Forbes article claims REITS better than investing directly

7 Replies

Just came across this Forbes article .

Some of the craziest parts of the article

"For fix-and-flip investors, a rule of thumb is that you need to make at least 30% above the purchase price in order to be profitable. This is due to the repair costs and other holding costs. This means that while fix-and-flippers make $58k, on average, it can be a risky investment. For example, as much as 40% of all short-term house flippers sell at either a breakeven or loss."

Where did they come up with the figure that as much as 40% of flippers lose money or break even ?

"For long-term investments, investors are required to find tenants, deal with maintenance and upkeep, and sometimes even renovate the property before renting it."

It's funny they completely ignore the option of professional property management .

"For example, when people buy a property, they can typically only finance one at a time. This means that while you might be adding diversification to your overall portfolio, you have a lack of diversification within the real estate asset class. If you own a residential property and the residential market takes a dive, you become overexposed to losses."

Huh ? Can only finance one property at a time ? The diversification complaint is strange too . If the residential market takes a dive you become overexposed to loses but if rents go down most likely stocks are going to go down and other types of assets . During the crash rents actually went up in many markets or at least stayed steady .

It's crazy that an article like this could even be published. I wonder if the author is truly ignorant or if they actually know better.

I mean some of it doesn’t make a lot of sense but a lot of it does. Flipping houses isn’t easy, and I bet most people sell at a loss of break even on their first couple. This is talked about a lot on the podcasts.

As far as the other stuff about buy and hold, yes that’s all true, but they don’t look at it from the perspective of property management like you said. But they are right about if you only buy a couple at a time you’re not really diversified.

REI isn’t a fool proof investment, it’s arguably riskier than the stock market due to the leverage. Leverage amplifies your returns but also the risk.

@Joseph M.   I think I can explain some of what the author is talking about. 

First... Their data most likely came from mandatory reporting states where the sales prices cannot be kept secret. 

Second... The 30% rule of thumb has been mentioned here on bigger pockets.

Third... Most buyers would take MANY YEARS to get a fair amount of diversification in real estate.

The main type of diversification REITs bring which the author is focusing on and what you may not be considering closely enough is geographic diversification.

Also rents are not in lock step with other investment classes.  My rents have doubled during the time the price of platinum has dropped 50%.  On the other hand the price of palladium has tripled in the same time period.

@Joseph M. I suspect the flipping stat is pretty accurate..  using my dear wife as an example

last year she wanted to flip a few homes.. she did two on her own..  first one was homerun she made 120k on it.. GREAT spread for our market.. second one not so good.. lost 30k so for a years worth of work she netted 90k..

I think for a lot of smaller investors who goal is to own one or two rentals. the REITS offer a nice alternative.  if you can scale rentals to 10 or more then that's better in the long run.. but one or two maybe the reit would be appropriate.. sure is a lot less work and stress and when you tire of tenants you can just call your stock broker when you own the asset not so easy.

@Account Closed   that's pretty cool on your rents ours in Oregon have done almost the same well probably gone up 50% in the last 5 years..

out in the super heavy duty rental markets of the mid west I see those rents pretty stable over the years.. when you have life long renters they are just geared to knowing a house is going to be 700 to 900 a month.. And HUD just does not move the rents much but those rents are consistent I will say that.

I sure wish I bought Silver at 5 bucks.. LOL.

95% lose money day trading.  Same goes for Poker

It wouldnt suprise me to hear that most DONT make money flipping.  Its a small % making most of the money.

Just like its a small % of agent raking in the  majority of sale commissions.

@Joseph M. The article is 100% correct, I've worked at 2 National REIT and the diversification of a REIT can't be compared to the small scale investing we do. A REIT can have Large scale Apartment complexes 500 Units or larger, Large Office buildings or Office parks consisting several office buildings, Hospitals, Land, Industrial Wharehouses, Hotels, Large Shopping centers, and they also have strategic components factored into the REIT to mitigate losses based on changes in market conditions or asset types. I can't begin to count the number of inexperienced flippers that forget to factor in something as simple as taxes on sales when they're doing the numbers to acquire a property causing them to have a loss on a deal.

My observations are that financial magazines by and large are funded (advertisements) by large financial institutions which are more focused on getting investors to buy their stock and bond products.  As REITS trade like a stock and are offered at these types of institutions you often seen more coverage of this asset type.  Direct owned real estate gets far less attention and is covered by far fewer experienced reporters with deep knowledge of real estate so it does not surprise me at all that reporting is not as helpful for the experienced investor.

You’re first mistake was reading Forbes for investment advice.

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