Rental property vs REIT

Leveraging, renting vs owning, making an investment or buying a home?
Blaargh
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Rental property vs REIT

Post by Blaargh » 01 Jan 2017 12:29

I own a rental property. Rental income after expenses works out to 2.5% per year in a problem-free year. In a year with major expenses (new roof, new sewer, etc) or vacancies, that number is closer to 0%. No mortgage. The property value has increased by 5-6% per year on average, although the last 4 years have been flat or perhaps even declining slightly. So, since purchase, it has returned ~7.25% per year (rent + property value - renovation expenses).

I'm contemplating selling it and putting the money into a REIT ETF.

With the REIT, the monthly distributions would be double what the current rental income is, and likely a little more tax-friendly as well. I would not have to fix toilets, haul broken washing machines up staircases, etc. And I could increase/decrease my holdings as needed.

Although the past is not necessarily predictive of the future, I used longrundata.com to see what the outcome would have been had I put the money into XRE instead of buying the rental property. The REIT ETF would have returned 7.75% per year over the same period (>10 years). So, no significant difference financially, but much less effort required on my part.

I don't necessarily have a problem with the time commitment of property management if it earns me greater returns. But if it doesn't, I don't see why I'd bother.

One drawback of selling the property would be capital gains tax payable and realtor fees. The other would be that the rental property seems less correlated to the stock market's ups and downs than a REIT would be (although the comparison above seems to indicate that this evens out over time).

Is there anything I've overlooked? What would you do in this situation?

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Re: Rental property vs REIT

Post by Just a Guy » 01 Jan 2017 12:53

The money to be made in real estate is not from a paid off property, but rather the leverage on it.

Let's say you have $100k and you buy a single property with it completely paid off. You rent it for $1000/month generating $12000/year before expenses. Let's just say real estate appreciates at inflation levels, in 25 years you've got a place still worth $100k in real dollars, and maybe made a modest monthly dividend.

Scenario 2 is you take that same $100k and put 10% down on 10 properties each worth $100k. You now generate $120k/year on $1M of assets. True, your expenses are higher, but let's say you break even. In 25 years you now have $1M in real dollar assets and $120k/year in real dollar dividends.

The trick, of course, is proper management. Which is the same for REITs, you can screw up a lot in real estate by overpaying, not doing proper maintenance, not screening tenants properly, getting greedy in pulling money out, etc.

There is a lot of money to be made in real estate, my example was only touching the surface of what can be legally done with accounting, but this often gets people into trouble, which is why there are so many real estate scams and scandals. Personally, I wouldn't trust someone running a REIT not to get greedy, especially since most people don't understand how lucrative it can be. The paltry returns they give make them lazy, they own stuff I would never have bought at the same prices, they are exposed heavily to a correction, yet unit holders think they are "safe".

If I were you, I'd leverage your current rental and buy more, but then I wouldn't have paid off the property in the first place which says to me, no offence intended, you don't really understand real estate investing to begin with. Chances are, you overpaid in the first place. You may be better off with a REIT.

To show you what's also possible, I'll present scenario 3 which is what I do, but it's not as simple as it sounds and I've been a real estate investor for a long time to develop this technique and experience...

Buy a place for $70k cash, renovate it for $10k, get it appraised by the bank after renovations for $100k, get an 80% LTV mortgage and get your money back. Rent it for $1000/month. Rinse and repeat. Now I have as many properties as I can find, 100% financed, I still have my $100k, and I generate $12k/year while paying down the value of the properties. In 25 years, I've generated 100k out of nothing with a 12k/year dividend. Again, not easy to do, not easy to find in this economy, but it is possible to do.

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Re: Rental property vs REIT

Post by patriot1 » 01 Jan 2017 17:48

Your examples assume a gross rental yield of 12% which is likely 3 times what OP is getting.

REITs generally aim for a net rental yield of 6% which is around 8% gross.

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Re: Rental property vs REIT

Post by Just a Guy » 01 Jan 2017 21:28

I was just posting simple numbers for an example. It wasn't meant to reflect actual properties. Those numbers are just easy for the math.

Since each property is unique, it's really hard to generalize with standard numbers.

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Re: Rental property vs REIT

Post by Arby » 01 Jan 2017 22:17

JAG, I agree money can be made by leveraging real estate. Leverage has worked very well over the past 30 years as the prime lending rate has been in a long term downward trend. But to be fair, why don't you include another scenario, where lending rates trend upwards over the next 10 years. Your properties are mortgaged to the hilt, and you have to renew at double your current mortgage rate.

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Re: Rental property vs REIT

Post by Just a Guy » 01 Jan 2017 23:03

Yes, that's why the purchase price is the key factor. The 1% rule has worked for a long time, even back when interest rates were much higher. So, a 100k property which makes $1k will work at higher mortgage rates.

As for my exposure, most of my properties were purchased for well below 100k, and have mortgages well below 100k, yet make over 1k/month/door on average. Not only that, but I also usually have a biweekly rapid paydown of my properties. So, whereas I have 100% financing (based on my purchase price), I also have 20% equity on my properties (based on an independent property appraiser) since my mortgages are only 80% LTV on the day I sign the papers.

I agree that real estate today is very hard to find a proper cash flowing property. I only find a couple each year usually, and I don't always get to purchase them all as there is competition. The places I look for are already at least 30% below market value to build in the correction I see coming. The last place I bought was 70k, it's rented for $1260, and I'm waiting to hear back from the bank appraiser, but a smaller unit sold in the same building for $140 (probably really overpaid), I expect it to appraise at over $100k, since no other similar places have sold lower than that in 2016.

Now, if you were purchasing rentals at $200k/door, and leveraging them, making $1200/month you'd be in a much worse scenario come renewal time. there are many "investors" who talk about even worse deals on this and other forums. These are usually the "investments" I speak against.

I hope you see that the problem isn't "being mortgaged to the hilt", it's the amount of the mortgage in question. My 100% financing is less than some people's 50% financing.

P.S. This is the reason I haven't bought apartments lately, for the last decade or more the asking price for places is at least $100k/door. A bachelor or even a one bedroom doesn't usually cash flow at $100k, so I won't pay that. So, I find individual places for less than 100k/door. It makes management much more difficult, but lowers my risk long term.

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Re: Rental property vs REIT

Post by Flaccidsteele » 02 Jan 2017 00:33

Arby wrote:JAG, I agree money can be made by leveraging real estate. Leverage has worked very well over the past 30 years as the prime lending rate has been in a long term downward trend. But to be fair, why don't you include another scenario, where lending rates trend upwards over the next 10 years. Your properties are mortgaged to the hilt, and you have to renew at double your current mortgage rate.
I think you're missing the point of what JaG is doing IMO. Your blinders are on the leverage. JaG can renew fairly easily in your scenario.

JaG outlines a very straightforward way to make money in real estate IMO. In one sense it's not easy, but in another sense it's not brain surgery either. Personally I like it. The numbers in JaG's examples aren't crazy. I think they're reasonable for those who like to do a lot of hunting and networking. Also JaG has set up a nice little system where he can do far better than the 1% rule. He's doing more like 1.6-1.9% rule.

For me this is a nice indicator of how different the Canadian market is compared to the US. JaG has to hunt for these kinds of returns. Back in 2010 in the US, those kinds of deals were everywhere for similar class properties. Even an unsophisticated first-timer like myself routinely fell backwards into these kinds of numbers.

I just kept putting in offers on short sales and approvals started rolling in after a few months. I bought a short sale detached 3/3 home for $50k. After waiting months for the bank to get back to me, I closed and immediately put a tenant in there for $1000/mo. No renovations outside of paint and carpet.

At this point JaG is reappraising and refinancing to get his money out. Which is smart in higher valued markets. I considered this in the US, but in the areas where I'm involved, we're at a different point in the market. We're still in a post apocalyptic crash phase. Prices are still rising strong as are rents. A generation of US citizens are shell shocked and many don't want to own a home. PTSD.

I could refinance the house immediately, but I knew that it would appraise far higher in a couple years and I was skeptical that the CAD was going to remain at parity with the USD. Also I didn't need the money so I didn't want to pay (interest) for it while it sat there doing nothing.

If I had refinanced the original $50k house back then, I could definitely pull out $50k. Financially it probably would have been smarter to do this, but I didn't. I'm lazy by nature. Very lazy. The home is worth over $150k USD today and I could refinance out more than triple (because today the USDCAD > 1).

Right now, I'm just setting myself for the next cycle in the US real estate boom. It hasn't started yet. Everybody says we've reached prices where they were in 2006, but that's only because a handful of markets are driving it (e.g. West Coast, NY, AZ, FL, LV etc.) In many parts of East North Central and East South Central nice rentals can be easily bought for the 1-1.3% rule.

As far as I'm concerned, my US properties are an inflation-adjusted USD-demoninated savings account and USD generator. For the next opportunity. Overall I think it will always be nice to be a Canadian, spending CAD, but earning USD income.

Another attractive feature that appeals to me about the US, is that their landlord/tenant acts make even Canada's strongest rules seem very weak. For example in Georgia, if a tenant misses rent, they automatically lose their eviction cases (if it even manages to get to court) and in Colorado a landlord can just waltz right into a tenant's home without any notice at all! Tenants know that I can kick them out very quickly for almost anything. It's brutal in many parts of the US. Personally I would hate to be a tenant in some of the cities down there.

In Canadian markets it's very difficult to find tear downs that have the ability to cash flow after renovation at price points above $500k (and probably even significantly lower). A developer friend of mine recently bought a $600k west coast 5-person rooming house that was disguising. After gutting and renovating it into a 3/3 family home, he sold it in a multiple offer scenario for $1.1m. He says there's no way he could get $10k/mo rent from it. He's just flipping. Canada and the US are just in different places when it comes to real estate.
Just a Guy wrote:Let's say you have $100k and you buy a single property with it completely paid off. You rent it for $1000/month generating $12000/year before expenses. Let's just say real estate appreciates at inflation levels, in 25 years you've got a place still worth $100k in real dollars, and maybe made a modest monthly dividend.
I just wanted to say that I particularly enjoyed this comment. Very true!
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Re: Rental property vs REIT

Post by Blaargh » 02 Jan 2017 01:57

Thanks for the comments. I appreciate the brutal honesty! I am definitely not an experienced real estate investor so it's great to hear from people who have more knowledge in this area.

At the time of purchase, the numbers weren't so bad, and it was initially mortgaged (25% down). By the time I had enough money to be in the position to buy another rental unit, property values had surged to a point that the local market seemed overpriced. And this has proved to be true - prices have been flat or perhaps even dropped 5% since the peak. So, I put the money into paying off the property rather than buying something else.

Property values went up while rents have gone nowhere (I'm charging the same now as I did in 2007), so something that initially had a marginally OK yield (not 1%-rule levels, maybe 0.65%) no longer does.

I like the way the JaG formula works, but I'd find it nearly impossible to find a property here that meets the 1%-rule (or even a 0.5%-rule). Here are some examples:
  • A respectable single-family house is $500K and rent on that would net you $1400/mo after expenses.
  • A 4-plex in a rough part of town is $630K and generates $3300/mo in income, and that would come with a large property management burden.
  • A basic bachelor suite downtown is $125k. Rent would be $800/mo. Condo fees & taxes are $400/mo, so you are left with $400/mo. Still not interesting.
  • If I were to leverage my current property to 80%, the rent wouldn't even cover the mortgage.
Am I missing something, or do you agree with me that these opportunities don't look too attractive? It seems like I'd have to go to a different market to make the formula work. Also, based on what you've said, I don't follow why you'd advise me to keep the current rental & leverage it vs. getting rid of it entirely and putting all the money into something better. Would you mind elaborating on this?

Anyway, I think we are in agreement that my existing paid-off rental unit is a sub-optimal investment at this point in time :( That's why I'd like to do something about it in the next little while. If anyone has time for some follow-up comments specific to my situation, I'd appreciate it!

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Re: Rental property vs REIT

Post by Flaccidsteele » 02 Jan 2017 02:05

Blaargh wrote:Am I missing something, or do you agree with me that these opportunities don't look too attractive?
You are correct. Those numbers aren't attractive.
Blaargh wrote:Anyway, I think we are in agreement that my existing paid-off rental unit is a sub-optimal investment at this point in time :( That's why I'd like to do something about it in the next little while. If anyone has time for some follow-up comments specific to my situation, I'd appreciate it!
Paid off rentals will always be sub-optimal unless you're in a white elephant market where rents are going gangbusters and price growth is stagnant. Which is nowhere.

Personally I would sell that property. It wasn't purchased at a great price anyway.
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Re: Rental property vs REIT

Post by gobsmack » 02 Jan 2017 06:40

I've done both and I prefer to own REITs over rental property. I am very debt averse though so that is probably part of the reason. Another problem is diversification because I would not want to own property too far from where I live. With a good REIT ETF, I get instant diversification across a large geographic area and different types of properties (e.g., commercial, industrial, etc).

When compared against VNQ though, I think Canadian REIT ETFs aren't that great. I think the best move is to own VNQ in an RRSP account. Full disclosure: I own both VNQ and ZRE.

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Re: Rental property vs REIT

Post by kukucanuck » 02 Jan 2017 09:33

Most of the times, we hear about leveraging rental properties but I have never heard of leveraging well managed REITs,

With the margin rates at about 4 percent or less (tax deductible) and REIT distributions in the range of six percent or thereabouts, one should be able to use at three to one leverage (or more depending on investment distribution between registered and non registered investments and borrowing capacity). Add the bonus of DRIPS, one could accumulate a good real estate portfolio without the headaches of real estate management, real estate commissions etc.

I am thinking in terms of holding REITs in registered accounts and borrowing against other investments (Passive index based ETFs) in non registered accounts. One could have a mix of rental, commercial and industrial REITs

There is always stock market risk just as there is local market risk in buying real estate.

The returns may not be as strong as recent real estate returns in Toronto or Vancouver but should be good in the long term.

Only a thought process for now, inviting further discussion and input.

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Re: Rental property vs REIT

Post by adrian2 » 02 Jan 2017 11:20

Just a Guy wrote:Yes, that's why the purchase price is the key factor. The 1% rule has worked for a long time, even back when interest rates were much higher. So, a 100k property which makes $1k will work at higher mortgage rates.
I remember reading this rule some 20 years ago, on the old Morningstar Vanguard Diehards forum: make 1% gross rent per month, pay 2% in property taxes and upkeep, therefore getting a positive cash flow with mortgage interest up to 10%.
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Re: Rental property vs REIT

Post by Just a Guy » 02 Jan 2017 11:25

Blaargh wrote:Am I missing something, or do you agree with me that these opportunities don't look too attractive? It seems like I'd have to go to a different market to make the formula work. Also, based on what you've said, I don't follow why you'd advise me to keep the current rental & leverage it vs. getting rid of it entirely and putting all the money into something better. Would you mind elaborating on this?

Anyway, I think we are in agreement that my existing paid-off rental unit is a sub-optimal investment at this point in time :( That's why I'd like to do something about it in the next little while. If anyone has time for some follow-up comments specific to my situation, I'd appreciate it!
I think you're finally starting to see the reality...just because you can buy something, doesn't mean you should buy something. This is a big lesson to learn as an investor, it doesn't what you're investing in either.

There was a five year period, not to long ago, where I didn't buy anything...there was nothing to buy. Last year I bought 4, the year before 5. Right now there is nothing on the market. I was working on a deal with another investor for 6, but he doesn't want to come down to my numbers yet, and I'm not stupid, or desperate enough to overpay.

Of course, the same thing applies to the stock market. There are times when it's also overpriced and you shouldn't buy. In fact, the market is worse than real estate because the prices are universal, the price is the price. In real estate, each price is unique the same house can sell for more or less depending on circumstances (divorce, need the money quick, foreclosure, death, etc.). It is possible, though rare, to get a deal in real estate, something you can't do in the stock market unless there is a massive crash.

I think you still misunderstand what I said initially, I never really advised you to hold your property and refinance it. I said I'd refinance my rental property and buy more because that is better than owning a single paid off property. I, hopefully, don't overpay for the properties I own and I, hopefully, know what I'm doing.

I don't know what you initially paid, so I wasn't commenting on your holdings specifically. It may be wiser to sell and cash in on the gains...it may not, I do t know your numbers.

You also can still have your cake and eat it too. You can refinance your property (you don't need to refinance it completely, take say 100k out on it) and invest that money in something else like your reits. You could then deduct the interest you pay, and increase your earning power. Then again, it may be more profitable to sell and get out of an overpriced property. I do t know your situation.

Of course, you acknowledge that you're not really a real estate investor, are you any better at picking stocks or reits, or will you be gambling with your money at this point?

Do you read the company financial statements? Do you know their holdings, customers, margins, products, profits, competition, competitive environment, etc?

In the case of reits, where you have some real estate experience, do you know their holdings, purchase price (did they overpay?) market climate (Calgary's real estate is suffering pretty badly), exposure to interest rate hikes, etc.?

There are lots of people who made money over the last few years of the long bull and think they are experts instead of lucky. I'm not saying you can't make money in stocks or reits either (I invest in stocks as well, but I buy in a crisis, I buy companies I know on sale and then I hold them...just like I do with real estate), but things don't look like they'll be all up up up going forward...the next few years could separate the investor from the gambler.

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Re: Rental property vs REIT

Post by Just a Guy » 02 Jan 2017 11:37

adrian2 wrote: I remember reading this rule some 20 years ago, on the old Morningstar Vanguard Diehards forum: make 1% gross rent per month, pay 2% in property taxes and upkeep, therefore getting a positive cash flow with mortgage interest up to 10%.
Yes, it fell out of favour as prices rose, making finding such a property nearly impossible...not good for realtors.

Then someone "discovered" that, with a lower interest rate, you could still make cash flow beyond the 1% rule. Of course the 1% rule was not about cash flow, it was about protecting yourself in the long term, which people quickly forgot in the face of cash...

Sound familiar? The stock market does the same thing every few years...with their "new rules". It always ends badly.

Same thing in commercial real estate. It used to be a minimum 8-10% cap rate...now I see bidding wars for 3% cap rates (which, by overpaying reduces the cap rate even further).

Too many people looking for the quick buck instead of understanding how the system and rules actually work...

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Re: Rental property vs REIT

Post by Blaargh » 02 Jan 2017 15:08

Just a Guy wrote: Of course, you acknowledge that you're not really a real estate investor, are you any better at picking stocks or reits, or will you be gambling with your money at this point?
Good point! I'll be the first to admit that I lack the intuition or magic formula needed to consistently pick winners again and again without fail (whether it is in stocks, real estate, choosing checkout lines at the supermarket, etc). I do not have the ability to accurately time the market and pinpoint the highs and lows. I admire those who have the instinct, decisiveness, and courage to seize an opportunity at the perfect moment and never make mistakes, but I am fully aware that I am not such a person. Not even close. I notice that this forum has a "Housing Bust 20xx" thread for basically every year, so perhaps I am not alone in this regard.

This is part of the reason why my initial post proposed moving the money from a single property to a REIT ETF (rather than buying another/different rental property, for example). The diversification offered by a REIT ETF would help spread out the risk. I am aware that this form of investment is not going to be lucrative in comparison to an experienced real-estate investor such as yourself who hand-picks and manages their own portfolio of properties. But will it be more successful and less effort than ME managing properties that I select, given that we've both got similar opinions of my aptitude as a real estate investor? :) The more we discuss this (coupled with the terrible state of my local rental market, and the fact that I don't have the desire to remotely manage a rental property in a market where rentals actually make sense), the more I am leaning towards selling the rental unit.

I mentioned swapping over to a REIT ETF just because it seemed like a reasonable comparison in that they are a similar asset class (vs. comparing my rental property to Peruvian mining stocks or something else drastically different). But honestly I am not sure what to do with the money if I sold the place. I like the monthly yield of a REIT ETF (in that I get paid whether the market is up or down), but that might be short-sighted of me.

So what do I do with the money? Going back to your original comment, since I cannot predict the future, all of the options feel a little bit like gambling. I'm not looking to take big risks and get rich - I'd be content to beat inflation by a few percent while being able to sleep at night.
gobsmack wrote: I've done both and I prefer to own REITs over rental property. I am very debt averse though so that is probably part of the reason. Another problem is diversification because I would not want to own property too far from where I live. With a good REIT ETF, I get instant diversification across a large geographic area and different types of properties (e.g., commercial, industrial, etc).

When compared against VNQ though, I think Canadian REIT ETFs aren't that great. I think the best move is to own VNQ in an RRSP account. Full disclosure: I own both VNQ and ZRE.
Thanks - that's definitely something for me to look into. I also have a strong aversion to debt, so the leveraging aspect of real estate is something I have a hard time feeling comfortable with even though it makes sense on paper.

Regarding VNQ, I hadn't previously considered something outside of the country, but now that you mention it, it could be helpful to give even further diversification.

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Re: Rental property vs REIT

Post by Just a Guy » 02 Jan 2017 15:25

I don't know anyone who can successfully predict the future on a consistent basis. However, there are things one can do to prevent gambling. For example, I find places that are cheap, I believe the market needs to correct, I don't think it will until interest rates increase. The interest rates may not increase for years, but hat just means I profit more today on what I bought using caution. I may miss out on "opportunities" like paying too much, but paying it off before the correction.

I didn't mean to imply you shouldn't invest, I was implying you may want to actually do some work and read up on the companies you are considering investing in to see if they at least pass your sniff test. As opposed to just buying some stock symbol.

A lot of fraud happens in real estate. Just because it's publicly traded doesn't mean it's legitimate...think Enron, worldcom, Nortel, BreX, etc.

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Re: Rental property vs REIT

Post by BRIAN5000 » 02 Jan 2017 15:41

So, since purchase, it has returned ~7.25% per year (rent + property value - renovation expenses).
This is + 7.5 % per year is it not, how much were you wanting to make.

I have a little saying stuck to my computer monitor "When the Riskless rate of return is about 7% its a good idea to lock in a major part of your portfolio".
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little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

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Re: Rental property vs REIT

Post by Transformer » 13 Jan 2017 02:50

I hope this is not too far off topic but let me give you my experience. I am a long time real estate and stock market investor. A few years ago I sold a duplex in Vancouver that I had owned for 20 plus years and compared my return to what my stock market investments returned. Yes it took a lot of effort to work this out, working in income over the years and price appreciation. The results - the return on the real estate was virtually identical to the return from the stock market. And the holding period is long enough that the years when one asset was better than the other sort of evened out.

Now here is the big difference. My stock market returns involved no leverage, my real estate was always leveraged with a mortgage. So when I recalculate my return to allow for the amount of cash I had in the real estate my cash on cash returns from the real estate were several times higher than my unleveraged returns in the stock market. So yes my returns from real estate were much higher than my stock market returns, but as one investment was leveraged and one was not it is not an apples to apples comparison. With todays low mortgage rates leverage looks benign but I am familiar with enough forclosure stories to know that leverage can also come up and bite you in the ass.

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Re: Rental property vs REIT

Post by 8Toretirement » 13 Jan 2017 14:44

Rental Property involves leverage, where REITS are cash investments, no hassle.

Personally, I'm into REITS, not risking money in other sectors from the leverage on a rental property.

Just a personal preference.

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Re: Rental property vs REIT

Post by adrian2 » 13 Jan 2017 19:50

8Toretirement wrote:Rental Property involves leverage, where REITS are cash investments, no hassle.
The leverage is internal in the REIT.
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Re: Rental property vs REIT

Post by BRIAN5000 » 13 Jan 2017 20:24

adrian2 wrote:
8Toretirement wrote:Rental Property involves leverage, where REITS are cash investments, no hassle.
The leverage is internal in the REIT.
The leverage is internal on every stock at about 65% for the S & P IIRC.
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

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Flaccidsteele
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Re: Rental property vs REIT

Post by Flaccidsteele » 15 Jan 2017 22:36

8Toretirement wrote:Rental Property involves leverage, where REITS are cash investments, no hassle.

Personally, I'm into REITS, not risking money in other sectors from the leverage on a rental property.

Just a personal preference.
REITs involve leverage. The difference is that as an owner of rental property I have more control over how much leverage I'm willing to employ. Apparently, for me, the amount of leverage I'm able to tolerate on my rentals is 0%. This may change in the future. It's unlikely that any REIT employs 0% leverage. My rentals are "cash investments". Definitely more so than REITs.

I agree, however, that it's a personal preference.
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

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Re: Rental property vs REIT

Post by Just a Guy » 16 Jan 2017 01:23

What a waste. O% leverage probably gives you lower returns than owning a bank stock with all the work associated with being a landlord.

I just posted this the other day on a different forum for a guy who wanted to pay $300k cash for a rental...
The way to make money in real estate is to use other people's money (OPM).

Let's say you paid it off completely, you've paid $300k to make $1700/month before expenses. You have insurance, property taxes, maintenance, vacancy, etc. Let's be genrous and say you clear $1000/month. That's a 4% return that you only earn by dealing with tenants, and trust me that's work. If you get a property manager, your returns go down even more.

You could buy a bank stock and earn more with their current dividend. And your money isn't locked in.

In this market, I wouldn't buy anything that doesn't at least make the 1% rule.

Where you really make money is when you leverage the property. Say you buy a place for 100k, which rents for $1000/month. You borrow the entire 100k (there are many ways to do this, but let's say 20% on a heloc and 80% mortgage).

Mortgage @ 3% is $473, taxes, insurance maintenance, etc. Should all come in at say $800, giving you $200/month income. Total invested $0. In 25 years, place is paid off, worth $100k in price adjusted dollars (maybe more, maybe less, but it will be worth something) which you created from...$0.

Infinite return, literally money out of nothing. If the market drops and it's only worth $50k, that's still 50k in your pocket with no loss...what happens to your paid off property, which is now $150k? You paid the loss.

Also, what happens when interest rates rise? The cash flow becomes even worse. Your $1700 doesn't cash flow today, it just cost more whereas my $100k place has $200 cushion to protect against higher costs you can get to nearly 7% interest rate and still break even assuming you never paid down anything at renewal.
If you're going to pay off the property out of pocket, may as well buy a reit, you'd get a better return for less work.

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Re: Rental property vs REIT

Post by FinEcon » 16 Jan 2017 12:14

Flaccidsteele wrote:
8Toretirement wrote:Rental Property involves leverage, where REITS are cash investments, no hassle.

Personally, I'm into REITS, not risking money in other sectors from the leverage on a rental property.

Just a personal preference.
REITs involve leverage. The difference is that as an owner of rental property I have more control over how much leverage I'm willing to employ. Apparently, for me, the amount of leverage I'm able to tolerate on my rentals is 0%. This may change in the future. It's unlikely that any REIT employs 0% leverage. My rentals are "cash investments". Definitely more so than REITs.

I agree, however, that it's a personal preference.
As JaG stated, in simpler terms, this is laughably idiotic.
What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact

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Re: Rental property vs REIT

Post by gobsmack » 16 Jan 2017 12:41

Hey JaG, my dad owns a few rental properties but he only buys them in his home town. This makes it easier for him to manage them. The drawback is that it concentrates the risk in that area. How do you deal with that? Do you buy outside of your area?

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