prices into the stratosphere. So, I was heavily overweight in REITs in the 2000s and am now slightly under market weight. I can hear the siren on the market timing police car coming for me.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by asif408 » Fri Jan 11, 2019 8:49 am

I actually don't know the answer to your question, but I do know that REITs are usually a good investment going forward when they perform poorly for several years while the overall market performs well (think late 1990s). They have lagged for the last 2 years or so, so I would say it wouldn't be a terrible idea to buy some now, but I don't think they've underperformed enough to make me want to buy them in any significant quantity.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by LadyGeek » Fri Jan 11, 2019 9:14 am

FYI - The OP has a related question here: Thoughts on placing REITs in Roth IRA? (where to put REITs)

This question is when to purchase them.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by Valuethinker » Fri Jan 11, 2019 10:14 am

asif408 wrote:
Fri Jan 11, 2019 8:49 am
I actually don't know the answer to your question, but I do know that REITs are usually a good investment going forward when they perform poorly for several years while the overall market performs well (think late 1990s). They have lagged for the last 2 years or so, so I would say it wouldn't be a terrible idea to buy some now, but I don't think they've underperformed enough to make me want to buy them in any significant quantity.
If the US hits a recession (I must say I don't see it, but presently one will come along) then the market will turn out to have been a pretty efficient discounting machine, again. Financials underperformed from 2007 and moved to "cheap" PE ratios, which turned out to be an accurate forecast of where the earnings are going (if not the magnitude of the disaster that followed Lehman).

So for REITs. A recession will hurt demand for commercial space - it always does. Commercial Real Estate is late cycle - construction peaks during or even after the recession, and so oversupply follows that, too.

You really want to buy these things either 1). when the market has overestimated the scale of the downturn 2). when the downturn is happening but before the economy has hit bottom. Situation 1 is very hard to call, situation 2 requires bravery and a willingness to be wrong.

A related factor has been the structural decline of US retail. The market caps of those REITs may now be so low that they basically don't impact the performance of the index, any more.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by nedsaid » Fri Jan 11, 2019 10:32 am

KyleAAA wrote:
Fri Jan 11, 2019 1:46 am
fire4fun wrote:
Fri Jan 11, 2019 1:22 am
My advice - own real property. Better returns, second to none tax incentives, more control, wealth building legacy. REITs aren't worth the paper they are printed on IMHO.
The numbers in my brokerage account beg to differ.
I agree with KyleAAA here. Plus my REITs won't call me at three in the morning complaining about a plugged toilet. REITs were a great investment in the past but my enthusiasm for them has lessened. All that yield chasing in the environment of very low interest rates made these quite expensive, valuations are better now but REITs still are not cheap.
A fool and his money are good for business.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by danielc » Fri Jan 11, 2019 10:42 am

fire4fun wrote:
Fri Jan 11, 2019 1:22 am
My advice - own real property. Better returns, second to none tax incentives, more control, wealth building legacy. REITs aren't worth the paper they are printed on IMHO.
What about diversification? I would be terrified to own a property and then have a major repair.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by JBTX » Fri Jan 11, 2019 10:44 am

It is a bit of a complicated question. From what I have read and seen, which may include some unreliable anecdotal perceptions (so take it for what its worth)

1. REITS tend to hold up fairly well during higher levels of inflation, because rents tend to increase with inflation. Nominal Interest rates also tend to go up and down with inflation also. Unlike a bond with a fixed yield, REITS yield will likely increase when inflation/interest rates increase.

2. Having said the above, given all of the yield chasing over prior recent years, REITS have been priced upwards. So if interest rates rise significantly, it would not be surprising for them to take a hit, until they eventually reach an equilibrium.

3. If low interest rates are a reflection of low inflation but a healthy economy, REITS do well. If low rates are a reflection of a sick economy, REITS probably don't do well as they are leveraged and economically stressed.

I am not sure if REITS do better in a steady state low interest rate or a steady state high rate. But if rates are trending upwards, they probably probably don't do well in the short term but eventually equalize.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by GoldStar » Fri Jan 11, 2019 10:49 am

Maybe take a look at the REIT Index funds (Vanguard and Fidelity both have them) and graph them with changes in interest rates throughout the years. Add in comparison to something like VTSAX (to track the total market impact).
Wouldn't this answer the question?

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Re: Are REITs better to purchase when interest rates are high or low?

Post by international001 » Fri Jan 11, 2019 10:56 am

Is this a new BH philosophy? Don't time the market with stocks but do it with REITs?

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Re: Are REITs better to purchase when interest rates are high or low?

Post by goblue100 » Fri Jan 11, 2019 11:08 am

international001 wrote:
Fri Jan 11, 2019 10:56 am
Is this a new BH philosophy? Don't time the market with stocks but do it with REITs?
It appears to me it is ok to time the bond market, and now the REIT market as well. At least based on the postings on this board. However, you can't time the stock market, but valuations do matter....
:oops:
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Re: Are REITs better to purchase when interest rates are high or low?

Post by sschoe2 » Fri Jan 11, 2019 11:12 am

Just don't buy nontraded reits. I remember Bob Brinker went off about them regularly and put them in the same category as gold coins, whole life, annuities etc. and he had some callers who really got rooked with them.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by staythecourse » Fri Jan 11, 2019 11:22 am

Sorry to lazy to read all the replies so apologize in advance if I am repeating. I believe Vanguard or someone else did a study showing there is NO correlation between REIT price changes and interest rates. So it would seem this is one I would put in the urban legend section.

Only makes sense as it is naive to think a WHOLE subasset class moves based on one single economic indicator.

Good luck.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Fri Jan 11, 2019 11:44 am

danielc wrote:
Fri Jan 11, 2019 10:42 am
fire4fun wrote:
Fri Jan 11, 2019 1:22 am
My advice - own real property. Better returns, second to none tax incentives, more control, wealth building legacy. REITs aren't worth the paper they are printed on IMHO.
What about diversification? I would be terrified to own a property and then have a major repair.
Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property. People do don't do well in real estate where never investors - merely accident landlords who didn't know what they didn't know.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Fri Jan 11, 2019 11:53 am

staythecourse wrote:
Fri Jan 11, 2019 11:22 am
Sorry to lazy to read all the replies so apologize in advance if I am repeating. I believe Vanguard or someone else did a study showing there is NO correlation between REIT price changes and interest rates. So it would seem this is one I would put in the urban legend section.

Only makes sense as it is naive to think a WHOLE subasset class moves based on one single economic indicator.

Good luck.
That doesn't surprise me. With my personal investing, I have seen the same thing. The interest rates rise, so it becomes a little more expensive to buy property. However, don't forget this affect your renters as well. That extra $200 payment per month would prevent a lot of borderline people from buying a home. So this increased rental rates and lowers vacancies. I enjoy both increased and decreased mortgage rate environments. A property owner benefits from both.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by hdas » Fri Jan 11, 2019 11:56 am

Jesteroftheswamp wrote:
Thu Jan 10, 2019 9:56 pm
I have a friend who said not to purchase REITs right now because interest rates are too high. It begs the question is there a better time to buy based on interest rates? When they are high or low? When are rates considered high vs. low? When is best? I know most will say do not time the market, but certainly REITs will behave differently based on interest rates.
Most of the comments so far are worthless opinions. For your specific query
What are some things to keep in mind?
1. Download the available free data on VNQ and/or NAREIT index
2. Download the available free data on interest rates and/or bond funds with the appropriate duration.
3. Put all that data on EXCEL or your preferred platform (Matlab, Python, R)
3. See what changes in interest rates did to forward returns on REITS

Cheers :greedy
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Re: Are REITs better to purchase when interest rates are high or low?

Post by sleepysurf » Fri Jan 11, 2019 12:52 pm

Folks, the Forbes article I previously referenced (https://www.forbes.com/sites/greatspecu ... 952ae86260) has a number of graphs illustrating the overall lack of correlation, at least over long market cycles.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by danielc » Fri Jan 11, 2019 3:58 pm

fire4fun wrote:
Fri Jan 11, 2019 11:44 am
danielc wrote:
Fri Jan 11, 2019 10:42 am
What about diversification? I would be terrified to own a property and then have a major repair.
Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property.
That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by MotoTrojan » Fri Jan 11, 2019 4:22 pm

Jesteroftheswamp wrote:
Thu Jan 10, 2019 9:56 pm
I have a friend who said not to purchase REITs right now because interest rates are too high. It begs the question is there a better time to buy based on interest rates? When they are high or low? When are rates considered high vs. low? When is best? I know most will say do not time the market, but certainly REITs will behave differently based on interest rates. What are some things to keep in mind?
Interest rates are at a historical low, no?

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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Fri Jan 11, 2019 4:55 pm

danielc wrote:
Fri Jan 11, 2019 3:58 pm
fire4fun wrote:
Fri Jan 11, 2019 11:44 am
danielc wrote:
Fri Jan 11, 2019 10:42 am
What about diversification? I would be terrified to own a property and then have a major repair.
Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property.
That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.

Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:

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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Fri Jan 11, 2019 4:57 pm

MotoTrojan wrote:
Fri Jan 11, 2019 4:22 pm
Jesteroftheswamp wrote:
Thu Jan 10, 2019 9:56 pm
I have a friend who said not to purchase REITs right now because interest rates are too high. It begs the question is there a better time to buy based on interest rates? When they are high or low? When are rates considered high vs. low? When is best? I know most will say do not time the market, but certainly REITs will behave differently based on interest rates. What are some things to keep in mind?
Interest rates are at a historical low, no?
Not quite. 30 year fixed mortgages (owner occupied) are at about the 5.375% range. They could be had for around 3.75% at the lowest point. Still "low" by historical standards, definitely not a historical low though.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by MotoTrojan » Fri Jan 11, 2019 5:34 pm

fire4fun wrote:
Fri Jan 11, 2019 4:57 pm
MotoTrojan wrote:
Fri Jan 11, 2019 4:22 pm
Jesteroftheswamp wrote:
Thu Jan 10, 2019 9:56 pm
I have a friend who said not to purchase REITs right now because interest rates are too high. It begs the question is there a better time to buy based on interest rates? When they are high or low? When are rates considered high vs. low? When is best? I know most will say do not time the market, but certainly REITs will behave differently based on interest rates. What are some things to keep in mind?
Interest rates are at a historical low, no?
Not quite. 30 year fixed mortgages (owner occupied) are at about the 5.375% range. They could be had for around 3.75% at the lowest point. Still "low" by historical standards, definitely not a historical low though.
Throw some standard deviation there and it’s up for debate :).

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Re: Are REITs better to purchase when interest rates are high or low?

Post by danielc » Fri Jan 11, 2019 6:33 pm

fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
danielc wrote:
Fri Jan 11, 2019 3:58 pm
That has nothing to do with what I said. Please re-read. I said "what about diversification?"
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate.
Yeah, that would be the goal. That would be diversified. Now how many properties can most of us own? If you can buy a diversified portfolio of properties, then that's fabulous. But I don't think that's most people.

fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
Warren Buffet has said that diversification is for those who don't know what they are doing.
He also said that most people should put their money in index funds. I am not ashamed to say that I don't know how to run a real estate company. For that matter, if I knew, and I ran a real estate company, I would not call that activity investing --- I would call it "my job".

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Re: Are REITs better to purchase when interest rates are high or low?

Post by Whakamole » Fri Jan 11, 2019 6:36 pm

fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
Very true, Warren Buffett is in fact working in his late 80s. Not sure why anyone would take advice from him.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Sat Jan 12, 2019 1:58 am

Whakamole wrote:
Fri Jan 11, 2019 6:36 pm
fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
Very true, Warren Buffett is in fact working in his late 80s. Not sure why anyone would take advice from him.
He chooses to work. Those financial advisors have to work. If they retired today they would be scared to run out of money. I wouldn't take advice from someone who sells an idea that hasn't achieved himself.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by nedsaid » Sat Jan 12, 2019 9:52 am

goblue100 wrote:
Fri Jan 11, 2019 11:08 am
international001 wrote:
Fri Jan 11, 2019 10:56 am
Is this a new BH philosophy? Don't time the market with stocks but do it with REITs?
It appears to me it is ok to time the bond market, and now the REIT market as well. At least based on the postings on this board. However, you can't time the stock market, but valuations do matter....
:oops:
Well, there are investments that are particularly interest rate sensitive like long term bonds, utilities, REITs. Why would an investor ignore this fact? Not saying we should try to predict interest rates but this should be taken into account when constructing a portfolio.
A fool and his money are good for business.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by unclescrooge » Sat Jan 12, 2019 11:58 am

fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
danielc wrote:
Fri Jan 11, 2019 3:58 pm
fire4fun wrote:
Fri Jan 11, 2019 11:44 am
danielc wrote:
Fri Jan 11, 2019 10:42 am
What about diversification? I would be terrified to own a property and then have a major repair.
Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property.
That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.

Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
I disagree with a lot of what your saying.

Owning a leveraged semi passive business has a very different risk profile than investing in a passive REIT.

For high income earners with white collar jobs, starting a business is often not feasible, nor necessary.

I personally know a couple, in their mid 40s with high school aged kids who got wiped out and lost $2 million of equity in 2008. They worked as a real estate broker and architect so they had zero income for a few years at the same time all their assets tanked.

That being said, when I was younger and broke, I leveraged myself 40x my annual income, bought 18 properties and made $500k on a $50k income, and got out before the crash.

But after the market crashed, I didn't jump back in because it was too much work and quite risky. If you have extended vacancies or need repairs, it can wipe you out unless you have a large liquid buffer.

Last year, I looked at properties in several places. With 20% down, none of them penciled more than 15% total return, which declines as your property gets paid down. Even as property values go up, your insurance goes up too offsetting a lot of the cashflow. And unless you refi, your return of equity constantly declines. The more desirable ones like on Maui were around 4%, unless we saw double digit appreciation.

Also, many amateur real estate investors measure gains by using return on original investment. This gives them a misleading idea of performance.

--
My college roommate got laid off from Lucent in 2000 and became a financial advisor/insurance salesman for MetLife. In 2010 he made over a million dollars. He's grown his business since then. He still works 6 days a week and probably will till the day he dies. His Dad retired as a dermatologist in a foreign country, came to the US, became an RN and also works 6 days a week at age 77.

Some people work because they enjoy it. Others because they have a strong work ethic and never developed any other hobbies. :mrgreen:

Even Warren buffet works every day!

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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Sat Jan 12, 2019 1:26 pm

unclescrooge wrote:
Sat Jan 12, 2019 11:58 am
fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
danielc wrote:
Fri Jan 11, 2019 3:58 pm
fire4fun wrote:
Fri Jan 11, 2019 11:44 am
danielc wrote:
Fri Jan 11, 2019 10:42 am
What about diversification? I would be terrified to own a property and then have a major repair.
Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property.
That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.

Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
I disagree with a lot of what your saying.

Owning a leveraged semi passive business has a very different risk profile than investing in a passive REIT.

For high income earners with white collar jobs, starting a business is often not feasible, nor necessary.

I personally know a couple, in their mid 40s with high school aged kids who got wiped out and lost $2 million of equity in 2008. They worked as a real estate broker and architect so they had zero income for a few years at the same time all their assets tanked.

That being said, when I was younger and broke, I leveraged myself 40x my annual income, bought 18 properties and made $500k on a $50k income, and got out before the crash.

But after the market crashed, I didn't jump back in because it was too much work and quite risky. If you have extended vacancies or need repairs, it can wipe you out unless you have a large liquid buffer.

Last year, I looked at properties in several places. With 20% down, none of them penciled more than 15% total return, which declines as your property gets paid down. Even as property values go up, your insurance goes up too offsetting a lot of the cashflow. And unless you refi, your return of equity constantly declines. The more desirable ones like on Maui were around 4%, unless we saw double digit appreciation.

Also, many amateur real estate investors measure gains by using return on original investment. This gives them a misleading idea of performance.

--
My college roommate got laid off from Lucent in 2000 and became a financial advisor/insurance salesman for MetLife. In 2010 he made over a million dollars. He's grown his business since then. He still works 6 days a week and probably will till the day he dies. His Dad retired as a dermatologist in a foreign country, came to the US, became an RN and also works 6 days a week at age 77.

Some people work because they enjoy it. Others because they have a strong work ethic and never developed any other hobbies. :mrgreen:

Even Warren buffet works every day!
There is a big difference between choosing to work / because you want to, and having to work / because you must.

I disagree with your RE investment analysis. If expenses such as insurance rise, so do rents (inflation - parts, labor, and rents are all prices on something, and prices slowly go up over time, what we call "inflation"). HOWEVER, gross rents are a higher number (in dollars) proportional to ALL of your expenses.

So focus here with me, on a $100,000 property that rents for $1000, with all expenses (incl. repairs and vacancy) totaling say $800, if both rents and expenses go up by 3%, the rents are a higher number (in dollars) so your profit INCREASES over time. Secondly, as you pay your lender a FIXED amount over 30 years, in dollars that are losing their purchasing power by the day, this further increases your profit through inflation hedging/profiting.

Due to this phenomena, even a deal that breaks even or cashflows only $100 per month, Year 10 profit is bigger than Year 1 profit. This of course doesn't even include appreciation.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 1:31 pm

No investment should be market timed. This is a flawed strategy and there is a lot of evidence to support that.

REITs (or any investment) should be a part of your investment portfolio if the strategy and approach calls or it in all types of markets.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by inbox788 » Sat Jan 12, 2019 1:53 pm

A look at the Callen Periodic Table will help you understand what you're dealing with.

https://www.bogleheads.org/wiki/Callan_ ... nt_returns

https://www.callan.com/wp-content/uploa ... e-2019.pdf

And not all REITs are the same, with some specializing in apartments, shopping centers, public storage, mortgages, medical buildings, etc. And some like PW (Power REIT) and AMT (American Tower) are really businesses mainly taking advantage of the tax structure.

https://seekingalpha.com/article/210321 ... its-a-reit
https://en.wikipedia.org/wiki/American_ ... orporation
fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.
Interesting what one considers "investing in real estate". One makes money buying and selling a property/land. One makes money renting out property. One makes money on the financing, both buying and selling. One makes money developing/improving the land. Hotels used to be more vertically integrated, but now are very specialized. One company owns the land, another the building, and a third operates the business. It's a bit like a tenant sublets an apartment in NYC for the summer and rents it out on AirBNB on a daily basis.
unclescrooge wrote:
Sat Jan 12, 2019 11:58 am
Also, many amateur real estate investors measure gains by using return on original investment. This gives them a misleading idea of performance.
I've seen this type of error way too often. It's similar to the survival bias we often hear from stocks investors and gamblers.
Last edited by inbox788 on Sat Jan 12, 2019 2:19 pm, edited 1 time in total.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 2:06 pm

fire4fun wrote:
Fri Jan 11, 2019 1:22 am
My advice - own real property. Better returns, second to none tax incentives, more control, wealth building legacy. REITs aren't worth the paper they are printed on IMHO.
A lot of investors would disagree. There are two schools of thought related to REIT investors: a) the direct real estate folks consider REITs stocks and b) the stock folks consider REITs real estate.

The problem with real estate, according to Ralph Block "Investing in REITs" is there is no perfect investment vehicle. There are three ways to invest in real estate (in no particular order):

* Private Placements and Partnership
* REITs
* Direct Ownership

Notably each of the above three strategies has its own advantages and disadvantages.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 2:08 pm

Top99% wrote:
Fri Jan 11, 2019 8:39 am
Kenkat wrote:
Thu Jan 10, 2019 10:15 pm
My observation having owned REITs since 2000 is that they benefit when rates are falling and struggle when rates are rising. The “yield” paid out as distributions competes to some degree with other investments. As rates fall, that yield becomes more attractive, driving REIT prices up.
This is my experience as well. REITs were also a screaming deal during the tech bubble as all the hot money was chasing stocks and REITs weren't really well known. After the GFC (Great Financial Crisis) yield chasing became in vogue and drove the prices into the stratosphere. So, I was heavily overweight in REITs in the 2000s and am now slightly under market weight. I can hear the siren on the market timing police car coming for me.
If I recall REITs were one of the only asset classes to increase when the tech bubble exploded.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 2:11 pm

Valuethinker wrote:
Fri Jan 11, 2019 10:14 am
A related factor has been the structural decline of US retail. The market caps of those REITs may now be so low that they basically don't impact the performance of the index, any more.
There is a lot of good real estate and REIT articles that show while retail has been evolving, many retail REITs are getting stronger and are well capitalized. REITs that focus on towers (i.e. American Tower) and Data Storage are going very well.

I guess there is always a bull market out there!
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Re: Are REITs better to purchase when interest rates are high or low?

Post by Whakamole » Sat Jan 12, 2019 2:51 pm

abuss368 wrote:
Sat Jan 12, 2019 2:08 pm
Top99% wrote:
Fri Jan 11, 2019 8:39 am
Kenkat wrote:
Thu Jan 10, 2019 10:15 pm
My observation having owned REITs since 2000 is that they benefit when rates are falling and struggle when rates are rising. The “yield” paid out as distributions competes to some degree with other investments. As rates fall, that yield becomes more attractive, driving REIT prices up.
This is my experience as well. REITs were also a screaming deal during the tech bubble as all the hot money was chasing stocks and REITs weren't really well known. After the GFC (Great Financial Crisis) yield chasing became in vogue and drove the prices into the stratosphere. So, I was heavily overweight in REITs in the 2000s and am now slightly under market weight. I can hear the siren on the market timing police car coming for me.
If I recall REITs were one of the only asset classes to increase when the tech bubble exploded.
That's also when the price of gold started going up: https://www.macrotrends.net/1333/histor ... year-chart.

I don't know why the performance of REITs during the tech bubble is relevant, since they don't always help during a stock market collapse; 2008 is of course a prime example when real estate did not do so well.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 3:23 pm

Whakamole wrote:
Sat Jan 12, 2019 2:51 pm
I don't know why the performance of REITs during the tech bubble is relevant, since they don't always help during a stock market collapse; 2008 is of course a prime example when real estate did not do so well.
I would guess it is a matter of diversification where asset classes perform differently based on any particular market environment.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by arcticpineapplecorp. » Sat Jan 12, 2019 3:30 pm

data back to 5/13/1996 (earliest for reit index fund admiral according to morningstar):

total stock market up 515.76% (in blue below)
reit index fund up 742.38% (in orange below)

Image

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

On the other hand, Portfolio Visualizer comes up with opposite results (going back to 1994). Porfolio 1 is US market, Portfolio 2 is REITs:

Image

source:
https://www.portfoliovisualizer.com/bac ... &REIT2=100

past results are no guarantee of future performance. draw your own conclusions.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by KJVanguard » Sat Jan 12, 2019 3:36 pm

Top99% wrote:
Fri Jan 11, 2019 8:39 am
Kenkat wrote:
Thu Jan 10, 2019 10:15 pm
My observation having owned REITs since 2000 is that they benefit when rates are falling and struggle when rates are rising. The “yield” paid out as distributions competes to some degree with other investments. As rates fall, that yield becomes more attractive, driving REIT prices up.
This is my experience as well. REITs were also a screaming deal during the tech bubble as all the hot money was chasing stocks and REITs weren't really well known. After the GFC (Great Financial Crisis) yield chasing became in vogue and drove the prices into the stratosphere. So, I was heavily overweight in REITs in the 2000s and am now slightly under market weight. I can hear the siren on the market timing police car coming for me.
I too loved REITs back in 2000 when the dot.com bubble peaked. REITs largely avoided the market down turn that followed. I don't currently own any US REITs as the valuations seem too high (other than the REITs found in other index funds).

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Re: Are REITs better to purchase when interest rates are high or low?

Post by KyleAAA » Sat Jan 12, 2019 3:54 pm

fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
danielc wrote:
Fri Jan 11, 2019 3:58 pm
fire4fun wrote:
Fri Jan 11, 2019 11:44 am
danielc wrote:
Fri Jan 11, 2019 10:42 am
What about diversification? I would be terrified to own a property and then have a major repair.
Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property.
That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.

Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
I don’t know many financial advisors still working in their 60s, personally. As for your points, they are the same tired arguments real estate investors always make up post hoc to try to justify what they already decided. Of course REIT investors get the same tax advantages: do the math. The only difference is whose tax return the benefit goes on, but due to the legal structure of REITs that’s purely a formality. This notion of “control” is overrated and I would argue is actually a negative for 95% of real estate investors. All it buys you is the ability to ratchet risk up and down, but there are plenty of ways to achieve that with securities, so it’s not a net gain for RE investors. Of course REITs are “investing in real estate”and to suggest otherwise is absurd. The securitized nature of REITs adds a layer of liquidity on top, which has implications for the risk and return profile, but it is still investing in real estate.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by inbox788 » Sat Jan 12, 2019 6:10 pm

KyleAAA wrote:
Sat Jan 12, 2019 3:54 pm
All it buys you is the ability to ratchet risk up and down, but there are plenty of ways to achieve that with securities, so it’s not a net gain for RE investors. Of course REITs are “investing in real estate”and to suggest otherwise is absurd. The securitized nature of REITs adds a layer of liquidity on top, which has implications for the risk and return profile, but it is still investing in real estate.
I'm not sure you can leverage up as much with securities anymore with margin requirements and all. That doesn't mean leveraging up to the max in real estate is a good thing to do. Leverage is a two edge sword, and commodity and currency traders know it all too well. For better or worse, regulations have limited some of the worst abuses, but if you want to trade options in leveraged funds, I guess you can. https://www.marketwatch.com/investing/fund/spxl/options
abuss368 wrote:
Sat Jan 12, 2019 2:11 pm
REITs that focus on towers (i.e. American Tower) and Data Storage are going very well.
IMO, these are not really in the real estate business, but in communications and information technology. Recall that GMAC (now Ally Bank) was a huge bank hiding inside GM. And Sony (yes, the TV/electronics company) is/was largely a life insurance company.

https://www.nytimes.com/2013/05/28/busi ... onics.html

Things are not always as they seem.
In the years leading up to the financial crisis, it was also G.M.’s most profitable unit, which tells you something about the auto industry at the time. The company earned more profit from lending money to customers than in selling cars.
https://dealbook.nytimes.com/2012/08/21 ... s-not-u-s/

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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 8:13 pm

inbox788 wrote:
Sat Jan 12, 2019 6:10 pm
KyleAAA wrote:
Sat Jan 12, 2019 3:54 pm
All it buys you is the ability to ratchet risk up and down, but there are plenty of ways to achieve that with securities, so it’s not a net gain for RE investors. Of course REITs are “investing in real estate”and to suggest otherwise is absurd. The securitized nature of REITs adds a layer of liquidity on top, which has implications for the risk and return profile, but it is still investing in real estate.
I'm not sure you can leverage up as much with securities anymore with margin requirements and all. That doesn't mean leveraging up to the max in real estate is a good thing to do. Leverage is a two edge sword, and commodity and currency traders know it all too well. For better or worse, regulations have limited some of the worst abuses, but if you want to trade options in leveraged funds, I guess you can. https://www.marketwatch.com/investing/fund/spxl/options
abuss368 wrote:
Sat Jan 12, 2019 2:11 pm
REITs that focus on towers (i.e. American Tower) and Data Storage are going very well.
IMO, these are not really in the real estate business, but in communications and information technology. Recall that GMAC (now Ally Bank) was a huge bank hiding inside GM. And Sony (yes, the TV/electronics company) is/was largely a life insurance company.

https://www.nytimes.com/2013/05/28/busi ... onics.html

Things are not always as they seem.
In the years leading up to the financial crisis, it was also G.M.’s most profitable unit, which tells you something about the auto industry at the time. The company earned more profit from lending money to customers than in selling cars.
https://dealbook.nytimes.com/2012/08/21 ... s-not-u-s/
American Tower owns the land. Data Storage owns the land and buildings. That’s real estate.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 8:15 pm

KyleAAA wrote:
Sat Jan 12, 2019 3:54 pm
fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
danielc wrote:
Fri Jan 11, 2019 3:58 pm
fire4fun wrote:
Fri Jan 11, 2019 11:44 am
danielc wrote:
Fri Jan 11, 2019 10:42 am
What about diversification? I would be terrified to own a property and then have a major repair.
Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property.
That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.

Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
I don’t know many financial advisors still working in their 60s, personally. As for your points, they are the same tired arguments real estate investors always make up post hoc to try to justify what they already decided. Of course REIT investors get the same tax advantages: do the math. The only difference is whose tax return the benefit goes on, but due to the legal structure of REITs that’s purely a formality. This notion of “control” is overrated and I would argue is actually a negative for 95% of real estate investors. All it buys you is the ability to ratchet risk up and down, but there are plenty of ways to achieve that with securities, so it’s not a net gain for RE investors. Of course REITs are “investing in real estate”and to suggest otherwise is absurd. The securitized nature of REITs adds a layer of liquidity on top, which has implications for the risk and return profile, but it is still investing in real estate.
Well said. REITs are taxed the same as direct real estate. A lot of folks don’t realize that.
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Re: Are REITs better to purchase when interest rates are high or low?

Post by inbox788 » Sat Jan 12, 2019 8:30 pm

abuss368 wrote:
Sat Jan 12, 2019 8:13 pm
American Tower owns the land. Data Storage owns the land and buildings. That’s real estate.
You can look at it that way, but it's a lot more nuanced than that. These REITs often don't own the land, but lease it from the owners. The industry is sliced and diced a whole lot more than you might think. The trend seem to be away from vertical integration and more specialization. Real estate agents and stock brokers may never actually own the products they sell, but they profit handsomely and not necessarily on the appreciation of the value of what they sell. The middle man can always make money even with distressed goods (like estate sale liquidators). Coldwell Banker is a real estate company, but I don't know if they'd be able to organize themselves as a REIT.

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Re: Are REITs better to purchase when interest rates are high or low?

Post by unclescrooge » Sat Jan 12, 2019 8:51 pm

fire4fun wrote:
Sat Jan 12, 2019 1:26 pm


There is a big difference between choosing to work / because you want to, and having to work / because you must.

I disagree with your RE investment analysis. If expenses such as insurance rise, so do rents (inflation - parts, labor, and rents are all prices on something, and prices slowly go up over time, what we call "inflation"). HOWEVER, gross rents are a higher number (in dollars) proportional to ALL of your expenses.

So focus here with me, on a $100,000 property that rents for $1000, with all expenses (incl. repairs and vacancy) totaling say $800, if both rents and expenses go up by 3%, the rents are a higher number (in dollars) so your profit INCREASES over time. Secondly, as you pay your lender a FIXED amount over 30 years, in dollars that are losing their purchasing power by the day, this further increases your profit through inflation hedging/profiting.

Due to this phenomena, even a deal that breaks even or cashflows only $100 per month, Year 10 profit is bigger than Year 1 profit. This of course doesn't even include appreciation.
I understand what you're saying. However, making a profit isn't the only criteria. You have to look at rate of return. If it starts out at 12%, and wifi drops to 6% by year ten, it's a bad investment.

Based on my data analytics background in very comfortable running all sorts of analysis. That isn't my problem. My other is finding a deal I'm willing to your up my money in.

Based on my personal experience with 18 rentals that ended in a net profit, I can tell you that you're either underestimating the downside risk, or undervaluing your time. And you're probably overestimating your long term returns.

But if you are able to make market beating returns without doing the management, then hats off to you, sir! Please share your personal experiences. I would love to hear them. :beer

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Re: Are REITs better to purchase when interest rates are high or low?

Post by fire4fun » Sat Jan 12, 2019 8:55 pm

abuss368 wrote:
Sat Jan 12, 2019 8:15 pm
KyleAAA wrote:
Sat Jan 12, 2019 3:54 pm
fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
danielc wrote:
Fri Jan 11, 2019 3:58 pm
fire4fun wrote:
Fri Jan 11, 2019 11:44 am

Repair costs are factored into your analysis. 5% repair 5% vacancy 8% property management cost (whether or not you manage yourself) of gross rents, if it still cash flows then you have a great investment property.
That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.

Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
I don’t know many financial advisors still working in their 60s, personally. As for your points, they are the same tired arguments real estate investors always make up post hoc to try to justify what they already decided. Of course REIT investors get the same tax advantages: do the math. The only difference is whose tax return the benefit goes on, but due to the legal structure of REITs that’s purely a formality. This notion of “control” is overrated and I would argue is actually a negative for 95% of real estate investors. All it buys you is the ability to ratchet risk up and down, but there are plenty of ways to achieve that with securities, so it’s not a net gain for RE investors. Of course REITs are “investing in real estate”and to suggest otherwise is absurd. The securitized nature of REITs adds a layer of liquidity on top, which has implications for the risk and return profile, but it is still investing in real estate.
Well said. REITs are taxed the same as direct real estate. A lot of folks don’t realize that.
This statement is false. The dividends that you earn on a REIT you will pay short or long capital gains taxes on. I've been investing real estate for over 11 years and despite consistently netting more than $5,000 of income into my bank account each and every month, I have still yet to pay taxes on rental real estate. Legally.

When you start paying zero taxes on your REIT income, call me. When I will be able to not pay any taxes on income from REITs, and not pay any taxes on capital gains via a 1031 exchange with a REIT, then I'll decide to invest in it.

The reality is, I control my leverage percentages (LTV), depreciation, and 1031 exchange the deals I want so that I never pay taxes on rental income nor capital gains. Can't control anything with a REIT. Just collect your -3% to 9% return and pony up on your taxes.

Please don't spread misinformation.

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abuss368
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Re: Are REITs better to purchase when interest rates are high or low?

Post by abuss368 » Sat Jan 12, 2019 9:13 pm

fire4fun wrote:
Sat Jan 12, 2019 8:55 pm
abuss368 wrote:
Sat Jan 12, 2019 8:15 pm
KyleAAA wrote:
Sat Jan 12, 2019 3:54 pm
fire4fun wrote:
Fri Jan 11, 2019 4:55 pm
danielc wrote:
Fri Jan 11, 2019 3:58 pm


That has nothing to do with what I said. Please re-read. I said "what about diversification?". Having one rental properties is not diversified. Your repairs will not be a predictable 5% of anything. You might be lucky and spend a lot less than average, or you might be unlucky and pay a lot more than average. This is the concept of risk. If instead of one rental property you own a million, you can now talk about averages and predictable costs. This is the whole reason why mutual funds exist.
That's why you diversify geographically, providers, property type, investment niche, etc., all within real estate. REITs aren't "investing in real estate." You have zero control, don't get any of the tax incentives, and get washed down profits. You can't control financing options, cash out refinance, how the property is managed, purchase significantly below value, etc. with a REIT. Not even in the same universe. Go ahead and buy a REITs, you don't get any of the benefits of investing in real estate.

Warren Buffet has said that diversification is for those who don't know what they are doing. Diversification is a word that financial advisors and financial planners throw around a lot. Did you ever stop to think why they are all still working in their 60s? :wink:
I don’t know many financial advisors still working in their 60s, personally. As for your points, they are the same tired arguments real estate investors always make up post hoc to try to justify what they already decided. Of course REIT investors get the same tax advantages: do the math. The only difference is whose tax return the benefit goes on, but due to the legal structure of REITs that’s purely a formality. This notion of “control” is overrated and I would argue is actually a negative for 95% of real estate investors. All it buys you is the ability to ratchet risk up and down, but there are plenty of ways to achieve that with securities, so it’s not a net gain for RE investors. Of course REITs are “investing in real estate”and to suggest otherwise is absurd. The securitized nature of REITs adds a layer of liquidity on top, which has implications for the risk and return profile, but it is still investing in real estate.
Well said. REITs are taxed the same as direct real estate. A lot of folks don’t realize that.
This statement is false. The dividends that you earn on a REIT you will pay short or long capital gains taxes on. I've been investing real estate for over 11 years and despite consistently netting more than $5,000 of income into my bank account each and every month, I have still yet to pay taxes on rental real estate. Legally.

When you start paying zero taxes on your REIT income, call me. When I will be able to not pay any taxes on income from REITs, and not pay any taxes on capital gains via a 1031 exchange with a REIT, then I'll decide to invest in it.

The reality is, I control my leverage percentages (LTV), depreciation, and 1031 exchange the deals I want so that I never pay taxes on rental income nor capital gains. Can't control anything with a REIT. Just collect your -3% to 9% return and pony up on your taxes.

Please don't spread misinformation.
The “dividends” from REITs include three components: ordinary income, capital gains, and return of capital. I know of someone who had direct real estate for years. No mortgage and minimal depreciation and in great shape. Cash flow positive and taxed at ordinary rates. Same as a very large portion of a REITs dividend. Hopefully that helps!
John C. Bogle: "Simplicity is the master key to financial success."

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