Why would anyone... (question re REITS / Property)

sixpence.

Why would anyone invest in a buy-to-let property when they can invest in a REIT fund / ETF?

I am genuinely wondering because I want to broaden my investments - it just seems like with the tenants and the letting agents and - goodness me -  the effort of actually going out to buy the property in the first place, that a REIT ETF is a much better option?

What do do people think? Does anyone have any experience that directly relates to this?

Cheers!

masonic

Your investment experience in a REIT vs BTL would be very different. For one thing, you don't see the value of your BTL property swing around so much due to market sentiment. You'll probably find the properties held by a REIT are quite different to the portfolio of a private landlord. As you indicate, as a BTL investor, you would be running a business and have to do a lot of the legwork or pay for a managed service, and you'd have concentration risk that could see you seriously out of pocket if you were unlucky. There's a question as to whether there is merit in investing in property investment companies beyond your natural exposure through the stockmarket. It tends not to be much of a diversifier as REITs are sensitive to the same sort of things that pull down other company valuations.

The answer to the question "why would anyone?" may be that they become accidental landlords after moving home and holding onto their previous property for whatever reason, though there will still surely be some BTL evangelists, despite the best efforts of the government to make letting less attractive. You obviously cannot go out and borrow vast sums of money against your REIT portfolio and thereby get the leverage a BTL investor might.

Mr.Generous

Depends on the returns and what the investors skills and preferences are.

A terraced house bought for £50k (10 years ago) now rents out at £650 pcm, a gross yield of 15.6%, the rent will rise each year. It has already repaid the purchase price and expenses in rent.

But as I own the asset I should also consider its current value. Approx £110 k.

How does it compare - say I'd invested the £50k in fund?

JohnWinder

Why bother with REITs? You can get REITs via a total stock market fund, exchange listed REITs at least and at market capitalisation - perfect. Is there a case for over-weighting REITs by adding unlisted REITs to one’s portfolio? Yes, if you’re after a William Sharpe portfolio, otherwise I’d like to hear it.  They come with higher management fees and less liquidity that a broad stock market fund, and data from the last 30 years shows they had slightly lower returns and more volatility than the total stock market (see portfoliovisualizer). That could reverse in the next 30 years, but there’s something to be said for simplicity in a portfolio when something complex won't make much difference. I don’t see any significant diversification benefit with REITs, just more of the same essentially if you own stocks.
As unappealing as investing in one or two residential properties clearly is, at least it has the benefit of being quite different from holding shares in public companies.

Malthusian

Mr.Generous said:

A terraced house bought for £50k (10 years ago) now rents out at £650 pcm, a gross yield of 15.6%

Not how yield works - the gross yield is 650 * 12 / 110000 which is 7.1%pa.

 the rent will rise each year

That's good going. Most tenants' rent doesn't automatically escalate, and landlords often avoid jacking the rent up if the tenants are reliable.

How does it compare - say I'd invested the £50k in fund?

An investment in the FTSE World TR ten years ago would be £141k with a 0.5%pa allowance for charges. That's total return including dividends, so we would also need to add on your total rent over 10 years to the £110k for a fair comparison. 

But a FTSE World tracker is entirely passive and much less risky. As well as being more tax-efficient.

cwep2

If you've invested in a REIT in 2021 or early 2022 then you've probably seen the value plummet, probably much more than house prices. Liquidity and concentration risk gives a big advantage to a REIT, but then when Gilt yields are 4.5-5% why would anyone want to buy a BTL now unless gross yields are 10%+ (which is frankly very rare).

Linton

I hold the AEW REIT.  Its price is now almost exactly the same as both 10 and 5 years ago.  It was volatile during COVID but appears to have settled down.

AEW has paid £8/year/share dividend for at least the past 5 years.  This currently represents a yield of 8%.  As a REIT its dividends should be relatively stable as they cannot be less than 90% of the net property income received.

Bostonerimus1

I bought a two family home 25 years ago and rent out the one bedroom flat on the ground floor. The rental flat cost around $110k and I've rented it out for an average of $1600/month with very few empty periods. After taxes and expenses are taken into account my ROI on the initial purchase price from rent is 7% and the price of the rental has grown from $110k to $400k which is an annual capital gain of around 5%. The mortgage is now paid off so the rental is an easy way to generate reliable income. Rentals are long term investments and I would never have more than one and ideally would live on the premises and do management and repairs (when possible) myself.

sixpence.

Linton said:

I hold the AEW REIT.  Its price is now almost exactly the same as both 10 and 5 years ago.  It was volatile during COVID but appears to have settled down.

AEW has paid £8/year/share dividend for at least the past 5 years.  This currently represents a yield of 8%.  As a REIT its dividends should be relatively stable as they cannot be less than 90% of the net property income received.

Would you mind sharing a link to the REIT so I can check it out?

Bostonerimus1 said:

I bought a two family home 25 years ago and rent out the one bedroom flat on the ground floor. The rental flat cost around $110k and I've rented it out for an average of $1600/month with very few empty periods. After taxes and expenses are taken into account my ROI on the initial purchase price from rent is 7% and the price of the rental has grown from $110k to $400k which is an annual capital gain of around 5%. The mortgage is now paid off so the rental is an easy way to generate reliable income. Rentals are long term investments and I would never have more than one and ideally would live on the premises and do management and repairs (when possible) myself.

I own a parking space which I rent out whenever possible. I think renting out property is a good idea if one has it. However beyond that I think funds are the way forward...

wmb194

sixpence. said:

Linton said:

I hold the AEW REIT.  Its price is now almost exactly the same as both 10 and 5 years ago.  It was volatile during COVID but appears to have settled down.

AEW has paid £8/year/share dividend for at least the past 5 years.  This currently represents a yield of 8%.  As a REIT its dividends should be relatively stable as they cannot be less than 90% of the net property income received.

Would you mind sharing a link to the REIT so I can check it out?

Bostonerimus1 said:

I bought a two family home 25 years ago and rent out the one bedroom flat on the ground floor. The rental flat cost around $110k and I've rented it out for an average of $1600/month with very few empty periods. After taxes and expenses are taken into account my ROI on the initial purchase price from rent is 7% and the price of the rental has grown from $110k to $400k which is an annual capital gain of around 5%. The mortgage is now paid off so the rental is an easy way to generate reliable income. Rentals are long term investments and I would never have more than one and ideally would live on the premises and do management and repairs (when possible) myself.

I own a parking space which I rent out whenever possible. I think renting out property is a good idea if one has it. However beyond that I think funds are the way forward...

LSE:AEWU. It's quite a small one with a NAV of just £167m.

https://www.londonstockexchange.com/stock/AEWU/aew-uk-reit-plc/company-page

https://www.aewukreit.com/

FirstUser

In my experience, not everybody who is comfortable investing in a buy2let is comfortable investing in securities instead, the feeling being that domestic real estate is more tangible, in particular if one does the whole management oneself. I have spent years persuading a relative to diversify into shares, and they still regard it all as just another form of gambling even though their shares portfolio now clearly outperforms their B2L.

Similarly, not everybody who is sufficiently competent to run a buy2let portfolio is by default sufficiently competent to swith to a self-invested funds portfolio of at least comparable financial performance. REITs are among the riskier and less transparent instruments, and I would not look at them as a direct alternative to B2L for the reasons mentioned in the thread already: they behave quite differently as an investment vehicle compared to a B2L portfolio, so moving funds from B2L to the stock market what one shold ask oneself is: what are my investment objectives here, and how can I design a portfolio that achieves those objectives.