REITs Vs. Rental Properties: Understanding The Risks

I discuss the risks of REITs and rental properties. REITs are volatile because they trade like stocks. But rental properties are illiquid, concentrated, highly leveraged investments with liability issues. Follow me on Twitter for real-time news on REIT investments: https://twitter.com/askjussi

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.
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