Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

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MrCheapo
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Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by MrCheapo »

[Edit. To clarify some ambiguity. I am referring EQUITY reits that own the properties, not say mortgage REITs that are just income vehicles. If anyone knows of an ETF or MF that specializes in equity REITs that are mostly landlords I'd be interested in knowing]

To diversify away from just owning stocks, I wanted to buy some real estate. But I wanted to side step the hassle of owning the real estate and was looking at REITs as an alternative.

Q1) But are they the same as owning residential real estate? I'm not expecting the REITs to get the returns (or tax breaks) that real estate gets you.

Q2) What type of REIT will be the best for matching real property returns I am guessing apartment/housing REITs?

I have space to own the REITs in my Roth so it will be tax efficient
Last edited by MrCheapo on Sun Feb 11, 2024 10:19 am, edited 4 times in total.
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nedsaid
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by nedsaid »

I think REITs are a fine alternative to direct Real Estate investing. If you can hold on long term, these can be fine investments, that is if you can take the volatility. These can be very volatile investments, I saw the REIT Index fall by 10% one day and recover the next. You can buy individual REITs that trade like stocks, my preference would be to buy the REIT Index and get a variety of Real Estate investments and also eliminate single security risk.

I personally own Fidelity REIT Index fund, a Vanguard REIT Index ETF, and a Global Real Estate fund at American Century, all of these in different accounts. The only REIT that I own individually is Weyerhaeuser, which is a Timber REIT.
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by csr »

nedsaid wrote: Sun Feb 11, 2024 12:49 amThese can be very volatile investments, I saw the REIT Index fall by 10% one day and recover the next.
REITs are nothing like real estate. REITs invest in real estate related companies not real estate itself.
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by bonesly »

I agree that it's nothing like being a land-lord... it's more like a high-dividend stock, with all the volatility that stocks have.

See a comparison of asset classes in Portfolio Visualizer.

US Stock: CAGR=9.93%, StdDev=15.56%, Market Correlation=1.00
REIT: CAGR=8.38%, StdDev=19.47%, Market Correlation=0.63
folkher0
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by folkher0 »

REITs are equities, not real estate. They are stocks and they behave like stocks. They do have correlation with the value of underlying real estate assets and the income generated by them. They are tax inefficient because they throw off dividend income. Because they are stocks they are more volatile but also more liquid when compared to real estate.
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by MrCheapo »

csr wrote: Sun Feb 11, 2024 1:22 am
nedsaid wrote: Sun Feb 11, 2024 12:49 amThese can be very volatile investments, I saw the REIT Index fall by 10% one day and recover the next.
REITs are nothing like real estate. REITs invest in real estate related companies not real estate itself.
" REITs invest in real estate related companies not real estate itself." This maybe the case for say mortgage REITs. But there are many that directly own real estate and are effectively landlords. For example all of the shopping center REITs (i.e. AKR) or the apartment REITs (ie. AIRC) or triple net commercial lease REITs (i.e. BNL). Some of the hotel REITs own and sometimes manage the property, but they seem to be not common (i.e. Hilton specifically spun of their property ownership into the REIT ticker PK).

If someone has an ETF that is only for REITs that own properties, I'd like to own that.
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by MrCheapo »

folkher0 wrote: Sun Feb 11, 2024 8:58 am REITs are equities, not real estate. They are stocks and they behave like stocks. They do have correlation with the value of underlying real estate assets and the income generated by them. They are tax inefficient because they throw off dividend income. Because they are stocks they are more volatile but also more liquid when compared to real estate.
To be clear, I was referring to Equity REITs like those that own apartments, nursing homes, hotels, commercial etc. You are right there are mortgage REITs that just lend out money but I was specifically focusing on equity REITs
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Re: Are Owning REITs an Alternative to Owing Real Estate

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csr wrote: Sun Feb 11, 2024 1:22 am
nedsaid wrote: Sun Feb 11, 2024 12:49 amThese can be very volatile investments, I saw the REIT Index fall by 10% one day and recover the next.
REITs are nothing like real estate. REITs invest in real estate related companies not real estate itself.
REITs are the best approximation to owning Real Estate that you can get with securities. It isn't a perfect match. The prices of individual properties are more volatile than people realize, Real Estate is much less liquid than a security, you can't sell with the click of a mouse as you can with a security. The Real Estate companies own the properties. I certainly wouldn't say that REITs are nothing like Real Estate, it is like saying owning stocks is nothing like being a business owner. You still bear a lot of risk and have a potential reward but without the management headaches.
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by MrCheapo »

nedsaid wrote: Sun Feb 11, 2024 9:04 am
csr wrote: Sun Feb 11, 2024 1:22 am
nedsaid wrote: Sun Feb 11, 2024 12:49 amThese can be very volatile investments, I saw the REIT Index fall by 10% one day and recover the next.
REITs are nothing like real estate. REITs invest in real estate related companies not real estate itself.
REITs are the best approximation to owning Real Estate that you can get with securities. It isn't a perfect match. The prices of individual properties are more volatile than people realize, Real Estate is much less liquid than a security, you can't sell with the click of a mouse as you can with a security. The Real Estate companies own the properties. I certainly wouldn't say that REITs are nothing like Real Estate, it is like saying owning stocks is nothing like being a business owner. You still bear a lot of risk and have a potential reward but without the management headaches.
You are right of course. I wasn't clear that I was referring to equity REITs that own the real estate as opposed to say mortgage REITs that lend money to buy real estate.

Do you know of any ETF/MF that is a surrogate for being a landlord?
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Re: Are Owning REITs an Alternative to Owing Real Estate

Post by nedsaid »

MrCheapo wrote: Sun Feb 11, 2024 9:08 am
nedsaid wrote: Sun Feb 11, 2024 9:04 am
csr wrote: Sun Feb 11, 2024 1:22 am
nedsaid wrote: Sun Feb 11, 2024 12:49 amThese can be very volatile investments, I saw the REIT Index fall by 10% one day and recover the next.
REITs are nothing like real estate. REITs invest in real estate related companies not real estate itself.
REITs are the best approximation to owning Real Estate that you can get with securities. It isn't a perfect match. The prices of individual properties are more volatile than people realize, Real Estate is much less liquid than a security, you can't sell with the click of a mouse as you can with a security. The Real Estate companies own the properties. I certainly wouldn't say that REITs are nothing like Real Estate, it is like saying owning stocks is nothing like being a business owner. You still bear a lot of risk and have a potential reward but without the management headaches.
You are right of course. I wasn't clear that I was referring to equity REITs that own the real estate as opposed to say mortgage REITs that lend money to buy real estate.

Do you know of any ETF/MF that is a surrogate for being a landlord?
I was referring to Equity REITs.

I think I am going to call Vanguard and complain that I am not getting any calls regarding plugged toilets at 3 a.m. in the morning. :wink: Isn't that the whole idea of REITs? You get ownership without the management hassles.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by jebmke »

nedsaid wrote: Sun Feb 11, 2024 9:24 am I think I am going to call Vanguard and complain that I am not getting any calls regarding plugged toilets at 3 a.m. in the morning. Isn't that the whole idea of REITs? You get ownership without the management hassles.
And a bit better liquidity :wink:
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by nedsaid »

jebmke wrote: Sun Feb 11, 2024 9:27 am
nedsaid wrote: Sun Feb 11, 2024 9:24 am I think I am going to call Vanguard and complain that I am not getting any calls regarding plugged toilets at 3 a.m. in the morning. Isn't that the whole idea of REITs? You get ownership without the management hassles.
And a bit better liquidity :wink:
Not only that, I am going to complain that I don't have to hire a Realtor whenever I buy or sell. I want to pay those Realtor commissions. :wink:
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by nisiprius »

No. Just for starters... to me the word "landlord" implies residential real estate, while the composition of the Vanguard REIT Index Fund is ⅞ commercial real estate.

Data Center REITS 8.30%
Diversified Real Estate Activities 0.20%
Diversified REITS 2.10%
Health Care REITS 7.80%
Hotel & Resort REITS 2.80%
Industrial REITS 12.80%
Multi-Family Residential REITS 8.10%
Office REITS 4.80%
Other Specialized REITS 6.00%
Real Estate Development 0.30%
Real Estate Operating Companies 0.30%
Real Estate Services 7.00%
Retail REITS 12.70%
Self-Storage REITS 7.00%
Single-Family Residential REITS 4.50%
Telecom Tower REITS 12.90%
Timber REITS 2.50

And, without saying what is better or worse, if you hand off a management task to someone else rather than doing it yourself, you are putting in less work/time/money, but you are incurring mismanagement risk. Very different risk/return propositions.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by nedsaid »

There are residential REITs that you can buy individually. I have chosen to use REIT Index funds and Real Estate Funds rather than buying REITs individually the exception being a Timber REIT. It can be done. Residential REITs will own a portfolio of properties. So one could bake their own Residential Real Estate REIT fund but I have chose not to.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by MrCheapo »

nedsaid wrote: Sun Feb 11, 2024 9:40 am There are residential REITs that you can buy individually. I have chosen to use REIT Index funds and Real Estate Funds rather than buying REITs individually the exception being a Timber REIT. It can be done. Residential REITs will own a portfolio of properties. So one could bake their own Residential Real Estate REIT fund but I have chose not to.
Thanks. I now see you listed some ETF/MF in your first post thanks for those. Are any of these ETFs tax efficient? I'd like to hold some ETFs of REITs in my taxable account if possible, but I know individual REITs are taxed as ordinary income.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by TxFrog »

USRT (iShares Core US REIT ETF) is the only ETF I know of that invests strictly in Equity REITs; no mortgage REITs or companies in the real estate “industry”. Most of the holdings should be REITs that own physical real estate and collect rents.

I have a position in USRT that represents ~9% of my portfolio.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by Impatience »

The S&P 500 and other broad indices already hold numerous REITs so if you’re invested in a typical Boglehead manner then you already have exposure to real estate valuations and income. If you’re going to tilt toward a greater allocation of RE then you should think hard about why you think it will outperform, and not in terms of ‘diversification’.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by nedsaid »

MrCheapo wrote: Sun Feb 11, 2024 10:17 am
nedsaid wrote: Sun Feb 11, 2024 9:40 am There are residential REITs that you can buy individually. I have chosen to use REIT Index funds and Real Estate Funds rather than buying REITs individually the exception being a Timber REIT. It can be done. Residential REITs will own a portfolio of properties. So one could bake their own Residential Real Estate REIT fund but I have chose not to.
Thanks. I now see you listed some ETF/MF in your first post thanks for those. Are any of these ETFs tax efficient? I'd like to hold some ETFs of REITs in my taxable account if possible, but I know individual REITs are taxed as ordinary income.
I hold all of these in IRA accounts. REITs are more tax efficient than people think because of the Section 199A income which essentially gives other business entities a similar tax break to what was given to large corporations when corporate tax rates were lowered. Hard to say if this break will be continued.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by ralph124cf »

Timberland REITs and Farmland REITs are far more concerned with the changes in the value of the land, than about the operating profit from sales of timber or crops. Thus I consider them to be more akin to direct ownership of property. Also, they throw off relatively little income subject to current taxes, compared to other REITs, so are more reasonable to own in a taxable account.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by White Coat Investor »

MrCheapo wrote: Sat Feb 10, 2024 11:05 pm [Edit. To clarify some ambiguity. I am referring EQUITY reits that own the properties, not say mortgage REITs that are just income vehicles. If anyone knows of an ETF or MF that specializes in equity REITs that are mostly landlords I'd be interested in knowing]

To diversify away from just owning stocks, I wanted to buy some real estate. But I wanted to side step the hassle of owning the real estate and was looking at REITs as an alternative.

Q1) But are they the same as owning residential real estate? I'm not expecting the REITs to get the returns (or tax breaks) that real estate gets you.

Q2) What type of REIT will be the best for matching real property returns I am guessing apartment/housing REITs?

I have space to own the REITs in my Roth so it will be tax efficient
No, they're not EXACTLY the same, but both are a viable way to invest in real estate. Both have their pros and cons.

Not sure why you're so anti-mortgage REITs either. Debt investing is another viable way to invest in real estate and one I've become more and more fond of over the years. Although I really prefer private funds to public traded REITs on the debt side.

At any rate, if you are going to stick with publicly traded real estate, I'd suggest VNQ on the equity side and REM on the debt side.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by Lumpr »

FWIW - there are at least a handful of single family home REITS: INVH, AMH, TCN, probably others.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by the_wiki »

The biggest returns advantage of buying actual real estate is that you can borrow heavily to buy it.

Buying a $1M dollar property with $150k is very normal, but you'd be nuts to go 7 to 1 leverage on a REIT.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by yolointopants »

Every time I consider buying REITs, which for some reason I am tempted by every 6-12 months, I re-read this:

https://rationalreminder.ca/blog/2019/8 ... -portfolio
The factor exposure of real estate roughly resembles that of a portfolio consisting of 60% small-cap value stocks and 40% high-yield bonds. This tells us that REITs are not necessarily going to give us something we could not already get by investing in stocks and bonds.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by toomanysidehustles »

the_wiki wrote: Mon Feb 12, 2024 2:35 pm The biggest returns advantage of buying actual real estate is that you can borrow heavily to buy it.

Buying a $1M dollar property with $150k is very normal, but you'd be nuts to go 7 to 1 leverage on a REIT.
^^^THIS^^^ Also, actual real estate is not passive. Most people on this board are NOT looking for a part time job.

Heck, so many posters here hate their jobs so much their main goal is to FIRE. No problem with that, but owning actual real estate will reward you with awesome returns...but you have to "actually do the work" - even hiring property management strips the returns down so much you might as well just keep plowing money in index funds at that point.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by momopi »

Investment property is really not the same as a REIT.

People buy investment home properties for:
* Buying in rapidly appreciating markets to flip for profit
* 1031 exchange to preserve equity gains from taxation
* Rent out for positive cashflow
* Refurbish fixer uppers or stud-out remodel for profit
* Knock down older/smaller house and rebuild larger house on lot for profit
* Access to private community amenities like swimming pools, fishing lakes, boating, golf course.
etc.

Being a landlord also comes with more liabilities. Bad tenant, hole in the roof, squatters, etc.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by Dmevsjd »

I looked at REZ (Ishares Residential REIT) before deciding not to overweight real estate. It’s all equity REITs geared toward residential, storage et al type investments. It has a 0.48% expense ratio so that’s a negative.
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Re: Are Owning EQUITY REITs an Alternative to Being a Landlord/Owning Real Estate

Post by moneyflowin »

the_wiki wrote: Mon Feb 12, 2024 2:35 pm The biggest returns advantage of buying actual real estate is that you can borrow heavily to buy it.

Buying a $1M dollar property with $150k is very normal, but you'd be nuts to go 7 to 1 leverage on a REIT.
REITs are already levered, so buying a REIT with 7:1 leverage is like being 14:1 levered.

BTW, buying a $1M property with $150k is borderline nuts. It wouldn't take much to slip underwater or be cashflow negative
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