Question about owning REITs

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Lynx310650
Posts: 148
Joined: Fri Sep 15, 2017 1:33 pm

Question about owning REITs

Post by Lynx310650 »

I'm thinking about tilting 10% of my overall portfolio towards REITs as I'm a renter and want some additional exposure to real estate. I'm only looking at residential REITs like INVH and/or EQR.

My question is if I own a share of an REIT, do I technically also own a slice of the underlying property itself (albeit very tiny slice)?

Theoretically, if the real estate market enters a prolonged stage where rents stay fairly flat but the value of property keeps rising, would REITs also rise to reflect this? Or are REITs primarily a play on the rent rather than the value of the underlying property?
refinedchain
Posts: 25
Joined: Tue Feb 17, 2015 10:32 am

Re: Question about owning REITs

Post by refinedchain »

Lynx310650 wrote: Mon Sep 14, 2020 9:22 pm My question is if I own a share of an REIT, do I technically also own a slice of the underlying property itself (albeit very tiny slice)?
Here is my take. For all practical purposes: no. Your name is not on the titles. You can't get a HELOC against any of them. You can't take a mortgage interest deduction on your taxes. No one will call you in the middle of the night about the toilet.
Lynx310650 wrote: Mon Sep 14, 2020 9:22 pm Theoretically, if the real estate market enters a prolonged stage where rents stay fairly flat but the value of property keeps rising, would REITs also rise to reflect this?
I would also like to know this. In theory it should be as simple as you describe: price goes up, earnings stay flat. But now the REIT's future capital is invested at a lower return. This is where I get lost.
000
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Re: Question about owning REITs

Post by 000 »

Lynx310650 wrote: Mon Sep 14, 2020 9:22 pm My question is if I own a share of an REIT, do I technically also own a slice of the underlying property itself (albeit very tiny slice)?
No.
Lynx310650 wrote: Mon Sep 14, 2020 9:22 pm Theoretically, if the real estate market enters a prolonged stage where rents stay fairly flat but the value of property keeps rising, would REITs also rise to reflect this?
I would think so because the REIT's assets are now worth more.
flaccidsteele
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Location: Canada

Re: Question about owning REITs

Post by flaccidsteele »

Lynx310650 wrote: Mon Sep 14, 2020 9:22 pm My question is if I own a share of an REIT, do I technically also own a slice of the underlying property itself (albeit very tiny slice)?
No

REIT is not a real estate investment. It’s a paper investment

No claim on underlying property

Dividends taxed as ordinary income

No depreciation

No cash out refi/HELOC/blanket

No 1031

No point (ie. Boglehead-wise) imo
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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JoMoney
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Re: Question about owning REITs

Post by JoMoney »

It's not "no claim" on the property, but it is detached enough to not really be clear.
If you own a share of a company, you are a passive part-owner of the business. A REIT is just a special type of business incorporated a certain way.
The business owns the property, and bears the liability and responsibilities associated with that.
As a share owner you get a vote, weighted proportionately with your other part-owners on who is on the businesses board, and can influence how the business is managed and what the business does with it's assets. If you owned all the shares you could choose to distribute the companies assets/property to yourself, so there is some sort of claim that could derived there.

If you own a mutual fund, you're even further detached, in that you own shares of a yet another special type of business incorporated as a financial investment company, and you vote for a board/management of that 'mutual fund' investment company that in turn owns the shares of the business that owns the property, plant, cash, and all the other assets on the books of the company.

With regard to differentiating REIT as a "paper investment", there is something to be questioned/considered about what it is you actually have with other forms of real estate. Ownership of it still comes down to a "paper" title somewhere, and is dependent on you and the governments willingness to enforce that "paper" claim should anyone dispute it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Greenman72
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Joined: Fri Nov 01, 2013 2:17 pm

Re: Question about owning REITs

Post by Greenman72 »

If you own a REIT, then you do NOT own any real estate. You own STOCK of a company that owns real estate.

Presumably, the NAV of the REIT would follow an increase in the FMV of the underlying real estate, but that’s not guaranteed.
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