Are REITs a good alternative to buying real estate? Anyone invest in them

In My Humble Opinion
1

For my retirement, which is decades away, I am investing my IRA and 401k monies in higher risk mutual funds since I intend to leave the money in for a long time.

But I also have money I’d like to invest in lower risk (and lower reward) investments for the shorter term.

Real estate seems like something I’d like, but it is a huge commitment both personally and financially. So I am thinking of REITs as an alternative.

Is the payoff of a REIT about what you’d get with a rental property? It seems like with a rental property worth 100k, you may get 5k a year in income (assuming the mortgage is paid off) after subtracting various expenses. And a REIT generally offers a dividend of roughly that (about 5% a year) so the income seems the same. Or maybe not, multi unit complexes probably pay more than 5% a year. But they are less liquid, plus you’d assume the people who run a REIT would have far more experience than I would.

I don’t know if now is a good time to invest in REITs since the housing market may start to grow over the next 10-20 years. The US population is expected to hit 400 million in the next couple decades, so you’d assume real estate demand would go up (but if nobody has good jobs, it doesn’t matter either).

I think I really should’ve put money into REITs around 2008/2009 when housing was down and I assume the stocks were lower. But live and learn.

2

Where did you get the idea that an REIT is low risk? I don’t think that’s the case, but I’m curious what your research is telling you.

3

I don’t think REITs are a bad investment - putting 10% or so of your nest egg into REITs isn’t a bad idea.

They are - in theory - pretty much as risky as regular stocks - the main difference being they are required to distribute 90% of their profits back to investors in the form of a dividend.

You would most likely want to keep these in a tax advantaged account - while keeping non dividend stocks in your regular accounts (assuming you can max out your tax advantaged accounts).

There are some tax advantages to owning regular real estate, but there is an income cutoff, and I don’t remember exactly what the advantages are. There are of course, as you have mentioned - many problems with them as well.

4

I think a REIT is less risky than buying a single property because it’s more diversified. With a REIT, you effectively own a tiny slice of a great many different properties. If one of them burns down or has renters who trash it before they move out, you don’t personally absorb that entire loss. The same is not true if your entire investment lies in one single property.

A REIT also has advantages in that you can invest/divest incrementally. You can also divest completely at any time with relative ease (as opposed to the hassle of trying to sell an individual property yourself or through a realtor).

But as you note, REITs ain’t particularly low-risk. They are subject to the same forces as the rest of the economy.

REITs give good dividends, but the share price also trends upward over time (assuming the rest of the market is going up too).

Wife and I have had some money in NBRFX for about a year now. It’s doing pretty well.

Hindsight is 20/20, especially when it comes to investing. Don’t kid yourself into thinking you can time the market. Dedicated investors can find individual stocks that are overvalued/undervalued and choose accordingly, but choosing mutual funds based on what you think the entire market is going to do in the next couple of years is folly. Invest steadily and consistently over time, and you are very likely to do better in the long run than if you try to time the market.

6

Actually, the stock market is the best place to invest money for the long term. It’ll give you better returns but you have to choose the right stocks.

7

This thread is old but I never saw it the first time round.

I work in real estate development and property management. Basically the partnership of which I am a member, we build things like multifamily housing developments, suburban strip malls and etc. We then rent them out (our preference for commercial space) or sell them off (our preference with residential–we prefer to sell condos versus renting them, but we do property management as it can take years to sell all the units in a condo development.)

From the perspective of buying and managing “real” real estate, in the form of directly investing in properties, REITs in general will offer lower rates of return. For example in our market you can charge anywhere from 1-1.5% of a unit’s value in monthly rent. So if a unit is a $130,000 condo, we can reliably rent it out at around $1,300/mo. We actually have units that rent for that up in Fredericksburg, but property prices and rents tend to be a little higher up there than in Richmond. But even in lower value markets we see a similar ratio (so a unit that might be $130k further North is $100k here, and rents for around $1k vs $1.3k.) So that means over a year you are looking at upward of 12% return on the value of the property gross. Then you need to slice some off for taxes, upkeep etc. That is a significant hit, but the net return is still typically higher than the 5% figure mentioned in the OP.

The problem is unless you can pool assets and get lending to start a business with “scale”, it’s very risky to do this as an individual. Owning one or two rental properties is bad, because one vacancy and half or all of your revenue is gone. When you own a good number of units, you can be profitable with 20% vacancy, but that is harder with smaller holdings.

Further, strange maintenance problems in one or two of your only rental properties can wipe out your profits from your entire real estate adventure for the year or even more.

So going with a REIT you do sacrifice some returns, but you avoid the dangers of being a small time real estate investor. When investing in a REIT look for one with a history of maintaining its dividend and a diversified geographical portfolio. That indicates 1. protection from swings in local markets and 2. suggests the management companies are doing a good job managing those businesses. REITs are just pass through entities, but they typically have a close relationship with a separate company or real estate development firm that is building new properties that eventually will be sold to the REIT. The same firm will also often do property management of the REIT assets in exchange for ongoing management fees. So one reflection that the management company the REITs are using do a good job is a consistent dividend, because if the REIT is paying a consistent dividend it means the underlying properties are usually being well managed (it can be hard to know for sure since the property management company is usually private and you can’t easily find out a lot about them.)

Usually a REIT’s annual report will also list important things like their overall vacancy rate year to year, number of units outstanding etc, that would be good to know before you invest.

8

One problem with investing in REITs is similar to the problem of investing in stocks. They are very liquid and the prices move quickly in anticipation of the future. By the time you figure out that it’s a good idea to invest in REITs, a lot of other people will likely also have it figured out, and the prices will reflect it.

In theory actual real estate should work the same way, but ISTM that REITs respond to anticipated future movements faster. (I own both, so I follow both markets, sort of.)

They are also more erratic, probably because they are heavily leveraged. The REIT that I have is VGSLX (from Vanguard) and it has gone from the low 90s to as high as 110 and back, within the last year (or less). And in 2009 it was under 30. You don’t get that much fluctuation with actual RE (unless of course you’re heavily leveraged yourself.)

9

The requirement to distribute most profits can be a double edged sword - it can give you moar dividendz nao, but this impacts the company’s ability to sock away earnings to protect itself when leaner times come (i.e. “Retained Earnings”), so a REIT may not have the cushion of being able to operate at a loss for five years living off of retained earnings until the economy picks up. Instead, the economy goes south and the REIT goes bust the next spring, files bankruptcy, and the share price goes to zero.

10

I put some in my Roth IRA as my “high-risk = hopefully high return” fund under the theory that in 15 years the real estate market will be worth a lot more than right now. That 20% of my Roth is kicking the ass of the other 80% of index, midcap, dividend and smallcap funds. It is at a 4.39% increase and my next highest is smallcap at 2.29%

Obviously YMMV.

12

One thing I noticed recently is that most REITs around here are listed as unincoporated. Does this mean that creditors can go after REIT unitholders if the REIT goes bust?

14

Reported.