JHZR2
Staff member
I am curious about the considerations of solely owning REITs vs. owning real estate as an investment. I'd love to own a few
rental properties of some sort, as a means of ultimately benefiting from long-term appreciation, rental income, and ownership
in something that is paid for via someone else's dime in the form of rent. That said, ever rising property taxes, association fees (for the condo/townhome world) the ever decreasing quality of the renting population, etc. makes me wonder how good of a deal it is long term, given the stress, maintenance, management, etc. that is required. So, to that end, I havea few questions, actually one question and two scenarios, and I'd love to learn peoples' insight into what is best.
Question: What is the benefit to owning the real thing (i.e. property for rent), vs. owning shares in a real estate trust, and vice-versa?
Situation #1: You have $15k to invest. You want to invest in real estate when the market hits bottom. It seems pretty
straightforward here that an REIT is the only way to get exposure to real estate, unless you can find properties in the $60-75k range. Any comments?
Situation #2: You have $150k to invest. This would make a really nice downpayment on quite a bit, and if in terms of single detached, townhome, condo, etc., it could nearly purchase a whole one, given the right place, deal, market conditions, etc. considering the effective risk inherent to property taxes, asociation fees, market conditions, etc. getting 'bad' versus the ability toincrease rent collected, there is a risk that the profit margin or payment for use may be a poor equivalent to what is owed. Additionally, given that a good consistent renter is hard to find, you have people nottaking care of your stuff, requiring it to have more maintenance, etc., and still having the exposure to a depreciating market, a downturn of a town for the worse, etc., and it seems that this may not be that great anyway.
Whether an REIT or a real property, if the market is going up, the value is going up, and vice-versa. With an REIT, assuming that dividends aremaintained fairly well and reinvested, when things are good and the REIT is expensive, the payout is good, but your gains are from the appreciation in intrinsic value. When times are bad, assuming that the properties are still utilized/rented, and the dividend is maintained, youre actually buying more property per dollar paid out, so you are still getting a good deal. With rent, you get what you get regardless of the valuation of the property, and to change that is either providing a risk of no occupancy, or else a re-write of a contract, which is year to year at best to make changes.
It seems to me that especially if you 'grow'your real estate empire, all of a sudden management is needed. Management fees are what, 10% of revenue? That is a lot eating into a homeowner's income fromthe properties if they are held as private property and not a REIT. These costs are I suppose rolled into the REIT dividend and value, but for better or worse, they are not seen. Couple that with an REIT that yields,say, 9%, and youve got a decent value. I dont see many $200k homes around that rent for $20k/year in safe, nice places where the renters are responsible.
So, am I way off? Is an REIT a superior way to own real estate compared to a home around the block or in the next town over, etc?
Any comments and insight would be appreciated.
Thanks,
JMH
rental properties of some sort, as a means of ultimately benefiting from long-term appreciation, rental income, and ownership
in something that is paid for via someone else's dime in the form of rent. That said, ever rising property taxes, association fees (for the condo/townhome world) the ever decreasing quality of the renting population, etc. makes me wonder how good of a deal it is long term, given the stress, maintenance, management, etc. that is required. So, to that end, I havea few questions, actually one question and two scenarios, and I'd love to learn peoples' insight into what is best.
Question: What is the benefit to owning the real thing (i.e. property for rent), vs. owning shares in a real estate trust, and vice-versa?
Situation #1: You have $15k to invest. You want to invest in real estate when the market hits bottom. It seems pretty
straightforward here that an REIT is the only way to get exposure to real estate, unless you can find properties in the $60-75k range. Any comments?
Situation #2: You have $150k to invest. This would make a really nice downpayment on quite a bit, and if in terms of single detached, townhome, condo, etc., it could nearly purchase a whole one, given the right place, deal, market conditions, etc. considering the effective risk inherent to property taxes, asociation fees, market conditions, etc. getting 'bad' versus the ability toincrease rent collected, there is a risk that the profit margin or payment for use may be a poor equivalent to what is owed. Additionally, given that a good consistent renter is hard to find, you have people nottaking care of your stuff, requiring it to have more maintenance, etc., and still having the exposure to a depreciating market, a downturn of a town for the worse, etc., and it seems that this may not be that great anyway.
Whether an REIT or a real property, if the market is going up, the value is going up, and vice-versa. With an REIT, assuming that dividends aremaintained fairly well and reinvested, when things are good and the REIT is expensive, the payout is good, but your gains are from the appreciation in intrinsic value. When times are bad, assuming that the properties are still utilized/rented, and the dividend is maintained, youre actually buying more property per dollar paid out, so you are still getting a good deal. With rent, you get what you get regardless of the valuation of the property, and to change that is either providing a risk of no occupancy, or else a re-write of a contract, which is year to year at best to make changes.
It seems to me that especially if you 'grow'your real estate empire, all of a sudden management is needed. Management fees are what, 10% of revenue? That is a lot eating into a homeowner's income fromthe properties if they are held as private property and not a REIT. These costs are I suppose rolled into the REIT dividend and value, but for better or worse, they are not seen. Couple that with an REIT that yields,say, 9%, and youve got a decent value. I dont see many $200k homes around that rent for $20k/year in safe, nice places where the renters are responsible.
So, am I way off? Is an REIT a superior way to own real estate compared to a home around the block or in the next town over, etc?
Any comments and insight would be appreciated.
Thanks,
JMH
