# REIT vs rental



## digitalatlas (Jun 6, 2015)

I've been looking at condos, townhouses, and houses in the areas outside of the GTA (Hamilton, Barrie, Ajax) and using Berubeland's cap rate calculator, can't find a single one that cash flows. Yes, as I've read from some of the more experienced landlords, they are out there, but they're few and far between.

It's hard to resist the speculation bug because interest rates have been low for so long, and i find it hard to believe that it could skyrocket even when it does eventually start to rise. Prices still keep increasing annually for single family homes. But I also know from first hand experience (years ago) that once you factor in the time you need to "invest" in a property, the appreciation as a percentage is not really much to write home about, and that's when there's some decent appreciation.

As a rental business, I'm not looking for just appreciation. But there's the huge leverage you can get from real estate, isn't that one of the key advantages. Now, I guess I could borrow to invest in the markets, but that doesn't seem too wise either.

So what about REITs instead of a rental? Is it common nowadays for people to be deterred from rentals and funneled to REITs (or something similar)? How do you think that compares?

Thanks for your thoughts.


----------



## AltaRed (Jun 8, 2009)

My take is unless you are prepared to invest in the time it takes to be a successful landlord, including being a property manager and jack-of-all-trades handyman, 'leave the driving to the experts'. I have a REIT component to my investment account and I am quite prepared to pay the expert 'investment manager' to manage that business for me. It is really no different than owning the shares of any other corporation. You are paying them to manage your ownership in <insert blank> for you.

One can do a lot worse than owning, for example, CAR.UN or BEI.UN, both of which are residential rental REITs. The cap rates are decent albeit getting tougher and tighter, particularly in hot markets, which is consistent with individuals trying to do the same in hot areas like the GVA or GTA. There is virtually no way to find a decent cap rate in either of those locations.


----------



## Mortgage u/w (Feb 6, 2014)

I think owning physical property in your portfolio has its advantages but, as you know, the property must be profitable to begin with. Yes, they are tough to find, but once you do find one and are willing to take on the landlord role, I believe this outweighs owning a REIT. Just like any stock, there is lots of speculation that affects the return of REITS and your investment will be dependant on what others 'feel'. When compared to your own investment property, you only have yourself to listen to and you have a direct influence on how your investment property performs. I don't see a REIT any much different than any other dividend paying stock, ETF or mutual fund. It all comes down to you - do you want to get your hands dirty or do you want to keep it clean.


----------



## Beaver101 (Nov 14, 2011)

^


> do you want to get your hands dirty or do you want to keep it clean.


 ... I would think the majority would prefer to keep their hands clean here.


----------



## Just a Guy (Mar 27, 2012)

One thing to consider when buying REITs, is they operate in the same market as an individual. If they are buying overpriced properties which struggle to cash flow in this low interest market then they'll be in trouble when interest rates increase as well.

If they aren't overpaying, where are they finding these properties? I'm watching for places all across the country, including larger places, and I rarely see anything worth purchasing, especially in the larger commercial area of residential properties.

So, if I don't think I can make money buying these places, it makes me wonder what corners are being cut to satisfy the returns they are generating after they pay themselves. From what I've seen, they also pay themselves really well for their "services" to investors.

REITs may be very hands off, but when you don't know what's going on, you leave yourself very exposed to shenanigans. Since I spend a lot of time in real estate, I have a pretty good knowledge of where the money is and what the numbers should be...REITs generally don't pass the sniff test to me.


----------



## sags (May 15, 2010)

Trying to find "cheap" properties that will rent well is in direct competition with realtors who are looking for the same thing.............and are first on the scene.

Properties that are listed on MLS have already been thoroughly vetted by realtors and their pals.

The only way I can see it working is direct word of mouth. Somebody knows somebody who is selling an estate home or something. Even then, people want fair market value for the property.


----------



## marina628 (Dec 14, 2010)

I am looking at a condo right now in Pickering for $240,000 with 20% down the mortgage is $817.67 and the condo fees ,insurance and taxes are $600 .It currently rents for $1650 a month so you would cash flow $200 a month and in 5 years pay $31,000 down on the mortgage.It is actually the best example I have seen in about 10 months .Option two for us is buying a new construction $500,000 town home in Bowmanville that completes in 2018 and giving $100,000 in deposits over next 12 months which would be bought purely on speculation of Appreciation.It really depends on your own risk tolerance ,if you think they will continue to go up etc.In my opinion with 407 extension coming out this way and seeing what my own neighbors are getting over asking I think I can handle the risk and in 5 years we will likely see prices this way 40% higher than today.If you cannot afford to carry the rental on your own don't buy it ,nothing worst than a broke landlord for you and your tenants .I personally would rather buy from a builder with long closing right now than get tied up with tenants again so we may go the new construction route .


----------



## treva84 (Dec 9, 2014)

digitalatlas said:


> As a rental business, I'm not looking for just appreciation. But there's the huge leverage you can get from real estate, isn't that one of the key advantages. Now, I guess I could borrow to invest in the markets, but that doesn't seem too wise either.


As a REIT owner and someone who is actively looking to buy my first investment property, I think the leverage component is the biggest pro that a rental unit has over a REIT. Even if there is no capital appreciation, the tenant pays your mortgage, so you'll get massive returns by using other peoples money. You can't really do this with REITS, unless you buy on margin, which I personally would not do.

Of course, the trade off, is that a rental is more hands on and more active - you have to find property, do the leg work, pay the closing fees, find the tenant and be a landlord. This is what I veiw as the cost for so easily being able to use leverage.


----------



## AltaRed (Jun 8, 2009)

But the REIT itself has leverage as well.... tenants paying their mortgages. That is the whole point. The REIT is a landlord too.


----------



## Just a Guy (Mar 27, 2012)

Well, with owning, I've found high double digit returns to be the norm when you factor in mortgage pay down, cash flow and appreciation...so, where does all at money go in a reit? It doesn't seem to be returned to investors.


----------



## AltaRed (Jun 8, 2009)

CAR.UN has had a 1025% return since it's IPO in 1997. That seems rather good in just under 20 years.


----------



## RCB (Jan 11, 2014)

I'm not certain, but renting out when the landlord is in a rent to own contract might be feasible in a tough RE environment. When a landlord rents a property from the owner, 100% of the mortgage amount is tax deductible, instead of just the interest if the landlord is owner. Double check that with CRA.

We were in a situation where we paid mortgage and all expenses on behalf of a parent that had to move to a nursing home, due to the remaining term on mortgage/penalty for early payout. We rented it out. By the time the term was up, our bank assessed it, we had more equity in than 20%, transferred title, nothing down. Perhaps some of that info could apply to a rent to own situation for a potential landlord.


----------



## Prospector (Jul 25, 2014)

What about speculating on new builds? 

There are a half dozen condo projects around me with units from the 200's - 300's. With 5% now, 5% in 90 days, etc. seems like you could buy in and then list in a year when the project is completed. Sell without ever having tenants. Of course you are getting 0% return on the 20% for that year, but then you aren't getting calls at midnight either...


----------



## Eder (Feb 16, 2011)

Wow, I would prescribe a 4 week dose of Garth Turner for most here.


----------



## andrewf (Mar 1, 2010)

Prospector said:


> What about speculating on new builds?
> 
> There are a half dozen condo projects around me with units from the 200's - 300's. With 5% now, 5% in 90 days, etc. seems like you could buy in and then list in a year when the project is completed. Sell without ever having tenants. Of course you are getting 0% return on the 20% for that year, but then you aren't getting calls at midnight either...


This is incredibly risky...


----------



## RCB (Jan 11, 2014)

Eder said:


> Wow, I would prescribe a 4 week dose of Garth Turner for most here.


Why? Not all RE is in the GTA or Lower Mainland, and not all RE is overly inflated. We purchased one house less than 100k and one less than 150k as rentals within the last few years. Even with renovations, new roof and windows, new kitchen and a second bath, we're still less than 100k. And both cash flow. And the cash flow allows us to begin investing. Some in REITs.


----------



## treva84 (Dec 9, 2014)

Prospector said:


> What about speculating on new builds?
> 
> There are a half dozen condo projects around me with units from the 200's - 300's. With 5% now, 5% in 90 days, etc. seems like you could buy in and then list in a year when the project is completed. Sell without ever having tenants. Of course you are getting 0% return on the 20% for that year, but then you aren't getting calls at midnight either...


You're banking on there being a greater fool. Sometimes there is, sometimes there isn't.


----------



## rl1983 (Jun 17, 2015)

Prospector said:


> What about speculating on new builds?
> 
> There are a half dozen condo projects around me with units from the 200's - 300's. With 5% now, 5% in 90 days, etc. seems like you could buy in and then list in a year when the project is completed. Sell without ever having tenants. Of course you are getting 0% return on the 20% for that year, but then you aren't getting calls at midnight either...


Good luck. Most builders have a clause in the sales contracts that state you can't sell it until a year AFTER possession.


----------



## tygrus (Mar 13, 2012)

rl1983 said:


> Good luck. Most builders have a clause in the sales contracts that state you can't sell it until a year AFTER possession.


 And see how easy it is to sell when there a dozen other 'identical' condos for sale at the same time


----------



## digitalatlas (Jun 6, 2015)

I'm never going pre-construction again. In the early 2000s, I got a condo in downtown Toronto at a steal and sold it a few years later before getting married and moving to the burbs for a pretty decent six figure gain. About 5 years ago I speculated on a condo development in Markham, even did way more research about the location, demographics, ran projections, read local news, etc. but I felt uneasy about it from day one. 

I was encouraged by a close relative to do it, and I guess that tipped the scales for me. Well, earlier this year I was informed that after sitting on my $60k deposit for the last 5 years, the project was being re-zoned (btw, it was Phase 2 and Phase 1 wasn't even complete and delayed by 2 years) and our deposits would be returned and we'd be given the chance to re-purchase at an undisclosed 'discounted' price. I was miffed at the lost opportunity cost because I had alternatively looked into buying a detached house in Hamilton at the time for, possibly less money (at that time), plus I borrowed the down payment and ended up out about $10k in interest, which was now no longer tax deductible. But I was oddly relieved, figured I'd learned my lesson. Actually I learned 2 lessons: 1) don't take investment advice from relative who don't have their money sorted out and 2) don't buy pre-construction for investment.

I was deterred from landlording at the time, for many of those reasons you all suggest: it would be a lot of work, at the time I my wife just got pregnant and I was starting a new job. Even though we had a pretty respectable situation, I didn't want to take on TOO much, so I figured if I went with preconstruction, I'd just let my deposit sit there and not have to worry about tenants and rent and mortgage and other stuff. In hindsight, at least I would have taken possession of some physical property, and some of those operating costs and interest would be tax deductible. Not to mention the appreciation, which seemed to average over 5% every year despite cries about rising interest rates and market corrections. It also seems that as of today, Stephan Poloz seems to think low interest rates are here to stay for a while too.

Anyway, the leverage and appreciation seems to be the big draw. I've liked the idea of REITs for years, though I sold all my REIT holdings when I 'invested' in the condo. I don't want to invest in REITs on margin, it's not the same as owing a mortgage on real estate, you can't live in a REIT, there's more risk, too much for my tastes.

Though for those of you who invest in REITs, how do you work that into your portfolio in terms of allocation? I've already got a 30/30/20/20 split between Canadian/US/Int equity/Canadian Bonds. Where do you fit REITs in there, or do you just include it into the geographical divisions? That would complicate my simple couch potato portfolio....

Anyway, I'm looking at rentals again. Seems really hard to find something in the GTHA..er...cause someone else probably already knows about it. It's not the kind of thing that, if you have the means to do it, you can run a rental. I don't know how any new landlords can make money at these rental rates. I've looked at Barrie too but I don't really know what's going on in Barrie, seems like everyone is employed by 5 manufactures and I don't know what kind of economic growth is headed there. Some beautiful houses at decent prices, if I lived up there, but that's not going to happen.


----------



## none (Jan 15, 2013)

I have about 5% in REITs. I think of them as a 50/50 bond equity kind of thing (for no real justified reason - just that it's a bit of diversity that is less correlated to either). Anyway, then i have 25/25/25/20/5


----------



## lost in space (Aug 31, 2015)

Eder said:


> Wow, I would prescribe a 4 week dose of Garth Turner for most here.


I'm a big fan of Garth but he misses the boat on the an intangible benefit to owning your own place. Been a tenants most of our married life and we are, in the next few months, moving back into one of our units. And I can’t tell how wonderful the feeling is to be able to give the landlord the middle finger! 

The main difference between owning place and owning a REIT is that being a landlord requires capital. Not just the down payment but also cash flow to manage the time between tenants, but also upgrades and repairs. This post from No Nonsense Landlord His story reflects pretty much our own. The other thing is the hassle factor, one of our units (condo) has a defective doorbell and what a clusterfuck it's been trying to get than damm thing sorted out. Going on 8 months now with no resolution in sight! Not only we’re having a fight with the previous owner over condo fees, it’s gotten to the point that we need to hire a lawyer. Don't get me wrong buying rental properties was one of the smartest investment decisions we ever made, particularly from a tax point of view and it allowed us to diversify our investments outside of Canada (we live in Germany). But it is a hassle being a landlord!


----------



## treva84 (Dec 9, 2014)

digitalatlas said:


> Though for those of you who invest in REITs, how do you work that into your portfolio in terms of allocation? I've already got a 30/30/20/20 split between Canadian/US/Int equity/Canadian Bonds. Where do you fit REITs in there, or do you just include it into the geographical divisions? That would complicate my simple couch potato portfolio....


I consider REITS as part of my equity holding, because their movement is correlated more with equity than with bonds. In my opinion the only reason that a 30 something young professional should hold bonds is as part of a hedge against an equity down turn / crash. So, to use your allocation as an example, I would split the Canadian equity from 30% to 25% Canadian Equity / 5% REIT or 20%/10%, something like that. 

Of course, REITS are also interest rate sensitive (like bond holdings) so they will also take a hit when interest rates rise.


----------



## digitalatlas (Jun 6, 2015)

I read this years ago, as I'm sure many of you have as well:
http://www.moneygeek.ca/weblog/2015/03/23/should-you-hold-reits-part-your-portfolio-xre-zre-vre/

I think that's why a few years ago I sold all of my XRE (also cause it didn't actually have too many holdings). Anyway, any of you agree with this? Basically, suggests that we own homes that's essentially already providing exposure to real estate, so don't need it in investment portfolio. There's some truths and I can figure some arguments against that idea, but what do you guys think?

Also, I've been looking into RioCan and Chartwell Retirement Residences, as far as REITs. I'm still in the process of going through investor documents, but as an outside feeling, RioCan is everywhere, I see them everywhere in the GTA and I do quite a bit of local travelling. Chartwell, I like the idea of a retirement residence, given the aging population. What do you guys think?


----------



## AltaRed (Jun 8, 2009)

Not all REITs are alike. Just like a bank stock is different from an industrial stock, so too would be an industrial REIT vs an apartment REIT. So I don't buy the argument that owning one's own house is enough exposure to RE because it depends on what sector it is in.

I have owned RioCan almost forever. It's downside is its heavy emphasis on retail and question marks about online retail hollowing out bricks and mortar retail. That is true to some extent BUT RioCan sits on huge amounts of real estate and much of its holdings can be redeveloped into mixed use, e.g. retail and light office mixed with apartment condos. There is huge potential if this gathers momentum.....and the primary reason I still hold RioCan. But they need to get some momentum going.

I like Chartwell as well but have been chasing prices. Missed the June 2015 hiatus when they were selling off their US holdings and I've kicked myself ever since. Valuation is too rich for me....for now.


----------



## Just a Guy (Mar 27, 2012)

A home is rarely a good investment. For one thing it's not something you can easily sell if you need the funds, especially since you'd need to replace it with some other form of shelter.

Next, they rarely make good returns, especially when you truly consider all the funds you put into it and all the expences that are associated with it (interest, taxes, etc.). 

Of course, I don't believe everything needs to be bought for an investment either.

Personally, though well diversified myself with real estate, stocks and businesses, I don't really believe that "being too exposed" to a particular sector is necessarily a bad thing. Depending on your entry point, the cash flow produced, etc. Some people I know could easily weather a downturn in their sectors.


----------

