REITs v. Direct investing in real estate
Madison, MS · Member since 2016 · 6 posts · 1 vote
REITs v. Direct investing in real estate
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Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8yKevin Humphreys So a publicly traded REIT is liquid as long the market is open that day. Put the sell order in (market price) and *poof* you have money that’s settled in 24 hours. But you don’t get tax benefits like depreciation, mortgage interest, etc. Now there are some non-public REITs that you hear about on the radio. That doesn’t mean they’re bad but they’re generally going to be for accredited investors (you hear it in the advertising) but their prospectus will tell you their intended hold period. As a passive investor you can’t decide to sell the property. You can sell shares in a publicly traded REIT today. You can sell me your property today (not that you’d get a good price in a compressed timeframe) but you don’t have that individual control with a lot of syndication investments. And if you did have that control, you wouldn’t be a “passive” investor anymore and there are legal/liability implications that go along with that.
That doesn’t mean that any single option is materially better than the other alternatives. Just that there are different vehicles to suit timeframes, liquidity needs, tax benefits, etc.
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- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes8yKevin Humphreys So a publicly traded REIT is liquid as long the market is open that day. Put the sell order in (market price) and *poof* you have money that’s settled in 24 hours. But you don’t get tax benefits like depreciation, mortgage interest, etc. Now there are some non-public REITs that you hear about on the radio. That doesn’t mean they’re bad but they’re generally going to be for accredited investors (you hear it in the advertising) but their prospectus will tell you their intended hold period. As a passive investor you can’t decide to sell the property. You can sell shares in a publicly traded REIT today. You can sell me your property today (not that you’d get a good price in a compressed timeframe) but you don’t have that individual control with a lot of syndication investments. And if you did have that control, you wouldn’t be a “passive” investor anymore and there are legal/liability implications that go along with that. That doesn’t mean that any single option is materially better than the other alternatives. Just that there are different vehicles to suit timeframes, liquidity needs, tax benefits, etc.
- 8yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Kevin Humphreys, I wouldn't say one is better or worse. They're different. A nice well managed passive REIT can certainly have it's place. But REITS shouldn't be thought of or researched as real estate investing. They are securities or investments in companies the manage real estate.
My personal preference is real estate ownership for the following reasons
1. Personal control
2. Tax advantages/opportunities.
3. Forced growth to accommodate share holder desired return can lead to investments that erode the quality of the REIT
4. Forced distributions require the REIT to borrow heavily to grow leading to credit risk.
5. Owned real estate may be less liquid than ownership of a REIT share (duh) but I can be ever so much more nimble in shaping my real estate portfolio than the success I would have in shaping the portfolio of a REIT I invest in (like 0 success).
The 1031 Investor5137 Reviews - 8yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Hi @Kevin Humphreys, that's a good question and actually not simple at all. And there are actually more variations and options than some of the people who previously are discussing or aware of. (I'm assuming you're not an accredited investor, and will talk about it from that perspective. If you're not, let me know).
First, there isn't just one type of REIT. Usually what people say REITs they're talking about public REITs listed on the stock market, and it sounds the same way for you. You're correct that they are more liquid, but the other advantages that you have are not actually unique advantages to public REITs.
For example, you can get the same low cost entry into private real estate, by investing in a nonlisted REIT (some of the start as low as $500). The first generation of nonlisted REITs were pretty horrible with ridiculous fees that were so high they would sometimes cause the entire investment to go negative (and created zombie REITs). However, the SEC cracked down, and most of these have now disappeared. The new generation has sprung up in the last year due with the new crowdfunding rules, with significantly lower fees. (In the previous poster was incorrect, because these are accessible by nonaccredited investors),
The other advantages over public stock market REITs is the income yield. You would be lucky to get 3 to 4% income from a public REIT, but the average for a nonlisted REIT is around 8%. Also, public REITs come with stock market volatility, and require you to pay a liquidity premium for the convenience of being able to liquidate whenever you want. Nonlisted REITs force you to lock your money up for a period of time, but in return you don't have to pay that premium and you get much less volatility. Also, these have professional managers so you don't have owner management issues and headaches, collecting rent, repairs etc.The other thing is that when you talk about owning real estate directly, you are assuming that the person is going to do all the management themselves. That is an option, but it's not required. Many people will hire someone else to manage the properties so they don't have to do all the headaches that you mentioned.
And you can own real estate directly in more than one way. Yes, you can go out and buy yourself with your own cash and take your own loan. Or, you can invest in the syndication/crowdfunding structure where you pooll your money with others. In this case, you also don't have those headaches you described that come from active management because it's completely passive. You are also not personally liable for the loan, other than up to the amount you contributed to the LLC.
The Real Estate Crowdfunding Review - Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
Good answers so far, so I will answer the return on investment part of your question. While there is no guarantee for either type of investing, generally speaking public REIT investing is low return investing around 6-9%, while direct investing often times sees yields in the 15%-30%+. Publicly traded REIT's follow the stock market and can expect stock market type returns, while direct investments follow real estate trends and neighborhood trends.
Now for direct investing, we are talking about buying an asset on your own. If you are buying just an ok multi-family, I would expect better than a 20% return. If you are passively investing in a private syndication, I would expect a 15-20% return.
- 8yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Originally posted by @Todd Dexheimer:
Good answers so far, so I will answer the return on investment part of your question. While there is no guarantee for either type of investing, generally speaking public REIT investing is low return investing around 6-9%, while direct investing often times sees yields in the 15%-30%+. Publicly traded REIT's follow the stock market and can expect stock market type returns, while direct investments follow real estate trends and neighborhood trends.
Now for direct investing, we are talking about buying an asset on your own. If you are buying just an ok multi-family, I would expect better than a 20% return. If you are passively investing in a private syndication, I would expect a 15-20% return.
I'll add onto Todd's comments here. Todd really didn't point it out, but he represents the middle ground between the options discussed here. REITS and direct ownership are not the only two options. REITs are Publicly Traded Securities. That's why they are liquid.
There are hundreds if not thousands of syndicators and others who offer Private Securities under Rule 506(b) or Rule 506(c). Private securities offer the most important benefit of direct ownership: depreciation. But as an investor in a private placement, you don't necessarily have to have the expertise of the sponsor/syndicator. The barrier to entry is much lower.
The main barrier to entry is the accredited investor status needed and there is an easy way around that for sophisticated, but non-accredited investors.
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