REITs vs Real Estate Ownership: Should You Buy Your Own Real Estate Property or Invest in a REIT? 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 :). 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. 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. Related: Four Things to Consider Before Purchasing an Airbnb Investment Property. I guess my main question was whether rental income was less correlated with the market. Looking for opinions on the pros and con's for both options to gain exposure to real estate. ... Is it a smarter move to buy property directly or to buy shares of a real estate investment trust (REIT)? You can make a higher rate of return on cash with rentals. Not something an individual can replicate. However, the degree to which these tax advantages can be realized depends on the specifics of the investment vehicle. We look at historical returns so you can decide which is a better investment. In comparison, REIT shares can be bought and … The possibility of getting a higher return on your money if you chose properties wisely. What do you suggest in tougher situations like those? The "passive" income I make per month is about $3,600. The work required to manage multiple properties doesn't scale proportionally to the number of properties that you own, whereas the the revenue does. Do we not have to temper this thought with the tax bracket of the OP? As an example, at RM1.19/unit, one could start to invest in YTL REIT at just RM119 (RM1.19 x 100 units).. They can scale it up/down as needed. And that education is free... My cash on cash returns are astronomical. 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. Rent may come down, worst case 20% down on rent, vacancies may increase...etc plenty of risk involved with individual rental. 2: Income earned . 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/. 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. Also, is it possible to get astronomical returns on cash when purchasing properties all cash no mortgage? Every asset value increases over time in line with inflation. 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. VGSLX and VGRLX? Anyone have experience with both? #1 question when investing - Real Estate vs Reits: Which Investment is Better? Therefore, when choosing an REIT vs. real estate property, investors may be better off pursuing both. 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 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. 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. I think the main thing I was wondering about was whether rental income was less correlated with the market than a REIT is. When you buy a reit, you know what exactly you are buying. Either that, or I'm very jaded by the California market. I'm 31. 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. A real estate investment trust, commonly called a REIT and pronounced "reet," provides an income without having to hire a property manager. 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 … Just word of caution. Having used rental properties for around 10 years, my vote is in favor rentals than REIT. Essentially, a REIT functions like a real estate mutual fund, but can be bought and sold like a typical stock. REITs 2. 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. 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. Airbnb vs. long term rental: What is a traditional rental? So, the question. I can't comment on REITS because I don't use the stock market at all expect gambling with options every now and then. That has to come at a cost, in the form of lower yields relative to owning your own property. REITs … 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. Do the dividends tend to drop more than a rental property would? My goal is 20 properties paid off and then hand the keys over to property management. REITs purchase commercial properties and distribute the rental income to shareholders as dividends. 2014 proved why they are important in an asset allocation. The investor doesn’t have to advertise for tenants. 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. I've read a fair amount about the pros and cons of owning a few rental properties vs. investing in REITs. VNQI if you want to go international. 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. REITs have historically strongly outperformed private real estate. Which gets you a better return? Compared to rental properties, REITs provide a much more affordable way to invest in Singapore real estate. This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money. IIRC, this happened in a big way back in early 2000's too. As someone that's planning on putting a couple thousand into O or VNQ very soon (i.e. Having said the above, should I happen to find the right property– and that includes a property … Crowdfunding allows entrepreneurs to raise capital for projects from a large group of … 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). Press J to jump to the feed. I may get back in the game later if I get bored or want more money. There are probably specific REITs that will have dividends that are similarly durable to rental income, and some that are more or less so. 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 … It's probably worth it though, unless you plan to scale your rental … 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. Thanks for the input. Traditional rentals are one of the long term investment strategies. As such, property investors are increasingly looking to invest in the sector via other ways, such as through Real Estate Investment Trusts (REITs). Let's just say $450k, since that's what one down the street from me went for the other day. In my area, that condo would rent for approximately $1500-1800/mo. Diversification is another … However, it requires significantly more effort and is a lot less liquid than a REIT investment. In REIT company makes mortgage and you can not leverage (or margin cost is too high). REIT's are more convenient than rental properties. Direct Depreciation and others benefits...I can list which will not be available in REIT. If you have 20k free cash to invest, you can buy 20k of an REIT, or you can buy a 100k property (with mortgage). Or pick and choose individual REITs if you want. More often discussions of different investment methods are comparing things like rental properties and flipping properties… Doesn't this highly depend on the market you are in and how much competition exists for great deals? Press question mark to learn the rest of the keyboard shortcuts. That has to come at a cost, in the form of lower yields relative to owning your own property. REIT income is taxed like normal income....for a person in high tax bracket, this is costly. I can tell you that rentals will make you rich if you know what you're doing. Thanks for the input. The ability to avoid taking on a Mortgage. It depends on how many properties you have and how much $$$ you can invest. 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. 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. New comments cannot be posted and votes cannot be cast, Press J to jump to the feed. Somehow I still have a hard time getting a sense of how much they differ in stability. 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. Am I just as likely to see rental income go down as I am to see REIT dividends go down? VNQI if you want to go international. REITs it is hidden and you won't realize the value or you will realize partial value when REIT sells it. A decent condo in my area will go upwards of $400k. When market crash, it affects everyone including your tenants and their jobs. 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. This matters for me because I live off my investments. Liquidity 2.Diversity 3.Exposure to properties that you couldn't normally invest in. YMMV of course. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. So $18000-21600/year, assuming no significant expenses (I did not factor in HOA, etc). Did I get the theory right? At the trust level, REITs are exempt from income tax. Owning rentals isn't passive income. If you disregard 2014's massive REIT gains, how much dividend income are you actually receiving (not in percentage)? Right now I have about 10% of my capital in rental properties. Thanks. By pursuing multiple investment opportunities, investors can increase their income potential and minimize overall risk. When you buy a property it takes 1 month to close, and another 8000 atop the purchase price to get the transaction through. I've owned rentals for brief periods, made pretty good money, but it was a hassle. I usually sell my REITS after I've made a 15 to 20% capital gain, and usually regret it. Owning rental real estate in the form of an REIT, or through direct ownership, offers various advantages. 1. Yeah: I guess my question is too general. However, it requires significantly more effort and is a lot less liquid than a REIT … VNQ will get you there dirt cheap. I'm guessing you get much higher leverage for your money on real estate than REITs, but I could be wrong. aren't the reits themselves usually using leverage though? I rebalanced from there into international equities that got crushed in 2014. 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. +30% returns for US REITS comprised almost half of the positive return of my overall portfolio. Rentals may be more work, but get some tax advantage in terms of depreciation, maintenance expenses, etc. I have been trying to diversify into rentals as well, but a high tax bracket in my state is a big barrier. In traditional renting, a real estate investor buys a rental property in order to rent … Owning REITs is stupidly simple. I see you have listed Vanguard ETFs, but what are the equivalent mutual funds? I own REITS as 11% of my portfolio (6% US, 5% international). When I've run the numbers, your return (after paying the mortgage) is considerably higher on the property. My current real estate vs stocks is 4:1 level. It's probably worth it though, unless you plan to scale your rental operations. I don't have any personal experience, since I've only gotten my shit together with my broader personal finances recently. It looks like VGRLX has front and back end loads, which I'm kind of salty about. 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. Sales of property or stake in a REIT … Rental vs. REITs: Taxation When it comes to taxes, rental properties are more tax efficient than REIT investments. 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? (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. REITs … 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? And it's less random than the stock market IMO. From an income perspective are they more likely to behave like a rental property or a stock? Rental properties. Are REITs a suitable replacement? 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/. Buying Rental Property Vs. Owning REITs is stupidly simple. Rentals are a headache but a worthwhile headache in my opinion. I've got 5 rental properties right now that are almost paid off. 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. Yeah, that all makes sense to me. Only issue is that your need to have right location, that comes with your own research and experience. A large percentage of REIT … REITs. IN individual rental, you realize the value fully when you sell it. In rental, you can have mortgage (leverage) at low cost and all risk and appreciation is yours. 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. For me, it just isn't worth the headache. 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? Real estate vs. stocks is a long-running debate. You also manage your own investment directly, so if you're savvy, you can make really nice returns (cash flow plus appreciation). 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). Rental Property: REIT's are more convenient than rental properties. Which one will make more money? However, the dividends generated by an REIT … 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 … 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). Same question running through my mind. As the co-founder and CEO … The advantages of a REIT are 1. Investing In A REIT, Part II. The term REIT is an acronym for real estate investment trust… REITs are better diversified, liquid, cost efficient, and therefore, less risky. As a REIT investor, you get to collect passive income without doing much at all. Unfortunately that is at the cost of a lot of complexity. Buying Rental Property vs. REIT Investing: Tax Benefits Owning a rental property, as well as REIT investing, has the benefit of tax deductions. 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