Irish Residential Properties REIT Plc is a €816m small-cap, real estate investment trust (REIT) based in Dublin, Ireland. REITs are basically a portfolio of

What’s the point in investing in real estate properties when you can just invest in a REIT much more easily from your computer at home?

There isn’t any logical reason about from one or two things. 1). Real estate can only beat the markets and indeed REITS if you use leverage. Example:

Example 1 – Asking Price £80,000

In the UK and elsewhere, cheaper houses in run down areas often have better yields, Let’s say you need to put down a deposit of £20,000 pounds. Believe it or not for international readers, the UK still has many towns and even cities where you can buy for £80,000!

In addition to the £20,000, you may need to pay fees to lawyers and for surveys, which will probably cost about £1,400-£1,600. Stamp Duty would cost around £2,400. It is 0% for first time buyers on cheap property, but 3% on buy to lets which cost £0 – £125,000. Houses costing £125,001 – £250,000 is charged at 5%, and the rate goes up to a maximum of 13%. The UK system is similar to many other countries which have sales taxes on buying property.

Finally in terms of costs, lets say there are some basic refurbishments that cost £900-£1,100. The total cost including deposit is £25,000. In the UK, in an inner city area such as Manchester or Stoke on Trend, such a property may rent for £575 per month based on houses in a similar area/price range. Getting £600 is possible, and if you target students which is risky as it is a smaller population who don’t always look after housing, you can get even more if it works out.

But let’s use the £575 to be safe. From that we need a mortgage for £60,000 at 5% interest, which will cost £250 a month. Management fees and insurance should come to £135, as an allowance for repairs at 10% of rent is fairly safe.

Now let’s imagine that the property is vacant for 2 weeks a year. 1 month every 2 years or 2 month every 4 years. With all these rental figures and costs, we end up with a yearly profit of about £2,200, which is a return on investment of 8.8% per annum. Longer-term if you get capital gains, the returns may be higher.

If you keep buying a new property like this every 18 months, and you do it for 15 years, you will have a yearly rental income of £22,000 after 15 years. By year 6-7, it may even be possible to buy 2 properties a year rather than every 18 months, given the accumulative process of building up capital.

This example shows how leverage can work in property. If somebody buys 10 properties with this method, they would have spent £250,000, delivering an income of £22,000. If cash would have been used instead, it would have only be possible to buy 2 properties, which would produce a yearly income of £10,200.

There are other strategies when it comes to real estate investing, including buying a cheap run down property and spending a lot making it over. This strategy though, is most effective for people who can do the work themselves, and therefore save on some of the fittings costs.

Example 2:

Another strategy is to rent out a property to multiple tenants, especially in professional areas such as Milton Keynes or other commuter towns. Let’s say you buy the property for £190,000. You would need to spend £7,000 on stamp duty, £10,000 on start up costs, £220 on repairs (10% again) and £593 on a mortgage if you get £142,500 borrowed on 5%. Now let’s say you have 6 tenants paying £370 each, so total monthly income of £2,200. This gives a return on investment of close to 17%, adjusted to costs.

The point is, that is hard work. Finding a property where you can fit 6-7 people in and getting 6-7 trustworthy people who don’t leave quickly, isn’t easy. Buying an S&P Index Fund takes less than 10 seconds. These property strategies can be time consuming and full of risk. You can beat the long-term average of 10% per annum stock market returns, but it will take a lot of work and tolerance for higher risk too.

So basically, as you can see, it is possible to beat markets and REITS on leverage IF you are prepared to take risks, use leverage and essentially be a slave to mortgages. But REITS and the markets are much easier than real estate.

Real estate doesn’t even outperform in hot markets like London and some in Canada – Why property outperformance is a complete lie

However, the human mind is an irrational one, and people choice to believe stories and things from their childhood over the academic evidence. Do something simple today if you get time. Ask 20 random people. Which investment do you think has performed best. The US S&P, gold or housing. In most parts of the world people would say housing or even gold.

Actually finance is close to religion for many people, as it gets to the heart of our upbringing, and it’s hard for people to change their cultural habits.