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Assume the following scenario: A person wants to invest $100k in REIT or buying a rental property. (Assume a property management company is used so we don't need to compare the work from each.)

  1. What effect (if any) does getting a mortgage have for buying the rental property? Does this increase the long-term value of real-estate compared to REIT?
  2. Has someone measured the average capital appreciation of REIT vs owning a home over time? Is one a clear winner?
  3. Is there a measurable tax benefit to investing in real-estate? How big a difference should this make?
  4. Are there long-term average returns that should be used for owning a rental vs REIT to calculate an expected annual return?

Thanks!

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    This is really hard to analyze. So many different REIT's and the options on rental property are also limitless. I am guessing you are trying to decide which would be a better investment given 100k - REIT or rental property? It almost isn't a way to compare as rental property/investing is its own beast. – Ross Sep 29 '15 at 16:47
  • Are you looking to do this with personal funds or IRA/tax deferred funds?? – Lindsey Sep 29 '15 at 16:51
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    There is much variation. This site shows the variation in rental returns: 2% to 25%. This REIT is averaging 7.87% over the last three years (but not the -6.07% YTD!). REITs have the bonus of not requiring any personal management involvement. – Peter K. Sep 29 '15 at 16:54
  • @Lindsey not IRA specifically, just generally. – Jonathan Winters Sep 29 '15 at 17:25
  • Since your question mentions taxes, please specify which country you are asking about. Taxes aren't the same everywhere. – Chris W. Rea Sep 29 '15 at 20:07
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I think that this mostly depends on your personality, not the return on investment. Are you willing to get nasty phone calls in the middle of the night about a busted water pipe? Can you weather the lack of income if your rental property goes unoccupied for a year? Are you willing to clean up after a resident trashes the place before moving out?

A REIT removes you from all similar considerations yet provide you with a reasonable income.

I am both a renter and an owner of a REIT.

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  1. With Leverage you get Cash-on-Cash Return.

example: Lets say the $100K property rents for $1,000.

Expenses: $400 (x12 $4,800)

NOI (rent - expenses) = $600 (x12 = $7,200)

Cap Rate: (NOI / $100K) = 7.2%

If I use leverage and only put 20% down ($20,000). I now have a mortgage of $430. "Cash-on-Cash Return" is based on the actual cash you have invested.

Cash Flow: (NOI - mortgage) = $170 (x12 $2,040)

CCR: (cashflow / downpayment) = 10.2%

And this does does not include the debt paydown from the tenant paying off your mortgage!

  • Expenses will include: Management, Vacancy, & Repairs. – tomsmithweb Oct 20 '15 at 19:35

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