REITs vs. rents

Young Juan calls in from the Caribbean to ask Dave's opinion of real estate investment trusts compared to actually owning rental property.

QUESTION: Juan calls in from a small island in the Caribbean, where he just graduated from high school at age 16. He knows about Dave’s love for real estate and asks about real estate investment trusts (REIT) versus actual rental properties.

ANSWER: In general, were I not talking to someone on a small Caribbean island, I would say real estate gives you a much higher rate of return. Real estate investment trusts are basically a mutual fund for buying real estate, but that doesn’t matter. What matters is what the actual customer who buys the shares makes. There are a few of them now that are performing well.

Basically, the guys running the thing own the property, it creates rent, you sell the property, it creates capital gain and all that, and it’s all supposed to filter back through to the shareholders. The bottom line is, though, that the vast majority of them have been under a 10 percent rate of return in the States, where a good growth stock mutual fund would’ve outperformed them. Now, there are a few of them here and there that have been doing better lately. But in general, the category has not kept up with good growth stock mutual funds.

I’ve told folks instead of doing that to do good growth stock mutual funds, and definitely buy regular real estate in your name before you buy an REIT. Now, that might change on your island. I don’t know the real estate market on your island. It’s probably volatile, because it’s a resort market in general, and I don’t have any idea about your governmental situation to be able to tell the volatility of the market. But in the States, I would rather own real estate than deal with an REIT.

Good question! It’s an honor to speak with a 16-year-old from the islands. Thank you, sir.