Data proves REITs are better than buying real estate?
Atlanta, GA · Member since 2017 · 9 posts · 5 votes
Data proves REITs are better than buying real estate?
Most Popular Reply
Lawrence, KS · Member since 2017 · 175 posts · 51 votes
9yREIT is simply a tax designation for a company. They can achieve it by following certain guidelines. The main advantage is that the company itself pays no taxes but they must pay out 90% of income to the shareholders, thus huge dividend yields. Here are the guidelines if you care https://www.sec.gov/fast-answers/answersreitshtm.h...
If they are publicly traded you can liquidate your position in a day. It would take longer if you were a much larger investor but doubtful anyone on BP is of that size. You can invest in different asset classes, MF, Mortgage, industrial, diversified, etc. They do have equity upside on top of solid dividends. I personally like mortgage REITs. They buy MSB and other loan papers so they have a really low overhead. The ones I'm in yield 10% dividends plus equity upside. Downside is that they are usually really levered up to get that high of a return which makes them susceptible to rising interest rates.
I own ARI and ABR. Both have a really solid track record. You can also get ones that pay out monthly, every other month, quarterly so you can have a steady CF. You would need to buy them in a taxable investment account to get what I think is the main advantage of real estate which is cash today. Obviously this brings up tax issues. Benefit of rentals is depreciation and ability to write other expenses off which you couldn't do buying a REIT.
My personal strategy is to do a build up rental incomes and leverage that into REITs in a taxable account which you can acquire faster and take advantage of compounding interest.
35 Replies
- Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes9y
@Maggie Wray REITs do not buy local. Many investors tend to buy local. In the last few years, markets across they county have not all been the same. I can tell you REITs are playing very hard in hot markets.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
I don't know where he got his statistics from, but in a REIT isn't someone is making money using all other peoples money? Like syndication on a huge level and the REIT is the sponsor? Assume you were represented all the cash in a REIT. You aren't getting all the returns from the investment. So wouldn't logic follow that if investing on your own where you get 100% of the returns you would do better?
But that's all assuming you are a good investor. If you aren't willing to put in the time, effort, and energy to be a good, successful investor then yes, you would probably be better investing in REITs.
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
REIT is simply a tax designation for a company. They can achieve it by following certain guidelines. The main advantage is that the company itself pays no taxes but they must pay out 90% of income to the shareholders, thus huge dividend yields. Here are the guidelines if you care https://www.sec.gov/fast-answers/answersreitshtm.h...
If they are publicly traded you can liquidate your position in a day. It would take longer if you were a much larger investor but doubtful anyone on BP is of that size. You can invest in different asset classes, MF, Mortgage, industrial, diversified, etc. They do have equity upside on top of solid dividends. I personally like mortgage REITs. They buy MSB and other loan papers so they have a really low overhead. The ones I'm in yield 10% dividends plus equity upside. Downside is that they are usually really levered up to get that high of a return which makes them susceptible to rising interest rates.
I own ARI and ABR. Both have a really solid track record. You can also get ones that pay out monthly, every other month, quarterly so you can have a steady CF. You would need to buy them in a taxable investment account to get what I think is the main advantage of real estate which is cash today. Obviously this brings up tax issues. Benefit of rentals is depreciation and ability to write other expenses off which you couldn't do buying a REIT.
My personal strategy is to do a build up rental incomes and leverage that into REITs in a taxable account which you can acquire faster and take advantage of compounding interest.
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
Also should mention another benefit of REITs is that the "cash drag" is minimal. Cash drag is the opportunity cost of cash. If you have to save up 20k for the down payment on a house over the course of the year, $1600/month, there is going to be cash just sitting in an account not earning interest (or very little) until you have the amount necessary. Instead that could be put to work in a REIT paying out dividends which can be reinvested over the year. I am currently giving you a really big non-answer but I could build a financial model that says a real estate deal is better than a REIT or the REIT is better than any given RE deal. If you spend a lot of time trying to maximize returns you may miss out on some investments that are still solid investments but don't return as much as you'd like.
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes9yIt's an invalid comparison. The composition, type, and location of your prospective RE assets is unlikely to resemble any particular basket of RE investments that any specific REIT is buying. There all all kinds of investments that historically outperform "Real Estate" As an ambiguously defined investment device. It's how you position your real estate investment specifically that will largely dictate your returns. Also if your basing your investment decisions on main stream magazine articles your probably better off sticking to mutual funds.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Though I disagree with some of the article's arguments, I agree with much of the overall conclusions, with some major caveats.
I still believe that a skilled, local, hands on investor would be able to handily out perform a REIT over a long duration. This is comparing an active investment to a passive one ... even if the local investor is buy-and-hold, it is still an active investment where they utilize their knowledge, skills, and work to earn themself superior returns.
However, where I agree with the article is if you take your typical newbie on BP, wanting to invest directly in turnkey rentals out of state, and be hands off, totally passive income. These investors just gave up all of the benefits of an active investment that earned superior returns above ... in this case, they would be much better served buying a REIT. Either way, they are going to pay others to manage their investment ... but with the REIT they have world class investment teams, diversification, economies of scale, smaller buy-in amounts, and better asset protection.
So, if you are willing and able to stay hands on and local (at least at first), then I think direct ownership is the way to go ... if you want totally hands off and remote, then I agree with the basic premise of the article, that REITs are a superior vehicle for this purpose.
- Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes9yYes, leverage is the key. You can buy stocks in REITs on margin and I suppose investors do. When you put 20% down on a rental it generates the income to pay off the loan.
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
@Roger S. that type of leverage is mainly for mortgage REITs. You can buy REITs that invest in actual property vs notes on properties. They obviously are still using leverage but won't give you 9-11% dividend yields but likely a still healthy yields. At the end of the day @David Faulkner is right that if you have the skills to do repairs and active management you are gonna see some solid ROI.
Check out dividend.com or obviously yahoo/google finance.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Marian Smith:
Yes, leverage is the key. You can buy stocks in REITs on margin and I suppose investors do. When you put 20% down on a rental it generates the income to pay off the loan.
You don't need to buy an REIT on margin in order to gain some financial leverage. REITs are not 100% equity, there is some debt (leverage) built into the investment already. The main difference is that with a REIT you have a professional doing the capital structure, so they decide the amount and types of debt that are most appropriate, but the leverage is already there ... you can look up the debt to equity ratio for any offering to find out how much and the types of leverage being applied.
- Glendora, CA · Member since 2016 · 106 posts · 21 votes9y
@Adam M. "My personal strategy is to do a build up rental incomes and leverage that into REITs in a taxable account which you can acquire faster and take advantage of compounding interest." Hey Adam Interesting strategy can you elaborate more on this... I guess you would need to do something with the rental income after all plus you gain the tax benefits of writing off deprecation on the property...
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
@David Faulkner from a balance sheet perspective, which is really the only way to look at it, publicly traded REITs are absolutely a 100% equity asset. You have to borrow 0 dollars to acquire a share you simply need to exchange enough cash for the current market price and thus incur no liability. Now from the standpoint of the REIT itself, they do use leverage to buy assets. If they default on the obligation the stock price will drop and if they default on enough it will drop to 0 and you lose your entire investment but the creditors do not come after you. When you buy a rental property you are exchanging some cash and signing a legal obligation to acquire the asset and if you default on that obligation you have to pay up.
- Glendora, CA · Member since 2016 · 106 posts · 21 votes9y
@David Faulkner Would tax write offs help offset returns between A REIT and a Passive investment property such as a turn key??
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
@Simon Ruiz what I was saying is that I would want to have actual rental properties because that will generate cash that is deposited into my bank account and can access it the day I get it. This is in contrast to having it in a brokerage account that is investing in dividend paying stocks and takes 3-4 days to transfer the cash out of the account so I can use it. As someone who wants a bit of financial freedom having cash today is more important than tomorrow. I wouldn't likely need all the cash generated from my rentals as I would have a primary job. Because of this I would parlay that into my brokerage account to buy more dividend paying stocks and increase my income.
- Glendora, CA · Member since 2016 · 106 posts · 21 votes9y
@Adam M. Understood... another strategy I have heard was buying REITS in Roth IRA account and having the dividends grow tax free but that money is locked up until retirement unfortunately... I Have 2 REITS myself STWD and NRZ however, ARI and ABR look really Good too might even be better
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
@Simon Ruiz yeah it is generally good practice to have dividend paying assets in a tax advantageous account and I absolutely plan on doing that for some amount of my retirement. But at the end of the day having cash now in the event of an unexpected expense or not being stuck in a situation where I hate my job but have to keep it to pay the bills is more important to me and that is why I'd like to have some cash generating assets even if they are taxable. Also should note that the tax rate of dividends if you have owned the share long enough is only 15% for most people and 20% if you get up into the higher tax brackets.
http://www.investopedia.com/terms/q/qualifieddivid... - Glendora, CA · Member since 2016 · 106 posts · 21 votes9y
@Maggie Wray Great post I'm a REITS investor and have wondered the same thing...
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
Good websites are
www.dividend.com - Pretty self explanatory
www.seekingalpha.com - Very good site for analysis. Downside is that some people post basically op-ed type articles vs fundamental analysis.
www.capitalcube.com - Fundamental analysis. Has some awesome analysis of REITs as far as dividend quality
For REITs I always google "XYZ dividend quality" and it brings up a capital cube article on that specific REIT
- Glendora, CA · Member since 2016 · 106 posts · 21 votes9y
@Adam M. Great Links never used Capitalcube before.... I use https://simplywall.st.com its become a paid subscription service but I think they offer a free version as well
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
@Simon Ruiz interesting site I've never seen it and will have to give it a look. On another note I'd at NYMT as a ticker to track (found it looking at the Capital Cube link for ARI). $6/share and 10%+ dividend yield. Almost no equity upside but if you are spinning that income into something like SPY which would be my strategy.
- Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes9y
Specifically for the buy-and-hold investors I work with and my industry, (DSTs/syndicated real estate), the passive nature of the investment is similar to REITS but I want to point out some key differences.
- REIT investors are not considered to have a direct interest in the real estate owned by the REIT and, therefore, do not own real estate that can be exchanged in a tax-deferred 1031 exchange.
A DST allows the investor to 1031 into/out of the property, the payment of the taxes is deferred, allowing the investor to have a greater amount to invest in the replacement property.
- Since DST investors own real property they get the benefit of depreciation on the property. Multi-family DSTs depreciate on the same 27.5 year schedule as 1-4 unit residential real estate.
This combined with using the whole amount invested plus the loan as the basis for depreciation shelters most if not all income for most investors.
REIT income on the other hand is typically taxed as ordinary income (which for a California investor at the top tax rate could equal as much as 52.9%). - Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Simon Ruiz:
@Adam M. Understood... another strategy I have heard was buying REITS in Roth IRA account and having the dividends grow tax free but that money is locked up until retirement unfortunately... I Have 2 REITS myself STWD and NRZ however, ARI and ABR look really Good too might even be better
With a Roth IRA that you have owned for more than 5 years, you are free to tap the principal at any time, retired or not, penalty free ... it is the interest that you must wait to be retired for. There are also Roth conversion ladder strategies whereby you can retire early and convert and tap a portion of your non Roth retirement assets tax free up to your taxable income limit ... this way the funds are not taxed going in AND not taxed coming out ... lot's of creative ways to skin the cat.
- Lawrence, KS · Member since 2017 · 175 posts · 51 votes9y
@Leslie Pappas Thanks for shamelessly plugging factually misleading information. Only part of the dividend is taxed as OID, 69% of the total income according to the following article. It is dependent on the individual REIT. Also how many people on this website are in the top tax bracket? Federally that is 400k+ per year. I don't know the OP but I would guess that they are likely not in the top tax bracket if they are looking to buy their first rental property. So fear mongering with the high tax rate in order to benefit yourself is a bit unnecessary.
http://twenty-first.com/pdf/How_REIT_Dividends_Are...@David Faulkner thanks for the info. What do you mean by "tap the principal?"
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes9y
The investment firm I work for utilizes REITS.
I will say one benefit is that you can invest institutional funds in them. We have a lot of clients who have no desire to really BE full time real estate investors- but do like the idea of having part of their IRA invested in real estate in some manor. We use it as a diversification tool for that situation mostly.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Adam M.:
@Leslie Pappas Thanks for shamelessly plugging factually misleading information. Only part of the dividend is taxed as OID, 69% of the total income according to the following article. It is dependent on the individual REIT. Also how many people on this website are in the top tax bracket? Federally that is 400k+ per year. I don't know the OP but I would guess that they are likely not in the top tax bracket if they are looking to buy their first rental property. So fear mongering with the high tax rate in order to benefit yourself is a bit unnecessary.
http://twenty-first.com/pdf/How_REIT_Dividends_Are...@David Faulkner thanks for the info. What do you mean by "tap the principal?"
I mean that if you are NOT yet of retirement age but you have owned the ROTH IRA for more than 5 years, then you are free to use those funds up to the total of any and all principal contributions that you have made up until that point however you see fit without a early withdrawal penalty or additional taxes ... generally, you should be hesitant to do that because once you "tap" the funds for personal use, then they are no longer growing tax free within the Roth. If start tapping interest, dividends, or capital gains that the fund has produced that exceed the principal amount that you have contributed before you are of retirement age, then those additional funds would be subject to early withdrawal penalties.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.