Making the Move from REITs to a More Active Investor Role

I don't want to make this an article about becoming a super fix & flip guru or even managing your own rental properties.  What I want to help investors to do is to look at how they can exit REITs but stay in real estate as an investment asset class.

Why Investors Like REITs

REITs have some really attractive attributes:

·         They trade like stocks:  Investors can buy into a REIT and enjoy the benefits without a big chunk of capital.  They can get out just about as easily and move their money elsewhere.

·         REITs pay great dividends:  This is true if things are going well.  In almost all cases, REIT dividends are higher than bonds, and retired investors want and need the steady income.

Why Care in REIT Investment is Required

REITs can lose big too:  When mortgage rates are low and investors see paltry returns from their bond investments, many move their money to REITs for those higher dividends.  Unfortunately, if rates rise, those same investors easily and quickly move their money back into other investments.  Depending on when an investor bought in, they could lose their gains quickly.

REITs trade like stocks:  Yes, I'm repeating what I said in the benefits section.  It is easy for investors to buy in and sell out of a REIT, so they can be pretty volatile.

What if You Don't want to be Really Active?

OK, you want to leave REITs but stay in real estate.  However, you really don't want to manage rentals, and you definitely do not want to get involved in fix & flip.  You want to get a nice double-digit ROI from an almost passive role.

Try seeking out successful rental property investors or people who are doing fix & flip at a profit.  They often are seeking investors to fund deals.  Be careful, check references and track record, and be sure you cover your assets.

You can team up in a partnership with an active fix & flip investor to fund their short term deals of a few months, and you can bank some nice profits.  You want to get help in structuring the deal, and you want a note against the property to cover your investment.

From a longer term perspective, you can enter into partnerships to buy and own rental homes or multi-family properties.  You want to team up with someone who does want to take on the management tasks and has the expertise to do so.  Or, you structure the financial side to afford hiring long term professional management.

The Great Long Term Outlook for Rentals

This is a great time to get involved in rental property investment.  Rents are rising with increased demand.  The younger generations are not buying homes at anything like the rates they have historically.  They are renting.

Baby boomers are hitting 65 at a rate of 10,000 every day.  Many will want to rent and get rid of the tasks of maintaining a home.  Locating homes in areas where they will have convenient access to shopping, cultural activities and entertainment will help you to keep your units occupied with stable tenants.

The key for those who want a real estate alternative to REITs is to assess their risk tolerance and either jump in completely or partner with expertise and experience.

Rent vs Buy – Lifestyle may Trump Cost

Consumers these days are bombarded with information through the Internet.  They can read reviews of any product they may be considering to buy.  There are consumer reporting and review sites with the stated objective of advising consumers about what is a good deal and what is not.  There are consumer product safety sites with loads of product safety information.

It’s “information overload” for many, but there is interest in reports by market area as to whether it’s more cost effective to rent or buy a home.  Over at Trulia.com, an article about rent vs buy economics in October 2014 states:  “Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. In fact, buying is 38% cheaper than renting now, compared with 35% cheaper than renting one year ago.”

There are obvious factors creating this disparity.  Low mortgage interest rates for purchase and rising rents are the primary factors creating this situation.  And, if all you look at are the direct costs of ownership as a snapshot in a market, it is clearly less expensive to own than to rent.  Even considering that property taxes and insurance costs can rise outside the control of the owner, buying still looks pretty good.

I am a real estate investor, so I do tend to prosper more when there is a healthy rental market, whether investing directly in rental properties or fix & flip and wholesaling to other investors.  Of course, there is a great profit potential in fix & flip to retail consumer buyers, and that market is really healthy right now.  All of this considered however, there really are other considerations consumers need to think about when making the rent vs buy decision.

Non-cost Considerations of Rent vs Buy

Will you need to move in under 8 years?

Especially with today’s higher down payments, it is anywhere from around 6 to 8 years before a home buyer can expect to get their money out of a home sale after the costs of sale.  Those can be significant, with title insurance and real estate commissions being the largest costs of sale.  If you’re not sure about having to move being out of your control, buying may not be wise.

Are you just starting a new family?

This isn’t a problem really unless you do like many first time buyers and get into a starter home that’s fine for two of you.  However, when children enter the picture within a few years, will you be pushed into upsizing and selling before you can recoup your costs, much less get any appreciation in equity?

Is being forced to move a rental issue?

Tenants have little control over when their landlord may decide to sell the home.  Generally, leases are for a year or less, so you can possibly be forced into a moving decision far sooner than you like.  One buyer surveyed said that they were forced to move three times in three years, so they bought as a self-defense move.  Their costs of moving that frequently were high, even disregarding the inconvenience.

Are you trading travel costs in this choice?

Many of today’s best jobs are in technology, financial and medical sectors, and these companies tend to locate in large urban areas.  Buying is usually much more costly close to the workplace.  Moving farther out to buy affordably can result in hundreds of dollars in travel costs every month.

The smart move is to consider every factor impacting your lifestyle, instead of just looking at a direct cost breakdown.  Sometimes renting may be a good “now” decision that you can far more easily change later than taking the buy first approach.

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