Got into a debate about this the other day with a guy I respect a lot in business. He asked me why I keep wasting resources o single family rentals instead if juse investing in a REIT? He was saying way less work, same money. I'm not sure I buy that.

Thoughts?

A REIT will diversify your property holdings and get you into markets/properties that were out of your range or area. Ideally, a little of each would be perfect.

Ask him how he is buying REITS at 70% of their AS-IS value. That's the biggest benefit to buying individual properties. The potential to get a good deal and grab hunks of equity on day one.

REITs are great, but they delay your tax filing by months and don't provide income. I prefer to keep them in retirement accounts so I don't have to deal with the taxes every year.

Often thought about this myself as my rentals are becoming more costly to maintain, etc. Not to mention the headaches. I guess the headaches have always been there but I am just getting longer in the tooth and more easily annoyed. Lately the ease and benefits of a REIT sure seem much more desirable.

94chem said:

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REITs are great, but they delay your tax filing by months and don't provide income. I prefer to keep them in retirement accounts so I don't have to deal with the taxes every year.

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How do they delay your tax filings and don't most throw dividends? I literally know very little about them, so I'm just curious.

tjones said:

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94chem said:

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REITs are great, but they delay your tax filing by months and don't provide income. I prefer to keep them in retirement accounts so I don't have to deal with the taxes every year.

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How do they delay your tax filings and don't most throw dividends? I literally know very little about them, so I'm just curious.

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Yes, they pay dividends, but don't most people other than retirees reinvest those in order to grow the investment? REITs don't send you tax forms until March. It's a PITA.

In the "your results may vary" category, the typical rental hopes to break even on cash flow for the first 5 years while making a decent chunk of equity and appreciation. When rents finally pass the increases in PITI (only TI really), then you start to make money. But how much? On a single property, maybe a few thousand per year. So it's a headache, and you still make most of your money on the amortization and appreciation.

So, and again, your results may be totally different, but to make current income, you need a lot of properties. Focus on properties that will appreciate, and make your money that way. And keep your REIT in a retirement account. I like the REIT for a hands off diversification approach. Rentals may be better if you're feeling lucky and smart.

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In the "your results may vary" category, the typical rental hopes to break even on cash flow for the first 5 years while making a decent chunk of equity and appreciation.

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I'm not sure I understand this part. Are you saying 5 years to make back your initial down payment, repairs, etc?

I have 2 rentals. The first is atypical b/c it was our former primary residence that we converted into a rental. But it cashflows every month.
The second we put 20% down and a few thousand in repairs. It's been about a year and a half. While we haven't made back the initial investment it has cashflowed well since we closed and also has appreciated a good amount.

Thanks

NoahAg>94chem.

There are groups out there to help you get a better handle on SFR. If you're not cash flowing, it's not a good deal.

Owner finance as the exit strategy is the correct answer.

12thMan9 said:

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NoahAg>94chem.

There are groups out there to help you get a better handle on SFR. If you're not cash flowing, it's not a good deal.

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I put 20% down on a $150K property at 3.5%. Started charging $1400/month, now up to $1500 in year 3. PITI has been around $1200. Factor in repairs, it's been about break even. I'm not allowed to claim depreciation, or I could have a deductible loss. However, I have gained about $8K in amortization and $60K in appreciation in 2+ years.
So, I'm not making any monthly income, but even if I were, I'd need 10+ properties for that to be a motivating factor. Sure, if I had it paid off, I'd be making $1000/month. But I'd rather carry the debt and have more money for college, with 4 family members attending last year.

I've got so much negative cash flow right now, that piddling little rental property is irrelevant. My job is what I depend on for cash flow. And some day when I sell that rental property, maybe I'll get a nice chunk of income. Hopefully I'll be able to deduct the lost depreciation, 'cause recapture would stink for something I never got to claim.

If you can't cash flow a higher % than your interest rate, then the dollars you invested are not working efficiently enough for it to be considered a good investment.

Negative leverage is not a good thing.

zagman said:

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If you can't cash flow a higher % than your interest rate, then the dollars you invested are not working efficiently enough for it to be considered a good investment.

Negative leverage is not a good thing.

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Sure, but if I bought it for one year of college tuition down payment, keep it for 3 years at break even cash flow, and sell it for three years of college tuition, that seems like a good deal to me. I used to deal in terms of Gilligan's Islands, but now it's college tuition payments.

94chem said:

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zagman said:

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If you can't cash flow a higher % than your interest rate, then the dollars you invested are not working efficiently enough for it to be considered a good investment.

Negative leverage is not a good thing.

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Sure, but if I bought it for one year of college tuition down payment, keep it for 3 years at break even cash flow, and sell it for three years of college tuition, that seems like a good deal to me. I used to deal in terms of Gilligan's Islands, but now it's college tuition payments.

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This is how I think as well. If you are gaining 5-10 % equity ot more annually, plus whatever it can cash flow, it seems like a better way to go than a REIT kicking you 5-8% return annually..

tjones said:

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94chem said:

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zagman said:

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If you can't cash flow a higher % than your interest rate, then the dollars you invested are not working efficiently enough for it to be considered a good investment.

Negative leverage is not a good thing.

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Sure, but if I bought it for one year of college tuition down payment, keep it for 3 years at break even cash flow, and sell it for three years of college tuition, that seems like a good deal to me. I used to deal in terms of Gilligan's Islands, but now it's college tuition payments.

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This is how I think as well. If you are gaining 5-10 % equity ot more annually, plus whatever it can cash flow, it seems like a better way to go than a REIT kicking you 5-8% return annually..

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And with yearly cash flow roughly equivalent to 2 months of rent not even including minimal operating expenses, what happens if you aren't rented for two months? What's the point of appreciation if you're having to pay part of it now to stay afloat? The point of debt is to leverage small chunks of equity to earn multiples more than a large sum. Because being able to diversify multiple small sums is more efficient than singularly investing in large sum. When you can't make more money than what your debt costs you, then you should have either found a better investment or just held the cash. It's costing you money to hold that investment.

That's not to say investing in REITS is better. They just happen to be better than the example of that one users investment. Despite the appreciation, his annualized rate of return is likely lower than it would be had he just invested in bonds.

zagman said:

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tjones said:

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94chem said:

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zagman said:

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If you can't cash flow a higher % than your interest rate, then the dollars you invested are not working efficiently enough for it to be considered a good investment.

Negative leverage is not a good thing.

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Sure, but if I bought it for one year of college tuition down payment, keep it for 3 years at break even cash flow, and sell it for three years of college tuition, that seems like a good deal to me. I used to deal in terms of Gilligan's Islands, but now it's college tuition payments.

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This is how I think as well. If you are gaining 5-10 % equity ot more annually, plus whatever it can cash flow, it seems like a better way to go than a REIT kicking you 5-8% return annually..

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And with yearly cash flow roughly equivalent to 2 months of rent not even including minimal operating expenses, what happens if you aren't rented for two months? What's the point of appreciation if you're having to pay part of it now to stay afloat? The point of debt is to leverage small chunks of equity to earn multiples more than a large sum. Because being able to diversify multiple small sums is more efficient than singularly investing in large sum. When you can't make more money than what your debt costs you, then you should have either found a better investment or just held the cash. It's costing you money to hold that investment.

That's not to say investing in REITS is better. They just happen to be better than the example of that one users investment. Despite the appreciation, his annualized rate of return is likely lower than it would be had he just invested in bonds.

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In the scenario where you are not making a positive return, then I agree with you. I'd assume most people aren't holding on to rental properties if its costing them money every month.

I'd have to own 20 homes like the one above free and clear to make enough to live on. Clearly, I'm in it for appreciation, not income. Ain't nobody got time for that.