REITs Vs. Rental Properties: Understanding The Risks

All in all, I think that REITs are a lot safer than rental properties because: 

Reason #1: Rental properties use a lot more leverage. The average Loan to Value of REITs is today around 35%, but it is typically 80% for rental properties. 

Reason #2: Rental properties expose you to greater liability risk. You can use an LLC or get insurance, but you will still likely have to sign on the loans and the tenants may sue you personally. With REITs, you are protected since you are just the minority shareholder of a publicly listed company. 

Reason #3: Rental properties are concentrated big-ticket investments. You won't be able to diversify risks as well as with REITs. When you invest in a REIT, you are buying an interest in a portfolio that's well-diversified. 

Reason #4: Rentals also expose you to social risks. People will put their lives into your assets and people can change over time for the worst. With REITs, you have a professional management team handles it all for you. 

Reason #5: Rental properties are illiquid. It may be complicated, expensive, and time-consuming to sell. REITs are liquid and can be sold at any time for a very low fee. 

Bonus reason: REITs are today priced at a discount to their NAV, providing margin of safety in case of a drop in property prices. 

Image sources: Realty Income, BSR REIT, NAREIT, YCHARTS, Canva

Important Disclaimer: This video is impersonal and does not provide individualized advice or recommendations for any specific person. Viewers/readers should not make any investment decision without conducting their own due diligence and consulting their financial advisor about their specific situation. This video is for entertainment purposes only and you are responsible for your own investment decisions. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. This YouTube channel is managed by Leonberg Research OÜ, a subsidiary of Leonberg Capital OÜ.
#reit #reits #rental #realestate #rentalproperty #realestateinvesting #investing

[JumpStartJim]

I've owned multiple investment properties and now I'm a REIT investor.

I teach sales to coaches and just since the beginning of this year I have had conversations with traditional real estate investors and owners.
Coincidentally, they all are struggling to get out from under several properties...they can't sell.

They are all behind on at least a few mortgage payments...yet they brag about having bought hundreds of properties in just a few years.

Sure, they could have made some different decisions, but the lack of liquidity is what hit me.
They had tenant challenges and now look worn out physically and emotionally.

I'll stick with my REITS...
Easier to find bargains, no management, no tenants with bad intentions, no repairs...and very easy for me to sell.

Thanks Jussi.

[chrisc]

I like your channel and all your info. I own both rental properties and REITS. I make considerably more money with my rental properties. That being said, it should be this was as you are taking on more risk owning and managing rental property VS. passively owning REITS. You owning 100% of the asset gives you a huge equity advantage to owning a very small fractional share with REITS. A buy and hold long term investor will do much better then someone just owning and holding REITS collecting say 4-6% annually. I agree with you in that REITS are safer however you will make considerably less money not owning real rental property. You also get to take advantage of all the tax benefits of owning real rental property where with a REIT the tax advantage is indirect

[Ryan-udtx]

Agree with this. Sold my rentals and moved into reits etc myself

[Saxafruge]

Another risk: Renter protections implemented by the local, state and even sometimes national governments. For example during the Pandemic landlords had restrictions that prevented them from evicting tenants, period. Even during regular times the eviction process can often legally drag on for 3-9 months. There's also rent control laws in some areas which tenants can leverage to keep renting a property at a lower than market price. On the plus side, theres ALOT of tax deductions for landords :)

[nono]

Excellent presentation! Thanks

New subscriber👍

[jeffpalo]

Beautiful Explanation! I am a fan of Dividend Investing and I started to fall in love with REITs too. I am adding Energy REIT to my portfolio. and I am waiting for the REIT IPO of the biggest Property Company in the Philippines, the SM Reit.

[muffemod]

One house
On one street
In one city
In one state
In one country

How is this not a highly concentrated bet?! The risks are quite extreme.

[daviddeveloper]

Jussi, question: you have been investing a long time.

Have you ever has situations where you had 75% or more of your assets in a single REIT?

[achillez]

Is this a correct understanding - REITs are safer than rental properties but since rental properties are leveraged assets 5x or 10x based on 10-20% down, rental properties have potential for much higher returns than RIETs ?

[joeltedley]

Not sure how happy the people who bought bsr @ $22 are today. I bought a small apt complex in 2012 paid cash and my cap rate has consistently averaged above 16%. I manage it myself and probably average 100-125 hrs a year. If I figured I could hire someone for $20 an hour it would reduce my cap rate to 9.5%, still a very respectable return. I currently have an offer from an investor for over 5.5 times what i paid for them in 2012. Granted I bought them from a motivated seller when the market was close to the bottom. I can't image paying the kind of prices investors are paying today.

[TheForge]

Great content!
Do you also make videos on the NAV and how to determine them?

I often hear that there is a real estate bubble again and the prices are now collapsing, but are not the reit's meant but what you call rental properties?

[timothymacdonnell]

Del Walmsley says you’re wrong. He bought dozens of properties and retired early. He lives the “lifestyle.”

[pepethefrog]

I'll just keep it short. plenty of billioniares in real estate direct investing where the super rich reits, OH I FORGOT there's none. stop selling the dream of getting money from others so you could use it for your company buffoon

[scottdaniels]

We were BURNT Badly....Still fixing the mess of our SFH rental (under property management co. for 9yrs; clause said NO contact with renters whatsoever) costing us over $30, 000 to rehab the house (permits were never pulled for all repairs except the re-roof) plus they let the previous renters (same for 9yrs) to never change the air filters, so I had growth throughout my $6, 500. I tried 4 different attorneys and have gotten the run around (demand letter sent supposedly; then the hurricanes Ian & Nicole hit never heard from again despite numerous emails) with the last one saying it could runover $20, 000 with expert witnesses if it came to litigation. Tried the private Ins adjuster route under vandalism never panned out either. Thanks for our excellent credit and 0% for 1 yr. on a few businesses' c/c plus the 1.5-2% cash back & spending bonuses....In this market I didn't want to use our cash upfront even Investment grade BB yield over 5.50%. Now we have 25-30% of our brokerage & retirement accounts in REITs.