Buying Real Estate vs REIT

[crew]

There are tons of info online but am looking for a Japan perspective as there are issues unique to a gaijin in Japan.

Let us say I want to go into Real Estate as I believe that is good path to financial independence. The traditional route would be to buy a second hand mansion, and earn about 4-5% on rental income plus (or minus) the value of the mansion when you sell it. Then you will probably want to buy a second property, by taking out a loan with the first property as collateral, and pay for the interest from the rental income. Eventually you may want a third, and before you know it, you are a real estate magnate!

The alternative can be REIT, you get about the 4-5% yield from dividends, you remain liquid, and most of all you avoid having to go through all the paperwork, property tax, broker costs, insurance etc. Downside would be you cannot get collateral for a loan if you want to make a new investment (though you can do so piece meal, buying up units at a time).

I am leaning towards REIT right now simply because it is less hassle, but I cannot see how to scale it the way having actual real estate can. What are your thoughts?

[RetireJapan]

A few scattered thoughts:

Japan real estate market quite different as not much capital gains but good cash flow apparently?
Using depreciation to offset income tax seems to be a big thing.
Commercial loans quite a bit more expensive than residential ones.

Anyone else?

[kizuki]

REIT makes sense if you already have enough capital to invest and not looking to leverage. But in that case one could argue that equity provides a better risk-return profile and REIT makes sense only for portfolio diversification.

However, since you are looking to scale up, I don’t see how you can achieve that without leveraging up. And the option of leveraging up at low costs exist only in real estate unless you have some friends in banking. One would not get a loan to invest in equity or REIT at the same terms as one would get to buy real estate. Of course the average cost of the loan would be such that one wouldn’t really make money by investing in an average piece of real estate. Something about non-availability of free lunches. You will have to figure out niche pieces of property where you can eek out the additional bps of yield which will make it profitable for you.

Prestia provides property investment loans at 3-4% up to 300 million yen. I have considered it a few times but was never able to find a property which would give me enough confidence to go ahead with the loan.

[ricardo]

Using depreciation to offset income tax seems to be a big thing

“Depreciation’s a wonderful thing...”
- Donald Trump

[crew]

REIT makes sense if you already have enough capital to invest and not looking to leverage. But in that case one could argue that equity provides a better risk-return profile and REIT makes sense only for portfolio diversification.

However, since you are looking to scale up, I don’t see how you can achieve that without leveraging up. And the option of leveraging up at low costs exist only in real estate unless you have some friends in banking. One would not get a loan to invest in equity or REIT at the same terms as one would get to buy real estate. Of course the average cost of the loan would be such that one wouldn’t really make money by investing in an average piece of real estate. Something about non-availability of free lunches. You will have to figure out niche pieces of property where you can eek out the additional bps of yield which will make it profitable for you.

Prestia provides property investment loans at 3-4% up to 300 million yen. I have considered it a few times but was never able to find a property which would give me enough confidence to go ahead with the loan.

Good point about leverage. In the beginning, returns between REIT and real estate would be almost the same (with REIT edging out real estate on the initial years due to the transaction costs), but indeed, you can leverage real estate so instead of a 10,000,000 yen property or REIT, you can own (loan) a 50,000,000 yen one.

[Jansen]

I've been following the blog of a Japanese guy that recently FIREd. A large portion of his income comes from REIT dividends. He has quite a few posts where he goes into detail about their pros and cons, worth a read if you can read Japanese. He doesn't use much technical jargon so it's quite easy to follow even if you're conversational.

https://zz597.blogspot.com/

[crew]

I've been following the blog of a Japanese guy that recently FIREd. A large portion of his income comes from REIT dividends. He has quite a few posts where he goes into detail about their pros and cons, worth a read if you can read Japanese. He doesn't use much technical jargon so it's quite easy to follow even if you're conversational.

https://zz597.blogspot.com/

This is a great resource! Thanks!

[goodandbadjapan]

I've been following the blog of a Japanese guy that recently FIREd. A large portion of his income comes from REIT dividends. He has quite a few posts where he goes into detail about their pros and cons, worth a read if you can read Japanese. He doesn't use much technical jargon so it's quite easy to follow even if you're conversational.

https://zz597.blogspot.com/

Thanks for this! I've been looking for FIRE type blogs which are Japan-based. I may be wrong or just know the wrong people but I get the feeling not many people really aspire to early retirement here!

[jcc]

Other than the leveraging issue, there's another major factor: diversification.

For every story of a person who did the "buy a place, rent it, use it as collateral for another, etc", there is another story of buying a place, and having spotty tenancy, horrible tenants, that can cause it to even go into the red.

Some places can return 10% an year while others lose money.

It's very much like buying individual stocks except that you *can* be very involved in the management(e.g. you can either pay someone to manage it for you, find tenants, collect rent etc, or you can diy, trading time for money).

Especially if you're capable of doing remodelling work yourself, and have the spare time to manage the place, I think it's fair to expect on average to make significantly better returns than a REIT, but if you're going to outsource the management, you're getting the same deal but with less diversification.

So, how much time do you have, how much work are you willing to put in, and how risk averse are you? If you have high risk tolerance, and have a lot of time to research locations, then manage them, buying real estate could be for you. Otherwise though, go with REIT.

Also returning to the leverage thing, you can always get the leverage through options. I have always avoided them personally, but seeing as we have options for everything else I don't see why there wouldn't be options to speculate on REITs.

[crew]

Especially if you're capable of doing remodelling work yourself, and have the spare time to manage the place, I think it's fair to expect on average to make significantly better returns than a REIT. . .

By how much though?plus 3%-6% . Am really curious how much more the pay off is. A management company charges around 5% of rent to manage it. I don't think I have the appetite to be hands on for just a single digit benefit. If its in the 15% up, then it could be something I'd be interested in.