sfd,
Great info. In short, individual property outweighs with this benefit, if affordable to buy/keep.
"when you invest directly in real property, you are able to deduct operating expenses and depreciate the asset, which can significantly reduce your taxable income. Another very significant tax advantage of investing in real estate directly is the ability to defer capital gains through a 1031 exchange, which allows investors to sell appreciated property and transfer their original cost basis over to new investment properties without triggering any taxes. "
I would further nuance this as - individual property is great as long as you have the bandwidth to manage yourself. At some point, you will want to move into a REIT to maintain exposure but tradeoff return for reduced management overhead
Maybe that is referenced/suggested in Part 2 of the article…
REIT investment requires minimal cash. Rental properties require down payment and cash reserves for unexpected repairs. Rental properties should have a higher return given it’s more work than owning a REIT. If not, why own rentals?
When we decide to go for investment, I try to avoid REIT as the dividends are taxed as income. This is good after retirement for good cash flow with low or no tax.
I prefer qualified dividend stocks presently.
This article is really one sided. Author often cherry picks the best scenario in rental to compare with worst scenario in REIT.
Again, there is a part 2 coming which I believe he is going the other way or at least pump the pros of REITs…
No, I don’t think Part 2 will be any better.
Take the example of leverage. On rentals you can take out loans so boom, there is your leverage. But why can’t you do the same in REIT? There is this wonderful thing called “margin”. Hello?
Or the cap rate comparison. Oh yes, rentals can yield 8% but REIT tops out at 4 or 5%? My REITs are all yielding above 7% and my rentals far lower.
This guy has an agenda and it shows.
Well, to his credit, he did start off the article by stating that he has experience with both sides. I for one would like to give the author a fair chance…
Wait hold on…if I put down say 50k on a home and I go belly up, I just lose that 50k (and the house). In your scenario with borrowing on margin, you are not forgiven for that amount borrowed correct?
Margin is similar. If your account value fell far below the brokerage will just sell it on your behalf. It’s kind of like foreclosure.
Cut the author some slack (I don’t know him) and let’s see what he spins in Part 2…
But doesn’t the argument still hold favorably that with direct investing you can command a much larger asset with less investment upfront?
Why? I can lever higher in my stock account. Loan terms are better in mortgages, I will give you that. But my margins interests is far lower than mortgage interests.
For the average Joes of the world, direct RE investment allows them the easier and more practical way to wealth attainment. Stock investment is for folks who have money already.
Brokerage will have auto sale rule. Still, we need to pay back the difference. The liability will not go away until the person pays or files Bankruptcy.
With Robinhood (2 millions accounts exceeded) full commission free trades, any one can invest now. They can start with $100 or $500 or $1000 or whatever amount they have.
People (average Joes of the world) can blindly place money in etfs like SPY or VOO or VTI or IVV. No management hassle, no maintenance, no major research required.
Then begs the question: why own rental property at all?
Stocks are volatile, higher risk and higher reward while real estate is less volatile, stable investment like Bonds.
Choose whichever we are comfortable.