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​ Why should you invest in real estate properties when you can simply buy REITs?



There are pros and cons to each approach.

REITs:

MUCH more diversification and much less work for you. With a few clicks, you can gain access to as much real estate as your brokerage account can handle.

Direct real estate investing:

You have to do the work. But if you do it well and use the tax incentives well and properly use the right amount of leverage, you can exceed the returns greatly. However, due to the concentration in a single market (most people don’t want to do it as their full-time job and can’t travel far to track properties in different markets) there is also higher risk.

If you have a local home price decline during a regional recession and lose your tenants at the same time, to keep your properties afloat (pay the mortgage and taxes, which won’t go away) you might have to dip into your other income. This won’t happen with a REIT unless it’s poorly managed.

So, there is a huge difference in risk profile and return and work load. The people who really enjoy the property picking, rehabbing, potential selling, etc. can have fun with it and make significant money.

The people who want to relax and enjoy a diversificd lower risk lifestyle go into REITs and other things (like MLPs, another popular source of dividend income).

One key point I want to make is that for people in the grey zone, the price to rent ratio in your local market may be a determining factor. They live in a fairly expensive part of the country where with 25% down (typical commercial down payment), and their local tax rates, even with depreciation-related tax benefits, the price of housing is high enough relative to rent that their returns would be on the order of 9% per year. This not counting potential price appreciation (which is unlikely to be much as the price to income ratios are quite stretched and rates are going up).  

Now if you’re able to get 6–7% a year on passive REIT and MLP income which also rises with inflation, the question is what is the 2–3% difference multiplying?  

If its multiplying 100k, you’re talking about a lot of work to make 2–3k more. If its multiplying $1M, your talking $20–30k. And if youre multiplying $10M, you’re talking $200–300k, which would make a pretty signficant difference to most people’s spending power.

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