Real Property or REITs ?

[ICNTR]

As some of you know, I am a little new at the ER thing. Please forgive me if I'm asking previously discussed topics.

Right now I feel that we are a little heavy in cash at about 17% which equates to about 6.5 years of annual expenses. I am trying to decide how to invest some of that in something other than stocks or bonds.

We currently do not own a home or any real estate. My general question is, if we wanted to diversify by adding real estate to our portfolio, should I do a REIT type of fund or go ahead and buy real property such as a primary home, a home to rent out, house to flip (DIY basis), farm or hunting land, etc. I am in southwest Missouri near Branson, MO where prices are seem to still be extremely depressed and I could be selective. However, no way to know if things will start picking up on 6 months or in 10 years! Also need to consider the hassle of renters, expenses and maintenace, and/or eventually having to sell the real property. (makes REIT fund sound easy!)

I know finance versus cash is a huge debate so I won't breach that subject. Let's assume that I will just pay cash in this case just to simplfy the discussion.

Thanks for any thoughts.

 

[Stress-Free Retirement]

You have to live somewhere. Owning a home gives you a sense of community, tax deductions, appreciation potential, some inflation protection (from a fixed mortgage).

If you can afford it, don't plan on moving for 5 years as well as a host of other considerations, owning a personal residence can give you more benefits than a REIT (albeit with more hassles and responsibilities).

REITS give no headaches, no leverage or tax deduction either and you stil need a place to live. Anyway just a few quick thoughts before the Falcons game!

 

[mathjak107]

It all depends if you want passive income or a job.

A reit wont wake to up at 2am and tell you the heats out .

A reit wont tell you the toilets clogged.

I have never had to evict a reit.

 

[kumquat]

If you're not planning to move in the next several years, a home offers a place to live on your terms, tax free gains (if any) and a few other things.

A REIT offers passive income (and potential gains).

A residential rental property offers headaches.

The only real property I'd want to own (and do own) is farm land. Very few hastles and if priced right no lack of good tenants. YMMV with location.

 

[HawkeyeNFO]

I think I would stay away from REITs. They are investing in more and more garbage these days, as the decent properties are less available due to high demand from REITs. Your situation may dictate otherwise, but right now seems like a good time to buy a primary residence due to real estate prices seeming to have bottomed out and low interest rates for mortgages.

 

[SumDay]

I inherited investment real estate. My mantra is now "if you love your children, and you won't leave them real estate."

Buy your own home and love it. I'd suggest staying as far from residential investment real estate as you can. Being a landlord or note holder is a never ending nightmare.

And by the way, I love Branson. We go at least once a year.

 

[David1961]

I own a couple of REITs, and they are paying 3.5% and 6% respectively. Not bad considering that they do not have the hassles that renting has. On the other hand, your money is not very liquid and there is no guarantee of a certain yield. If the real estate market tanks, it will affect your REIT.
I think your decision should be based on part by how long you plan on staying in the Branson area.
And I'd be cautious about renting property - it sounds easy on paper but most people I have talked to have horror stories about renting out property.

 

[sunsnow]

I disagree with most on in this forum about this issue. I think it can be prudent to invest in rental real estate. I look for properties that are in established neighborhoods, that are at a price that allows me to have professional management and to put aside sufficient money in reserve for maintenance expenses. I like owning properties more than shares in REITs, because I have more control over all aspects of the investment. So far, I have seen about 7.5% annual income, after all expenses including setting aside 10% of gross rents for maintenance. I have also seen considerable capital appreciation, but since I don't plan to sell, I'm not concerned about that.

 

[Spanky]

Buying a home to live is not exactly the same as investing in real estate. As others have mentioned, if you are planning to stay in an area for 5-years or more, buying is better than renting.

 

[kumquat]

I disagree with most on in this forum about this issue. I think it can be prudent to invest in rental real estate. I look for properties that are in established neighborhoods, that are at a price that allows me to have professional management and to put aside sufficient money in reserve for maintenance expenses. I like owning properties more than shares in REITs, because I have more control over all aspects of the investment. So far, I have seen about 7.5% annual income, after all expenses including setting aside 10% of gross rents for maintenance. I have also seen considerable capital appreciation, but since I don't plan to sell, I'm not concerned about that.

I have a friend who thinks like you. He tells me it's really easy to find a rental with positive cash flow after allowing 10% for maintenance, 10% for management and a few % for vacancies. His business card reads "Realtor" not "snake oil salesman" but I think he actually believes it. He has owned several over the years but I doubt he ever paid that 10% management fee. He may have collected a few.

 

[FIREd]

To invest in commercial real estate properties, I prefer to use REITs. For residential real estate and land, I prefer to own real properties.

 

[teejayevans]

Your upside/downside is greater if you personally own the real estate, more risk, more hassle, less diversification, but possibly more reward, I owned a rental for a short time and hated it. I would use a VGSLX.
TJ

 

[rescueme]

To invest in commercial real estate properties, I prefer to use REITs. For residential real estate and land, I prefer to own real properties.

U R correct.

A lot of folks don't know the difference between commercial RE investments (e.g. REIT's), which provide a return based upon rentals, along with expenses if not contracted for lease, and holding property such as a home, or even a rental (which probably would not be commercial RE).

While it's all "real property", what you invest in (based upon your "target holding") and how you invest does make a difference.

 

[67walkon]

If I had a really big chunk of money, like millions, to invest in real property, I would invest in an apartment building with a full time manager or a very stable strip center type property. With smaller amounts, it would be a REIT. Managing a few single family rentals is a pain in the rear end. I had 3 for about 15 years and loved it when everything went smoothly, but hated it when everything didn't go so smoothly. Like the Sunday afternoon when a tenant called to tell me the condo was flooding. "Turn the water off outside and I'll be there in 30 minutes" I said. Got there in about 30 minutes and the water was still on--they either didn't know where the cutoff was or didn't care. Or the many times tenants would be a little late on rent-do you evict them or work with them? Then you figure out that there are people out there who know they can string you along and get 4 or 5 months of rent free living before you can get them out.

I won't be a landlord ever again. And if I did have $2-3,000,000 to put into real estate, I wouldn't do it because at that point, it would be "why bother".

I might look at putting some money in a REIT, but not into individual properties.

 

[sunsnow]

I have a friend who thinks like you. He tells me it's really easy to find a rental with positive cash flow after allowing 10% for maintenance, 10% for management and a few % for vacancies. His business card reads "Realtor" not "snake oil salesman" but I think he actually believes it. He has owned several over the years but I doubt he ever paid that 10% management fee. He may have collected a few.

Are you implying that I'm not actually getting the return I think I am? Since people tend to be negative about rental property on this forum, I do wonder why I see things differently. Hope I'm not missing something, but like I said, I am getting 7.5% after ALL expenses -- and that's with fixing up the properties so that they don't have any deferred maintenance, paying a maintenance company so I don't deal with any tenants, and setting aside big reserves. Also, the properties are in very stable, desirable neighborhoods. I'm not a realtor and don't need to convince anyone else of the wisdom of my approach -- but If I am missing something, I wish someone would help me see it, before it bites me.

 

[kumquat]

I'm not suggesting that you are exagerating. Real estate is local. You may be able to get such returns in your market. You won't get them here. Others may or may not depending on their local market.

 

[sunsnow]

Real estate is local. You may be able to get such returns in your market. You won't get them here. Others may or may not depending on their local market.

This is very true, and in fact in my market returns never went above 4.5% until the crash. I used to wonder why anyone would invest in those properties. But things have changed and the numbers now add up. I guess in some places they still don't make sense, though.

 

[ejw93]

Residential Real Estate

I disagree with most on in this forum about this issue. I think it can be prudent to invest in rental real estate. I look for properties that are in established neighborhoods, that are at a price that allows me to have professional management and to put aside sufficient money in reserve for maintenance expenses. I like owning properties more than shares in REITs, because I have more control over all aspects of the investment. So far, I have seen about 7.5% annual income, after all expenses including setting aside 10% of gross rents for maintenance. I have also seen considerable capital appreciation, but since I don't plan to sell, I'm not concerned about that.

Sunsnow -

I recently jumped in with both feet and bought a detached residence in the SouthEast (out of state). I sold REIT shares from my taxable brokerage acct to fund the down payment.

I did it b/c I believe too many of the markets are now heavily correlated (domestic stocks, domestic bonds, REITs, overseas stocks, overseas bonds). Historical asset allocation lessons may no longer apply- I'm tired of watching my investment balances take a wallop because a tiny Mediterranean Archipelago with a GDP smaller than the state of Indiana makes irresponsible pension and benefit commitments to its citizens.

Everyone has to live somewhere. Right now it is dirt cheap to borrow money, and in many markets homes are selling for less than 70-80 percent of their replacement cost. Including reasonable assumptions for rents, delinquencies, maintenance, and professional management I will have positive Before Tax Cash Flow. I'm not counting on the residence appreciating at all, but if it does, its an added bonus.

The way I see it, borrowing money right now at low fixed rates (30-year mortgage) at little or no out-of-pocket cost is a great hedge against the inflation that will come WHEN the economy recovers.

Will let you know how it goes.

 

[haha]

With REITs, it depends on what you buy, when you buy, and how much you pay.
With all the usual caveats about concentration and timing (all of which I ignore) now would not seem to be a wonderful time to buy a basket of REITs. OK maybe, I don't know, but it doesn't jump out and say kiss me.

13 months ago I bought one REIT, Weyerhaeuser. It was fairly cheap because its earnings are highly tied to housing starts, esp sfh starts. Also because those interested in timber REITs tended to be drawn to Plum Creek Timber. However compared to WY, plum Creek timber is junk. WY owns prime Pacific Coast forest lands, and very good southern pine plantations. I don't consider WY cheap anymore, but haven't sold. I may sell, or I may wait to see if it gets an QE-infinity bounce. But in thirteen months I have collected a 3% dividend, and am sitting on a 50% capital gain. I also own another timber vehicle, which I bought in 2008. That one is up over 100%, with good income too, but it is not a REIT

In the past I have at times had over 50% of my port in REITs, most prominently VNO.
I try hard to avoid 2nd stringers.

Ha

 

[MBAustin]

I inherited investment real estate. My mantra is now "if you love your children, and you won't leave them real estate." ...

+1

My grandfather was a [-]slumlord[/-] landlord in the small town where I grew up. The properties passed to my parents and my dad managed them for many years. When they moved to FL about 15 years ago they started the process of gifting them to us kiddos. Neither of us live within 250 miles now and remotely managing them has been a hassle and honestly has caused a lot of unnecessary stress between us. We have been selling off the properties over the past few years (a major hassle in itself). One more closing to go and we'll be very happily out of this business that we wish we had never been in. In hindsight, I wish we had talked about this more and asked our parents to sell the properties rather than turning them over to us. So if you decide to go the rental route, decide in advance along with your heirs what will happen down the road.

 

[RetireBy90]

I think back to OP, I would consider a primary residence and investment in individual properties and/or REITs as separate items.

A personal residence has lots of advantages and would recommend this if you can afford it. One big advantage is that you will pay a similar amount in rent or payments. However, you payments (principal and interest) don't go up with inflation like rent does. 2nd big advantage is one day you will have a place to live without payments or rent.

On rental properties, we have owned several and I don't manage them. First, you need to look at them like any other investment, what do you invest and what is your return. It does take some time and effort, but then so does any other good investment. You gotta watch them all. Just went through this with a bud and he bought a house in Reno. He should get 6% return with management costs included (he paid cash).

My view FWIW

 

[SumDay]

MBAustin, AMEN! Don't assume your kids will be delighted to receive (what you perceive to be) a valuable gift.

You name it, it happened to me: I had one of dad's tenants try to sneak into dad's intensive care room (by telling the nurse he was my brother) to sign a "release", thus gifting the house to the tenant. The one good payer we had passed away, leaving his wife with no life insurance and a mortgage. She is a nursing assistant at a retirement home. And one guy moved in with the sole purpose of suing me to try to steal the house from me. That was HIS retirement plan. Thank heaven the judge saw it differently. That only cost me $22,000 in legal fees, and he left the house in shambles. I sold it for pennies on the dollar.

So again, have an exit strategy. Your kids may not live near the properties, and even if they do, they may have absolutely no interest in trying to fill your landlord shoes.

 

[foxfirev5]

My experience with tenants has been that anything can happen. One more element of risk. Personally if I need the income that a rental property would provide I would keep my day job for a little longer. Much easier, more profitable and I sleep well at night. I strongly prefer liquid investments that I can follow at my leisure.

 

[mathjak107]

me tooooooooooooooooooo!