REIT vs Multi unit investing

19 Replies

My question for all of you guys is that while some of you guys are investing in multi units that provide a rent income of 10-15% return. My question is why not invest all this money to Real estate investment trusts? Most of them provide the same amount of returns if not more. Why waste the time of going through all the hassle of it while you can just get a more passive income? Is it insecurities of not having something physical ?

David, when own property directly, you make money 5 ways. Cash flow, appreciation, depreciation, equity capture, mortgage pay down. With a REIT, you only make money in two ways-cash flow in the form of dividends and appreciation. Direct real estate offers higher returns when you incorporate all 5 returns. Be extremely careful of REITS offering yields north of 5%. The market benchmark is only 3.2%. When I see a yield of 10-15% it means the portfolio is using massive leverage. There's no free lunch on Wall Street or Main Street!

Cory thank you for your insight, i been reading up on the two differences all morning. Vanguard REIT currently is average of 9% last time i checked. Cory can't you also argue that time is more valuable and you are on call if you invested a property directly (maintenance, repair , etc). With mortgage crisis behind us, isn't it more safer bet that the requirements for big firms to invest much more stricter hence a safer investment than before?

@David Ma
Cory Binsfield is right about all the benefits of owning a real estate directly rather than through REIT. But the reason why I own real estate is the control I have. I would do it even if I did not have all the benefits Cory outlined. I have invested in mutual funds before but always felt so dumb and never in control. I am a firm believer in controlling your own destiny. This does not mean I don't do bad in my investments. On the contrary, I have lost a lot of money buying my own properties. But I made those mistakes and I am responsible for them. I guess you can say I am insecure.

Having said that, you can buy real estate and still be hands off as you would be in a REIT. It is called turn key investing. You will get all the benefits Cory outlined and still work very little at it. Such deals are all over BP.

I am certain that REITs are much more scrutinizing than they were before and current REIT investments are safer than they were before. But greed is always stronger than any rules on the books. Real Estate crashes will happen again and passive investors (as well as active investors) will be hurt in droves. I predict that another crash is heading our way. I am trying very hard to be prepared for it better this time.

Hi @David Ma - Cory is spot on. I would emphasize the fact that you don't actually own any real estate in a REIT, and therefore you have no control over it. You are not free to make any decisions related to the purchase, sale, improvement, or management of the properties. Additionally, the management team of the REIT is usually the ones making the lion share of the profits from the investors money.

Finally, you would be buying a security, which means you'll likely be paying the highest amount of tax on any profits. And there is also the risks involved with most paper assets -- and in today's shaky economy, there is no guarantee that the value of the shares (or the shares themselves) will b worth anything "tomorrow".

Regarding "Vanguard REIT currently is average of 9% last time i checked." I believe this is the total return... assuming you are taking about VANGUARD REIT ETF. The yield is 3.22%. The rest is from price appreciation.

But you are spot on. Just buy stocks that go up in price;) (Note: as an individual, you don't control the price in the market, whereas you have a lot more control over your multi-family investment).

David: You must also remember the income from a REIT is highly taxed as regular income so the amount you put in your pocket is considerably less than owning multifamily and having the tax advantage of depreciation. It 's how much you keep not how much you make .

Can you 1031 exchange into a REIT? That may be a good exit strategy.

Generally, you can not 1031 Exchange into a REIT. You have sold an interest in real estate and must buy an interest in real estate. Shares or units in a REIT represents an interest in a security and not a direct interest in real estate, so it would be not considered Qualified Use and/or Like-Kind property for 1031 Exchange treatment.

However, there is one exception. You can 1031 Exchange into an upREIT (the "up" stands for umbrella partnership), which is also known as a 1031/721 Exchange. There are not very many upREITS on the market at anyone time, if any, so you have to be careful when timing your sale.

And, the one big draw back is that once you 1031 Exchange into the upREIT, you can not 1031 Exchange back out - ever. You now own a security.

Everyone has great points about control and risk. One more critical advantage of owning is leverage. With $20K I control $100K in assets. With current low mortgage rates and home prices I can get homes where the cash flow pays off the mortgage in under 10 years even after all expenses. So effectively I get 5X my initial investment in 10 years. I dont think a REIT will do that for me. Not to say they are bad. I own several REITs but I buy REITs in sectors I cannot invest directly like hospitals or NNN REITS.

@David Ma

I've done both REITs, direct ownership as well as Limited Partnerships. With LPs and REITs, you are not even the tail of the dog, you are more like a fleas on the tail of the dog. With direct ownership, you are the big dog.

Do you want to be a fleas on the tail of a big dog, or do you want to BE the big dog?

Besides the tax issues which are more favorable to direct investment, and the rate of return, there is the control issue. As the owner of a property you decide when to buy, when to sell, when to make improvements, who to rent to, etc. etc. etc. With an LP or REIT, you just along for the ride no matter where it takes you.

Once upon a time there was a Wall Street stock Brokerage company that was selling a joint ownership LP/REIT that invested in apartment complexes in the sunbelt. Normally one consideration is the amount of leverage. Higher leveraged properties can be more risky. But this offering was only 50% leveraged, 50% LTV and the partners had 50% equity in the properties or more. Well the market sunk, the value of the properties declined, and ultimately the properties were under water. How can you be under water with only 50% LTV? You may ask? But it is easy if the value goes below 50% The LP/REIT gave back the underwater properties to the lenders and hung on with the other properties that were not so severe under water. With the Deed in Lieu properties, the 50% equity was wiped out, gone, Kaput, zip, nada, zero.

The remaining properties were sought after by Carl Icahn and T. Boone Pickens at around 20 to 30 cents on the dollar. At that point the investors had the choice of selling and losing up to 80% of their investment on the properties remaining after they lost 50% on the properties given back. Or the investors could hang on and hope that the values would increase. They never actually did.

So the control given freely to others, besides the management fees charged, can run your investment to zero, but fortunately not below zero.

And certainly with direct ownership, you can also lose the property, but hopefully have better control and more direct interest in the profitability.

David, when own property directly, you make money 5 ways. Cash flow, appreciation, depreciation, equity capture, mortgage pay down. With a REIT, you only make money in two ways-cash flow in the form of dividends and appreciation. Direct real estate offers higher returns when you incorporate all 5 returns. Be extremely careful of REITS offering yields north of 5%. The market benchmark is only 3.2%. When I see a yield of 10-15% it means the portfolio is using massive leverage. There's no free lunch on Wall Street or Main Street!

Cory Binsfield, I'm a newbie here. Would you (or anyone else who might know) mind elaborating on depreciation, equity capture, and mortgage pay down?

Thanks!

Great forum discussion everybody. One thing we failed to mention is the liquidity of the REIT. With a click of a mouse, your investment is sold. Selling a Multi-family or a single family rental has major liquidity issues.

In terms of returns, this is why the REIT offers a lower return. Liquidity plus lack of control are two facets that force the return and the risk lower than direct real estate investing. I must point out that the return on the Vanguard REIT index at 9% that was mentioned is based on PAST PERORMANCE. For investors in the REIT market, it's been the golden age as the dumb money chases the higher yields of Reits over safe income plays like government bonds.

Bottom line, by taking control of your investments and dealing with tenants, taxes and toilets, you better be aiming for a 20% annualized return or you are better off in a publicly traded REIT. Whatever you do, don't fall prey to a salesman touting a direct real estate investment that's privately traded. These are extremely illiquid and make a boatload of money for the salesperson and the sponsor. Check out David Lerner and his Apple REIT for all the gory details on how these sponsors fleece poor retirees out of their hard earned savings.

@David Ma

Thank you for starting this thread; I was about to start one just like it, but figured I'd run a quick search to see if anything else was out there first. I'm struggling with the same thing. Some of the buy-and-hold investors on here are picking up AWESOME deals on rental property, where their returns will almost certainly outperform those of a REIT. Unfortunately, I don't seem to be able to find those deals in my market.

I don't have the time/desire for extensive repairs, and I'd have to hire it all out anyway, so I'd end up paying top dollar. I would need something turnkey, therefore, I'd likely pay quite a bit more for the property. After all the normal expenses, and I do include property management because I don't necessarily want to self-manage, my returns are nothing more than average, at best.

I can think of two main reasons that I would want to own real property versus a REIT:

1.) Tax benefits - I would likely receive much more in terms of tax benefits than I otherwise would without investing in real property. I'm currently in a 28% federal bracket. Taxes will likely go up. My W-2 income will likely continue going up. I could definitely use the tax break.

2.) Leverage - As many have already said, I can put 20% down and control 100% of a property. That's pretty incredible.

I can think of several reasons why I'd want to invest in a REIT instead:

1.) Truly Passive - No tenants, termites, and toilets to deal with. No destroyed property to repair. No maintenance bills to pay. No property management company to oversee.

2.) Decent Returns - Although dividend yields can change at any time, the REITs I've been looking at recently seem to hover around 7% yield. While that's not fantastic by any means, it's just the dividend yield; there's also potential capital appreciation (which, many on here would probably say is the same as speculation on appreciation of real property).

3.) Exposure to Certain Types of Property - As someone has already stated, you can invest in certain types of real estate through certain REITs that you may not be able to afford to invest in directly. Student housing and NNN were mentioned already. There's also retail, office buildings, etc.

4.) Diversification of Risk - Many will argue that they have more control with direct real estate investing locally. There's definitely truth to that, however, there are also factors outside of one's control. By investing in a REIT, I get diversification over numerous properties instead of just one.

Another obvious answer is that I can, and likely will, invest in both. REITs for the reasons stated above and real property for the tax benefits and leverage. Is there anyone that believes it's all or nothing? I know many will lean towards real property and NOT REITs, but taking a look at my skill set and personality type and comparing myself to the 50+ guest investors on the Podcasts, there are just certain things I do not want to deal with. I feel like a REIT gives me a way to invest in real estate without many of the typical headaches. I'm okay sacrificing a little return to have something that's totally hands-off and passive.

Any input, advice, and opinions are appreciated as I continue to try to formulate my thoughts. Thanks in advance, everyone!

Originally posted by @Mark S. :

@David Ma

Thank you for starting this thread; I was about to start one just like it, but figured I'd run a quick search to see if anything else was out there first. I'm struggling with the same thing. Some of the buy-and-hold investors on here are picking up AWESOME deals on rental property, where their returns will almost certainly outperform those of a REIT. Unfortunately, I don't seem to be able to find those deals in my market.

I don't have the time/desire for extensive repairs, and I'd have to hire it all out anyway, so I'd end up paying top dollar. I would need something turnkey, therefore, I'd likely pay quite a bit more for the property. After all the normal expenses, and I do include property management because I don't necessarily want to self-manage, my returns are nothing more than average, at best.

I can think of two main reasons that I would want to own real property versus a REIT:

1.) Tax benefits - I would likely receive much more in terms of tax benefits than I otherwise would without investing in real property. I'm currently in a 28% federal bracket. Taxes will likely go up. My W-2 income will likely continue going up. I could definitely use the tax break.

2.) Leverage - As many have already said, I can put 20% down and control 100% of a property. That's pretty incredible.

I can think of several reasons why I'd want to invest in a REIT instead:

1.) Truly Passive - No tenants, termites, and toilets to deal with. No destroyed property to repair. No maintenance bills to pay. No property management company to oversee.

2.) Decent Returns - Although dividend yields can change at any time, the REITs I've been looking at recently seem to hover around 7% yield. While that's not fantastic by any means, it's just the dividend yield; there's also potential capital appreciation (which, many on here would probably say is the same as speculation on appreciation of real property).

3.) Exposure to Certain Types of Property - As someone has already stated, you can invest in certain types of real estate through certain REITs that you may not be able to afford to invest in directly. Student housing and NNN were mentioned already. There's also retail, office buildings, etc.

4.) Diversification of Risk - Many will argue that they have more control with direct real estate investing locally. There's definitely truth to that, however, there are also factors outside of one's control. By investing in a REIT, I get diversification over numerous properties instead of just one.

Another obvious answer is that I can, and likely will, invest in both. REITs for the reasons stated above and real property for the tax benefits and leverage. Is there anyone that believes it's all or nothing? I know many will lean towards real property and NOT REITs, but taking a look at my skill set and personality type and comparing myself to the 50+ guest investors on the Podcasts, there are just certain things I do not want to deal with. I feel like a REIT gives me a way to invest in real estate without many of the typical headaches. I'm okay sacrificing a little return to have something that's totally hands-off and passive.

Any input, advice, and opinions are appreciated as I continue to try to formulate my thoughts. Thanks in advance, everyone!

 I'm with you!

It's not insecurities, it's that owning real property poses more benefits in a lot of ways than REITs do. 

I wrote this article awhile back...it doesn't use the same numbers you use as an example, but it hits on the differences between the two. Ultimately, neither are bad, but they both of pros and cons.

http://www.biggerpockets.com/renewsblog/2015/01/24...

Originally posted by @Mark S. :

@David Ma

Thank you for starting this thread; I was about to start one just like it, but figured I'd run a quick search to see if anything else was out there first. I'm struggling with the same thing. Some of the buy-and-hold investors on here are picking up AWESOME deals on rental property, where their returns will almost certainly outperform those of a REIT. Unfortunately, I don't seem to be able to find those deals in my market.

I don't have the time/desire for extensive repairs, and I'd have to hire it all out anyway, so I'd end up paying top dollar. I would need something turnkey, therefore, I'd likely pay quite a bit more for the property. After all the normal expenses, and I do include property management because I don't necessarily want to self-manage, my returns are nothing more than average, at best.

I can think of two main reasons that I would want to own real property versus a REIT:

1.) Tax benefits - I would likely receive much more in terms of tax benefits than I otherwise would without investing in real property. I'm currently in a 28% federal bracket. Taxes will likely go up. My W-2 income will likely continue going up. I could definitely use the tax break.

2.) Leverage - As many have already said, I can put 20% down and control 100% of a property. That's pretty incredible.

I can think of several reasons why I'd want to invest in a REIT instead:

1.) Truly Passive - No tenants, termites, and toilets to deal with. No destroyed property to repair. No maintenance bills to pay. No property management company to oversee.

2.) Decent Returns - Although dividend yields can change at any time, the REITs I've been looking at recently seem to hover around 7% yield. While that's not fantastic by any means, it's just the dividend yield; there's also potential capital appreciation (which, many on here would probably say is the same as speculation on appreciation of real property).

3.) Exposure to Certain Types of Property - As someone has already stated, you can invest in certain types of real estate through certain REITs that you may not be able to afford to invest in directly. Student housing and NNN were mentioned already. There's also retail, office buildings, etc.

4.) Diversification of Risk - Many will argue that they have more control with direct real estate investing locally. There's definitely truth to that, however, there are also factors outside of one's control. By investing in a REIT, I get diversification over numerous properties instead of just one.

Another obvious answer is that I can, and likely will, invest in both. REITs for the reasons stated above and real property for the tax benefits and leverage. Is there anyone that believes it's all or nothing? I know many will lean towards real property and NOT REITs, but taking a look at my skill set and personality type and comparing myself to the 50+ guest investors on the Podcasts, there are just certain things I do not want to deal with. I feel like a REIT gives me a way to invest in real estate without many of the typical headaches. I'm okay sacrificing a little return to have something that's totally hands-off and passive.

Any input, advice, and opinions are appreciated as I continue to try to formulate my thoughts. Thanks in advance, everyone!

 Hello,

I came across to this thread. I agree with you. For the same reason, I prefer to have total passive investment. It has been a while since you posted this. How are your investment portfolio looking? As I am a starter, I have been reading and researching. but I am not finding deals that many investors find. I would like to know if your position has been changed. :)

@David Ma Great question. I would suggest reading up on syndication and direct ownership of multifamily. If you're new to the game Ken McElroy has a great basic intro titled "The Advanced Guide to Real Estate Investing." Don't let the title fool you. It's not the end all be all but it is one of the best "Trail Heads" on the path less taken.  After that try Dave Lindhal's "Multifamily Millions."  All the best on your journey and happy hunting!

Originally posted by @Soomin Kim :
Originally posted by @Mark S.:

@David Ma

Thank you for starting this thread; I was about to start one just like it, but figured I'd run a quick search to see if anything else was out there first. I'm struggling with the same thing. Some of the buy-and-hold investors on here are picking up AWESOME deals on rental property, where their returns will almost certainly outperform those of a REIT. Unfortunately, I don't seem to be able to find those deals in my market.

I don't have the time/desire for extensive repairs, and I'd have to hire it all out anyway, so I'd end up paying top dollar. I would need something turnkey, therefore, I'd likely pay quite a bit more for the property. After all the normal expenses, and I do include property management because I don't necessarily want to self-manage, my returns are nothing more than average, at best.

I can think of two main reasons that I would want to own real property versus a REIT:

1.) Tax benefits - I would likely receive much more in terms of tax benefits than I otherwise would without investing in real property. I'm currently in a 28% federal bracket. Taxes will likely go up. My W-2 income will likely continue going up. I could definitely use the tax break.

2.) Leverage - As many have already said, I can put 20% down and control 100% of a property. That's pretty incredible.

I can think of several reasons why I'd want to invest in a REIT instead:

1.) Truly Passive - No tenants, termites, and toilets to deal with. No destroyed property to repair. No maintenance bills to pay. No property management company to oversee.

2.) Decent Returns - Although dividend yields can change at any time, the REITs I've been looking at recently seem to hover around 7% yield. While that's not fantastic by any means, it's just the dividend yield; there's also potential capital appreciation (which, many on here would probably say is the same as speculation on appreciation of real property).

3.) Exposure to Certain Types of Property - As someone has already stated, you can invest in certain types of real estate through certain REITs that you may not be able to afford to invest in directly. Student housing and NNN were mentioned already. There's also retail, office buildings, etc.

4.) Diversification of Risk - Many will argue that they have more control with direct real estate investing locally. There's definitely truth to that, however, there are also factors outside of one's control. By investing in a REIT, I get diversification over numerous properties instead of just one.

Another obvious answer is that I can, and likely will, invest in both. REITs for the reasons stated above and real property for the tax benefits and leverage. Is there anyone that believes it's all or nothing? I know many will lean towards real property and NOT REITs, but taking a look at my skill set and personality type and comparing myself to the 50+ guest investors on the Podcasts, there are just certain things I do not want to deal with. I feel like a REIT gives me a way to invest in real estate without many of the typical headaches. I'm okay sacrificing a little return to have something that's totally hands-off and passive.

Any input, advice, and opinions are appreciated as I continue to try to formulate my thoughts. Thanks in advance, everyone!

 Hello,

I came across to this thread. I agree with you. For the same reason, I prefer to have total passive investment. It has been a while since you posted this. How are your investment portfolio looking? As I am a starter, I have been reading and researching. but I am not finding deals that many investors find. I would like to know if your position has been changed. :)

 I am doing both.  My real investments are turnkey and syndications.  

Originally posted by @David Ma :

My question for all of you guys is that while some of you guys are investing in multi units that provide a rent income of 10-15% return. My question is why not invest all this money to Real estate investment trusts? Most of them provide the same amount of returns if not more. Why waste the time of going through all the hassle of it while you can just get a more passive income? Is it insecurities of not having something physical ?

People are drawn to control. 

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