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Do I need real estate in my investment potrfolio? are REITs mutual fund/ETFs enough?

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  • Do I need real estate in my investment potrfolio? are REITs mutual fund/ETFs enough?

    There are tons of folks/doctors advocating for real estate investing opportunities as a way passive income. This includes crowdfunded syndications, direct syndications, turnkey properties, etc...
    It's hard to decipher if over the long run I would make more off of that vs simple S&P 500 investing, since all the online doctor gurus including WCI have courses and investment opportunities advocated. Is it just for portfolio diversification, or is there some magic (tax benefiting/large annual return) to it? If just for portfolio diversification, would investing in REITs mutual fund/ETFs be enough or no since it can follow the market as well?

  • #2
    That's a good question - difficult to answer with absolute certainty. I can give you my perspective. In short - I believe that you can be successful and achieve your financial goals using only publicly traded funds / etfs. For me, I do hold about 5% of my publicly traded funds in Vanguard's REIT fund. However, there is still pretty good correlation between the REIT fund and other equity index funds. As such, I have recently decided (within the last year or so) to start introducing private equity RE funds into my overall portfolio - because I believe that this provides more diversity that is less correlated with the markets. The majority of my investments will still be in publicly traded funds though. This is not the only way to reach ones financial goals, but it makes sense for me in terms of added diversification. Also, for me, direct ownership is more work than I am willing to do.

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    • #3
      I looked into it at the beginning of this year in some depth. For me eventually I'd like to perhaps do a private fund, but the $50-100K minimums are hard to swing at the moment. Anything smaller than this and the cost of filing multi-state returns really eats into your investment returns. I'm waiting until I have a chunk of change large enough to throw into a fund where it will be worth it.

      Also, there was a nice forum thread around the time I was doing this with some well-noted forum members that brought a good dose of reality into the cons of these private deals. It helped me get over the FOMO for the time being

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      • #4
        I personally think these private deals are products that are meant to be sold. I think they've had a good run lately and they're able to gather business because of it but trees do not grow to the sky. Most of them started this past decade which happens to be a decade we were coming out of one of the worst housing recessions in history. Of course things are going to do well comparatively.

        I also do not see the purpose of overweighting REITs in a portfolio. You are just taking a bet on a sector. My crystal ball cannot tell me that they are going to do any better than consumer defensive or technology.

        I think half this crap comes about because people have run out of ways to make money off of us talking about the basics and it is too simple to just promote the three fund portfolio.

        Local individual real estate is a whole different beast. That is a job upon itself. However it could be a very hands-off job if you are willing to pay for it. It could be quite lucrative or it can blow up in your face. A lot depends on the market of your region.

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        • #5
          Originally posted by Lordosis View Post
          I personally think these private deals are products that are meant to be sold. I think they've had a good run lately and they're able to gather business because of it but trees do not grow to the sky. Most of them started this past decade which happens to be a decade we were coming out of one of the worst housing recessions in history. Of course things are going to do well comparatively.

          I also do not see the purpose of overweighting REITs in a portfolio. You are just taking a bet on a sector. My crystal ball cannot tell me that they are going to do any better than consumer defensive or technology.

          I think half this crap comes about because people have run out of ways to make money off of us talking about the basics and it is too simple to just promote the three fund portfolio.

          Local individual real estate is a whole different beast. That is a job upon itself. However it could be a very hands-off job if you are willing to pay for it. It could be quite lucrative or it can blow up in your face. A lot depends on the market of your region.
          The direct real estate is where the true diversification is obtained. Most of the money is made on the front side, the purchase and then "passive" is a relative term. Passive applies to the tax status not the effort and upkeep. Skill is key. Leverage is needed to amplify the returns and much is due to the tax rules. Tax loss and positive cash flow. When you sell, you almost have to stay in since those tax benefits are temporary if you don't do a like kind exchange. You are actually running a real estate business.

          If you read carefully, virtually every link on real estate has a disclosure, a financial interest. Promoting real estate investment is a business as well. Beware. You may be tilting to a confirmation bias based on your reading here. Ask yourself a question, should you overweight semi-conductors? It is a business too, not advertised here.
          Philosophical question.

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          • #6
            All the Hoopla about the tax advantages of real estate are real for those who are real estate professionals, but, that doesn't apply to the vast majority of practicing Drs. For most Drs your best bet is a REIT in a non taxed retirement account. It takes a lot of effort and due diligence to dive into directly owned real estate or syndications. Really owning real estate is another business for which most Drs don't have the time or drive.

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            • #7
              Totally optional. I, and many others here, have achieved financial independence without meaningful investment in non-REIT (non-publicly traded) real estate investments. Late in the game, I have done some investing in this space, with mixed success. Truth be told, I would probably be better off if I did not know these opportunities existed. For one thing, tax filing would be simpler and more timely. Of course, if I were making money, hand over fist, this would not matter.

              As for buying and flipping, renting, or selling physical real estate, I do not have the aptitude or interest. Even REITs are an optional asset class, IMO.

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              • #8
                I heard if your spouse is not working, it makes financial sense to get them labeled as “real estate professional status.” Even if the working doctor/high income earner is the one actually doing all the work. That way you can write off more of the investment in real estate to make greater gains.

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                • #9
                  I sold my rental this year, couldn't be happier.

                  Waiting for a K-1 from a syndication before I can finalize my taxes, huge PITA. Unless you want to get into the weeds doing your own RE with associated tax benefits, my suggestion is to not do it.

                  If you are subscribed to the WCI programming, it seems like there is something every single day about real estate, so perhaps this is where you are hearing about these "tons of doctors" advocating?

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                  • #10
                    I have signed on to four equity deals and two debt deals in the past 18 months or so. Among them I have only put in about $250k so far, may put in another $50-100k this year but I doubt I’ll go too much beyond that. Debt funds seem to be doing fine so far. Too soon to comment on the equity deals. I got my two K-1s for 2020 by the end of March. I also decided to file an extra OOS tax return for California this year to lock in my passive activity losses. I could have done it for several other states but decided only CA was worth it (since they are so notoriously aggressive).

                    I would seriously think about directly owning RE, but I live in an area where not much seems to cash flow.

                    I agree that many deals seem to be designed to be sold, which is why if they are broadly marketed to physicians I give them a side eye. In addition to knowing how to do due diligence, the most difficult part of real estate investing is knowing how to find deals in the first place. You basically need some kind of networking or need to belong to some kind of investing group with private access. It’s totally different than the stock market where optimal investing is in publicly available assets and takes minimal time and effort.
                    “Work” is a four letter word for good reason.

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                    • #11
                      You don't need it. I don't have any real estate or REITS, I've been happy with stock market returns. I have family members that do really well with real estate but its like a full time job. no such stress when owning index funds!

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