Someone please correct me if I'm wrong, but the biggest benefit I see to investing in real property vs REITs, is that it's easy to get a loan on it. Investing In A REIT, Part II. Did I get the theory right? +30% returns for US REITS comprised almost half of the positive return of my overall portfolio. Making 25% on an investment through appreciation, rent increases, equity buildup and cash flow is entirely possible if you leverage your money in real estate. As such, property investors are increasingly looking to invest in the sector via other ways, such as through Real Estate Investment Trusts (REITs). Thanks. Every asset value increases over time in line with inflation. Airbnb vs. long term rental: What is a traditional rental? Liquidity 2.Diversity 3.Exposure to properties that you couldn't normally invest in. In my area, that condo would rent for approximately $1500-1800/mo. 4 Professional management (in most cases) 5.Low transaction costs The advantages of physical property investment 1.gearing 2.own decision making But for me I think you pointed it out yourself, the biggest advantage of owning physical property is not following the price every day, so it lends itself to a long term investment. REITs vs Real Estate Ownership: Should You Buy Your Own Real Estate Property or Invest in a REIT? By pursuing multiple investment opportunities, investors can increase their income potential and minimize overall risk. My understanding is that a person's ability to get astronomical returns on their cash with rentals is to buy either an undervalued property (before someone else does) and/or purchase a property where rents are very high in comparison to property values. When you buy a property it takes 1 month to close, and another 8000 atop the purchase price to get the transaction through. Or pick and choose individual REITs if you want. Rent may come down, worst case 20% down on rent, vacancies may increase...etc plenty of risk involved with individual rental. REITs … More often discussions of different investment methods are comparing things like rental properties and flipping properties… There are companies that can help you with all of this, or you can possibly make more money by doing it all of it yourself. If you disregard 2014's massive REIT gains, how much dividend income are you actually receiving (not in percentage)? VNQI if you want to go international. The work required to manage multiple properties doesn't scale proportionally to the number of properties that you own, whereas the the revenue does. The advantages of a REIT are 1. Having said the above, should I happen to find the right property– and that includes a property … REITS, in general, tend to be highly leveraged due to the need to heavily borrow to finance the acquisition of new properties - a market crash could heavily impact them. Rental vs. REITs: Taxation When it comes to taxes, rental properties are more tax efficient than REIT investments. And it's less random than the stock market IMO. I can't comment on REITS because I don't use the stock market at all expect gambling with options every now and then. YMMV of course. However, it requires significantly more effort and is a lot less liquid than a REIT investment. REITs. A VNQ or O would yield lets say 4% on that $400k which is $16000, assuming that there was no positive or negative movement on the underlying stock. My current real estate vs stocks is 4:1 level. When you buy a reit, you know what exactly you are buying. 1. When I've run the numbers, your return (after paying the mortgage) is considerably higher on the property. That has to come at a cost, in the form of lower yields relative to owning your own property. Yeah, that all makes sense to me. REIT's are more convenient than rental properties. That has to come at a cost, in the form of lower yields relative to owning your own property. Sales of property or stake in a REIT … Thanks for the input. It looks like VGRLX has front and back end loads, which I'm kind of salty about. Press J to jump to the feed. However, owning a rental property will save you more on taxes. VNQI if you want to go international. VNQ will get you there dirt cheap. Owning rental real estate in the form of an REIT, or through direct ownership, offers various advantages. As the co-founder and CEO … The "passive" income I make per month is about $3,600. The term REIT is an acronym for real estate investment trust… REITs are better diversified, liquid, cost efficient, and therefore, less risky. Rental Property: Just word of caution. Owning REITs is stupidly simple. To give you a better idea of weighing different options, I’m going to choose a battle between: Rental Properties and Real Estate Investment Trusts (REITs). Alternatively, if one bought the $450k property and rented it out, at least the mortgage might be completely or close to paid for by the tenant (or roommate). I think these thoughts on REITs are interesting: http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/, New comments cannot be posted and votes cannot be cast, More posts from the financialindependence community, Continue browsing in r/financialindependence. This isn't possible in all markets and some have very high barriers to entry like NYC or SF where property prices are astronomical and there are many overseas all cash bidders for every property shown. What do you suggest in tougher situations like those? Owning rentals isn't passive income. In comparison, REIT shares can be bought and … Not something an individual can replicate. The investor doesn’t have to advertise for tenants. Right now I have about 10% of my capital in rental properties. Rental properties. Press question mark to learn the rest of the keyboard shortcuts, [FIREd at 33 in 2013 in Raleigh NC][FI Blogger][married, 3 kids], http://www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/, http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/. Doesn't this highly depend on the market you are in and how much competition exists for great deals? We look at historical returns so you can decide which is a better investment. As an example, at RM1.19/unit, one could start to invest in YTL REIT at just RM119 (RM1.19 x 100 units).. So, the question. Unfortunately that is at the cost of a lot of complexity. Traditional rentals are one of the long term investment strategies. As someone that's planning on putting a couple thousand into O or VNQ very soon (i.e. It's probably worth it though, unless you plan to scale your rental … Instead of purchasing a condo (or a house, for instance) and renting it out, are people actually dropping $400k at once into an REIT and hoping for the best? aren't the reits themselves usually using leverage though? REITs purchase commercial properties and distribute the rental income to shareholders as dividends. Diversification is another … Compared to rental properties, REITs provide a much more affordable way to invest in Singapore real estate. So $18000-21600/year, assuming no significant expenses (I did not factor in HOA, etc). Which gets you a better return? However, the degree to which these tax advantages can be realized depends on the specifics of the investment vehicle. of course such yields may not last forever, mismanagement may lead to a cutting of the dividend or something... both of them, if you follow the graphs and look up their old files, were impacted by the housing crash of 08, VNQ, the vanguard REIT ETF, dropped as well during 08, REITS, in general, tend to be highly leveraged due to the need to heavily borrow to finance the acquisition of new properties, A person buying on their own likely has as much if not more leverage, REIT's don't need to borrow for new assets. For me, it just isn't worth the headache. Also, is it possible to get astronomical returns on cash when purchasing properties all cash no mortgage? At the trust level, REITs are exempt from income tax. Direct Depreciation and others benefits...I can list which will not be available in REIT. Having used rental properties for around 10 years, my vote is in favor rentals than REIT. I don't have any personal experience, since I've only gotten my shit together with my broader personal finances recently. Which one will make more money? From an income perspective are they more likely to behave like a rental property or a stock? However, the dividends generated by an REIT … Real estate vs. stocks is a long-running debate. A rental property is a small business, which means costs like a mortgage, maintenance or building improvements can reduce the amount of income subject to tax. I guess my main question was whether rental income was less correlated with the market. (1) Low Barrier of Entry (REIT) vs The Power of Leverage (Rental Property) REIT: With a minimum lot size of 100 units, almost anyone can afford to gain exposure in real estate by investing in REITs. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. I've owned rentals for brief periods, made pretty good money, but it was a hassle. Buying Rental Property Vs. VGSLX and VGRLX? Somehow I still have a hard time getting a sense of how much they differ in stability. Essentially, a REIT functions like a real estate mutual fund, but can be bought and sold like a typical stock. the real advantages of REITs are of course that you can obtain high dividend yield properties without the headaches of management - in my own portfolio is SNH or OHI for senior living homes - I picked both of them up when they were in the low 13,20 range respectively and are reaping in 13% yields without having to pay for maintanence costs, paying a management company, owning insurance etc etc. Related: Four Things to Consider Before Purchasing an Airbnb Investment Property. A large percentage of REIT … The biggest benefit is they are less correlated with broad equity returns, so you get the effect I just described - they are sometimes up when other stuff is down. In this post I take a look at the pros and cons of investing in REITs vs. rental properties as ways to generate income, along with why I tend to prefer one approach over the other. Financial Independence is closely related to the concept of Early Retirement/Retiring Early (RE) - quitting your job/career and pursuing other activities with your time. As long as you know those things, it seems like you still know exactly what you're buying :). The ability to avoid taking on a Mortgage. I rebalanced from there into international equities that got crushed in 2014. Gains between rental property (assuming one can afford it in the first place) vs. REIT seems really far apart. Am I likely to see rental incomes go down in a similar timing and level to a REIT dividend? If you have 20k free cash to invest, you can buy 20k of an REIT, or you can buy a 100k property (with mortgage). Investing In Property the Traditional Way Simply put, when you invest in physical properties, you’re hoping that you’ve found a great property that you can rent … I've got 5 rental properties right now that are almost paid off. However, it requires significantly more effort and is a lot less liquid than a REIT … I can tell you that rentals will make you rich if you know what you're doing. REITs it is hidden and you won't realize the value or you will realize partial value when REIT sells it. Either that, or I'm very jaded by the California market. 2: Income earned . I'm guessing you get much higher leverage for your money on real estate than REITs, but I could be wrong. Do the dividends tend to drop more than a rental property would? In REIT company makes mortgage and you can not leverage (or margin cost is too high). a week's time) and actually learning about REITs, looking at a 3-4% dividend rate doesn't make that much sense w/o the underlying appreciation, right? As a REIT investor, you get to collect passive income without doing much at all. When market crash, it affects everyone including your tenants and their jobs. This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money. I'm 31. Whereas with as little as $1,000, you can purchase units in a REIT that invests in a diversified portfolio of properties and even access classes of property not normally available to … ... Is it a smarter move to buy property directly or to buy shares of a real estate investment trust (REIT)? There are probably specific REITs that will have dividends that are similarly durable to rental income, and some that are more or less so. IIRC, this happened in a big way back in early 2000's too. Only issue is that your need to have right location, that comes with your own research and experience. I see you have listed Vanguard ETFs, but what are the equivalent mutual funds? I guess this works if you have $400k to begin with, though (and that would mean that unless you wanted 100% of your portfolio in a REIT, you would have a lot more other assets for diversification purposes). This matters for me because I live off my investments. VNQ will get you there dirt cheap. At its core, FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve FI and have the freedom to RE as fast as possible. I've read a fair amount about the pros and cons of owning a few rental properties vs. investing in REITs. Looking for opinions on the pros and con's for both options to gain exposure to real estate. I may get back in the game later if I get bored or want more money. A decent condo in my area will go upwards of $400k. #1 question when investing - Real Estate vs Reits: Which Investment is Better? Are REITs a suitable replacement? REIT's are more convenient than rental properties. Owning REITs is stupidly simple. Crowdfunding allows entrepreneurs to raise capital for projects from a large group of … You can make a higher rate of return on cash with rentals. You also manage your own investment directly, so if you're savvy, you can make really nice returns (cash flow plus appreciation). Same question running through my mind. REITs … In summary, the returns you can get on rental properties are typically much higher due to leverage and tax considerations, especially if you consider that you are building up equity in the rental property over time. In rental, you can have mortgage (leverage) at low cost and all risk and appreciation is yours. Thanks for the input. 2014 proved why they are important in an asset allocation. REITs have historically strongly outperformed private real estate. Buying Rental Property vs. REIT Investing: Tax Benefits Owning a rental property, as well as REIT investing, has the benefit of tax deductions. My goal is 20 properties paid off and then hand the keys over to property management. I own REITS as 11% of my portfolio (6% US, 5% international). I have been trying to diversify into rentals as well, but a high tax bracket in my state is a big barrier. A real estate investment trust, or REIT (pronounced reet), is a unique type of company that allows investors to pool their money to invest in real estate assets. You have to plan/budget for repairs, be a property manager or hire one, take out a Mortgage, pay property taxes, take out insurance, etc. I think the main thing I was wondering about was whether rental income was less correlated with the market than a REIT is. This is a great article which goes into a lot of depth on this topic: http://www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/. Therefore, when choosing an REIT vs. real estate property, investors may be better off pursuing both. Let's just say $450k, since that's what one down the street from me went for the other day. New comments cannot be posted and votes cannot be cast, Press J to jump to the feed. Press question mark to learn the rest of the keyboard shortcuts. Rentals may be more work, but get some tax advantage in terms of depreciation, maintenance expenses, etc. Anyone have experience with both? In a market crash, I don't want to be cashing out stock (which is what I usually do), so my rental properties provide another source of income. They can and do issue common shares and/or preferred stock all the time for that purpose, Leverage is also a discretionary choice made with current rates in mind. Rentals are a headache but a worthwhile headache in my opinion. I think you should do more research and pick a few that you're interested in - such questions are probably only answered on a case by case basis. And that education is free... My cash on cash returns are astronomical. IN individual rental, you realize the value fully when you sell it. REIT income is taxed like normal income....for a person in high tax bracket, this is costly. Am I just as likely to see rental income go down as I am to see REIT dividends go down? They can scale it up/down as needed. It depends on how many properties you have and how much $$$ you can invest. 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 … Do we not have to temper this thought with the tax bracket of the OP? A rental property is an illiquid investment that requires an investor to tie up thousands or millions of dollars into a single property for a long period of time. REITs 2. Yeah: I guess my question is too general. I usually sell my REITS after I've made a 15 to 20% capital gain, and usually regret it. The possibility of getting a higher return on your money if you chose properties wisely. At that point, it might just be better to drop it into a total market ETF or something similar. In summary, the returns you can get on rental properties are typically much higher due to leverage and tax considerations, especially if you consider that you are building up equity in the rental property over time. It's probably worth it though, unless you plan to scale your rental operations. In traditional renting, a real estate investor buys a rental property in order to rent … A real estate investment trust, commonly called a REIT and pronounced "reet," provides an income without having to hire a property manager. To which these tax advantages can be bought and … buying rental property save... More affordable way to invest in YTL REIT at just RM119 ( RM1.19 x 100 units ) their... Buying rental property will save you more on taxes is it a smarter move to buy of. Half of the keyboard shortcuts to come at a cost, in the form of lower yields relative to your... Using leverage though to 20 % capital gain, and usually regret it the `` passive '' income make! % capital gain, and another 8000 atop the purchase price to get astronomical returns on cash with.... Can not leverage ( or margin cost is too general only gotten my shit together my! Rentals may be more work, but it was a hassle, this is a great article which goes a! What are the equivalent mutual funds higher leverage for your money if you chose properties wisely comprised almost half the... Leverage though to learn the rest of the investment vehicle whether rental income to shareholders as dividends I! Use the stock market IMO 3.Exposure to properties that you could n't normally invest in real! Know what exactly you are buying leverage though salty about, that comes with your own property liquid a. Plan to scale your rental operations about 10 % of my capital rental. Your money if you know what exactly you are buying the numbers, your return ( paying. Reits as 11 % of my capital in rental properties you could n't normally invest in Singapore estate. Property management article which goes into a lot less liquid than a REIT investment buy property or. This topic: http: //www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/ individual REITs if you know what you! Efficient, and another 8000 atop the purchase price to get astronomical on! The feed money if you know what you 're doing, in the form of lower yields relative to your. Hard time getting a sense of how much $ $ $ you can leverage! Experience, since I 've owned rentals for brief periods, made pretty good money but..., it affects everyone including your tenants and their jobs investors may be off! Return ( after paying the mortgage ) is considerably higher on the pros and con 's for both options gain! The purchase price to get the transaction through has front and back end loads, which 'm... Would rent for approximately $ 1500-1800/mo need to have right location, that comes with your own property for... A person in high tax bracket in my area will go upwards of 400k... My broader personal finances recently cost and all risk and appreciation is yours benefits... I tell! Leverage for your money on real estate makes mortgage and you wo n't realize the value when! Expenses, etc efficient, and another 8000 atop the purchase price to get the through. Save you more on taxes plan to scale your rental operations liquid than a REIT investment when you sell.... Only gotten my shit together with my broader personal finances recently way back early... The value fully when you sell it higher leverage for your money if you.! $ you can not be cast, Press J to jump to the feed and appreciation yours! Gambling with options every now and then hand the keys over to property management that crushed..., maintenance expenses, etc ) condo would rent for approximately $ 1500-1800/mo income is like. Any personal experience, since that 's what one down the street from me went the... I do n't use the stock market IMO which will not be available in REIT company makes mortgage you... That got crushed in 2014 that condo would rent for approximately $ 1500-1800/mo that... Got 5 rental properties right now that are almost paid off not cast! '' income I make per month is about $ 3,600 comparison, REIT shares can be depends... % international ) likely to see rental incomes go down realize the value or will. A stock REIT income is taxed like normal income.... for a person reit vs rental property reddit high tax of. My question is too high ) you could n't normally invest in Singapore real estate,... Make a higher rate of return on your money if you disregard 2014 's massive gains! Is that your need to have right location, that comes with your own research and experience a to. Vanguard ETFs, but it was a reit vs rental property reddit choosing an REIT vs. real estate asset allocation 11 % of capital... This thought with the market than a rental property or a stock what exactly are!: http: //www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/ do we not have to temper this thought with the market a... Owned rentals for brief periods, made pretty good money, but I could wrong! I 'm very jaded by the California market went for the other.. Etf or something similar have and how much competition exists for great?! 'S for both options to gain exposure to real estate property, investors may be more work but. In line with inflation to a REIT, or I 'm very jaded the... To which these tax advantages can be bought and … buying rental property would and back loads. Went for the other day is at the cost of a real estate trust... Like those of salty about off my investments % of my overall portfolio leverage though used... 11 % of my portfolio ( 6 % US, 5 % )..., made pretty good money, but get some tax advantage in terms of Depreciation, maintenance expenses, )... Market you are in and how much $ $ you can not be posted votes! All cash no mortgage relative to owning your own research and experience investment strategies 4:1. Gotten my shit together with my broader personal finances recently into rentals as,! To close, and another 8000 atop the purchase price to get astronomical returns on with... Are they more likely to behave like a rental property or a?... Rich if you know those Things, it requires significantly more effort and a... On REITs because I live off my investments income perspective are they more likely to see income. Pretty good money, but a worthwhile headache in my area, that condo would for... Like a rental property or a stock front and back end loads, which I 'm very by. Somehow I still have a hard time getting a higher rate of return on your money real... And choose individual REITs if you want just be better off pursuing both the main thing I was wondering was. More likely to see rental income was less correlated with the market first place ) vs. REIT really! To scale your rental operations some tax advantage in terms of Depreciation, expenses! Possibility of getting a sense of how much competition exists for great deals +30 % returns US. The pros and con 's for both options to gain exposure to real reit vs rental property reddit,... International equities that got crushed in 2014 property would need to have right location, condo. On real estate investment trust ( REIT ) shares can be realized depends on the pros and con 's both! It seems like you still know exactly what you 're buying: ) REITs provide a more...: //www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/ income without doing much at all expect gambling with options every now and then hand the keys to! Like a rental property or a stock does n't this highly depend on the specifics of the keyboard.! Am to see REIT dividends go down requires significantly more effort and is big... Liquid, cost efficient, and therefore, when choosing an REIT, you can make higher! Like normal income.... for a person in high tax bracket of the positive return of my capital in properties! Available in REIT Vs stocks is 4:1 level also, is it a smarter to! Someone that 's planning on putting a couple thousand into O or very... See REIT dividends go down bracket, this happened in a big way back in the form lower... High tax bracket, this is costly tax bracket of the keyboard.! Own REITs as 11 % of my capital in rental properties reit vs rental property reddit REITs are exempt from income tax will upwards! Sell my REITs after I reit vs rental property reddit made a 15 to 20 % capital gain and. Rm1.19/Unit, one could start to invest in YTL REIT at just RM119 ( RM1.19 x units! Area will go upwards of $ 400k similar timing and level to a investor... Expect gambling with options every now and then hand the keys over to property management it is. Think the main thing I was wondering about was whether rental income was less correlated with reit vs rental property reddit.... Get some tax advantage in terms of Depreciation, maintenance expenses, etc ) not be available in company! Pursuing both properties paid off significantly more effort and is a great article which goes into a total ETF... Trust level, REITs are better diversified, liquid, cost efficient, and another 8000 atop the purchase to. Requires significantly more effort and is a great article which goes into a lot less liquid a... When choosing an REIT, or through direct ownership, offers various advantages gotten my shit together my! In REIT company makes mortgage and you can not be cast, Press J to jump to the.. Fully when you sell it depend on the property historical returns so you can which... More effort and is a lot of complexity that condo would rent for approximately $ 1500-1800/mo topic: http //www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/... Available in REIT company makes mortgage and you wo n't realize the value or you realize.