Also, is it possible to get astronomical returns on cash when purchasing properties all cash no mortgage? Which gets you a better return? Instead of purchasing a condo (or a house, for instance) and renting it out, are people actually dropping $400k at once into an REIT and hoping for the best? We look at historical returns so you can decide which is a better investment. Making 25% on an investment through appreciation, rent increases, equity buildup and cash flow is entirely possible if you leverage your money in real estate. You have to plan/budget for repairs, be a property manager or hire one, take out a Mortgage, pay property taxes, take out insurance, etc. Rentals may be more work, but get some tax advantage in terms of depreciation, maintenance expenses, etc. REITs. Alternatively, if one bought the $450k property and rented it out, at least the mortgage might be completely or close to paid for by the tenant (or roommate). Press question mark to learn the rest of the keyboard shortcuts, [FIREd at 33 in 2013 in Raleigh NC][FI Blogger][married, 3 kids], http://www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/, http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/. Compared to rental properties, REITs provide a much more affordable way to invest in Singapore real estate. In summary, the returns you can get on rental properties are typically much higher due to leverage and tax considerations, especially if you consider that you are building up equity in the rental property over time. I mentioned swapping over to a REIT ETF just because it seemed like a reasonable comparison in that they are a similar asset class (vs. comparing my rental property to Peruvian mining … Did I get the theory right? What do you suggest in tougher situations like those? Someone please correct me if I'm wrong, but the biggest benefit I see to investing in real property vs REITs, is that it's easy to get a loan on it. VGSLX and VGRLX? As long as you know those things, it seems like you still know exactly what you're buying :). However, it requires significantly more effort and is a lot less liquid than a REIT … I'm guessing you get much higher leverage for your money on real estate than REITs, but I could be wrong. Diversification is another … Either that, or I'm very jaded by the California market. However, the dividends generated by an REIT … And it's less random than the stock market IMO. YMMV of course. In comparison, REIT shares can be bought and … Traditional rentals are one of the long term investment strategies. The investor doesn’t have to advertise for tenants. REITs it is hidden and you won't realize the value or you will realize partial value when REIT sells it. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Owning REITs is stupidly simple. I've read a fair amount about the pros and cons of owning a few rental properties vs. investing in REITs. +30% returns for US REITS comprised almost half of the positive return of my overall portfolio. The advantages of a REIT are 1. In traditional renting, a real estate investor buys a rental property in order to rent … When market crash, it affects everyone including your tenants and their jobs. The ability to avoid taking on a Mortgage. 2014 proved why they are important in an asset allocation. I can tell you that rentals will make you rich if you know what you're doing. Thanks for the input. As someone that's planning on putting a couple thousand into O or VNQ very soon (i.e. Rental properties. In my area, that condo would rent for approximately $1500-1800/mo. A real estate investment trust, commonly called a REIT and pronounced "reet," provides an income without having to hire a property manager. More often discussions of different investment methods are comparing things like rental properties and flipping properties… I rebalanced from there into international equities that got crushed in 2014. Which one will make more money? Only issue is that your need to have right location, that comes with your own research and experience. In a market crash, I don't want to be cashing out stock (which is what I usually do), so my rental properties provide another source of income. a week's time) and actually learning about REITs, looking at a 3-4% dividend rate doesn't make that much sense w/o the underlying appreciation, right? The "passive" income I make per month is about $3,600. I think these thoughts on REITs are interesting: http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/, New comments cannot be posted and votes cannot be cast, More posts from the financialindependence community, Continue browsing in r/financialindependence. I own REITS as 11% of my portfolio (6% US, 5% international). At its core, FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve FI and have the freedom to RE as fast as possible. Having said the above, should I happen to find the right property– and that includes a property … At the trust level, REITs are exempt from income tax. REITS, in general, tend to be highly leveraged due to the need to heavily borrow to finance the acquisition of new properties - a market crash could heavily impact them. They can scale it up/down as needed. When I've run the numbers, your return (after paying the mortgage) is considerably higher on the property. Unfortunately that is at the cost of a lot of complexity. Do the dividends tend to drop more than a rental property would? Every asset value increases over time in line with inflation. Buying Rental Property Vs. REITs purchase commercial properties and distribute the rental income to shareholders as dividends. Right now I have about 10% of my capital in rental properties. The biggest benefit is they are less correlated with broad equity returns, so you get the effect I just described - they are sometimes up when other stuff is down. REITs have historically strongly outperformed private real estate. I don't have any personal experience, since I've only gotten my shit together with my broader personal finances recently. At that point, it might just be better to drop it into a total market ETF or something similar. It's probably worth it though, unless you plan to scale your rental … As an example, at RM1.19/unit, one could start to invest in YTL REIT at just RM119 (RM1.19 x 100 units).. Related: Four Things to Consider Before Purchasing an Airbnb Investment Property. Therefore, when choosing an REIT vs. real estate property, investors may be better off pursuing both. A VNQ or O would yield lets say 4% on that $400k which is $16000, assuming that there was no positive or negative movement on the underlying stock. However, owning a rental property will save you more on taxes. You also manage your own investment directly, so if you're savvy, you can make really nice returns (cash flow plus appreciation). I think you should do more research and pick a few that you're interested in - such questions are probably only answered on a case by case basis. Investing In A REIT, Part II. However, the degree to which these tax advantages can be realized depends on the specifics of the investment vehicle. The work required to manage multiple properties doesn't scale proportionally to the number of properties that you own, whereas the the revenue does. As the co-founder and CEO … REITs … I see you have listed Vanguard ETFs, but what are the equivalent mutual funds? Anyone have experience with both? My goal is 20 properties paid off and then hand the keys over to property management. Airbnb vs. long term rental: What is a traditional rental? 1. VNQI if you want to go international. That has to come at a cost, in the form of lower yields relative to owning your own property. Same question running through my mind. Are REITs a suitable replacement? As a REIT investor, you get to collect passive income without doing much at all. This matters for me because I live off my investments. aren't the reits themselves usually using leverage though? I think the main thing I was wondering about was whether rental income was less correlated with the market than a REIT is. As such, property investors are increasingly looking to invest in the sector via other ways, such as through Real Estate Investment Trusts (REITs). Rental Property: That has to come at a cost, in the form of lower yields relative to owning your own property. of course such yields may not last forever, mismanagement may lead to a cutting of the dividend or something... both of them, if you follow the graphs and look up their old files, were impacted by the housing crash of 08, VNQ, the vanguard REIT ETF, dropped as well during 08, REITS, in general, tend to be highly leveraged due to the need to heavily borrow to finance the acquisition of new properties, A person buying on their own likely has as much if not more leverage, REIT's don't need to borrow for new assets. My understanding is that a person's ability to get astronomical returns on their cash with rentals is to buy either an undervalued property (before someone else does) and/or purchase a property where rents are very high in comparison to property values. I'm 31. REIT's are more convenient than rental properties. A rental property is an illiquid investment that requires an investor to tie up thousands or millions of dollars into a single property for a long period of time. IIRC, this happened in a big way back in early 2000's too. Owning rentals isn't passive income. If you have 20k free cash to invest, you can buy 20k of an REIT, or you can buy a 100k property (with mortgage). ... Is it a smarter move to buy property directly or to buy shares of a real estate investment trust (REIT)? And that education is free... My cash on cash returns are astronomical. Investing In Property the Traditional Way Simply put, when you invest in physical properties, you’re hoping that you’ve found a great property that you can rent … New comments cannot be posted and votes cannot be cast, Press J to jump to the feed. Am I likely to see rental incomes go down in a similar timing and level to a REIT dividend? Rentals are a headache but a worthwhile headache in my opinion. They can and do issue common shares and/or preferred stock all the time for that purpose, Leverage is also a discretionary choice made with current rates in mind. However, it requires significantly more effort and is a lot less liquid than a REIT investment. Press J to jump to the feed. To give you a better idea of weighing different options, I’m going to choose a battle between: Rental Properties and Real Estate Investment Trusts (REITs). Rental vs. REITs: Taxation When it comes to taxes, rental properties are more tax efficient than REIT investments. In rental, you can have mortgage (leverage) at low cost and all risk and appreciation is yours. REITs are better diversified, liquid, cost efficient, and therefore, less risky. Yeah, that all makes sense to me. the real advantages of REITs are of course that you can obtain high dividend yield properties without the headaches of management - in my own portfolio is SNH or OHI for senior living homes - I picked both of them up when they were in the low 13,20 range respectively and are reaping in 13% yields without having to pay for maintanence costs, paying a management company, owning insurance etc etc. Thanks. A rental property is a small business, which means costs like a mortgage, maintenance or building improvements can reduce the amount of income subject to tax. A decent condo in my area will go upwards of $400k. It's probably worth it though, unless you plan to scale your rental operations. VNQ will get you there dirt cheap. REIT's are more convenient than rental properties. Buying Rental Property vs. REIT Investing: Tax Benefits Owning a rental property, as well as REIT investing, has the benefit of tax deductions. 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