REITs or investment property?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
PTGuy1
Posts: 18
Joined: Sat Jun 09, 2018 8:01 am

REITs or investment property?

Post by PTGuy1 » Mon Oct 14, 2019 7:41 am

What do you all think of owning REITs versus rental property that you hold yourself?
Are they fiscally equivalent?
Are the benefits of a corporate structure around property worth the hassle?

Jack FFR1846
Posts: 10506
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: REITs or investment property?

Post by Jack FFR1846 » Mon Oct 14, 2019 8:07 am

You have to look into the make up of the REIT you're considering. Some have absolutely no real estate holdings and are simply a bundle of credit default swaps (watch the movie the Big Short).

On the good side, REITs don't abandon the property, leaving damage and not paying rent or call because they flushed a towel down the toilet and now it's plugged. Rental properties do take time on your part. Might just be a little time or could be a bunch of anxiety promoting time.

Personally, I think of it like this. Total Market funds are composed of companies who own real estate. That's as much real estate exposure as I need.
Bogle: Smart Beta is stupid

balbrec2
Posts: 220
Joined: Mon Nov 13, 2017 3:03 pm

Re: REITs or investment property?

Post by balbrec2 » Mon Oct 14, 2019 9:26 am

PTGuy1 wrote:
Mon Oct 14, 2019 7:41 am
What do you all think of owning REITs versus rental property that you hold yourself?
Are they fiscally equivalent?
Are the benefits of a corporate structure around property worth the hassle?
Owning and managing rental property is a second job. You need the time
and temperament for it. There are tax advantages.There are headaches.
REIT's are much more liquid. VTI includes REIT's. If you want to go a little heavier then there
is VNQ. Good luck!

stinkycat
Posts: 82
Joined: Sat Apr 23, 2011 6:40 am

Re: REITs or investment property?

Post by stinkycat » Mon Oct 14, 2019 9:27 am

Here is an example, although one anecdote is certainly not data. A friend of mine bought a duplex at a foreclosure sale in 2010 for $60k. Today it is worth about $120k, not a bad appreciation. However, I checked the price change of VNQ over the same time period. VNQ basically doubled as well. He received better cash flows from the property, but part of that is a return to labor.

Investment property can be a good investment for the right person who has the right temperament. However, I personally prefer the reits. For my friend, the investment property was better, because he would have spent any of the gains from VNQ years ago. Sometimes a little less liquidity is not a bad thing.

User avatar
StormShadow
Posts: 753
Joined: Thu Feb 09, 2012 6:20 pm

Re: REITs or investment property?

Post by StormShadow » Mon Oct 14, 2019 9:30 am

balbrec2 wrote:
Mon Oct 14, 2019 9:26 am
VTI includes REIT's. If you want to go a little heavier then there is VNQ. Good luck!
Umm, "a little heavier" would be a bit of an understatement.

VNQ is a real estate sector index fund. Its only REIT's.

VTI is an index fund of the entire US stock market. Quite a difference.

User avatar
arcticpineapplecorp.
Posts: 4530
Joined: Tue Mar 06, 2012 9:22 pm

Re: REITs or investment property?

Post by arcticpineapplecorp. » Mon Oct 14, 2019 9:38 am

some things to consider:

1. do you believe in active management or passive? (If you own physical real estate you're an active manager. Reits are passive on your part. Don't let anyone tell you it doesn't have to be a lot of work. Any amount of work means your investment is not passive). Do you have a plan for if you become incapacitated and unable to run your new real estate business? If you don't, you could see your business go down the drain. What's even more important than building up wealth is preserving it, otherwise, what's the point of trying to build it at all?

2. do you believe diversification is the only free lunch? If so, why would you buy one property in one location, when instead you could own hundreds of companies that own many properties in locations far and wide, through use of a REIT).

3. do you agree with the costs matter hypothesis? That is, the less you pay the more you keep. You know what your costs are with a REIT index fund (low). You don't know what your costs might be with a physical piece of real estate.

4. how much of your portfolio do you want real estate to be? Do you own a home? If you have equity even if the house isn't paid off, that's part of your overall net worth which means your primary residence is already contributing to your real estate percentage desired in your asset allocation. Do you need more than that?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

User avatar
Sandtrap
Posts: 8500
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: REITs or investment property?

Post by Sandtrap » Mon Oct 14, 2019 9:43 am

PTGuy1 wrote:
Mon Oct 14, 2019 7:41 am
What do you all think of owning REITs versus rental property that you hold yourself?
Are they fiscally equivalent?
Are the benefits of a corporate structure around property worth the hassle?
First:
1. What types of physical rental properties are you interested in?
2. How much can you afford to buy? In cash? Mortgaged? Leveraged?
3. Can you afford to buy a fourplex rental unit in cash or mortgage?
4. Can you property manage yourself or do you need to hire a property management company?
5. After purchasing a rental property, how much "working capital" do you have on hand? $100k ???
6. Is your current income level high enough to absorb all the monthly expenses of a rental property unit if there was a period where rental income was zero?

If the above factors are not feasible, then something like a Vanguard REIT Index Fund may fit you better.
Search past threads (lots of them) on REIT's.

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

User avatar
AerialWombat
Posts: 895
Joined: Tue May 29, 2018 1:07 pm

Re: REITs or investment property?

Post by AerialWombat » Mon Oct 14, 2019 10:15 am

Jack FFR1846 wrote:
Mon Oct 14, 2019 8:07 am
Total Market funds are composed of companies who own real estate. That's as much real estate exposure as I need.
But then you are drastically underweight on the single largest asset class in the world. The market value of US residential real estate is about $30 trillion, commercial another $5 or $6 trillion. US public stocks are $34 trillion.

For Bogleheads that want to hold cap weight of the market, they should be overweight in REITs, no?

To the OP: I suggest looking at it this way: REITs are passive to you, direct ownership is a business. Do you want to operate a business? Do you have time for a second job?

For some of us, it’s THE path to wealth. But it’s not a good fit for everybody.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

User avatar
AerialWombat
Posts: 895
Joined: Tue May 29, 2018 1:07 pm

Re: REITs or investment property?

Post by AerialWombat » Mon Oct 14, 2019 10:17 am

Sandtrap wrote:
Mon Oct 14, 2019 9:43 am
Search past threads (lots of them) on REIT's.
You and I should just team up and write The Bogleheads Guide to Real Estate Investing. 8-)
“Life doesn’t come with a warranty.” -Michael LeBoeuf

User avatar
nedsaid
Posts: 12802
Joined: Fri Nov 23, 2012 12:33 pm

Re: REITs or investment property?

Post by nedsaid » Mon Oct 14, 2019 10:21 am

REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
A fool and his money are good for business.

student
Posts: 4142
Joined: Fri Apr 03, 2015 6:58 am

Re: REITs or investment property?

Post by student » Mon Oct 14, 2019 10:25 am

Please take a look at this thread about a nightmare tenant. viewtopic.php?f=2&t=191039

User avatar
packer16
Posts: 1278
Joined: Sat Jan 04, 2014 2:28 pm

Re: REITs or investment property?

Post by packer16 » Mon Oct 14, 2019 10:37 am

One aspect many REIT index fund investors forget is the REIT index fund is a fund of funds. What is cheap is your top level fund expenses your underlying fund expenses can be very high. The last time I checked the look through expense ratio for the Vanguard REIT was on the order of 5%, 4.7% on the underlying & .3% of the top level.

Packer
Buy cheap and something good might happen

User avatar
AerialWombat
Posts: 895
Joined: Tue May 29, 2018 1:07 pm

Re: REITs or investment property?

Post by AerialWombat » Mon Oct 14, 2019 10:38 am

nedsaid wrote:
Mon Oct 14, 2019 10:21 am
REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
My tenants don’t call me, either. They call the people I pay to take that call.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

User avatar
arcticpineapplecorp.
Posts: 4530
Joined: Tue Mar 06, 2012 9:22 pm

Re: REITs or investment property?

Post by arcticpineapplecorp. » Mon Oct 14, 2019 10:43 am

AerialWombat wrote:
Mon Oct 14, 2019 10:38 am
nedsaid wrote:
Mon Oct 14, 2019 10:21 am
REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
My tenants don’t call me, either. They call the people I pay to take that call.
but then paying others reduces your profits. And in the event the people you pay to take the calls don't do as good a job as you would, or you would like, then you may have to manage other people who are managing your tenants.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

User avatar
arcticpineapplecorp.
Posts: 4530
Joined: Tue Mar 06, 2012 9:22 pm

Re: REITs or investment property?

Post by arcticpineapplecorp. » Mon Oct 14, 2019 10:44 am

student wrote:
Mon Oct 14, 2019 10:25 am
Please take a look at this thread about a nightmare tenant. viewtopic.php?f=2&t=191039
and watch the movie "Pacific Heights".
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

User avatar
AerialWombat
Posts: 895
Joined: Tue May 29, 2018 1:07 pm

Re: REITs or investment property?

Post by AerialWombat » Mon Oct 14, 2019 10:53 am

arcticpineapplecorp. wrote:
Mon Oct 14, 2019 10:43 am
AerialWombat wrote:
Mon Oct 14, 2019 10:38 am
nedsaid wrote:
Mon Oct 14, 2019 10:21 am
REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
My tenants don’t call me, either. They call the people I pay to take that call.
but then paying others reduces your profits. And in the event the people you pay to take the calls don't do as good a job as you would, or you would like, then you may have to manage other people who are managing your tenants.
Yes, absolutely. I do have to manage the manager, but it’s during normal business hours. And yes, it eats into profits. But, those are business decisions I happily make and deal with, because I recognize that this is a business, not a passive investment.

I only run one business, in traditional day-to-day terms. But I recognize that I really run three companies in much broader terms, and I am OK with that. It’s not a good fit for everybody, though.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

medic
Posts: 38
Joined: Thu Jul 18, 2019 11:30 am

Re: REITs or investment property?

Post by medic » Mon Oct 14, 2019 10:58 am

AerialWombat wrote:
Mon Oct 14, 2019 10:38 am
My tenants don’t call me, either. They call the people I pay to take that call.
+1

Treat real estate like a business; you're the "CEO" so pay people to handle the daily situations.

gch
Posts: 21
Joined: Thu May 30, 2019 2:47 pm

Re: REITs or investment property?

Post by gch » Mon Oct 14, 2019 11:01 am

arcticpineapplecorp. wrote:
Mon Oct 14, 2019 10:43 am
AerialWombat wrote:
Mon Oct 14, 2019 10:38 am
nedsaid wrote:
Mon Oct 14, 2019 10:21 am
REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
My tenants don’t call me, either. They call the people I pay to take that call.
but then paying others reduces your profits. And in the event the people you pay to take the calls don't do as good a job as you would, or you would like, then you may have to manage other people who are managing your tenants.
By investing in REITs you’re paying several layers of people to manage your real estate investments which reduces your profits even if you can’t see the actual transaction.

User avatar
packer16
Posts: 1278
Joined: Sat Jan 04, 2014 2:28 pm

Re: REITs or investment property?

Post by packer16 » Mon Oct 14, 2019 11:20 am

gch wrote:
Mon Oct 14, 2019 11:01 am
arcticpineapplecorp. wrote:
Mon Oct 14, 2019 10:43 am
AerialWombat wrote:
Mon Oct 14, 2019 10:38 am
nedsaid wrote:
Mon Oct 14, 2019 10:21 am
REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
My tenants don’t call me, either. They call the people I pay to take that call.
but then paying others reduces your profits. And in the event the people you pay to take the calls don't do as good a job as you would, or you would like, then you may have to manage other people who are managing your tenants.
By investing in REITs you’re paying several layers of people to manage your real estate investments which reduces your profits even if you can’t see the actual transaction.
By may calcs those REIT management folks are taking about 5% of the return.

Packer
Buy cheap and something good might happen

User avatar
Nate79
Posts: 5177
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: REITs or investment property?

Post by Nate79 » Mon Oct 14, 2019 11:40 am

packer16 wrote:
Mon Oct 14, 2019 10:37 am
One aspect many REIT index fund investors forget is the REIT index fund is a fund of funds. What is cheap is your top level fund expenses your underlying fund expenses can be very high. The last time I checked the look through expense ratio for the Vanguard REIT was on the order of 5%, 4.7% on the underlying & .3% of the top level.

Packer
This is a very important point that is missed by most people on BH posting about REIT index funds.

DesertDiva
Posts: 644
Joined: Thu Mar 01, 2018 12:49 pm
Location: In the desert

Re: REITs or investment property?

Post by DesertDiva » Mon Oct 14, 2019 12:19 pm

Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin

ThrustVectoring
Posts: 769
Joined: Wed Jul 12, 2017 2:51 pm

Re: REITs or investment property?

Post by ThrustVectoring » Mon Oct 14, 2019 1:01 pm

Owner-occupied housing is heavily subsidized, so the real estate investment I personally like is occupying one unit in a duplex, triplex, or quadplex. It still has a hell of a lot of caveats to it - idiosyncratic risk from bad tenants, labor costs for DIYing repairs and managing things, and the correlation between rents and the local job market - but if you can stomach all that the subsidies are really nice.

As a bonus, the entire owner-occupied building is bankruptcy-protected in Texas (and possibly other states).
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Real estate functions as a combination of cash, long-term real bonds, and short nominal interest rates (if financed via 30-year fixed mortgage). Also, the sustainable spending you can draw from real estate is roughly equal to the free cash flow it generates from rents. Price-to-rent ratios are like at most 20, where price-to-drawdown ratios on a three-fund portfolio vary from 25 to 35. In theory, direct real estate is more efficient at generating retirement cashflow than a three-fund portfolio is.
Current portfolio: 60% VTI / 40% VXUS

jb1
Posts: 326
Joined: Sun Nov 27, 2016 8:33 am
Location: NC

Re: REITs or investment property?

Post by jb1 » Mon Oct 14, 2019 1:50 pm

I prefer rental properties over a reit. In fact that is my long term goal to own rentals.

Looking at VGSIX, I just don’t see how money is made in it unless you bought at the bottom of the market.

I bought a house for 191k last year, rent it out to friends, mortgage is all covered except $4 I pay. Natural appreciation in the NC market, plus upgrades, I’d assume my house is valued over 200k with recent comps in the area.

Uncorrelated
Posts: 171
Joined: Sun Oct 13, 2019 3:16 pm

Re: REITs or investment property?

Post by Uncorrelated » Mon Oct 14, 2019 1:58 pm

Nate79 wrote:
Mon Oct 14, 2019 11:40 am
packer16 wrote:
Mon Oct 14, 2019 10:37 am
One aspect many REIT index fund investors forget is the REIT index fund is a fund of funds. What is cheap is your top level fund expenses your underlying fund expenses can be very high. The last time I checked the look through expense ratio for the Vanguard REIT was on the order of 5%, 4.7% on the underlying & .3% of the top level.

Packer
This is a very important point that is missed by most people on BH posting about REIT index funds.
If it often missed because it's not important. It doesn't matter if the fund takes 20% of 5% of 1%. REIT's are publicly traded companies, unless you believe that markets are fundamentally inefficient all the information is priced in.

The same arguments don't apply for individually owned real estate because there is no efficient market.

renue74
Posts: 1777
Joined: Tue Apr 07, 2015 7:24 pm

Re: REITs or investment property?

Post by renue74 » Mon Oct 14, 2019 2:50 pm

This question comes up every few months.

It's like comparing Apple to Oranges.

About 5 years ago I started investing in rental properties in my town because I always wanted to and had the $ to do it finally. I can buy houses for $45K and rent them for $900 to $1200 per month in town.

I have about 10 properties now and occasionally, I'll buy a house and do a complete flip. Just bought one in Feb. for $46K, put $45K into it and just sold it for $155K. It's my money making hobby.

At no point in time did I think...hmmm...can I invest this money in REITs and not buy rental or flip property. It's just not the normal course of thought.

It's totally a 2nd job. I tend to work 6 or 7 days per week and enjoy it...for now.

For most novices at this point in time of frothy real estate, I would probably suggest not investing in real estate.

By the way...I get at least one to two people per week who ask my "how do you do real estate." 99% of them never pull the trigger on doing it themselves.
Last edited by renue74 on Mon Oct 14, 2019 6:04 pm, edited 1 time in total.

User avatar
packer16
Posts: 1278
Joined: Sat Jan 04, 2014 2:28 pm

Re: REITs or investment property?

Post by packer16 » Mon Oct 14, 2019 3:13 pm

Uncorrelated wrote:
Mon Oct 14, 2019 1:58 pm
Nate79 wrote:
Mon Oct 14, 2019 11:40 am
packer16 wrote:
Mon Oct 14, 2019 10:37 am
One aspect many REIT index fund investors forget is the REIT index fund is a fund of funds. What is cheap is your top level fund expenses your underlying fund expenses can be very high. The last time I checked the look through expense ratio for the Vanguard REIT was on the order of 5%, 4.7% on the underlying & .3% of the top level.

Packer
This is a very important point that is missed by most people on BH posting about REIT index funds.
If it often missed because it's not important. It doesn't matter if the fund takes 20% of 5% of 1%. REIT's are publicly traded companies, unless you believe that markets are fundamentally inefficient all the information is priced in.

The same arguments don't apply for individually owned real estate because there is no efficient market.
If you are comparing individual properties you own with the REITs it is. If on average you assume most underlying real estate is efficiently priced (which I think is true), then the cost matters hypothesis would say cost should matter a great deal.

Packer
Buy cheap and something good might happen

rascott
Posts: 1114
Joined: Wed Apr 15, 2015 10:53 am

Re: REITs or investment property?

Post by rascott » Mon Oct 14, 2019 5:56 pm

renue74 wrote:
Mon Oct 14, 2019 2:50 pm
Just question comes up every few months.

It's like comparing Apple to Oranges.

About 5 years ago I started investing in rental properties in my town because I always wanted to and had the $ to do it finally. I can buy houses for $45K and rent them for $900 to $1200 per month in town.

I have about 10 properties now and occasionally, I'll buy a house and do a complete flip. Just bought one in Feb. for $46K, put $45K into it and just sold it for $155K. It's my money making hobby.

At no point in time did I think...hmmm...can I invest this money in REITs and not buy rental or flip property. It's just not the normal course of thought.

It's totally a 2nd job. I tend to work 6 or 7 days per week and enjoy it...for now.

For most novices at this point in time of frothy real estate, I would probably suggest not investing in real estate.

By the way...I get at least one to two people per week who ask my "how do you do real estate." 99% of them never pull the trigger on doing it themselves.

Very true.... I've been doing it for roughly 15 years, and it has made new me a good bit more than any form of BH type investment. There are a multitude of reasons I like the business, and continue to sniff around for opportunities to add to the rental portfolio. But it's a side business, not a fully passive investment (though some years it's very passive). I've built systems up through trial and error that work good for me. There is always a desire in the back of the mind to just cash it all in and dump all the proceeds into a simple index fund portfolio.... but the returns/ cash flow are something I would miss. I'm sure I'll get to that point somewhere down the road, bur now that I'm running a system based biz, it's actually not the least bit stressful to me.

I've heavily encouraged those that ask to try it out. Go buy one property and see how it works for you. I've had friends talk and talk about it, but never do anything. I've had a couple that have jumped in ... and ended up creating a fairly good size portfolio that exploded their net worth within a matter of under 10 years.

Real estate remains a tremendous way to become wealthy if you take the time to get educated, as you can use relatively high forms of leverage that's cheap and not available in other investments to mere mortals.

rascott
Posts: 1114
Joined: Wed Apr 15, 2015 10:53 am

Re: REITs or investment property?

Post by rascott » Mon Oct 14, 2019 6:17 pm

student wrote:
Mon Oct 14, 2019 10:25 am
Please take a look at this thread about a nightmare tenant. viewtopic.php?f=2&t=191039

Honestly that's not really a nightmare tenant..... the nightmare tenant is the one that doesn't pay plus destroys the property. That was just a routine eviction that ran its course fairly quickly, with a little drama due to her breaking back into the property via a locksmith.

student
Posts: 4142
Joined: Fri Apr 03, 2015 6:58 am

Re: REITs or investment property?

Post by student » Mon Oct 14, 2019 6:20 pm

rascott wrote:
Mon Oct 14, 2019 6:17 pm
student wrote:
Mon Oct 14, 2019 10:25 am
Please take a look at this thread about a nightmare tenant. viewtopic.php?f=2&t=191039

Honestly that's not really a nightmare tenant..... the nightmare tenant is the one that doesn't pay plus destroys the property. That was just a routine eviction that ran its course fairly quickly, with a little drama due to her breaking back into the property via a locksmith.
This proves that I can never be a landlord. :shock: :shock: :shock:

User avatar
unclescrooge
Posts: 3997
Joined: Thu Jun 07, 2012 7:00 pm

Re: REITs or investment property?

Post by unclescrooge » Mon Oct 14, 2019 8:38 pm

DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Stability of cashflows.

renue74
Posts: 1777
Joined: Tue Apr 07, 2015 7:24 pm

Re: REITs or investment property?

Post by renue74 » Mon Oct 14, 2019 9:18 pm

unclescrooge wrote:
Mon Oct 14, 2019 8:38 pm
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Stability of cashflows.
To have some sort of semi stability, you must have multiple rental properties....to offset capital expenditures. Let’s say you have one rental...bringing in $10k per year gross. Then your HVAC goes out and you need to replace it...at $7k.

Move that expense over a rental “empire” of multiple properties and the expense is not as difficult on your bottom line.

Even if you use a property manager, you’re still having more responsibility than a more passive income stream.

retired@50
Posts: 701
Joined: Tue Oct 01, 2019 2:36 pm

Re: REITs or investment property?

Post by retired@50 » Mon Oct 14, 2019 10:30 pm

PTGuy1 wrote:
Mon Oct 14, 2019 7:41 am
What do you all think of owning REITs versus rental property that you hold yourself?
Are they fiscally equivalent?
Are the benefits of a corporate structure around property worth the hassle?
I hold a REIT index fund. In my life I've known several people who are generally handy, and had the time and willingness to own individual rental properties. One example, an engineer at one of the Big 3 Auto companies, went in on inexpensive houses with his brother. They split costs and profits, so there was always one of them around to deal with issues. He and his brother eventually owned 18 houses in the Detroit area, and he earned more from his real estate business than he did being an automotive engineer. So, it's possible, but not necessarily easy. Of all the people I've known who hold individual properties, I've never met one who regretted it, or got out of the business. Another person I know, 91 years old, still owns rental property, which is handled by a property management company. Best of luck.

Uncorrelated
Posts: 171
Joined: Sun Oct 13, 2019 3:16 pm

Re: REITs or investment property?

Post by Uncorrelated » Tue Oct 15, 2019 5:27 am

unclescrooge wrote:
Mon Oct 14, 2019 8:38 pm
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Stability of cashflows.
This argument is fallacious in many ways.

In the vast majority of cases, you don't care about cashflows. You only care about total return. Given sufficient liquidity, all assets with the same total return are equivalent even if their cash flow is different. If you own very illiquid investments such as individual real estate or company stock, cash flow can be important. But depending on your situation, a lower cash flow investment might be preferable to a high cash flow investment (provided that the total return is the same). I would argue that in most cases, a lower cashflow investment is preferable for tax reasons.

Additionaly, in most cases you don't care about the stability of the cashflows. You care about reaching your goals. How does a stable cashflow help you reach your goal? Surely, you want stable total return instead.

Finally, the idea that individual real estate gives stable cashflows is absurd. A REIT of 100 properties *obviously* has more stable cashflow than a single property. An ETF of 100 REIT's obviously has even more stable cashflow than a single REIT. An ETF of the entire world obviously has even more stable cashflow.

There are good reasons to become a landlord, but stability of cashflow isn't one of them.

Uncorrelated
Posts: 171
Joined: Sun Oct 13, 2019 3:16 pm

Re: REITs or investment property?

Post by Uncorrelated » Tue Oct 15, 2019 5:39 am

packer16 wrote:
Mon Oct 14, 2019 3:13 pm
Uncorrelated wrote:
Mon Oct 14, 2019 1:58 pm
Nate79 wrote:
Mon Oct 14, 2019 11:40 am
packer16 wrote:
Mon Oct 14, 2019 10:37 am
One aspect many REIT index fund investors forget is the REIT index fund is a fund of funds. What is cheap is your top level fund expenses your underlying fund expenses can be very high. The last time I checked the look through expense ratio for the Vanguard REIT was on the order of 5%, 4.7% on the underlying & .3% of the top level.

Packer
This is a very important point that is missed by most people on BH posting about REIT index funds.
If it often missed because it's not important. It doesn't matter if the fund takes 20% of 5% of 1%. REIT's are publicly traded companies, unless you believe that markets are fundamentally inefficient all the information is priced in.

The same arguments don't apply for individually owned real estate because there is no efficient market.
If you are comparing individual properties you own with the REITs it is. If on average you assume most underlying real estate is efficiently priced (which I think is true), then the cost matters hypothesis would say cost should matter a great deal.

Packer
A REIT is accurately priced because it is tradable on the stock market and can be traded for pennies. Individual properties are not accurately priced because of high transaction costs, lack of information in electronic format, and liquidity issues.

Because of this, you can beat the stock market with individual properties because there is no efficient market. You can't beat the stock market with REIT's because it's an efficient market, you're playing the same game as the active managers and HFT's and you cannot win. There is no point in comparing REIT's with individual properties, you should be comparing individual properties with total stock market (or more precisely, the entire universe of possible assets).

chw
Posts: 712
Joined: Thu May 24, 2012 4:22 pm

Re: REITs or investment property?

Post by chw » Tue Oct 15, 2019 6:27 am

Direct ownership of investment property is a bit different than owning REIT shares. Direct ownership is a never ending job (think taking a call a 2am from a tenant that the heat went out). One could hire a property manager, but many managers do a poor job of managing, and their cut erodes the positive cash flows of the property.

One positive of direct ownership, is that leverage( a mortgage) is usually used, which magnifies the potential gains (and losses). If you don’t mind managing and maintaining property, this aspect of ownership is what generates the outsize returns for the property owner vs. ownership in a REIT.

hiduplex
Posts: 6
Joined: Sat Jan 19, 2019 11:04 am

Re: REITs or investment property?

Post by hiduplex » Tue Oct 15, 2019 6:31 am

ThrustVectoring wrote:
Mon Oct 14, 2019 1:01 pm
Owner-occupied housing is heavily subsidized, so the real estate investment I personally like is occupying one unit in a duplex, triplex, or quadplex. It still has a hell of a lot of caveats to it - idiosyncratic risk from bad tenants, labor costs for DIYing repairs and managing things, and the correlation between rents and the local job market - but if you can stomach all that the subsidies are really nice.

As a bonus, the entire owner-occupied building is bankruptcy-protected in Texas (and possibly other states).
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Real estate functions as a combination of cash, long-term real bonds, and short nominal interest rates (if financed via 30-year fixed mortgage). Also, the sustainable spending you can draw from real estate is roughly equal to the free cash flow it generates from rents. Price-to-rent ratios are like at most 20, where price-to-drawdown ratios on a three-fund portfolio vary from 25 to 35. In theory, direct real estate is more efficient at generating retirement cashflow than a three-fund portfolio is.
I do this everyone has to have a home mine as well "House Hack" and lower my overall cost of living. I owner occupy a Duplex it is my only rental and real estate investment I have at this time.

User avatar
packer16
Posts: 1278
Joined: Sat Jan 04, 2014 2:28 pm

Re: REITs or investment property?

Post by packer16 » Tue Oct 15, 2019 7:37 am

Uncorrelated wrote:
Tue Oct 15, 2019 5:39 am
packer16 wrote:
Mon Oct 14, 2019 3:13 pm
Uncorrelated wrote:
Mon Oct 14, 2019 1:58 pm
Nate79 wrote:
Mon Oct 14, 2019 11:40 am
packer16 wrote:
Mon Oct 14, 2019 10:37 am
One aspect many REIT index fund investors forget is the REIT index fund is a fund of funds. What is cheap is your top level fund expenses your underlying fund expenses can be very high. The last time I checked the look through expense ratio for the Vanguard REIT was on the order of 5%, 4.7% on the underlying & .3% of the top level.

Packer
This is a very important point that is missed by most people on BH posting about REIT index funds.
If it often missed because it's not important. It doesn't matter if the fund takes 20% of 5% of 1%. REIT's are publicly traded companies, unless you believe that markets are fundamentally inefficient all the information is priced in.

The same arguments don't apply for individually owned real estate because there is no efficient market.
If you are comparing individual properties you own with the REITs it is. If on average you assume most underlying real estate is efficiently priced (which I think is true), then the cost matters hypothesis would say cost should matter a great deal.

Packer
A REIT is accurately priced because it is tradable on the stock market and can be traded for pennies. Individual properties are not accurately priced because of high transaction costs, lack of information in electronic format, and liquidity issues.

Because of this, you can beat the stock market with individual properties because there is no efficient market. You can't beat the stock market with REIT's because it's an efficient market, you're playing the same game as the active managers and HFT's and you cannot win. There is no point in comparing REIT's with individual properties, you should be comparing individual properties with total stock market (or more precisely, the entire universe of possible assets).
IMO I believe individual properties are a lot more efficiently priced than theorized. You have many other buyers of individual properties so you do have an efficient market for homes. Do you have occasional mispricing, yes, but you have that in the equity market also. You may actually have an overvalued market as many people do not put a large value on their own time. The valuable aspect of owning home is you control it & you may be able obtain favorable financing (however with a REIT you can obtain margin lending for cheaper rates than the REITs can borrow at).

Areas I find interesting are in hybrid securities, like NNN real estate. NNN are mix of real estate and a bond portfolio of the leaseors. They typically trade at somewhere between the real estate value and the bond portfolio of the leaseors. If the underwriting of the tenants is done correctly, it should be closer to the bond portfolio but they trade at higher yields (more like real estate) & many are modestly levered so if desired you can add cheap margin leverage if you like.

Packer
Last edited by packer16 on Tue Oct 15, 2019 8:48 am, edited 1 time in total.
Buy cheap and something good might happen

User avatar
nedsaid
Posts: 12802
Joined: Fri Nov 23, 2012 12:33 pm

Re: REITs or investment property?

Post by nedsaid » Tue Oct 15, 2019 8:10 am

arcticpineapplecorp. wrote:
Mon Oct 14, 2019 10:43 am
AerialWombat wrote:
Mon Oct 14, 2019 10:38 am
nedsaid wrote:
Mon Oct 14, 2019 10:21 am
REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
My tenants don’t call me, either. They call the people I pay to take that call.
but then paying others reduces your profits. And in the event the people you pay to take the calls don't do as good a job as you would, or you would like, then you may have to manage other people who are managing your tenants.
Making money with rentals, at least in the beginning, takes sweat equity and probably lots of it. You can hire stuff out but you also hire away your profits. When you get to a certain size and have better cash flow, it gets easier to hire things out but it sure is helpful if you are handy.
A fool and his money are good for business.

rascott
Posts: 1114
Joined: Wed Apr 15, 2015 10:53 am

Re: REITs or investment property?

Post by rascott » Tue Oct 15, 2019 8:53 am

nedsaid wrote:
Tue Oct 15, 2019 8:10 am
arcticpineapplecorp. wrote:
Mon Oct 14, 2019 10:43 am
AerialWombat wrote:
Mon Oct 14, 2019 10:38 am
nedsaid wrote:
Mon Oct 14, 2019 10:21 am
REITs. My REIT funds won't call me at 3 a.m. to report a plugged toilet.
My tenants don’t call me, either. They call the people I pay to take that call.
but then paying others reduces your profits. And in the event the people you pay to take the calls don't do as good a job as you would, or you would like, then you may have to manage other people who are managing your tenants.
Making money with rentals, at least in the beginning, takes sweat equity and probably lots of it. You can hire stuff out but you also hire away your profits. When you get to a certain size and have better cash flow, it gets easier to hire things out but it sure is helpful if you are handy.
I guess it depends upon what you classify as sweat equity.

If by that you mean doing repairs yourself. I've never done a single repair myself in 15 years. If there is a minor issue, I call one of a few handymen/ Jack of all trades types that live close by and can usually be there that day. Bigger issues I make a few phone calls until I find a contractor I'm good with. Over time your build up quite a virtual rolodex of trades.

If someone needs to do toilet repairs themselves (actually never had a toilet issue.... and I charge tenants for clogs they create).... then they've done a poor job analyzing the investment and have likely well overpaid.

I do not use property managers...I do all screening and lease-ups myself, and that certainly can be a time consuming process. As well as managing contractors for larger jobs. So yes that's a form of sweat equity that does not make it fully passive.

User avatar
packer16
Posts: 1278
Joined: Sat Jan 04, 2014 2:28 pm

Re: REITs or investment property?

Post by packer16 » Tue Oct 15, 2019 9:05 am

For those who have direct interest in properties, what do you estimate your unlevered and levered returns to be? TIA

Packer
Buy cheap and something good might happen

StandingRock
Posts: 344
Joined: Sat Feb 02, 2019 6:54 pm

Re: REITs or investment property?

Post by StandingRock » Tue Oct 15, 2019 9:18 am

I have some investment property by way of living in it for a few years. I use a property manager and I put in at most a few hours per year on it. There are tax advantages to owning property vs REIT shares. I think it depends on your individual situation really, there are pros and cons for both options and your own situation might tilt you into either column.

bigwidemoat
Posts: 2
Joined: Thu Oct 10, 2019 6:08 pm

Re: REITs or investment property?

Post by bigwidemoat » Tue Oct 15, 2019 9:33 am

For exposure to real estate, REIT's definitely.

1. No Operations: you get the financial upside and stability of real estate, without the operation headaches of finding tenants, maintaining property, etc. Sure, you could do it all yourself, but typically, it's 24/7 no-thanks close to minimum wage work.

2. Expanded Exposure: you can get exposure to commercial real estate: office space, warehouses, hospitals. Money-generating assets paid by large businesses, not random people.

User avatar
unclescrooge
Posts: 3997
Joined: Thu Jun 07, 2012 7:00 pm

Re: REITs or investment property?

Post by unclescrooge » Tue Oct 15, 2019 10:58 am

Uncorrelated wrote:
Tue Oct 15, 2019 5:27 am
unclescrooge wrote:
Mon Oct 14, 2019 8:38 pm
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Stability of cashflows.
This argument is fallacious in many ways.

In the vast majority of cases, you don't care about cashflows. You only care about total return. Given sufficient liquidity, all assets with the same total return are equivalent even if their cash flow is different. If you own very illiquid investments such as individual real estate or company stock, cash flow can be important. But depending on your situation, a lower cash flow investment might be preferable to a high cash flow investment (provided that the total return is the same). I would argue that in most cases, a lower cashflow investment is preferable for tax reasons.

Additionaly, in most cases you don't care about the stability of the cashflows. You care about reaching your goals. How does a stable cashflow help you reach your goal? Surely, you want stable total return instead.

Finally, the idea that individual real estate gives stable cashflows is absurd. A REIT of 100 properties *obviously* has more stable cashflow than a single property. An ETF of 100 REIT's obviously has even more stable cashflow than a single REIT. An ETF of the entire world obviously has even more stable cashflow.

There are good reasons to become a landlord, but stability of cashflow isn't one of them.
I never said I was buying a single property. I was just just stating my goal. Real estate does have more stable cashflows than equities. And so I would like exposure to that asset class that is disassociated from the capital markets, where cashflows are disrupted by unrelated events.

pyld76
Posts: 272
Joined: Thu Feb 09, 2012 4:15 pm

Re: REITs or investment property?

Post by pyld76 » Tue Oct 15, 2019 11:17 am

If you have the desire/ability to manage your own? Buy investment properties.

If not, buy REITs.

You have seen and will see a bunch of debate on this thread and others about just how much "work" or "cost" or "time" is actually involved in owning the investment property and how to measure that. My take is this: my day job is sufficiently lucrative that if I want to take on additional hours for something income generating, I simply stay in that field. It pays more on an hourly basis than I think I'd be able to capture owning real estate. So, I overweight REITs and get the best of both worlds save the tax advantages of owning actual real estate.
unclescrooge wrote:
Tue Oct 15, 2019 10:58 am
Real estate does have more stable cashflows than equities. And so I would like exposure to that asset class that is disassociated from the capital markets, where cashflows are disrupted by unrelated events.
I think the 2007-2010 period pretty much disproves the notion (anecdotally, at least) that real estate is disassociated from capital markets. You might have something at "should be disassociated" but maybe not even then.

jb1
Posts: 326
Joined: Sun Nov 27, 2016 8:33 am
Location: NC

Re: REITs or investment property?

Post by jb1 » Tue Oct 15, 2019 11:23 am

These arguments are funny.

Yes owning rentals is more work, yes it brings in more. Anyone who says otherwise needs to rethink themselves.

Would you rather own Apple stock, or be a VP at Apple?

One involves work, one doesn’t.

Uncorrelated
Posts: 171
Joined: Sun Oct 13, 2019 3:16 pm

Re: REITs or investment property?

Post by Uncorrelated » Tue Oct 15, 2019 12:16 pm

unclescrooge wrote:
Tue Oct 15, 2019 10:58 am
Uncorrelated wrote:
Tue Oct 15, 2019 5:27 am
unclescrooge wrote:
Mon Oct 14, 2019 8:38 pm
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Stability of cashflows.
This argument is fallacious in many ways.

In the vast majority of cases, you don't care about cashflows. You only care about total return. Given sufficient liquidity, all assets with the same total return are equivalent even if their cash flow is different. If you own very illiquid investments such as individual real estate or company stock, cash flow can be important. But depending on your situation, a lower cash flow investment might be preferable to a high cash flow investment (provided that the total return is the same). I would argue that in most cases, a lower cashflow investment is preferable for tax reasons.

Additionaly, in most cases you don't care about the stability of the cashflows. You care about reaching your goals. How does a stable cashflow help you reach your goal? Surely, you want stable total return instead.

Finally, the idea that individual real estate gives stable cashflows is absurd. A REIT of 100 properties *obviously* has more stable cashflow than a single property. An ETF of 100 REIT's obviously has even more stable cashflow than a single REIT. An ETF of the entire world obviously has even more stable cashflow.

There are good reasons to become a landlord, but stability of cashflow isn't one of them.
I never said I was buying a single property. I was just just stating my goal. Real estate does have more stable cashflows than equities. And so I would like exposure to that asset class that is disassociated from the capital markets, where cashflows are disrupted by unrelated events.
Real estate is not disassociated with the capital markets. See this article from Larry, the returns of REIT's can be decomposed into small cap value and corporate bonds. Due to the additional diversification, such a portfolio is much more stable than a portfolio of only REIT's.
https://www.etf.com/sections/index-inve ... nopaging=1

I repeat that there are many arguments to buy individual real estate, but cashflow isn't one of them. The idea of diversification with real estate is an illusion.

rascott
Posts: 1114
Joined: Wed Apr 15, 2015 10:53 am

Re: REITs or investment property?

Post by rascott » Tue Oct 15, 2019 12:17 pm

packer16 wrote:
Tue Oct 15, 2019 9:05 am
For those who have direct interest in properties, what do you estimate your unlevered and levered returns to be? TIA

Packer

20%+ to infinity in a couple of cases - I own cash flow postive real estate where I have none of my actual own money invested - what's my IRR on that?

All levered at max of roughly 65% LTV.

rascott
Posts: 1114
Joined: Wed Apr 15, 2015 10:53 am

Re: REITs or investment property?

Post by rascott » Tue Oct 15, 2019 12:24 pm

Uncorrelated wrote:
Tue Oct 15, 2019 12:16 pm
unclescrooge wrote:
Tue Oct 15, 2019 10:58 am
Uncorrelated wrote:
Tue Oct 15, 2019 5:27 am
unclescrooge wrote:
Mon Oct 14, 2019 8:38 pm
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Stability of cashflows.
This argument is fallacious in many ways.

In the vast majority of cases, you don't care about cashflows. You only care about total return. Given sufficient liquidity, all assets with the same total return are equivalent even if their cash flow is different. If you own very illiquid investments such as individual real estate or company stock, cash flow can be important. But depending on your situation, a lower cash flow investment might be preferable to a high cash flow investment (provided that the total return is the same). I would argue that in most cases, a lower cashflow investment is preferable for tax reasons.

Additionaly, in most cases you don't care about the stability of the cashflows. You care about reaching your goals. How does a stable cashflow help you reach your goal? Surely, you want stable total return instead.

Finally, the idea that individual real estate gives stable cashflows is absurd. A REIT of 100 properties *obviously* has more stable cashflow than a single property. An ETF of 100 REIT's obviously has even more stable cashflow than a single REIT. An ETF of the entire world obviously has even more stable cashflow.

There are good reasons to become a landlord, but stability of cashflow isn't one of them.
I never said I was buying a single property. I was just just stating my goal. Real estate does have more stable cashflows than equities. And so I would like exposure to that asset class that is disassociated from the capital markets, where cashflows are disrupted by unrelated events.
Real estate is not disassociated with the capital markets. See this article from Larry, the returns of REIT's can be decomposed into small cap value and corporate bonds. Due to the additional diversification, such a portfolio is much more stable than a portfolio of only REIT's.
https://www.etf.com/sections/index-inve ... nopaging=1

I repeat that there are many arguments to buy individual real estate, but cashflow isn't one of them. The idea of diversification with real estate is an illusion.

Very few REITs invest in 1-4 unit residential real estate, which is where the bread and butter of mom and pop investors operate.... so do not see how looking at REITs in comparison to direct ownership of a few rental homes is at all relevant. Many REITs are going to be very much tied to the health of the economy.... particularly those in commercial/ industrial.

I've mentioned here many times that 2007-2012 were the best of times possible to be a single family landlord in most areas of the country (outside of the insanely over-built areas in a few locales)

Stability of cash flow is more impacted by unexpected expenses, IMO, than than actual gross rental income

User avatar
unclescrooge
Posts: 3997
Joined: Thu Jun 07, 2012 7:00 pm

Re: REITs or investment property?

Post by unclescrooge » Tue Oct 15, 2019 12:40 pm

packer16 wrote:
Tue Oct 15, 2019 9:05 am
For those who have direct interest in properties, what do you estimate your unlevered and levered returns to be? TIA

Packer
For the properties bought sold between 2001 and 2006, I would say annualized levered return in excess of 100%. Some properties I bought with less than zero down, yes I did a cash-out purchase, so the unleveraged returns are hard to quantify. But usually I put for6m between 3% and 10%.

For the properties bought in 2005, which I still own, annualized levered return is been 12 and 15%. Since the loans are constantly declining, it's hard to calculate the unleveraged return.

Without leverage, I fail to see the point of investing in real estate. I also don't believe in paying down mortgages early.

What's the levered/unlevered return of your private REIT investments? I know broadstone is about 50% leveraged.

User avatar
unclescrooge
Posts: 3997
Joined: Thu Jun 07, 2012 7:00 pm

Re: REITs or investment property?

Post by unclescrooge » Tue Oct 15, 2019 12:45 pm

Uncorrelated wrote:
Tue Oct 15, 2019 12:16 pm
unclescrooge wrote:
Tue Oct 15, 2019 10:58 am
Uncorrelated wrote:
Tue Oct 15, 2019 5:27 am
unclescrooge wrote:
Mon Oct 14, 2019 8:38 pm
DesertDiva wrote:
Mon Oct 14, 2019 12:19 pm
Maybe your first question should be: "do I really need real estate in my portfolio?" What are you trying to achieve that a classic 3-fund portfolio can't give you? #justsayin
Stability of cashflows.
This argument is fallacious in many ways.

In the vast majority of cases, you don't care about cashflows. You only care about total return. Given sufficient liquidity, all assets with the same total return are equivalent even if their cash flow is different. If you own very illiquid investments such as individual real estate or company stock, cash flow can be important. But depending on your situation, a lower cash flow investment might be preferable to a high cash flow investment (provided that the total return is the same). I would argue that in most cases, a lower cashflow investment is preferable for tax reasons.

Additionaly, in most cases you don't care about the stability of the cashflows. You care about reaching your goals. How does a stable cashflow help you reach your goal? Surely, you want stable total return instead.

Finally, the idea that individual real estate gives stable cashflows is absurd. A REIT of 100 properties *obviously* has more stable cashflow than a single property. An ETF of 100 REIT's obviously has even more stable cashflow than a single REIT. An ETF of the entire world obviously has even more stable cashflow.

There are good reasons to become a landlord, but stability of cashflow isn't one of them.
I never said I was buying a single property. I was just just stating my goal. Real estate does have more stable cashflows than equities. And so I would like exposure to that asset class that is disassociated from the capital markets, where cashflows are disrupted by unrelated events.
Real estate is not disassociated with the capital markets. See this article from Larry, the returns of REIT's can be decomposed into small cap value and corporate bonds. Due to the additional diversification, such a portfolio is much more stable than a portfolio of only REIT's.
https://www.etf.com/sections/index-inve ... nopaging=1

I repeat that there are many arguments to buy individual real estate, but cashflow isn't one of them. The idea of diversification with real estate is an illusion.
Tell that to banks who let you borrow 75% of real estate. They obviously think that's a risk they're willing to take.

Post Reply