Thursday, February 18, 2010

Investing in New York Property - direct investment or REITs

Comparison of direct property investment (buying a condo or building) vs buying REITs (eg stocks of Boston Properties, SL Green, Vornado who own a lot of Manhattan commercial properties). 

 1.  Liquidity:  REIT wins
REITs are liquid and can be bought or sold anytime.  Not the case for direct investment.


2.  Entry level:  REIT wins
Capital requirement for REITs is low.  But to buy a Manhattan condo, the starting price point is approx $500,000.


3.  Leverage:  Direct wins
Direct investment benefits from the power of leverage.  For example, one puts down 30% in downpayment.  If the property appreciates 10%, the return on investment becomes about 33% (10% / 30%). 


4.  Return on investment:  Direct wins
Returns from direct investment is much higher because of the power of leverage.  With REITs, they typically invest in very large properties which will have a lower return from the competition from institutional buyers.  By the time they pay the MBAs and numerous staff, the return to investors become significantly reduced.
 
5.  Control:  Direct wins:
The property owner controls performance of the property.  With REITs, the investor does not have any control.
 
In summary, I personally do not own any REITs.  If one needs liquidity or has limited capital, then REITs is a good option.  But if tying up capital for at least 5 years is not an issue and one has the required capital, then I recommend buying a property directly. 
 
When was the last time you hear about someone making it big from REITs?  The people making money from REITs are the REIT's management, through their management fees.               
 
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