I've been following Bigger Pockets and planning to buy my first rental property sometime this year...but this article made me wonder if I should be rethinking that decision, and investing in REITs instead!
So, I'd love to hear what Bigger Pockets members with more firsthand experience with real estate think about this article.
Are they right about this? Do you think the arguments in this article are valid, and REIT's really are a statistically better than buying real estate directly?
OR are there other counter-arguments this article was ignoring, that make purchasing real estate directly a better investment after all?
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.
Reits are by far better for passive investors than the BP turnkey variety. Or have been much better for over 10 years in a row let's say. You have control of which Reit you pick and is the reply for those who claim you have no control. And who really wants control of a random sfr in some random city anyways.
Sound very relative to me. If your plan is to do nothing, have someone else manage everything, and still have low risk then you're probobly going to fair better with a REIT than trying that strategy on actual real estate.
@Matt R. I would really like to hear from A pro Turnkey person about this... I myself have been contemplating purchasing a turnkey property of sorts but it seems its not really worth the trouble.. It also seems a majority of people that live in hi priced markets like Los Angeles and New York use the turnkey model out of state to add real estate to there portfolio.
@Adam M. What's you opinion on using a 401k loan to buy up more REITS ?? In my market ( Los Angeles County and Inland Empire) A lot of people use them as down payments to purchase there primary residences...
@Matt R. I would really like to hear from A pro Turnkey person about this... I myself have been contemplating purchasing a turnkey property of sorts but it seems its not really worth the trouble.. It also seems a majority of people that live in hi priced markets like Los Angeles and New York use the turnkey model out of state to add real estate to there portfolio.
You may hear from a few tk promoters or sellers or novice investors but there is the problemo in that. Either not going to know the basic investment math or have bias. Think about this...how can one compare a randomly located sfh rental to the much more specialized commercial properties and how can random retail priced sfrs that someone else (real investor in the TK tranaction) fixed up for their profit now have more passive returns than a commercial property that is 100% designed for passive investor returns? Which one is actually passive and which one has the most likelihood for higher returns? Which one can attract and keep professional management? Which one is liquid? There is much more but that is a good start.
@David Faulkner Would tax write offs help offset returns between A REIT and a Passive investment property such as a turn key??
There are ways to defeat or at least beat back the tax man in either case ... I've already alluded to some. Since you have more control over the capital structuring with individual RE investments, I'd say you likely have more "levers to pull" to optimize for taxes, but that presumes that you (and/or your CPA) still knows which levers to pull, when, and how ... which gets us back to that whole active vs passive investment thing. Taxes are a consideration no doubt, but I'm careful to never let them drive my investment decisions ... risk adjusted returns come first, then how to legally shelter those returns from Uncle Sam comes after. Never let the tax tail wag the investment dog.
REIT investing is basically like invest money as a lender, whereas REI by yourself is like a borrower. Completely different thing.
For example, as a REI, you buy a property for $400k, with $80k downplay, $320k loan from lender. Rent covers moregage and PITI, with a few hundred dollars positive cash flow.
In 10 years, the property value increase to $800k. Your equity increased from $80k to $480k.
That is a 600% increase on your investment in 10 years, not considering cash flow income.
Furthermore, you can refinance 70%, i.e., $560k out. With zero money in the property, you raise the rent to market and still cover the mortgage and PITI. Wait for another 10 years, that will be profit with no upfront investment.
That return is way way higher than REIT investment.
When inflation starts to increase, you want to borrow as much money as possible with fixed rate as REI investor. Let the inflation raise the property value and rent, and force the borrowed money to lose its value.
For REIT investor, you are actually acting as the lender. Playing on the other side of the game.