REIT vs owning a property yourself

[Stalin]

It seems to be that going with a REIT would be a better idea than buying a property myself. I'm not at the point in my financial life or career where I am ready to settle down and live in a specific town for the next 10+ years. Plus despite the fact that I can make the 20% down payment and the mortgage, that would be a huge commitment.

However if I bought a multi-unit home (2 or 3 units) and lived in one, that would save me decent money (assuming I lived in a city where I felt comfortable staying long term. Due to my career choice I may eventually have to move to a city with a high cost of living, which would be totally different than the real estate prices in the midwest). After factoring in the money I'd save on rent and the income I'd get from renters, that adds up to about $1500 in lower expenses and higher revenue on a property that may only cost me 100-130k. That is almost an 18% ROI annually (assuming the mortgage is paid off). REITs are offering closer to 2-6% a year. Even if I got a duplex, it seems like a 10% ROI in lower expenses and higher income would be pretty plausible. Most REITs don't offer that.

But like I said I'm not ready to make that kind of investment.

Are REITs a better idea than dividend stock for short/medium term investments? What do people like for short/medium term investments?

 

[RunningBum]

REITs are pretty volatile. It's a good way to get some real estate exposure, especially commercial real estate, without the work of owning the properties directly, but I consider it more or less like a sector stock mutual fund. For short/medium term I'd say cash equivalents and bonds. Bonds have some volatility but not like REITs.

Right now I have about 1% of my portfolio in REITs, held in a Roth IRA. I don't remember exactly why, but I found REITs to be a bit of a pain in taxable accounts come April 15. Maybe it was just the late reporting or maybe it was something more, or maybe I'm confusing it with something else. In any case I'd rather have the dividends in a tax protected account.

 

[JoeWras]

REITs are pretty volatile. It's a good way to get some real estate exposure, especially commercial real estate, without the work of owning the properties directly, but I consider it more or less like a sector stock mutual fund. For short/medium term I'd say cash equivalents and bonds. Bonds have some volatility but not like REITs.

Right now I have about 1% of my portfolio in REITs, held in a Roth IRA. I don't remember exactly why, but I found REITs to be a bit of a pain in taxable accounts come April 15. Maybe it was just the late reporting or maybe it was something more, or maybe I'm confusing it with something else. In any case I'd rather have the dividends in a tax protected account.

+1. The tax thing is a pain. I ended up moving my REITs to my IRA. Much less tax pain.

And the volatility issue is true. Like RunningBum, my exposure is relatively small. I'm in it long term and enjoy watching the crazy movements of the REITs. Overall, in time over the last 15 years, they've turned out to be good investments. Thankfully, I didn't do anything silly like get out in 2009.

 

[jon-nyc]

For me its a no brainer. When I invest in the stock market, I buy index funds, not single stocks, because the risk I want to expose myself to is that of the broad equity market, not the various risks associated with owning a lot of one particular company.

Same with real estate - with a broad REIT index, I get exposure to what I want (real estate) and NOT the specific risks of a particular town, neighborhood, or address, not to mention the risk of particular renters.


Oh - and with VGSLX you don't even have to go collect the rent! They deposit it right into your account!

 

[Stalin]

REITs are pretty volatile. It's a good way to get some real estate exposure, especially commercial real estate, without the work of owning the properties directly, but I consider it more or less like a sector stock mutual fund. For short/medium term I'd say cash equivalents and bonds. Bonds have some volatility but not like REITs.

Right now I have about 1% of my portfolio in REITs, held in a Roth IRA. I don't remember exactly why, but I found REITs to be a bit of a pain in taxable accounts come April 15. Maybe it was just the late reporting or maybe it was something more, or maybe I'm confusing it with something else. In any case I'd rather have the dividends in a tax protected account.

Aren't bonds only offering 1-2%? What kind of bonds (federal, municipal, corporate, etc)?

 

[John Galt III]

I got into a REIT 1 year ago, and it has done very well. Knock on wood. I picked it based on its past performance, and got lucky, I guess. There were plenty of REIT's last year that were performing poorly.

 

[RunningBum]

Aren't bonds only offering 1-2%? What kind of bonds (federal, municipal, corporate, etc)?

Yes, but when you say short term I assume you don't want volatility. Medium term can take some but not so much. If you want a higher return, you are taking more risk.

I generally like bond mutual funds. I'm mostly in the Vanguard Total Bond Index for my bond holdings. I've also got some of the High Yield Corporate which has a higher yield but more risk and even Vanguard says it tends to mimic a stock fund more than a bond fund wrt volatility. Something like Wellesley or Wellington are appropriate if you want a mix of stocks and bonds to get a good mix of yield and appreciation without too much higher risk.

It just depends on what your risk tolerance is. There is no free lunch. For the most part a higher return comes with more risk. You can mitigate this some with good research but that only goes so far.

 

[daylatedollarshort]

If you just compare the rates of return of investment property to REITs, you are comparing apples to oranges because of the time and risk factors.

We know people that had a double homicide in their rental and another person who was sued by one of his tenants, and other rental property owners with lots of other stories. Plus investment property takes longer to pick out, maintain and buy than REITs. If you only compare the percent increase per year you are valuing your own time at zero and not factoring any of the extra risks, liabilities and non-portability if you have to move that come with rental properties.

Rental properties can be a good idea, especially because of potential tax advantages, but you have to factor in the value of your time, increased risk and other negative factors. There is a thread on fatwallet right now about tenants that caused 11K in structural damage in the condo building's parking garage.

 

[calmloki]

Yeah, REITS don't come with the entertainment of rental property. Stories about REITS? major snoozefest. Tenant tales? fraught with excitement.

 

[Animorph]

I use VNQ as 5% of my portfolio. It was about the most volatile thing I had during 2007-2012. Not a short term investment, and not like owning property around here at least. It made rebalancing a more frequent and rewarding task however.

 

[mickeyd]

Owning the Vanguard REIT index fund does not require me to answer the phone at 2AM to hear all about the backed up toilet in the rental unit. That's enough of a reason to own REIT.

 

[clifp]

Yeah, REITS don't come with the entertainment of rental property. Stories about REITS? major snoozefest. Tenant tales? fraught with excitement.

LOL, I am quite sure wise folks like you told me this before I ventured into the world of owning real estate. Now 2 years into the process I can state.

"Landlording is not just a job it is an adventure"

In my opinion REIT are a hybrid bond and stock asset class. They are pretty interest rate sensitive but will generally go up and down like regular stocks.

In contrast, owning individual real estate is it own unique asset class and is not closely correlated with other classes.

The good news I think for most people is that owning your own home provides plenty of exposure to the real estate asset class.

 

[bondi688]

REIT offers diversification, and you don't have to deal with the headache of finding tenants, their demands and complaints, repairs, unrented apartments, unpaid rents when you own a couple of properties.

 

[heeyy_joe]

You might try to check out some preferred stock that is related to real estate. Public Storage comes to mind, as does Senior Housing.

 

[ESRwannabe]

I own Vanguard's US and foreign REIT indexes in my Roth IRA.

In my taxable brokerage account I own only one REIT stock. It is possible I will add more REIT companies as time goes on. However, I'm not interested in buying a "generic" REIT company that invests in the typical types of commercial real estate. I'd rather use the REIT index for that.

The one REIT stock I own right now is CXW, Corrections Corporation of America... They are the largest US company that owns and runs prisons... They just changed to a REIT this year and are not in the indexes yet.

As for REIT vs actual real estate, I would never want to be an actual landlord. I look at that as buying your self a part-time job... too much work and liability involved.

 

[bondi688]

ESRwannabe
Running the jails is apparently a great business. Wow.

 

[ESRwannabe]

ESRwannabe
Running the jails is apparently a great business. Wow.

Yeah, there is good money in it... keep in mind that CXW saves states money. They can operate prisons more efficiently than the state governments. Around 90% of prisons are run by the government.

The only way CXW gains business is by doing a better job at it than the government.

 

[bondi688]

ESRwannabe
Great dividend and an impressive 4 years run in share price. Going forward, wonder whether government budget squeeze and the possibility of some disaster events : general liabilities or prison riots and the ensuing claims, are potential limiting factors to such performance.

 

[ESRwannabe]

ESRwannabe
Great dividend and an impressive 4 years run in share price. Going forward, wonder whether government budget squeeze and the possibility of some disaster events : general liabilities or prison riots and the ensuing claims, are potential limiting factors to such performance.

The budget squeeze is a feature not a bug... Most states are already running above legal capacity in their prisons and have no money for expanding... They will be under even more pressure than normal once sequestration kicks in... So this will generate more business for CXW and GEO (the other large player).

There are small prison riots and gang fights all the time. The media just doesn't report it. As far as claims go, prisons are highly regulated. As long as the law and regulations are followed then liabilities are not a concern.

 

[bondi688]

The budget squeeze is a feature not a bug... Most states are already running above legal capacity in their prisons and have no money for expanding... They will be under even more pressure than normal once sequestration kicks in... So this will generate more business for CXW and GEO (the other large player).

There are small prison riots and gang fights all the time. The media just doesn't report it. As far as claims go, prisons are highly regulated. As long as the law and regulations are followed then liabilities are not a concern.

I ought to keep an eye on this. The price action and dividend are rather attractive. Thanks.

 

[FinancialDave]

For me its a no brainer. When I invest in the stock market, I buy index funds, not single stocks, because the risk I want to expose myself to is that of the broad equity market, not the various risks associated with owning a lot of one particular company.

Same with real estate - with a broad REIT index, I get exposure to what I want (real estate) and NOT the specific risks of a particular town, neighborhood, or address, not to mention the risk of particular renters.


Oh - and with VGSLX you don't even have to go collect the rent! They deposit it right into your account!

I echo that -- I have better use of my time than dealing with rentals, and besides, the pay is lousy!

fd

 

[SumDay]

i echo that -- i have better use of my time than dealing with rentals, and besides, the pay is lousy!

+10000

 

[ronocnikral]

It seems to be that going with a REIT would be a better idea than buying a property myself. I'm not at the point in my financial life or career where I am ready to settle down and live in a specific town for the next 10+ years. Plus despite the fact that I can make the 20% down payment and the mortgage, that would be a huge commitment.

However if I bought a multi-unit home (2 or 3 units) and lived in one, that would save me decent money (assuming I lived in a city where I felt comfortable staying long term. Due to my career choice I may eventually have to move to a city with a high cost of living, which would be totally different than the real estate prices in the midwest). After factoring in the money I'd save on rent and the income I'd get from renters, that adds up to about $1500 in lower expenses and higher revenue on a property that may only cost me 100-130k. That is almost an 18% ROI annually (assuming the mortgage is paid off). REITs are offering closer to 2-6% a year. Even if I got a duplex, it seems like a 10% ROI in lower expenses and higher income would be pretty plausible. Most REITs don't offer that.

But like I said I'm not ready to make that kind of investment.

Are REITs a better idea than dividend stock for short/medium term investments? What do people like for short/medium term investments?

I assume by "owning a property yourself" you mean residential and renting it out to individuals to live in. This differs from an REIT, which invests mainly in commercial real estate, but there are some residential aspects to it. Plus, you get a diversification benefit. I would look beyond the "ROI," as most people overstate it and look more at the PITA owning a rental would be.

One thing many people don't talk about is exposure to RE outside of the US. It is a newer thing, but VG does offer an ETF for international REIT, VNQI. Boglehead's have put it under the microscope...some tidbits.

Bogleheads • View topic - How (and whether) to add Global ex-US Real Estate?

I don't have any disagreement with the diversification benefit. My issue is with the cost of these funds. The expense ratio for a foreign real estate fund is high, and global real estate funds not much lower even though the global real estate funds holds about half in US REITs.

Rick Ferri

From Bernstein's Investor's Manifesto

Another asset class worthy of consideration is international REITs — property companies in Europe, Asia, and Australia. Like U.S. REITs, they have suffered recent massive price falls, and consequently yield dividends in excess of 8 percent. They may also offer even more diversification than their domestic cousins. Their only drawback is that they are only available in passive funds to independent small investors in ETF form, and thus incur commissions and spreads. Since this asset class should not constitute more than a few percent of anyone's assets, I do not recommend including it in a portfolio unless its size is at least several hundred thousand dollars, and you can tolerate a highly complex mix of assets.

I sliced my REIT allocation to half US/Int'l and added some exposure (5->7%). I'm young (30) and I think there is a lot to be gained from international countries as they move into the developed world, and the already developed countries. I don't have the 5% earmarked for "testosterone" investing, so instead of trying to pick individual securities, I bought an int'l REIT.

 

[nun]

Owning the Vanguard REIT index fund does not require me to answer the phone at 2AM to hear all about the backed up toilet in the rental unit. That's enough of a reason to own REIT.

If you employ a manager you don't need to get those phone calls.....generally they'll charge between 5% and 10% of the rent.

Buying a rental property in a good neighbourhood was one of the best things I've done financially and ER wise.

I live in a 2 family house and manage it myself because it takes so little time and effort. I've always had good tenants. I do the small jobs myself and call in the professionals when it gets too complicated, just as I do in my own apartment upstairs. Now that the mortgage is paid off the $1200/month I get in rent is really nice, and once I stop work it will be great to know that someone will still be paying me a check every month. Also if I move downstairs and rent out the slightly nicer and bigger apartment I live in now I could increase the rent check to $2000/month, but I'd have to deal with renting to a family or other group of people so it might be more work, still I have the option.