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Investing in Real Estate vs Stocks - or both

Discussion in 'Investing' started by Griff, Jul 11, 2019.

  1. Griff

    Griff New Member

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    I plan on investing in dividend stocks, and using the DRIP method to take advantage of compound interest. I will turn 18 years old in September of this year, and plan on investing the $5000 that I have saved up into different dividend stocks. I have 11 on my radar, including the NOBL dividend aristocrat index fund. My only reasoning for having that fund is to be a part of my portfolio that will be a continuous, stable fund. The other companies are stable, but the chances of the NOBL fund failing are slim to none, and still bring in a 1.8% yield as of now. This is lower than most of the companies I am looking at, but still provides a good reassurance.

    I will also add that I will not invest in these 11 with my $5000, that will come later on. I would probably choose 2-3 stocks to invest in with my starter money.

    However, I have been looking at real estate too. When I graduate college at 21 and commission into the Army, I will receive a decent paycheck. It will be approximately $3200 a month, along with a $1000 monthly housing allowance. By age 25-26 I would be receiving $4400 a month after taxes, with a $1500 monthly housing allowance. I plan on buying a duplex or triplex then since I will be making more than enough money to pay the bill, and I can rent the other side out to cover most of the mortgage anyways.

    I see the potential to invest in real estate past that first duplex, but I understand that the more I invest in real estate, the more I take away from my dividend portfolio. My goal would be to devote my monthly stock funds (that I would invest from my paycheck, not the dividends themselves) to real estate for a time, and then hopefully I could have a snowball effect for each one separately. Use the income I get from my rental properties to buy more properties, and use the dividends I receive to buy more stocks, along with a certain amount each month that I will add to my dividend portfolio.

    As a beginner investor, (I really haven't even begun yet, I am simply researching) what would you guys recommend? Is it more beneficial to stick with only one? Or could it potentially be more profitable to invest in both?


    Honestly, my primary problem with real estate is simply the risk. Real estate is probably the best debt to have, but what if your properties don't rent? It could quickly stack up depending on the amount of properties and debt you have. I hear of real estate investors that have millions of dollars in debt, but they make more on the return than the interest rate so they are still profiting. But what if 3 or 4 of your houses are vacant, and remain that way for a couple months? That could add up quick, and make it almost impossible to pay for.
     
  2. OldFart

    OldFart Well-Known Member

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  3. OldFart

    OldFart Well-Known Member

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  4. TomB16

    TomB16 Active Member

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    Real estate is location dependent. There are areas where R-E investors have good experiences and areas where they do not.

    Keep in mind, R-E is a business, as well as an investment. R-E takes a lot more time of it's holders than other investments.

    We hold a lot of both. There was a time, we were happy with our R-E holdings and only held other investments because we didn't have time to hold more R-E. These days, our R-E has not been performing properly and our market holdings have been performing great.

    Personally, I think 99.9% of people should not hold R-E. I feel the same way about stocks. Most people should hold an index fund and they will succeed if they can ignore market fluctuations.
     
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  5. Griff

    Griff New Member

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    Isn't a REIT a type of stock? I keep doing research but I can't find much of a difference between a REIT and a normal stock. Yes, the REIT pays back 90% of taxable income, but it honestly seems the same. The yields are extremely similar. If REIT's have to pay back 90% of their taxable income, how come the yields are essentially the same as normal stocks? For example, AIV is a residential REIT and it has a 2.8% yield. [​IMG] [​IMG] Also: How do I evaluate this company? All I got from this is it may be undervalued because it has a really good P/E ratio, it has a good market cap, it has a decent yield, $51 share price, and... that's about all I can understand.


    Also, thank you guys for the replies, and especially @OldFart for the stock screener, I didn't even know things like that existed!
     
  6. OldFart

    OldFart Well-Known Member

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    Here's a look at all of the REIT's ( residential ) with their yields. This is only an example of the many different REIT's available.
    As you can see, some pay a high dividend ( almost 13% ).
    Yes they are a stock and can be traded just like a stock.

    https://finviz.com/screener.ashx?v=161&f=ind_reitresidential
     
  7. OldFart

    OldFart Well-Known Member

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    2 ways to look at a company:
    fundamentals ( finances , P/E, earnings, etc ) or technical ( chart patterns )
    Can't really go into the entire trading philosophy of both in a forum.

    Lots of reading here:
    https://stockaholics.net/forums/educational-videos-and-material.20/
     
  8. OldFart

    OldFart Well-Known Member

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  9. OldFart

    OldFart Well-Known Member

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    @Griff

    Only reason I mentioned REIT's is because you mentioned real estate. I just think it's easier to buy a REIT than becoming a landlord.
     
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  10. TomB16

    TomB16 Active Member

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    True that!
     
    OldFart likes this.
  11. anotherdevilsadvocate

    anotherdevilsadvocate Well-Known Member

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    Yeah there's a bit of risk. Don't forget, as landlord you will have to do repairs if your tenant has damage in the home. Also, if you are in military and away from the property for an extended time, or end up getting a second property, you may look into paying a manager to run your rental; so that could be another cost.
    This is why some people look at REITs, because they are a way to get access to real estate investing without the headaches.

    Personally, I think the big advantage of real estate is being able to leverage: you get a low interest loan from the bank for $100,000s. Maybe you only have $50k yourself but you could get a loan for $500k to get a house, and if you can rent that house and it makes 6% a year for you (no idea where you live, maybe the return could be higher), then at one glance (ignoring taxes, and the loan that you need to repay) you are getting $30k/year when you started with $50k.

    If you're not going to leverage, I don't know if you shouldn't just go all stocks.
     
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  12. TomB16

    TomB16 Active Member

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    I've never seen a scenario in which unleveraged real estate was a good investment.

    I've also never seen a contracted management situation work out well. Best case, it can be OK but there are always problems.

    We manage our property ourselves. If we didn't, we wouldn't be making much money.
     
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  13. OldFart

    OldFart Well-Known Member

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    I have a friend that got into rental properties back in the 80’s. “Carleton Sheets” program.
    He actually did well with it but plenty of headaches. He still owns the properties and they are paid off, so now it’s pure profit other than maintenance.

    He also managed the properties himself.
     
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  14. Bodacious

    Bodacious Active Member

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    I've read good things about a REIT with the ticker DEA, apparently the trust only leases to governmental entities, and mostly long term, and according to what I have read the government has surplus funds allocated solely for payment of the aforementioned rents.

    DEA sticks to critical missions of the Federal government that don't go out of favor - agencies such as the Federal Bureau of Investigation and the Immigration and Customs Enforcement.

    https://www.reit.com/investing/reit-directory/easterly-government-properties
     
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  15. Onepoint272

    Onepoint272 Well-Known Member

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    REITs are likely not something you'd want to trade frequently because of the tax treatment and record keeping. Also, I'm not sure of this but you likely do not want to put these into an IRA because of the special tax treatments. Here's a snippet from Investopedia:

    https://www.investopedia.com/articles/pf/08/reit-tax.asp

    Three Types of REITs


    REITs can be broken down into three categories:



      • Equity REITs: These trusts own and/or rent properties and collect the rental income, dividends and capital gains from property sales. The triple source of income makes this type very popular.
      • Mortgage REITs: These trusts carry greater risk because of their exposure to interest rates. If interest rates rise, the value of mortgage REITs can drop substantially
      • Hybrid REITs - These instruments combine the first two categories. They can be either open- or closed-ended (similar to open- and closed-ended mutual funds), have a finite or indefinite life, and invest in either a single group of projects or multiple groups.
    Taxation at the Trust Level
    REITs must follow the same rules as all other unit investment trusts. REITs must be taxed first at the trust level, then to beneficiaries. But they must follow the same method of self-assessment as corporations. So, REITs have the same valuation and accounting rules as corporations, but instead of passing through profits, they pass cash flow directly to unitholders.

    There are a few extra rules for REITs beyond the rules for other unit investment trusts:

    1. Rental income is treated as business income to REITs because the government considers rent to be the business of REITs. This means all expenses related to rental activities can be deducted the same as business expenses can be written off by a corporation.
    2. Furthermore, current income distributed to unitholders is not taxed to the REIT, but if the income is distributed to a non-resident beneficiary, that income must be subject to a 30% withholding tax for ordinary dividends and a 35% rate for capital gains, unless the rate is lower by treaty.
    For all practical purposes, REITs are generally exempt from taxation at the trust level as long they distribute at least 90% of their income to their unitholders. However, even REITs adhering to this rule still face corporate taxation on any retained income.

    Taxation to Unitholders
    The dividend payments made by the REIT are taxed to the unitholder as ordinary income, unless they are considered qualified dividends, which are taxed as capital gains. Otherwise, the dividend will be taxed at the unitholder's top marginal tax rate.

    Also, a portion of the dividends paid by REITs may constitute a nontaxable return of capital, which not only reduces the unit holder's taxable income in the year the dividend is received, but also defers taxes on that portion until the capital asset is sold. These payments also reduce the cost basis for the unitholder. The nontaxable portions are then taxed as either long- or short-term capital gains/losses.

    Because REITs are seldom taxed at the trust level, they can offer relatively higher yields than stocks, whose issuers must pay taxes at the corporate level before computing dividend payout.

    Example - Unitholder Tax Calculation
    Jennifer decides to invest in an REIT currently trading at $20 per unit. The REIT has funds from operations of $2 per unit and distributes 90%, or $1.80, of this to the unitholders. However, $0.60 per unit of this dividend comes from depreciation and other expenses and is considered a nontaxable return of capital. Therefore, only $1.20 ($1.80 - $0.60) of this dividend comes from actual earnings. This amount will be taxable to Jennifer as ordinary income, with her cost basis reduced by $0.60 to $19.40 per unit. As stated previously, this reduction in basis will be taxed as either a long- or short-term gain/loss when the units are sold.

    The Bottom Line
    The unique tax advantages offered by REITs can translate into superior yields for investors seeking higher returns with relative stability. Theoretically, it is possible for a unitholder to achieve a negative cost basis if the units are held for a long enough period of time. While this is hardly common, the potential for realizing a possible gain or loss in this manner should be clearly understood by investors.
     
    #15 Onepoint272, Jul 11, 2019
    Last edited: Jul 11, 2019
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  16. Mark42

    Mark42 New Member

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    I’ve heard good things about Fundrise for an easy way to invest in real estate. I haven’t looked into it much however.
     
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  17. ElectricSavant

    ElectricSavant Active Member

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