real estate vs. stocks

J

Joe T

Guest
I'm mostly interested in multi-tenant
investment properties as a source for retirement
income. I've noticed most of the discussion in ER
mentions stock/bonds/cash, but not much in
terms of investment real estate.

I was just wondering how you folks feel
about rental property vs. stock as a retirement
income source. I'd think the cash flow would
be more stable, in addition to the property (land value?)
ability to keep up with inflation. What are some
of the things to look for? Is properly value loss
a major issue (mostly due to building age)?
Anyone living out of income from rental property?
How is that likely to play out long term, e.g. 30-50 years
later?

Thanks,

Joe
 
Rental property = Job = Work = Not retired :)

You might make more money with the rental property than stocks, but you should because lets face it - it's a job!
 
Rental property = Job = Work = Not retired :)

You might make more money with the rental property than stocks, but you should because lets face it - it's a job!
Click to expand...

I agree with Cut-Throat. I will inherit a small house one day from my aunt that is close to a college and thought about the prospect of renting to students. Then I thought about all the maintance calls I would get. No thanks......I will just sell it and put the proceeds in a REIT if I feel like I have to have something property related.
 
I agree with Cut-Throat. I will inherit a small house one day from my aunt that is close to a college and thought about the prospect of renting to students. Then I thought about all the maintance calls I would get. No thanks......I will just sell it and put the proceeds in a REIT if I feel like I have to have something property related.
Click to expand...

My parents owned an apartment building full of students. What a trip that can be!

Mikey
 
Rental property = Job = Work = Not retired :)

You might make more money with the rental property than stocks, but you should because lets face it - it's a job!
Click to expand...

Not necessarily true. There are companies that do the work for you, and all professional investors in rental properties employ such management companies (or are themselves one). For individuals, it is split: some do the management work themselves, and others hire a management company. The "work" then is being sure that the management company is doing their job.

In my case, the jury on the economics is still out. I believe it is a good path and have made money in the past. Both major purchases have followed the same timeline - manage it myself for 2 years, then hire a management company. For the second purchase, I just contracted the company last month. I couldn't find good help, and it was too much like a job. Managing it myself held expenses down while I replaced the appliances, but did take some time. Then I got tired of it, just on schedule, and hired the work out.

Wayne
 
re-reading your post, I wonder if you mean commercial or residential? I know people who have done well with both, and the headaches are fewer with commercial, but more major when they come up. I don't think that I personally would place as significant a portion of my assets in a commercial property as I would a residential property, and would not place >20% in either.

Of my non-indexed investments, I have a multifamily building, and 2% of a shopping center.
 
I have done well in real estate and have owned about every type you can buy. Currently we still have 50%
of our net worth in directly owned real estate.

Re. commercial property; I once owned a very large building
which was used as a manufacturing/distribution
point. I managed to find a new tenant who
(as part of the lease) agreed to put on a new roof
within the first 6 months of occupancy. The roof had been shot for years and I had just patched and patched
after I saw what a new roof would cost. Anyway, they
did the roof and moved out 2 months later, breaking the
lease. I chased them for the lost rent and settled for 50%, but truly I was pretty happy with just having the roof. I sold it soon after and it wouldn't have been
so easy with puddles on the floor and water marks on the walls. Got lucky again. As someone pointed out,
commercial can be easier than residential, but the
problems tend to be bigger.

JG
 
re-reading your post, I wonder if you mean commercial or residential? I know people who have done well with both, and the headaches are fewer with commercial, but more major when they come up.
....

Of my non-indexed investments, I have a multifamily building, and 2% of a shopping center.
Click to expand...

I meant residential (multi-tenant) on my original post.

However, I have also considered commercial, specially
NNN type of properties which I thought would
minimize - if not eliminate - most of the management
headaches. Has anyone had any experience with
NNN properties that confirm this?

Also, to offer a low-entry point, I've seen a lot
of companies offering Tenants-In-Common
where you own usually parts of large properties.
In the residential space, there are offerings
for large apartment complex, while
for commercial, shopping malls or office spaces
(often with a NNN set up) are also available.
Lots of these offerings come as part of 1031-exchanges
to avoid capital gains. Since these are professionally
managed, including have a management budget
allocated (for repairs, etc.), it seems it would eliminate
most of the management work. The downsides
are the high upfront fees (up to 15% of the
purchase price) the companies offering
these charge, and the loss of flexibility as all
tenants need to agree on what to do, including when
or whether to sell. How do you folks feel about
these set ups? Has anyone had any experience (good
and bad) to share with us?

Thanks for all the reponses, btw. I'm new here and
am really enjoying learning from all of you.

Joe
 
I am squeemish about the tenant in common (TIC) arrangements because of the potential for unlimited liability and the difficulty of exiting the investment. If you did invest in one, I would recommend forming a LLC to be the owner so the liability is limited to the assets of the LLC. Get good insurance. Investigate securities issues. See if your interest is freely transferable.

I also don't like the provision that all have to agree to sell, but there really isn't a good way around it. Generally if there is a dispute about a sale, any one of the owners can ask the court to partition the property, which generally means a court ordered sale.

I wouldn't do it myself. We have invested in a number of real estate limited partnerships and LLCs and I prefer those vehicles.
 
I am squeemish about the tenant in common (TIC) arrangements because of the potential for unlimited liability and the difficulty of exiting the investment. If you did invest in one, I would recommend forming a LLC to be the owner so the liability is limited to the assets of the LLC. Get good insurance. Investigate securities issues. See if your interest is freely transferable.
....

I wouldn't do it myself. We have invested in a number of real estate limited partnerships and LLCs and I prefer those vehicles.
Click to expand...

Thanks. I really appreciate the advice.

Which sorta raises the question of how owning
a real estate LP/LLC, or a REIT, compares to
actually owning a property directly. What would some
of the tradeoffs be? Do you find more volatility
in owning a LP/LLC/REIT, or would think they directly
correlate to real estate prices?

I recall back in the late 90's when interest rates where
much higher, you could find REITs/LPs with
pretty good cashflows - around low 10's%,
But now, most are yielding only around 5-8% so
I wonder as interest rates rise, whether their prices would
fall to adjust for the spread to lower risk bonds, eg.
treasury. What is on take on their outlook?

Thanks,

Joe
--
 
I'm curious. How do you find RE LPs or LLCs to invest in?
 
VERY dependent on your local real estate market.

Around here, you cant make the cash flow work.

We're in the process of selling my wifes old house rather than rent it. We can get $240-250 for the house outright, or rent it for roughly 1100-1200 a month. After our expenses, we'd clear about $800 a month. Just investing the sales proceeds in a 5 year 5% cd would give us more than that with zero effort or liability.

On the other hand, seven years ago I got in the mood to buy some rental homes. A 3/2 of reasonable size, new construction on a small lot could be had for $140-150 and rented out for $1000 a month. The numbers worked. I made an offer on one that was accepted, but the elderly woman selling it backed out about a week before closing. I was a little annoyed at the massive waste of time so I shelved the idea for a while. Real estate prices shot up and shortly the numbers no longer worked.

But had I gone through with the plan and bought six of those, I'd be in fat city. Those homes are selling for $350-390 a pop right now.

I'll probably drop the money into a CD for now and wait for REIT or stock prices to improve. Maybe split it between CD's and vanguards HY bond fund. We wouldnt even have a use for the extra income. Probably turn into the kids college money at some point.
 
I'm curious. How do you find RE LPs or LLCs to invest in?
Click to expand...

One of our former lawyers at heart was really a doer of deals. His first deal was some property Resolution Trust was getting rid of in the S & L failure days. He scrapped up money from friends, clients and relatives and bought an office building and an apartment building. He flipped them a few years later. Eventually, DH and I became investors in some of his deals and hold LP/LLC interests in some apartment buildings in Arizona and Florida, as well as in some land held for investement. Has done well, but nothing new has come along for about a year---he says everything he is looking at now is overpriced.

He is one of those guys who will do deals until the day they die, no matter how many millions they accumulate. Very intense. I wouldn't want to be married to him.

:)
 
I think the NNN properties are the way to go if you really want to be retired. I have individual rentals, and they made me a lot of money but they were also a lot of work. I have a friend currently looking to invest a 2.1mil 1031 into a NNN property. He is finding that they sell almost as quick as they come on the market, especially the ones with cap rates approaching 8%.
 
I think the NNN properties are the way to go if you really want to be retired. I have individual rentals, and they made me a lot of money but they were also a lot of work. I have a friend currently looking to invest a 2.1mil 1031 into a NNN property. He is finding that they sell almost as quick as they come on the market, especially the ones with cap rates approaching 8%.
Click to expand...

Beachbum, do leases on this type of property usually contain rent escalation clauses of some sort? Ie, CPI, PPI, or some kind of property index?

Thanks, Mikey
 
Beachbum, do leases on this type of property usually contain rent escalation clauses of some sort? Ie, CPI, PPI, or some kind of property index?

Thanks, Mikey
Click to expand...

From what I've seen, most NNN leases do have
escalation clauses which trigger over the years.
The one thing about NNN properties is that they
are usually fairly expensive - from around 1.5M up
for small ones, e.g. Burger King, to 3-5M for
a Walgreens, to 50M for a large shopping center.

Wouldn't it be nice to have about 30-50M to buy
a large shopping center on a prime location
with absolute NNN terms yielding 8% cashflow?..;-)

Joe
-
 
I'll probably drop the money into a CD for now and wait for REIT or stock prices to improve. Maybe split it between CD's and vanguards HY bond fund. We wouldnt even have a use for the extra income. Probably turn into the kids college money at some point.
Click to expand...

What if you already own REITS? The YTD is -5.7%. Should you sell? Let's suppose REIT represents 10% of your portfolio.

Spanky
 
Good hypothetical question since REITS compose about 10% of my port right now.

At the end of last year, I felt they were really over done. I was going to sell some off and rebalance. After a few hours of consideration, I couldnt find anything I liked a lot better to balance into. Then we had a baby. Then the price was down ~6%. Then I decided they werent as overpriced as they had been (still over, but less) and to do nothing.

Apparently the multiple confluences of life have conspired to turn me from a dirty market timer into a boring investor that will probably do better as a result ;)
 
Mikey,
Yes it appears that most have some clause for rent increases, but they all seem to vary quite a bit. For instance, one property my friend has been looking at has an increase every 5th year at 2xCPI, but capped at 10%, others are annually, some, like Walgreens, have 25 year terms with NO rent increases.

They do tend to be pretty expensive like Zak mentioned, Applebees, Arbys, Johnny Carinos and Tire Kingdom are all about 2 million or so, but have cap rates of 7.3 to 8.25% with rent increases. You can get loans on these, but usually would be 15 year terms which would cut into the cash flow pretty bad. I also heard there were some medical properties in the 350K range with 8% cap rate, but I know nothing about them.

Also, you need to be sure that you are looking at "absolute NNN" properties. Some properties have clauses that require you to maintain the roof and parking lot; I wouldn't want any part of that!

How 'bout a few early retirees, forming an LLC to purchase a couple of properties, basically having your own REIT with a return of about 7.5% less expenses.

The Beachbumz
 
I was able to pick up several single family homes on the repo market during the S&L collapse back in the 80's.  It was a job, and even though I sold them all at a nice profit, if one added the hours and effort it was not all that great a money maker.  Many folks will tell you how much they made on a real estate deal, but they are just telling you about the cash out, and seldom about the real investment energy it takes to make real estate work.  The capital appreciation should be considered in the context of the management and maintenance costs over the ownership period.

With the exception of my home I own CD's, bonds and funds.  I have a large position in the Vanguard REIT index and the Third Avenue Real Estate funds, and they pull a decent return without any real effort on my part.  And thats the way I prefer my real estate investing! 8)
 
Back when I was still hunting, I owned quite a bit of raw land. I had to hold it a long time, but my family was using it and I did real well when I finally sold. There was
a long holding period, but no management worries in the meantime. Actually, our condo is similar
in the sense that we have hired management and we get to use it personally. Even so, we have positive cash flow, tax deductions, and appreciation is a slam-dunk.

JG
 
Many folks will tell you how much they made on a real estate deal, but they are just telling you about the cash out, and seldom about the real investment energy it takes to make real estate work.  The capital appreciation should be considered in the context of the management and maintenance costs over the ownership period.
Click to expand...

I think this is the real appeal of the absolute NNN properties. You have to spend about 5 minutes a month (walk to mail box to get check :D) on managing these properties and you get a nice return. You also get to shelter part of the return from taxes with the depreciation deduction.

The Beachbumz
 
I have a large position in the Vanguard REIT index and the Third Avenue Real Estate funds, and they pull a decent return without any real effort on my part.  And thats the way I prefer my real estate investing!
Click to expand...

Basically, you are paying people to manage your property, and still making a decent return on your investment. You should be able to accomplish the same thing without the REIT, if you were so inclined. You would not have the costs of managing the fund itself, but you would probably not have the diversification either.
 
It just occurred to me that our Texas condo is the
first piece
of real estate I ever owned with professional management. I tried to buy some pretty large apt.
complexes a few times with the idea I could hire management, but never got it done. Anyway, like with
all services, there is a wide variation in what you get for your money. We are fortunate that the realtor's office
is about a mile from the condo, and she knows the
property intimately. Also, her fee is reasonable and
she is quite honest and reliable. Got pretty lucky on my first time handling a rental in this manner.

JG
 
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