Why I Quit Buying Rental Properties To Buy REITs Instead

seekingalpha06-22

REITs are better investments than rental properties in most cases.They are not only safer, but they are also more rewarding.Even then, many investors favor rental properties due to misconceptions. Let...

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Let...</p>\n\n<a href=\"https://seekingalpha.com/article/4699557-why-i-quit-buying-rental-properties-to-buy-reits-instead\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Why I Quit Buying Rental Properties To Buy REITs Instead</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWhy I Quit Buying Rental Properties To Buy REITs Instead\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-22 19:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4699557-why-i-quit-buying-rental-properties-to-buy-reits-instead><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>REITs are better investments than rental properties in most cases.They are not only safer, but they are also more rewarding.Even then, many investors favor rental properties due to misconceptions. Let...</p>\n\n<a href=\"https://seekingalpha.com/article/4699557-why-i-quit-buying-rental-properties-to-buy-reits-instead\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0234572021.USD","symbol_name":"高盛美国核心股票组合Acc","start_time":0,"source_url":"https://seekingalpha.com/article/4699557-why-i-quit-buying-rental-properties-to-buy-reits-instead","article_id":"2445722230","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/124310106/image_124310106.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2445722230","pubTimestamp":1719055800,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"REITs are better investments than rental properties in most cases.They are not only safer, but they are also more rewarding.Even then, many investors favor rental properties due to misconceptions. 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Let's correct them once and for all.   alexsl/E+ via Getty ImagesLast August, I explained in an article why I think that REITs are better investments than rental properties in most cases. In short, studies show that REITs are more rewarding investments because they enjoy:  Significant economies of scale Better access to capital  Development capabilities to earn better yields and create value Additional profits from offering services to other investors Better relationships with tenants, contractors, lenders, brokers The best talent in real estate works for them Faster growth prospects from issuing shares at a premium and/or buying back shares at a discount, taking advantage of capital market dislocations  But despite being more rewarding, they are also safer investments because they are:  Liquid Diversified Professionally managed Conservatively financed in most cases And shareholders enjoy limited liability  And finally, REIT shareholders also enjoy other important benefits:  You won't be distracted and can therefore fully focus on your career to advance faster and get that pay hike, which is far more important anyway.  Maintain full geographic freedom to take on new opportunities as they present themselves and/or travel the world without constraints. No negative impact on your general lifestyle.  Invitation Homes To my surprise, this article gained a lot of attention. It is one of my best-performing articles to date, with ~50,000 views and over 100 comments. It seems to have struck a nerve with real estate investors, who find it hard to accept that such a simple and low-effort strategy as buying REITs could earn better returns than all the hard work that they put into their rental properties. It pushed many of these investors to comment on my article, and it made me realize that many real estate investors really don't understand much about REITs. There are very significant misconceptions about them and as a result, many will think that they are bad investments just because they are ill-informed. I kept facing five recurring misconceptions, and in today's follow-up, I am going to address them once and for all: Misconception #1: You cannot use leverage when investing in REITs This is the most important misconception. Real estate investors seem to think that you cannot use leverage when buying REITs and, therefore, you cannot achieve the same returns as rental property investments, which typically enjoy 60-80% leverage. But this is wrong. What these investors ignore is that REITs enjoy the exact same benefits of leverage. The key difference here is that you don't need to take out a mortgage yourself, since the REITs handle all of that for you. When you buy shares of a REIT, you are providing them the equity - or put differently - your investment is the equivalent of the down payment. The REITs then take your equity and add debt on top of it to leverage it and earn better returns. As such, a $50,000 investment into a REIT may well represent $100,000 or even $150,000 worth of assets depending on how much leverage the REIT is using. This leverage is actually even better in the case of the REIT because you won't need to sign on any of the mortgages yourself and therefore, your personal liability will be protected. Moreover, REITs have access to a much bigger variety of different capital including bank mortgages, bonds, convertibles, and even preferred equity, allowing them to better leverage your capital and improve risk-adjusted returns. The REIT will also typically get better terms than you could because lenders prefer to lend money to large, diversified, public, SEC-regulated companies with countless analysts covering them than to a small private real estate investor. So all of this is to say that REIT investors enjoy the exact same benefits of leverage. What you see traded on the stock market is the equity value, not the total asset value. Nearly every REIT adds debt on top of your equity to leverage it for you, so this is not a unique advantage of private real estate. It is just a misconception. Misconception #2: REITs are not tax-efficient Another misconception that I see is that real estate investors will claim that REITs are not as tax-efficient as private real estate investments and that therefore, they will earn lower after-tax returns. This misconception stems from the fact that REIT dividend payments are taxed as \"ordinary income\". But the reality is that taxation is far more complex than that, and in my case, I actually pay less taxes investing in REITs than in rental properties. REITs are incredibly tax-efficient, and here's why: REITs pay zero corporate taxes, giving you the benefits of limited liability at no cost. REITs will typically retain 30-50% of their cash flow to reinvest in growth and since they pay no corporate taxes, this cash flow is completely tax-deferred. You are not paying any taxes on it, and it gets directly reinvested by the REIT, allowing you to compound faster. Some REITs like SBAC Communications (SBAC) retain as much as 70% of their cash flow, so you are essentially only paying taxes on just the 30% of the cash flow that's distributed. Then a portion of the distribution is typically classified as \"return of capital\", which is not taxed either. It simply reduces your cost basis, just like depreciation in the case of private real estate. The portion that actually gets taxed as \"ordinary income\" also gets a 20% deduction, lowering the effective tax rate. REITs will typically invest in Class A properties in growth sectors like data centers and e-commerce warehouses. Those properties come with lower starting yields, but enjoy far faster growth and appreciation, which is also tax-deferred. REITs have the scale to hire their own in-house legal team to fight off property tax hikes, reducing their impact on profitability. That's something that you couldn't do unless you owned $100s of millions worth of properties. REITs also shield investors from any type of property transfer taxes, which are significant in some markets. You are simply buying an interest in an existing portfolio, and not buying an entire property, which comes with significant transaction costs, often accounting for 5-10% of the property value, including taxes in many cases. Finally, if all of this still isn't enough for you, you could simply put your REITs in a tax-deferred account and be done with it. Misconception #3: The yields of REITs are too low Another point that many real estate investors keep making is that REIT dividend yields are too low to keep up with private real estate. They may see that major REIT ETFs, like the Vanguard Real Estate ETFs (VNQ), only offer a 4-5% dividend yield and compare that to the higher cash flow yields of their rentals, and conclude that REITs are poor investments. But here's the issue: First of all, dividend yield does not equal cash flow yield. As we noted earlier, REITs will typically retain 30-50% of their cash flow to reinvest in growth, which is beneficial for REIT investors since it increases tax efficiency. Therefore, if you are getting a 5% dividend yield and the payout ratio is 50%, then the actual cash flow yield that you are earning is 10%. The REIT retains half of it and reinvests it in growth, which will lead to higher cash flow per share and a higher share price. So you need to consider the cash flow yield of REITs, and not just the dividend yield. Secondly, these REIT ETFs only offer a low yield because they are mostly invested in mega-cap REITs that use little debt and invest in growth sectors like data centers and e-commerce warehouses. These REITs will typically only have 30% leverage, and they own lower-yielding, but faster-growing assets. Not surprisingly, their yield will then be lower than that of a highly leveraged rental property, especially since they also tend to maintain low payout ratios. So you are not comparing apples to apples here. If you are looking for high yield, you can also find that in the REIT sector, but you need to look beyond the major ETFs. There are plenty of REITs that offer an 8%+ dividend yield, and that's despite still retaining ~30% of their cash flow to reinvest in growth, which means that their cash flow yield is closer to 12%. EPR Properties (EPR) is a good example of that. Misconception #4: I can earn 20%+ returns with rental properties Often, I will also see rental property investors claim that they are able to earn 20%+ annual total returns by investing in rental properties, and REITs don't come close to that. But that's all talk in most cases. First of all, when they are talking about 20%+ returns, they are referring to a specific property that they have cherry-picked, and they are comparing it to the average of the REIT sector, which includes good and bad REITs. So right off the start, the comparison is meaningless since you are comparing an exceptional rental property versus the average of the REIT sector. I could also point to an exceptional REIT and compare that to the average of the rental property segment to make REITs look better. To give you an example, Innovative Industrial Properties (IIPR) earned a 17x multiple in just 5 years to its shareholders from 2017 to 2022:   YCHARTS How many rental property investors can match that? $100,000 turned into close to $2 million in just 5 years. But that's not representative of your average REIT, and therefore, we need to stick to averages if we want to have a good comparison, and studies show that on average, REITs outperform private real estate by 2-4% per year. Here are three of these studies:   EPRA  CambridgeNAREITHere, some of you may claim that I can do way better than the 8-10% annual returns presented in these charts. Some of you might, but most of you are likely just miscalculating returns in two ways: Firstly, you fail to account for the value of your own time and labor. You will work countless hours to find the right deal, negotiate it, finance it, renovate it, market it, manage it, etc. and you will assume that all of this labor is free even as you could have used this productive time to earn a wage or started another business. If you assigned a value to your labor, say $30 per hour, you would realize that a significant portion of your returns is actually coming from your own labor, not from your investment property. Secondly, investors will also refer to the returns of a typical good year in a bull market. But returns are bumpy in real estate. You may earn a 20% average annual total return for 3 years in a row, and then in the fourth year, you may need to heavily reinvest in your property to fix it up, causing you to lose two years of rental income. There will also be some years when property values drop and if you are 80% leveraged, all it takes is a 10% correction for your equity value to be cut in half. (Quick side note: remember that what's traded on the stock market is the equity value, and this explains the higher perceived volatility of REITs.) So over a full cycle, the actual average annual returns are a lot lower than those of your typical good year, and that is especially true after you deduct the value of your own labor from the returns. Studies that account for these adjustments find that REITs are more rewarding, which is not surprising given that real estate is a low-margin business in which scale offers a major advantage. If you are still not convinced, consider this point: real estate is a low-margin business that's highly competitive with low barriers to entry. If you could realistically earn 20%+ annual returns, then a lot more capital would make its way into real estate, and returns would compress to lower levels. That alone disproves the theory that investors are just casually earning 20%+ annual returns by buying rentals. Remember that Warren Buffett became the richest man on earth by compounding Berkshire Hathaway (BRK.B) at 20% annually. If rental property investors were earning even better returns, we would have far more real estate billionaires. Misconception #5: REITs are just paper assets This is my favorite misconception because it makes the least sense to me. Real estate investors will argue that REITs are just \"paper\" assets and that this somehow makes them less attractive. They seem to imply that REITs are not backed by anything tangible... they are just paper... and could disappear overnight... and there's nothing you could do about it. But this, of course, makes no sense. Everything is backed by paper in some form. Your real estate ownership is backed by a deed - which is paper. Your mortgage is paper. Your property taxes are paper. If you don't take this paper seriously, you will quickly lose your property. If you put your property in an LLC as many do, then it is the LLC (paper) that owns the property, and you simply own the paper... no different than a REIT investor owning an interest in a corporation that holds the real estate. The reality is that the corporate structure (paper...) is there to limit your liability risk. Moreover, seeking a listing for the corporation on a stock market also benefits you by allowing the REIT to more efficiently raise capital, accelerating its growth, boosting its profitability, and reaching higher total returns over time. Real estate investors seem to think that if you cannot see or touch the property yourself, then it doesn't count. But you can actually do that with REITs if you want. Most REITs will provide a list of their properties on their website, and you could go and visit all of them if that reassures you. If not in person, then with Google street view. I regularly do that. Finally, for those of you who appear to think that REITs are riskier because they are \"paper\" assets, keep in mind that only a handful of REITs have gone bankrupt over the past decades, but countless real estate investors are filing for bankruptcy protection or fall victim to scams each year. REITs are typically multi-billion dollar organizations that are SEC-regulated and there are countless analysts closely monitoring their every move, including short sellers looking to profit from any mistakes that a REIT might make. \"Paper\" does not make REITs riskier. It makes them a lot safer. They are public, regulated, and transparent, and you enjoy limited liability, unlike private real estate investments. Closing Note I also used to suffer from these misconceptions back when I was still working in private equity real estate. But as I learned more about REITs, I realized that I was ill-informed. Eventually, I concluded that REITs offered far better risk-and-hassle-adjusted returns in most cases, and this caused me to switch from private real estate to REIT investing.  Today, 90% of my real estate portfolio is in REITs, and I rarely invest in private real estate anymore.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445722230"}