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Comment by ceejayoz | Hacker News Reader

I'd need someone to explain why they'd be better than a REIT from an organization like Vanguard or TIAA-CREF.

Two reasons: leverage and taxes.

With REITs, there is typically no leverage and the dividends are taxed as ordinary income. If you invest in real estate directly, you can borrow at low rates and the tax treatment is better through deductions, depreciation, 1031 exchange, etc.

Spot on. Taxes have been missing from this entire HN discussion. A primary reason for investing directly in real estate (even in a syndication as a passive investor) is to get the tax benefits. For example, with the "eREITS" from fundrise mentioned above, these are just like public non-traded REITS (ie no depreciation, interest deduction, or 1031 exchange).

Often with a strong commercial real estate project you can show taxable losses but still get positive cash flow. Why? Because of generous IRS depreciation treatment of the improvements. Then, when you get to the end of the investment and you can sell it, you can just defer the capital gains taxes indefinitely by using a 1031 exchange. This can be done until you die, when your heirs will get your property with a "Stepped up basis", effectively eliminating the capital gains tax altogether.

You can't get this with REITS. Doesn't matter if they are publicly traded, non-traded, private, or the new fad eREITS.

This is true, however, it has been missing from this discussion because its not on topic.

The question wasn't "why is investing directly in real estate better than REITs?" it was not "why are eREITs better than a diversified REIT mutual fund or ETF?"

There have been many questions about how these crowdfunding sites compare to a vanguard REIT index. Taxes haven't been mentioned. Don't be so pedantic.

The REIT, though it may not have the tax advantages you mention it is diversified.

However, the tax angle is interesting.

How easy is it to diversify with real estate syndication? Or so called real estate crowdfunding - which I assume are more or less the same thing?

I would not say they are better, but they are different. REITs are stocks, so they tend to rise and fall with the overall stock market. Take a look at what happened to VGSIX in 2008 (when the SP500 was down over 36%). VGSIX got crushed as well.

Would that have happened to individual investments at Realtyshares/Fundrise/Realtymogul had they been around at the time? Doubtful.

It is true that the Realtyshares/Fundrise/Realtymogul holdings may not be marked to market, and therefore have less apparent volatility. However, it is highly likely that if you tried to sell your holding during a market downturn you would need to take a significant discount to the face value to liquidate your position. The discount would probably be in a very similar range as the REITs at the same time. Private investments may have low apparent volatility, but more often than not, their economic volatility is actually greater than their liquid, publicly traded counterparts.

>if you tried to sell your holding during a market downturn

This is not possible with Realtyshares at least. You have no way to sell your holding. You just have to wait it out.

So.. what about liquidity? Are the liquidity options for the funding shares similar to that of VGSIX? Doubtful.

In no way could I imagine you would have had the option to liquidated those shares for pre-recession prices. Without that option, you were probably stuck holding the shares or selling for a similar loss. So what's the advantage again?

>So what's the advantage again?

I didn't say there was one. I invest in real estate because it has historically strong returns and is not 100% correlated with the stock market. That is very different from an 'advantage'.

> Would that have happened to individual investments at Realtyshares/Fundrise/Realtymogul had they been around at the time? Doubtful.

Hang on. Are you claiming the real estate market's collapse wouldn't have affected stuff like Realtyshares? How so?

REITs got crushed because the underlying real estate got crushed. As did the rest of the economy.

>Hang on. Are you claiming the real estate market's collapse wouldn't have affected stuff like Realtyshares? How so?

Some impact sure, but let's take an average Fundrise investment. They buy an apartment complex for $20 million and it is at 90% occupancy. They plan to sell it after holding for 10 yrs. If the market was terrible at that time they could hold it a bit longer, and in the interim it is still at 90% occupancy and generating income.

You don't think occupancy rates and per-tenant income levels go down during a massive recession? You can hold onto the REIT just like you can hold onto the apartment building.

Hold on, how is that at all different from an REIT? Equity REITs also generate income from rents/occupancy and are required to distribute at least 90% of that income in the form of dividends to shareholders.

The big difference is you get to choose to sell or not with a REIT but not with Fundrise.

(not to mention occupancy and rental rates are affected during a housing crash)

I'm not following how Realtyshares/Fundrise/Realtymogul would have faired better in 2008 than traditional REITs.

Yes, VGSIX dropped to a third of its original value in six months in 2008. But, those same shares have increased 40% in the past 10 years.

If you had used a vehicle like Realtyshares/Fundrise/Realtymogul there is a good chance that the specific property you invested in would have gone belly up. Your investment today would be zero.

The diversification that a product like VGSIX provides insulates you from the specific risk of an individual investment.

someone mentioned selling and forclosure. so if they get the property and/or it sells for 80%at foreclosure and the group only paid 75% then you probably break even assuming fees.

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