Why I Stopped Buying Rental Properties to Buy REITs Instead

Why REITs earn higher returns than rental properties? There are 10 reasons. In short: REITs enjoy significant economies of scale. They develop their own properties. They skip brokerage fees. They do sale and leaseback transactions, etc. To give you an example: Realty Income $O has managed to generate 15% annual returns for its shareholders by buying Class A net lease properties with a conservative 30% LTV. Most private net lease investors would have been happy to earn a ~10% return.

Why REITs are safer than rental properties? REITs are liquid, professionally managed, diversified, less leveraged investments and shareholders enjoy limited liability. With the right adjustments, REITs are also less volatile than rental properties.

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Image sources: Realty Income, NAREIT, EPRA, Cambridge, YCHARTS, Canva

Important Disclaimer: Leonberg Capital OÜ is long O. 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.

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[askjussi]

I know that this video is quite long, but please try your best to stick to the end. It is my most comprehensive review so far :)
Also, let me know which do you prefer: REITs or rental properties?
Finally, like and subscribe! Thank you for all your support

[luksdoc]

You're really my primary source on REITs. I really love your channel and follow your recommendation.

[ЕвгенийСеменович-ъщ]

REITs are amazing for such a young person as me at 23, I couldn't imagine my life managing rental properties At this age when lots of things are going on like crazy

[Dividend_Info]

Now is one of the best times to buy REITs in the last 10 years

[samy]

It’s much easier to dollar-cost average in REITs. Also, if you don’t need to cash out the dividends for some number of years into the future, it’s much easier to reinvest your cash flow from dividends into buying more REIT shares, and thus compound the returns on your investment.

[LuckyLukky]

As always, love this kind of presentation! It helps me also formulate my arguments within a group of friends on REITs vs Rentals

[jumbothompson]

I have one rental property and I can't say for certain that I won't get another one but for now there's no plans. Reits/stocks are totally hands off investments. Rental property is actual work. Not all the time but it can be frustrating at times.

[tritosac]

There are two schools of thought in this debate. Some investors love being hands on in real estate. Those people inevitably have gone through all the challenges to understand how to best select properties & tenants. Their probability of success increases. They end up doing very well. Others have the mentality it's best to partner with people who are smarter than you. In a sense that's what you are doing when investing in REIT stocks. You're letting the smarter & more experienced people do the work. They have the resources to best deal with rising property taxes, they have prime holdings with tenants less likely to not pay their rent and they have the cash reserves to deal with emergencies. Small investors typically don't have those resources. Buying actual properties can be risky with mortgages for small investors if something goes sideways with renters, acts of God/weather events etc. Unless you develop an unbridled passion for managing properties & love the hands on aspect of it, REIT's are just a much simpler way of investing in real estate.

[fernandojarillo]

Hello Jussi, I heard this podcast and then I started following you, I have invested my first 10k with reits and I could not be happier with the decision. Thank you

[straybits]

Major risk factor of the small time rental owners are the tenants. 10 years of good operation income can be thrown out to the garbage bin with a single bad tenant.
An eviction and multiple year law suite will kill 'active investor' in you easily... I'm done with rental property investments.

[JoaoSilva-lxxr]

Great material Jussi! Thank you for sharing your thoughts.
I have some experience with both investimentos, both can provide excelente returns. When I was younger I preferred private rental properties, simply because I had time to build the portfolio and the mortgage where payed by income - total income accelerated the first house pay off, then one by one. By the way, if you are in the rental business you must build a sizable portfolio, if you have one or two properties you don’t have a business, you have a big headache.
When I was close to retirement I started to move out of the rentals and increased the REITs portfolio, and this process is still ongoing.

[Tchp-lduz]

Reits make more sense if -

You live in an area with disproportionate housing costs (I live in NYC - Queens) and even if I have the money for a down payment on a multi family property, the rent doesn’t pay given the taxes and tenant protections (god forbid you get the wrong person in your house).

My single reit holding is in realty income (o). Also have been researching American Tower.

If you’re just getting started you need a covered call ETF like a Qyld or jepi to passively earn then snowball a reit to grow your passive income stream.

[AdrianButler]

What people really need is a video on how and why one would probably not wanna buy upon market open or upon close. Or not buying on certain days if u support that idea. Also breaking down the differences of order type(market, limit, stop limit, trailing stop loss $ or %, trailing stop limit $ or %) and explain time In force (day, GTC, fill or kill, immediately or cancel, on the open and on the close). Please help people understand all that and how In different situations u would wanna use and not use certain methods.

[christophkral]

Yesterday bought 150 shares of my one of my Favorits: Broadstone Netlease. I would never buy a rental property in Germany where I live. My parents had one but it is a lot of work and a huge single risk.

[ConundrumProductions]

Thank you, thank you, thank you!!! ❤ At the time of this comment, I'm building a monthly-paying, dividend-stock portfolio containing BDCs (Business Development Companies) and REITs. Again, thank you, thank you, THANK YOU!!!❤❤❤

[henrik]

In the US you are able to have a financial institution refinance your equity, when you have increased the rental income.

Say you put in 100, 000 loan 200, 000
Yield 5% increasing 4% pr year.

After 5 years your rental income has increased more than 20%. Maybe you also have optimised the expenses by 10%. A total free cash flow of plus 30%.

If interest rates are the same, Now you get a loan 30% over 200, 000 = 260, 000.

So after 5 years your investment is no longer 100, 000 but 40, 000.

Still you receive yield but now 6% (on the total amount invested).

Am I missing something?

[richardcarlin]

Advantage of REITS. You buy a REIT stock and that's it. You, monthly or quarterly will receive dividend income. It is truly passive. You don't need to do anything else. The biggest risk is the actual value of the REIT stock can go down based on stock market and interest rate forces. As long as you don't sell, it isn't a n issue. Over the long run, the REIT should increase in value. Another drawback is you won't make as much money per dollar invested than if you bought and managed rental properties yourself. But then again, rental properties have lots of risk in finding and dealing with tenants and funding the property.

[CarnacTheMagnificent]

Great video Jussi! As a semi-retired guy, the last thing I want to do is manage rentals, or even property managers!

One thing I’m unclear on is your leverage argument. You say REITs use leverage, which is fine, but that seems like apples to oranges if you’re comparing that to leverage on a rental. I think the answer is if one wants to leverage a REIT, then one can buy it on margin in their brokerage account. Is that right?

[chrisc]

when buying REITS you are getting a very tiny piece of the equity VS when buying a rental you get 100% of the equity as well as all the tax benefits and 100% of the appreciation VS a tiny piece of the appreciation. I invest in both but would have to disagree and say that my rental income/ROI is far superior with my rentals compared to my REIT investments

[kokolada]

How about tourism oriented realestate where u make ur money during summer. Here it gets better and safer returns then residential