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