Question on Rental vs REIT

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Question on Rental vs REIT

Post by Longtimelurker » Fri Dec 13, 2013 8:55 am

Scenario 1: Assume I could buy a rental property using 20% equity and 80% leverage, and have no mortgage on my primary residence.

Scenario 2: Maintain a mortgage on the primary property, using that leverage to own REIT's (same 20% equity, 80% leverage split).

Would owning REIT's, while avoiding prepaying the mortgage on your primary property, be the same as buying a single rental property - sans diversification?
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Re: Question on Rental vs REIT

Post by rogermexico » Fri Dec 13, 2013 12:55 pm

I own some REITs among my stock lazy portfolio and multifamily rentals. I see them as totally separate asset classes (one is a stock, the other is small business income). I haven't seen much correlation in the returns between the two types. One is much more diversified but I have no control over it like I do with the small business. One requires significantly more oversight.

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Re: Question on Rental vs REIT

Post by HouseStark » Fri Dec 13, 2013 2:46 pm

Depending upon your tax situation and the particulars of the property, owning rental property could produce an ongoing loss which is deductible against ordinary income. That cannot happen with owning a REIT. As pointed out, holding shares of a REIT is very similar to owning shares of a general type of mutual fund. One difference is that REITs pay only ordinary dividends, not qualified dividends. Some REITs may have limited liquidity, but most are much easier to get out of than a piece of real estate. Along with all the potential hassles, expense, lack of diversification and liquidity, and the potential liability of owning income real estate, I don't think it can be considered to be equivalent to owning shares of a REIT. That's not saying that is has no potential upside, simply that there is much more to it than a REIT.

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