Why I Stopped Buying Real Estate To Buy REITs Instead
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- čas přidán 23. 08. 2024
- I stopped buying real estate to buy REITs instead because they earn higher returns with lower risk and less effort in most cases. Example: Realty Income (O) has managed to generate 15% annual returns, but most private net lease investors would have been happy to earn a ~10% return with the same strategy. I also discuss three major misconceptions: you cannot use leverage when investing in REITs. REITs are not tax efficient. Finally, rentals generate 20-30% annual returns. All three are wrong and I explain why. 🎁You can access my entire REIT Portfolio by taking a 2-week free trial to my REIT newsletter, High Yield Landlord: seekingalpha.c...
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Why REITs earn higher returns than rental properties? There are 10 reasons. In short: REITs enjoy significant economies of scale. They develop their own properties. They skip brokerage fees. They do sale and leaseback transactions, etc. To give you an example: Realty Income $O has managed to generate 15% annual returns for its shareholders by buying Class A net lease properties with a conservative 30% LTV. Most private net lease investors would have been happy to earn a ~10% return.
Why REITs are safer than rental properties? REITs are liquid, professionally managed, diversified, less leveraged investments and shareholders enjoy limited liability. With the right adjustments, REITs are also less volatile than rental properties.
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Image sources: Realty Income, NAREIT, EPRA, Cambridge, YCHARTS, Canva
Important Disclaimer: Leonberg Capital OÜ is long O. This video is impersonal and does not provide individualized advice or recommendations for any specific person. Viewers/readers should not make any investment decision without conducting their own due diligence and consulting their financial advisor about their specific situation. This video is for entertainment purposes only and you are responsible for your own investment decisions. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. This CZcams channel is managed by Leonberg Research OÜ, a subsidiary of Leonberg Capital OÜ.
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Which do you prefer? REITs or Rentals and why? Let me know below.
Thank you for all your support. All your "likes" help me a lot to grow the channel. Thanks!
Jussi
For about 10 years ago I invested in apartments and rented them. It was ok untill I got a real bad tenant. Now I invest in REITS instead of owning rental properties. In my opinion it is really hard to get even 5% wins on rental. I invest instead in REITs and there are 3 reasons why I do that.
1. I don't have to take a loan to by REITs as I can by a smaller amount at a time. 2. I can sell all my REITs with a push of a button. With a apartment it takes more time. 3. I dont have to do any renovations or deal with tenants.
REITs are much simpler to own and the return is better.
Great addition, thank you! @@andersnordquist2350
When I helped with my parents' rental properties, I met some of the worse people on the planet. It didn't help that California was in their corner. I was glad when they finally sold out. A young woman (newby) purchased a house in our neighborhood for an investment. She rented out the house. Her tenant fell behind in rent. He wasn't answering her calls. She went to see what the story was. He had cut out the floor and floor joists in the livingroom and excavated 20 feet down. She asked why. He said he needed to build a bunker to hide from space aliens. The repairs were $80,000.
Thank you for sharing your experience. I appreciate it
What a nightmare ...
Well did the space aliens get him?
😆 🤣 😂
that's kind of hard to believe. do you have local news article or something to support that?
Dollar cost averaging is infinitely easier and quicker in REITs versus rental properties.
Good point that's also underrated. You can immediately reinvest the cash flow. It is very efficient.
Hahaha. I was getting salty cause I thought you were copying an article I read recently on bigger pockets about the same subject. Then I looked at it and realized you wrote the article. Saltiness gone. I enjoyed this a lot and the ideas you presented have helped me let go of my desire to buy a lot of property. I’ve been looking at reits and I think that will be a better route for me for the reasons you mentioned here.
I refuse to invest out of state because I've done it before and I just don't consider it a sustainable way to build wealth. But locally, there isn't a single property that makes sense for a Mom and Pop investor like me. REITS took somewhat of a hit in recent times, but that just means it's a great time to buy them. Better to follow the market instead of trying to fight it. Direct ownership makes no sense right now, and REITs are priced attractively. You do the math! :)
Thanks for sharing!
What youre saying doesnt make sense.
If REITs took a hit recently, doesnt that mean the money has been moving out? And if your local env is too expensive, doesnt it mean much of the money has moved in? Why follow the money?
@@asw654 Correct on both. Not sure what the confusion is. REIT prices have gone down due to the trading dynamics, which were partially influenced by interest rates, so it's a good time to buy them. Conversely, So Cal real estate is expensive as hell, so unless you're a major player or an experienced syndicator with a strong network who can alert you to a good off-market bargain, buying as a mom and pop investor such as myself here doesn't make sense, unless you enjoy negative cash-flow.
@@TSK24692 The confusion might be because of your figure of speech or expression, "Better to follow the market instead of trying to fight it."
Maybe there's some context to that quote, but to me it intuitively means to follow the market, and do what others are doing. If REIT prices are going down, I'd assume that's because the market / everyone else is betting against it. If an RE market is hot, I'd assume it's because the market's betting in favor of it.
What you're suggesting now is actually betting against the market, and trying to lead it or preemptively go where you think it will in the future.
@@asw654 Got it and that's a very reasonable point. To clarify my point when I say "follow the market instead of trying to fight it", I believe in buying things that are attractively priced as opposed to buying things that aren't attractively priced. I see a lot of mom and pop investors eager to get into direct ownership because of the run up in prices and seeing how many people have gotten wealthy in the past 10+ years from accumulating rentals. Now of course, in the long run, buying additional rentals now will eventually pay off, but IMO it just isn't an attractive time to buy them. I see so many people trying to justify certain properties by "penciling in" some adjustments that magically allow them to cash-flow on paper. That to me is trying to fight the market. REITs, whose prices have been battered, are now a much more attractive option. Perhaps a better way of stating it would be "do what the market tells me to do".
I think the main point is very straightforward: Liquidity.
Also, the entrance threshold is singificantly lower than ownership.
In German, there is a virtually omnivalent legal clause that applies to pretty much everything you buy and keep: ''Eigentum verpflichtet.'', which means ''Ownership obligates (the owner)''.
This can become a huge problem with real estate and more often than not, bites you in the butt with current interest rates and the mortgage market. A REIT owner cares about that: The REIT. That is it. He does not care about the roof starting to leak, the cabling becoming obsolete, a window that does not shut all the way or a toilet that does not flush correctly. The real estate owner is not going to sell the house once these problems come up -but they will, at some point or another. At that point, he is obligated to do something about it, and with current prices, he might get a 5 percent ROI after tax (which is considered ''high'' in Germany at the moment) despite all the headaches he went through, just to find out that once the roof is fixed, the plumbing needs to be redone.
REIT= Instant liquidity and none of the hassle I mentioned. Is buying a house or flat bad? No; It is not bad when you consider it what it is: Shelter. If you do not intend to live in a home, my take is that you should not buy it.
I agree that liquidity is a major advantage that's greatly underappreciated
You’re providing such a needed voice! TY
Thanks a lot for your support! Let me know if I can help with anything
Thx Jussi I prefer RIETs it’s a lot less work
I agree. The risk-and-HASSLE-adjusted returns are greater
In Germany selling properties is tax free after 10 years for rentals, even earlier when you lived in it yourself.
But you pay high property transfer taxes, notary fees, etc. in Germany.
Thank you for this video.
At ~ 6:00 you mention depreciation as a way to shelter current income. True. Then you lower your tax basis and pay the taxes upon the sale of the property. A professional real estate investor wouldn’t just sell the property. Most likely they would do a 1031 exchange. This postpones the taxes and the investor gets to depreciate a larger property. Continue until you die and heirs receive the properties at the step up cost basis. A tough way to get a tax break.
I am looking for monthly income and growth. REITs seem like they have a place in my portfolio.
Mask On Nurse Marty (Ret)
Right, but then you remain invested in real estate forever, even if real estate becomes unattractive as an investment. That's the downside. You end up stuck with real estate. Thanks!
thanks
I really liked this video. Not that many of the things are unusual/surprising. Sometimes it's just easier when someone says it aloud.
Wow! Great information, Jussi, as always. I really am enjoying your take on undervalued REITS right now and your assessment of the various costs and advantages. In one of your videos, you mentioned the difference between REITS that are managed in-house and REITS which outsource their management. Is there a quick way to check this in their investor information brochures? Or do you find it out some other way? Thanks so much once again!!
Great to hear, thank you! You would need to check on the company's website or subscribe to a REIT service like High Yield Landlord. We have an Intelligence sheet that shows the management structure of every REIT. Feel free to join us for a 2-week free trial: seekingalpha.com/checkout?service_id=mp_1268
I’m subscribing , I like the REIT videos !
Thank you!
Can we pay the taxes o n the reits through the dividend returns ?
Hi what’s your quick opinion? NNN or WSR, both are cheap but I feel I might prefer NNN as they have better track record so it feels less risky, but I wonder if WSR provides more risk, more reward?
Bullish on both but they are very different REITs. You are correct
You should get ahold of that guy from Stag again and ask him when the heck they are going to raise the dividend in a meaningful way. It's just so laughable.
Likely towards the end of the year
Can you please do a video on Granite Riets?
Sure! I have not looked at it in a while. What's your thesis?
Excellent and spot-on rebuttal to the three misconceptions mentioned in your video presentation. Thanks, Jussi!
Thank you!
Can I defer those taxes if I buy more stocks with the dividend?
You can if you hold the shares in a tax deferred account or if the dividend is classified as return of capital
Pure gold speech, share guys 👌🇧🇪
Thank you for your support!
Hi Jussi i feel like you are really not making a fair comparison as you also need to factor strategies of the real estate investor such as forced appreciation, pulling your cash out via cash out refi, doing 1031 exchange to trade up to larger buildings. There are many more things the savvy real estate investor also does giving them a much better return then say investing in REITS as you are more a limited partner earning a fixed income so to speak without the ability to take advantage of what the hands on savvy real estate investor can do
All of those factors that you mention also apply to REITs and are not unique benefits of real estate. All REITs utilize those things to improve your returns.
How do you just a reits position on it debt? Affo per share? Debt to assets?
Debt to Asset and Debt to EBITDA are good metrics to follow
@@askjussi I am very influenced to invest by you and watch every single video you release.
I appreciate your interest. Make sure to also double check and do your own research :) Thank you for your support! @@bryce7502
@@askjussi Definitely always do my own due diligence! Do you know what the difference between net assets and book value is? Or are they different words for the same metric?
Book value is not accurate for REITs due to non-cash depreciation. Sounds good! :) @@bryce7502
Uk Market is down a lot right now see any good opportunities?
Maybe LAND.L?
Lots of them. Most REIT markets are down heavily and historically cheap
EPIC for me. They own out of town retail parks. Seem to be booming, cities don’t want shops with emission zones and parking charges
When a market is down is when there are opportunities.
Exactly! @@HepCatJack
Dividend Stock, including RIET is the ONLY TRUE passive income
Dividends/Riets are able to be double leverage..
As Jkussi stated AND your portfolio can also be leverage in ALL asset classes because you can borrow against it if you wish..
Dividends/Riets are MORE efficient and Effective Taxable due to 1
You can have them in your ROTH and ROTH 401K,
2. Holding LT, allows 0% to 15% taxed after 1 year and 1 day..
3. No true interest stalls and political cares ever needed or bother by these thing,
4. You can NOT do a triple net leases EVERY TIME,
We are all Triple net lease AND 5, 10, 15 year lease terms....
You are what??? Year to year??? Maybe 2???
Dividends/ REITS are 100% better in all case, UNTIL you add in personal preferences....
Thank you for sharing your thoughts!
REIT's are not good growth stocks though. You take them out in the dhort term for the contributions paid out and then sell it before you lose capital value