Rent house vs REITs

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Less liquid than REITS/stocks, etc.

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sure

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The market where I'm looking (Houston) is pretty high

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who said you HAD to invest only there?

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No experience renovating or managing properties

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who said you had to do all this yourself? get with subs and property managers. This has been discussed ad nauseum in all of our RE threads. you may want to do a search.

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Would require fronting the down payment which would otherwise be making money from being invested in the market

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You realize your DOWN PAYMENT is an investment which gives you huge leverage? So much that SHOULD you buy correctly your RE returns with that down payment should be way more than any dividend payer in the market.

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Risk of nightmare tenant or property sitting on the market for months

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one more time. property manager. let them vet them and handle it.

That's some good stuff and all fine and dandy most of the time, but of you time things wrong and buy right before a crash, you can be in for some hard times.
Of course this is true of any investment though

well here are a couple cons of RE also. two givens

maintenance and vacancies. you will have them sooner or later. i have never really had any serious vacancy problem thus far. most my stuff stays leased and they keep renewing leases or we fill it quickly. good thing about maintenance and property management and interest and insurance and taxes is it is all written off.

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5)HUGE TAX ADVANTAGES

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Tax advantages are overblown, unless you're a full time real estate professional as defined by the IRC.

Your maximum passive loss offset is capped at $25,000 versus your actively earned income, and that benefit will be phased out significantly/completely as your AGI grows. If your current deductions are phased out, the same phase out applies to rental income. If you have a dual income household, there's probably little to no tax benefit.

On the list of 5 advantages in the prior post, 1,2,4 are intangible unless you sell, 3 is probably a few thousand in real cash and 5 is very limited or zero. I say this as an owner of 3 rental properties and my own house, with a spouse who works at publicly traded company. If you're successful at your job and have a good income, the tax benefit is effectively none.

Your positive cash flow for an entire year can be swallowed up by an untimely repair and you've got nothing but intangibles to float on for half a year. This has happened to me on 2 properties this month, major AC failures, so I'm a little bearish on rentals right now. The years with no headaches I can do okay, clearing 400~500 in net cash per unit per month, and probably double that including intangible equity. My properties are a condo and a few townhouses, average market value of $350,000 each.

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here are the pros:

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1)EQUITY CAPTURE

4) PRINCIPLE PAYDOWN

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Same thing?

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2) MARKET APPRECIATION

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I think its inflation protection more than market appreciation, as equities move with the market also.

Not much when they're occupied. They take about 2-3 days to turnaround in between tenants, to do maintenance that keeps them livable and nice enough to charge premium rent. I have a few trusted vendors and a fairly expensive handyman to complete the turnaround, but I know it will get done right.

The last turnaround cost me just under a month's rent, around $2,400 (rent is $2,500), but that turnaround was after a 3 year tenant and included new insulation for about $1,100 that is not an every year cost. I would've been comfortable living there myself with my family after the 3 days it was redone so well.

The condo I repainted and fixed stuff (trim, lights, fans) myself and paid friends around $1,100 all in to help paint over a weekend, that was 4 years ago. That place rents for $2,350 and it's 920 square feet.

Both the townhouse and the condo required a new AC ($4,460) and a compressor motor & blown capacitor ($800) in the last month though, so you get a call at 9:30 pm from the tenant with no AC and have to meet the AC guys the next day. This month has me considering a property manager to respond to stuff like this on a flat fee basis to deal directly with the contractors I use. I've had to vacuum out AC drain lines on labor day when they clog, so I'll do semiannual AC maintenance on a Saturday morning now on all 3 places and change AC filters every 3 months to keep eyes on the place.

I allocate a fixed amount every month for maintenance & vacancy for these hiccups every few years, about 5-6% of the gross rent per month per location. Those figures are based on appraisal data of vacancy and my maintenance costs over the years. Put those funds in a separate internal "escrow" fund so they don't commingle with operating funds.

Each place makes about $5000 - 6000 per year in cash flow, when I don't have a major repair. I really hate going there unexpectedly so I developed a consolidated maintenance schedule that works for me.

This is not something you can set and forget like an investment at all and you'll still have to be involved in some direct capacity. Frequently I've considered selling them all and buying more mutual funds, because they don't call you with a broken AC and pay quarterly dividends, but then I think about getting jammed in the bunghole on recaptured depreciation when I sell (another tax disadvantage!) and go back to collecting rent and hoping the tenants don't call.

Also, unlike a lot of people here, I recommend you buy nicer properties because they're more reliable, rent for more money and are easier to resell. People talk about houses they rent for less than $1,500 and I just wonder how people value their own time to make such a small amount of money for the same headaches and uncertainty as a house that rents for double.

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Same thing?

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no but i see your confusion.

If you bought those houses correctly, you should have captured equity in each house.

Your tenants will be paying down the principle on all of your houses adding more equity...while similar both instances are different

then again maybe just maybe i have been beating the system. Hopefully i do not get audited.

I fully agree with you.

Years ago, a pal of mine wanted to go in with me and purchase a package of townhouses. They were in what I'll call a lower middle class area. Not a huge crime problem or anything, but it wasn't an area that most people would call their dream destination. Just your average blue collar neighborhood, with Chevys and Fords and no Bimmers or Jags.

It was a very low money down deal, some owner financing that would come in as a 2nd mortgage, a good price and a stable tenant base. The plan was cash flow generation over appreciation. You can buy looking for one over the other, or *try* to get both. I spelled it out as a long term (10 years plus) play. Everything seemed set. Then his lovely wife wanted to take a tour of the area. So we're cruising through the area in their baby Benz, with me in the backseat, and all I can hear from his former sorority girl bride in the front seat is a bunch of chatter and chin music about "how do people live like this?" and "we're not buying anything that we wouldn't live in ourselves."

I try to have set goals, going in, for whatever I buy. But never has changing the world been one of my goals. I got into real estate to pay for my Jags, not to make sure that my tenants also had Jags. Hey, maybe a bit crude, but true. So I told my pal that it would be best for our friendship (and his marriage) if we just let it go. I bought the package myself and sat on it for the better part of a decade. The main thing that has made a meaningful difference for me is the leverage that I can get from real estate that I can't get from a REIT or a stock. Leverage can make a good deal a great deal. And yes, it can also make a bad deal a horrible deal. But that's why you have to be serious in doing your research and setting your goals going in. People should do that with stocks too, but because they're so easy to dump, they seldom do. If you gamble in real estate, as many do with stocks, you'll get your arse set on fire - and it takes a long time to douse the flames (speaking from experience ).

If the OP has the determination and the mentality to make his real estate investment a business and not a hobby, he can blow the doors off of most any equity investment that he might make. But if it's about pointing to the nice rental house that you own, I'd go for the REIT and just put the stock certificate in a gold plated frame to show it off.

I'll flip higher priced homes if I stumble across a foreclosure or distress sale,. But seldom have I found higher priced single families to be good enough income generators to be worthwhile.

Just my 2 shillings.