"There Are No Bad Questions" Question about the Long Term

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"There Are No Bad Questions" Question about the Long Term

Dave Olverson
Real Estate Investor · Durham, NC · Member since 2014 · 89 posts · 32 votes

After a little time on these boards, I often see advice about a deal not being worth it, or suggesting that someone should go into REITs instead.

I am generally interested in turnkey investing, which is why I think I see this a lot. There are a number of people who seem to be anti-turnkey. But that aside, I have a pretty dumb, newbie question.

It seems to me that even if the ROI based on your down payment is low (but positive), turnkey and buy & hold strategies are good.

If the returns for a REIT and the return for a rental property are the same, don't I come out ahead with the rental property? 30 years from now, my cash flow will jump up as I finish my mortgage payments and I will have this fully paid off asset. If I go with a REIT, my return every year is the same, but I don't get that bonus at the end.

Am I missing a key component in this scenario? Is it unwise to think in terms of a 30+ year timeframe? Or is that just a more conservative approach that some people go for and some don't?

Thanks all and sorry for the totally newbie question.

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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
12y

@Dave Olverson - We have good CF now but we reinvest all of it to pay the mortgages down earlier, so the more CF the quicker they are paid off

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  • Mark UpdegraffBusiness Member
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 714 votes
    12y

    When you're leveraging money in Real Estate you should be able to ramp up your return. What kind of return do you think is suitable? I analyze each investment from an all cash purchase perspective and would not consider anything that was less than 10% unless the location was strategic to my long term plan for some reason.

    An REIT is similar to a mutual fund in that you loose money in the management & advertising. You'll be better off investing on your own as you can control the costs better, but it is more hands on. If you're buying in an REIT you're still enjoying the "bonus" you're just diluting things through added layers of management.

    Hope that helps.

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    12y

    I don't know about REIT's but I think some of the comments on here about investing in them are because the property they are asking to be analyzed is not a good deal and they are better off putting it in a REIT vs buying a bad property.

    We have long term buy and hold properties and are really looking forward to the day the loan is paid off and we can retire off the rental income.

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  • Dave Olverson
    OP
    Real Estate Investor · Durham, NC · Member since 2014 · 89 posts · 32 votes
    12y

    Thanks Mark and Brianna

    @Brie Schmidt - so does that mean you are less concerned about your current cash flow (i.e. before the loan is paid off)?

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    12y

    Dave -

    There is nothing wrong with the question or even your observation that there is a lot of push back against turnkey investing. Much of it because the bad situations in Turnkey, like any other service or product, are the ones that get the most attention and air-time.

    The reality is that every form of investing exists because there is a demand for it from some investor. Whether it is a REIT or Turnkey or actively flipping properties or buying notes...the list goes on and on. And there are certain investor groups who are drawn to each for various reasons and some invest in multiple different strategies. To each person, the one they choose to do is going to be superior to other forms of investing, but they all offer advantages and disadvantages. How you see those just depends on which direction you are looking from.

    I think a long-term outlook is good. Don't forget that over time you will have opportunities to change your outlook. Maybe pay down a property quicker or cost average your investments by purchasing more property or maybe use a 15 year not on additional purchases. Either way, a long-term outlook is smart and no one says you cannot buy for long-term hold and also invest in a REIT for simple consistent return while you figure out what else to do with your money. So they are all right or wrong depending on your personal outlook and needs.

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  • Dev HornPro Member
    Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
    12y

    I may be far out of my area of expertise here, but the reason a well-managed and well-diversified REIT may make more sense than a turn-key single property is a REIT spreads out the vacancy risk (i.e., revenue/cash flow loss as a result of vacancy) . Generally, a fund is less risky than a single asset investment, and that may offset the management fees charged to manage the fund.

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  • Dave Olverson
    OP
    Real Estate Investor · Durham, NC · Member since 2014 · 89 posts · 32 votes
    12y

    Thanks Dev and Chris - both of those observations make a lot of sense and they both point towards a more diversified strategy, which is appealing to me.

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  • Bob Hines
    Real Estate Investor · StL, MO · Member since 2008 · 296 posts · 152 votes
    12y

    REITs are an investment while rental real estate, even turnkey with management, is a business to run. They are different animals so there are different risks and different rewards with each.

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  • Dave Olverson
    OP
    Real Estate Investor · Durham, NC · Member since 2014 · 89 posts · 32 votes
    12y

    Absolutely true, Bob - I am more trying to have a conversation about the benefits of the equity though and if I am missing something there - as it always seems that people don't talk about that when talking about the ROI.

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    12y

    @Dave Olverson - We have good CF now but we reinvest all of it to pay the mortgages down earlier, so the more CF the quicker they are paid off

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    Second City Real Estate4.821 Reviews
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  • Bob Hines
    Real Estate Investor · StL, MO · Member since 2008 · 296 posts · 152 votes
    12y

    There's a lot to be said about having somebody else pay for property you own. It's just better if they can pay for that property AND you get to keep some money for yourself every month.

    There are a number of 4 families in a great area of town here in St. Louis. They each rent for $550 +/- monthly and people buy the buildings like hot cakes for $300k-$350k. It doesn't make sense cash flow wise but there are plenty of people who look at it like you stated above-not making much money but they are paying the mortgage off on a good, stable building over the long term. So yes, there are those that think and practice what you stated above. I would guess that not many of them would be on an active REI forum and you won't hear their perspective like you will the active investors here.

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