February 25, 2015
Investing in Real estate can be an expensive proposition. Why should you consider a publicly traded REIT index fund instead?
Investing in Real estate can be an expensive proposition. Why should you consider a publicly traded REIT index fund instead?
Over the life of your investment, index funds will be far less costly for you to investing in than real estate. And, when you decide that you would like to sell your assets, index funds are much more liquid, and so will be easier for you to sell.
There is a major difference in cost between a home and a REIT index. A REIT index runs at only a few basis points a year while a house can cost you close to 10% of the value of the house. For a house you have the cost of a realator when you sell it, you have to pay property taxes on it, you also have interest on the loan if you do have the loan, the opportunity cost of buying the house is also quite large. If you want to make money off the house you have to find people to rent it from you, which may damage the house. For a REIT you will never get a phone call in the middle of the night that the toilet is broken. For a REIT you have a good opportunity to have a return that has a negative correlation to stocks. The value of a house normally just goes up at the rate of inflation. If you are expecting to make money off of the house increasing in value you will be out of luck for the most part. You will not have the same return as if you would buy stocks or REITS with that same money. Only buy a house if you want to live there for a very long time.
Well said. Let’s review.
(1) Stop thinking about your home as an investment. It’s not. It’s a consumption item. Enjoy it, but look elsewhere when trying to grow your money over time.
(2) Rental Real estate can be an option, but always consider the costs when making your calculations. Yearly costs can easily reach up to 10% per year, canceling out the appreciation on the property and the monthly rental income.
(3) Stay away from private REITs and limited partnerships. They lock up your money for long periods of time with little transparency and plenty of risk. Stay away from brokers and you should have no problem avoiding these high risk investments.
(4) Consider a publicly traded REIT no-load index mutual fund that charges a minimal yearly fee (the Vanguard REIT Index Fund Admiral Shares charges .10% per year). This fund provides you stock in commercial Real estate like hotels, shopping malls, and office buildings. You capture the appreciation AND the high yearly dividends. When owning, try to do it in a retirement fund because of the large amount of distributed yearly dividends.
(5) Yearly returns after costs can reach 10% per year on average (in any given year the numbers will fluctuate). Educate and ACT.