Buying Real Estate for only $100: REITs vs Rental Property

Here’s a way you can invest in real estate with as little as $100…it’s a REIT. But how does this compare with just straight up owning rental property, and is it even worth owning a REIT in the first place? So lets analyze the pros/cons of each! Add me on Snapchat/Instagram: GPStephan

Join the private Real Estate Facebook Group:

Like I mentioned, this is an investment trust which acts as a holding company for real estate. By investing in this company, you thereby are entitled to some of their profit, in the form of dividends.

Pros to doing this:
-There’s pretty much zero barrier to entry. Anyone with $50-$100 can invest.
-It’s also really easy to buy into a REIT…open up any stock trading website or app, and boom, you’re done. You don’t need to go out looking for properties that cash flow for weeks or months.
-There’s also no management aspect of this. With a REIT you don’t do ANYTHING. You just buy it and forget it…done.
-It’s also really, really easy to sell…no need to pay a 5% commission, no need to show your home to buyers, no need to negotiate prices…it’s just as easy as buying a REIT. You just click “sell” and you have your money almost immediately.
-With a REIT, you’re really well diversified.

Negatives:
-How the income YOU get is taxed…you get paid in the form of a dividend. This is usually an amount that’s paid out quarterly, but it’s taxed as though it’s earned income, which means it’s taxed at your highest marginal rate.
-Because REITs pay high dividends, they usually don’t increase much in price.
-The third downside is that you don’t have any control over your investment…unlike a property where you can pick the color to paint the walls, how to remodel the property, or how to manage the property and how much to rent it for - with a REIT, you have zero control.
-You also can’t build equity in a REIT like you can with real estate.

Investment Real Estate Downsides:
-High barrier to entry…you generally need a large down payment and will need to have the income to support the loan payments.
-The second downside to owning real estate is the time commitment. Finding the right deal is essential - and it can take a lot of time. Then you have the time aspects of managing a rental property.
-Lack of immediate liquidity. I can’t just sell my property for top dollar within a day - it just doesn’t happen.

Rental Real Estate upsides:
-You can leverage your money. While yes, a REIT does invest in leveraged properties and you own a portion of that, generally the returns aren’t as high as when you do it yourself.
-Your income from rents is generally tax free. When owning physical real estate, you can depreciate the cost of the property against your rental income. Compare this to paying 22-37% taxes on dividend income.
-You have total control over your investment. This means you can find a really, really good undervalued deal where you make a significant amount of money.
-You’re able to borrow against the equity in your home - completely tax free.

So at the end of the day, this is what it really comes to…

If your goal is long term equity, owning physical real estate is the way to go. When you buy an investment property, you’re continuously building equity in a tangible asset. Having more equity in your asset also gives you the ability to refinance over time and use the proceeds to buy additional assets and grow your portfolio. More work, more time involved, more money long term. However, if you have a little money and want some exposure to real estate, a REIT could be a nice way to diversify. However, since dividends are taxed as ordinary income, it’s best to hold the REIT in a tax advantaged account like a 401k or Roth IRA to avoid paying taxes. This way you get all the benefits of having exposure to real estate, without the tax consequences of paying a stupid amount of taxes on it. Not financial advice ;)

Suggested reading:

Favorite Credit Cards:

[MichaelJayValueInvesting]

Please upvote to help this message get to others

Important if you are considering owning REITs:
1. Dividends are taxed at ordinary income rates (not long term capital gains rates) see 3:48.
2. Because of that, you will want to own REITs in a tax advantaged account (i.e. Roth/traditional IRA/401k).
3. Most of the return is from dividends, make sure you choose a fund with a low expense ratio or research individual REIT stocks.
4. Note, some companies like Vanguard are changing their indexes, so their Real Estate EFT (VNQ) will no longer contain only true REITs but will also include companies related to servicing and developing real estate.
5. Always do your due diligence and research before making any investment, including REITs.

Thanks for the video Graham, important distinctions between the two.

[impala]

I have my REITs in a Roth IRA so my dividends are reinvested. REITs is how I got started in real estate, now I own rental property.

[James-vjhz]

My Vanguard REIT Index has been paying me monthly with no headaches. No complains while i'm waiting to pull the trigger on my first rental property .

[HepCatJack]

If you compare the SPDR REIT index RWR versus the S&P 500 (SPY) from the year 2000 til now, the REIT index is up 430% whereas SPY is up 207%. You definitely can get some capital appreciation with the REITS.

[ddillard]

If you can afford it diversify. Get real estate and REITs. Get property managers for the real estate and invest in REITs through Roth IRA. Continue working until the income from these Investments can support your lifestyle. That's how you handle all the cons of either one.
Also look at physical real estate as a hedge against the collapse of the currency system

[Simon-jeko]

You don't need a financial advisor when you can learn everything on YouTube or yourself and also generate more returns. Less fees.

[GNXClone]

I like REITs. I don’t consider it investing in real estate as much as just another stock. They pay great dividends compared to most stocks. SNH pays 10%. Keep REITs in an IRA and bypass taxes until withdrawal. Or in a Roth IRA and avoid taxes altogether. Don’t buy them for principal appreciation, buy them for dividends and hold forever.

My real estate investment is my own home. I’ve done the landlord thing and didn’t care for late payments, fixing stuff, etc. If I ever own a rental again, I will absolutely hire a property manager.

[MrThomasCWest]

This was quite informative. It sounds like if you are low on funds in general, a REIT is the best way to start. Eventually, even with the legalized theft that is taxes, one could get into real estate investments, given enough time and patients of course.

[Viperever]

I wait for dips before I invest in REITS that way I can get a good capital return plus a juicy yield. I currently own only one REIT (SABRA) that's giving me a 10% yield and a decent capital return.

[ChrisTopherBedNARLY]

Thanks man, I really appreciate all the knowledge you are consistently dropping on us! You really find a way to break down the dull and mundane topics of money management and investing in a way that anyone can understand, keep doing what your doing!!

[CommandoMaster]

Always max out your tax-free savings accounts first so you don't have to pay taxes on your investments!

[victoriasklavos]

Nice! Finally found a video with some valuable information on REITs vs Rental Properties. Nicely done Graham!

[ChampagneCents]

Finding out about REITs changed the game for me! I love real estate investing but this is way easier! They are constantly by best dividend payers.

[KaitouKaiju]

The problem with REITs is, if you hit a downturn you can't go live on your property

[nitinkumar]

Graham, love your videos, but there are some errors here...
-Tax rate: The TCJA tax bill allows REIT dividends to be counted as pass-through income, at an excellent tax rate. Additionally, REITs are not taxed at the corporate level, so they have more income to pass to shareholders.
-Share price appreciation: WITHOUT dividends, REIT share price appreciation has essentially matched the S&P 500 (Vanguard's ETF VNQ). Additionally, several of the biggest REITs such as AVB, ESS, EQR, and PSA have just smashed the S&P 500's performance in share price appreciation, WITHOUT counting dividends. With compounding reinvested dividends, the returns in some of these are breathtaking, and rival private real estate investment (we're talking 17.3% compounded annually since 1995 in ESS).

And not an error, but for full disclosure the depreciation tax break in private real estate is really a tax deferral - sure, you could 1031 it forever, but a tax bill is still adding up in the background. Maybe more like a tax-deferred traditional IRA than an actual tax write-off.

[abul]

Etf, mutual fund, index funds, reit, dividends stocks fund, and real estate is the best investment1

[BOSSProductionsBeats]

22 years old and have about 10k in REITS in my tfsa so no worrying about taxes in the slightest, monthly dividends about 8%, reinvested, will probably start buying physical properties at around 28/30 once I have a lot of cash stashed in my tangerine bank account for down payment and my credit will be way better

[mattlogan]

you truly are one of my inspirations on youtube graham! i gotta do double what you did to even fill half of your shoes in this game! respect man

[MoonbearDiedHere]

I opened a Roth IRA account about a year and a half ago. Started learning about REITs last year. I watched this video at the right time because now I know not to buy any REITs in my MMA account. Thanks.

[jpneezy]

Thanks for the great insight into REITs. I have been looking heavily into them. I want to spread out my investments a bit more to diversify, but I don't want to buy a property or manage one physically. The one downside you mention is the gains tax on the dividends, which you can get around with an tax sheltered account. The best one if you have access to one is an HSA account. You can buy REITs with it and compound and tax out money even before retirement tax free using saved up medical receipts you just pay outside of the HSA so that investment money works for you.