April 26, 2015

Is the Extra Work From Owning a Rental Worth it Versus Buying a REIT?

My rental investments have performed better than simply buying a REIT index.    I estimated this a while ago and its held true.  But if I were to just buy a REIT instead it would be easier and take less of my time.   Whether or not its worth it to spend the extra time to directly own and manage properties versus just buying a REIT depends on their relative investment performance and the amount of work I put into the rentals.

I've previously estimated that it takes about 1 hour a week to handle a single rental.    That adds up to 52 hours a year.    If I were to handle 40 rental units then it would amount to a full time job.   I'd certainly want my return per hour to amount to a decent wage.

One property we bought in 2006 and jointly own with my father.    If I add up all the rent we've made on that unit and the current market value of the property I've seen a 100% return on my initial investment over the 9 year period.

If I had simply bought the Vanguard REIT index (VNQ) then the cumulative dividends and current REIT value would be about 44% increase.

I can figure the amount I've made per hour worked on the rental versus just buying a REIT by subtracting the gain on the REIT from the gain on the rental and then dividing by the hours worked.   Doing this I come out with about $33 per hour worked before taxes.   Thats a pretty good wage.

There is however more risk in owning the individual property versus the REIT.

In this case the rental has been worth it as far as $33 /hr being a decent return on my labor.   But if I can find better things to do with my time to net $33/hr then I'd probably be better of just buying a REIT and putting my time elsewhere.  

What if I'd instead hired a property manager to do all the work?    That would have cut the hours I spent considerably but also reduced the profitability of the rental.       I figure that if I'd had a property manager running the rental then my return would be about 85% on my initial investment but my return per hour of my personal time would be more like $200/hr.

Here is how the options compare :

REIT : 4.6% return and no work
Rental ran  personally : 8% return or $33/hr of work
Rental handled by a property manager : 7% return or $200/hr worked

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