Critique my thoughts on Real Estate Investing

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PonziScheme
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Joined: Mon Apr 28, 2014 8:54 pm

Critique my thoughts on Real Estate Investing

Post by PonziScheme »

I am currently considering investing approximately 30% of my portfolio into real estate. Most would be tangible, specifically duplexes (or some other multifamily residence) or inexpensive (sub $150k) single family homes. I would increase liquidity and diversification with some REIT holdings as well.

I think this is prudent for the following reasons:

1) I am not currently invested in real estate and real estate is a very distinct asset class that is not closely correlated to other markets and would therefore add diversity to my portfolio.
2) I think that owning homes that have low mortgages could allow me to actually profit from a major economic collapse as people would be generally jettisoning the homes they could not afford to buy or rent one that is they could.
3) Because real estate markets are generally local, they are probably not necessarily as efficient and therefore higher returns could be captured.
4) There are a wide array of tax benefits specifically associated with residential real estate ownership.
5) I perceive inflation as a real and serious threat in the near term and real estate would be a strong hedge against inflation risk.

Please critique my reasoning.
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sdsailing
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Re: Critique my thoughts on Real Estate Investing

Post by sdsailing »

Try buying one sfr and see how you like it. Buying a whole bunch of real estate before knowing if you make a decent landlord would be a huge mistake.
Topic Author
PonziScheme
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Re: Critique my thoughts on Real Estate Investing

Post by PonziScheme »

sdsailing wrote:Try buying one sfr and see how you like it. Buying a whole bunch of real estate before knowing if you make a decent landlord would be a huge mistake.
Who said I was going to go out and buy "a whole much of real estate"? I plan on doing my homework and entering the market prudently and with caution.

I'm more interesting in hearing peoples' critiques of the underlying reasons why I want to get into the market.
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sdsailing
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Re: Critique my thoughts on Real Estate Investing

Post by sdsailing »

You implied it in the first two sentences of your post.
Novine
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Re: Critique my thoughts on Real Estate Investing

Post by Novine »

1) I am not currently invested in real estate and real estate is a very distinct asset class that is not closely correlated to other markets and would therefore add diversity to my portfolio.

That wasn't the case in 2008 - 2009.

2) I think that owning homes that have low mortgages could allow me to actually profit from a major economic collapse as people would be generally jettisoning the homes they could not afford to buy or rent one that is they could.

While the second part may occur, how does that guarantee that you'll "profit" in those circumstances? In such a scenario, rental rates will likely collapse too.

3) Because real estate markets are generally local, they are probably not necessarily as efficient and therefore higher returns could be captured.

Operative word here is "could" - you could capture higher returns

4) There are a wide array of tax benefits specifically associated with residential real estate ownership.

I don't know enough about those benefits to comment.

5) I perceive inflation as a real and serious threat in the near term and real estate would be a strong hedge against inflation risk.

There's no signs of inflation in the near term. People have been warning about the inflation threats for several years and those have yet to materialize.
Lafder
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Re: Critique my thoughts on Real Estate Investing

Post by Lafder »

How much cash do you have for this investment? I believe you need 25-30% down for non owner occupied mortgages.

What is the average price of a home, duplex, triplex in your area?

How much time do you have for managing the properties?

How many extra resources do you have to cover cash flow during vacancies, unpaid rent, repairs ?

I like having some real estate. But taking 1/3 of my investable $ and putting it into real estate would make me nervous. I agree what someone else said, start with one, preferable a "deal" of a price for what it is, and see how it goes.

Check out biggerpockets for more info. Though I think there are a number of beginners on there that have not been doing it long enough to know if they are coming out ahead financially or will abandon it due to stress. There are also a number of larger scale more successful real estate investors.

I love the idea of lots of real estate holdings, I just don't like the idea of having to spend money I earned to get it.

Lafder
trueblueky
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Re: Critique my thoughts on Real Estate Investing

Post by trueblueky »

One concern with local real estate is that it is local. It doesn't take a national downturn to affect prices and vacancies. Megacorp can close a factory with x,000 local jobs, for instance.

Owning and managing several units of real estate is a job. If you hire someone else to manage it, you lose some of the return, decreasing the portion of the time you're profitable. Read up on the tax rules on passive investments if you plan to have a manager, or if you only have one property.

As with any investment, diversification within the real estate class helps smooth the return.
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Bustoff
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Re: Critique my thoughts on Real Estate Investing

Post by Bustoff »

In the mid-west you can buy nice SFH's for $65,000. That's only a $17,000 down payment (if you need the loan at all).
Typical rent on a house like that is $800/mo. or $9600 per year.
You do the math.
cherijoh
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Re: Critique my thoughts on Real Estate Investing

Post by cherijoh »

PonziScheme wrote:I am currently considering investing approximately 30% of my portfolio into real estate. Most would be tangible, specifically duplexes (or some other multifamily residence) or inexpensive (sub $150k) single family homes. I would increase liquidity and diversification with some REIT holdings as well.

I think this is prudent for the following reasons:

1) I am not currently invested in real estate and real estate is a very distinct asset class that is not closely correlated to other markets and would therefore add diversity to my portfolio.
2) I think that owning homes that have low mortgages could allow me to actually profit from a major economic collapse as people would be generally jettisoning the homes they could not afford to buy or rent one that is they could.
3) Because real estate markets are generally local, they are probably not necessarily as efficient and therefore higher returns could be captured.
4) There are a wide array of tax benefits specifically associated with residential real estate ownership.
5) I perceive inflation as a real and serious threat in the near term and real estate would be a strong hedge against inflation risk.

Please critique my reasoning.
You are extremely late to the game. The rebound in many real estate markets has been due to investors who have the same idea as you. They have already grabbed up underpriced properties. It is hard to succeed in residential real estate if you have to pay premiums for the property.
dbr
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Re: Critique my thoughts on Real Estate Investing

Post by dbr »

PonziScheme wrote:
Please critique my reasoning.
I would suggest with all due respect that if your don't know enough about real estate investing to answer questions such as yours rather than ask them, that you shouldn't be doing this, at least not with 30% of your portfolio and multiple properties right off the bat.

Real estate investing is a perfectly fine venture in principle. There should not need to be an argument about that. I think your particular reasons are not particularly cogent, though having some elements of truth. 2, 3, and 5 are particularly dubious. A good thing to do would be to start with one property and learn more about what is involved.

I would say such investments are prudent to the extent you can tolerate whatever possible (leveraged) losses you might generate, any legal liabilities you will incur, and the drain on time and energy that is involved in managing properties.
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Bustoff
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Re: Critique my thoughts on Real Estate Investing

Post by Bustoff »

cherijoh wrote: You are extremely late to the game. The rebound in many real estate markets has been due to investors who have the same idea as you. They have already grabbed up underpriced properties. It is hard to succeed in residential real estate if you have to pay premiums for the property.
Talk about over-broad statements. Take a look at a map. California is not the only real estate market in the country.

Here is a list of over 80 SFH's for sale for less than $60K that can be rented for $800/mo.
http://www.zillow.com/homes/for_sale/Be ... _zm/0_mmm/
4nursebee
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Re: Critique my thoughts on Real Estate Investing

Post by 4nursebee »

First impressions of your reasons/rationale/thinking? Blah blah blah a bit like hyperkinetic traders convincing themselves that they know what the tea leaves hold.

1. If you own an index fund you are likely diversified, low cost, hands off, AND in real estate.
2. You come across as unaware of what the past 5-10 years have been like.
3. While I cant well dissect the arguement, your logic and progression of thought seems poor.
4. There are not a wide array of tax benefits. It is a business. Tax treatments for businesses are different.
5. Perceptions don't pay the bills. Is your perception better than others? What in your lifetime suggests your perception is something to bank money on?
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TravelerMSY
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Re: Critique my thoughts on Real Estate Investing

Post by TravelerMSY »

It all comes down to the cap rate. Are you going to get enough return to match or beat what you can get in stocks/bonds? If you buy fixed uppers in bad neighborhoods you might get 10-15%. Buying nice houses in good neighborhoods might only get you 6%. It's very much a local market that must be considered deal by deal.

And try to be honest with yourself about the amount of time involved. A lot of real estate guys will brag about having a passive rental yield of 20%, but won't mention they spent 6 months of full-time work rehabbing the property.
jebmke
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Re: Critique my thoughts on Real Estate Investing

Post by jebmke »

TravelerMSY wrote:And try to be honest with yourself about the amount of time involved. A lot of real estate guys will brag about having a passive rental yield of 20%, but won't mention they spent 6 months of full-time work rehabbing the property.
In order to calculate the true return on investment you need to impute a management fee and charge that against the rental stream. This is often overlooked in real estate (and franchise investment) as part of the investment is buying a job. You also need to amortize large capital items into the equation and set aside capital for this -- much like condo associations do.
Stay hydrated; don't sweat the small stuff
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HardKnocker
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Re: Critique my thoughts on Real Estate Investing

Post by HardKnocker »

PonziScheme wrote:I am currently considering investing approximately 30% of my portfolio into real estate. Most would be tangible, specifically duplexes (or some other multifamily residence) or inexpensive (sub $150k) single family homes. I would increase liquidity and diversification with some REIT holdings as well.

I think this is prudent for the following reasons:

1) I am not currently invested in real estate and real estate is a very distinct asset class that is not closely correlated to other markets and would therefore add diversity to my portfolio.
2) I think that owning homes that have low mortgages could allow me to actually profit from a major economic collapse as people would be generally jettisoning the homes they could not afford to buy or rent one that is they could.
3) Because real estate markets are generally local, they are probably not necessarily as efficient and therefore higher returns could be captured.
4) There are a wide array of tax benefits specifically associated with residential real estate ownership.
5) I perceive inflation as a real and serious threat in the near term and real estate would be a strong hedge against inflation risk.

Please critique my reasoning.
Your reasoning is fairly solid. The point about major economic collapses is in tinfoil-hat-land though.

Running rental real estate is a small business. It takes time and sweat. Using common sense as your guide, give it a shot and see how it goes.

Don't over-analyze. Buy at a discount, screen your tenants, collect the rents, keep the properties in good condition. That's it.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
Calm Man
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Re: Critique my thoughts on Real Estate Investing

Post by Calm Man »

OP, here is your comparison.
1) You can put the money in a total stock market index fund. Or if you like REITS, add a % in REITs.
2) You can take the money and start a small business - you will need to find properties, get the legal work done, arrange financing, get insurance, go to closings, show the rental or have it shown, collect the rent or have it collected, take care of maintenance or have it taken care of, screen tenants, replace tenants, evict tenants and spend a bunch of time doing all of this.

Doing 2) does not assure you of anything compared to 1) except a lot more of your time being spent on these activities. If you are young, better to go to a sporting event, go to the movies, read, exercise or go out socially in my opinion.
john94549
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Re: Critique my thoughts on Real Estate Investing

Post by john94549 »

Having filed Sch E for over 23 years on our rental Condo, I'd be interested in the "wide array" of tax benefits my accountant(s) apparently missed. Form 8582 does begin to help when one's MAGI falls below $150K, and you can avoid depreciation re-capture if you leave the property to the kids, but that's about it, far as I know.

Eager to learn, though.
tibbitts
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Re: Critique my thoughts on Real Estate Investing

Post by tibbitts »

PonziScheme wrote:I am currently considering investing approximately 30% of my portfolio into real estate. Most would be tangible, specifically duplexes (or some other multifamily residence) or inexpensive (sub $150k) single family homes. I would increase liquidity and diversification with some REIT holdings as well.

I think this is prudent for the following reasons:

1) I am not currently invested in real estate and real estate is a very distinct asset class that is not closely correlated to other markets and would therefore add diversity to my portfolio.
2) I think that owning homes that have low mortgages could allow me to actually profit from a major economic collapse as people would be generally jettisoning the homes they could not afford to buy or rent one that is they could.
3) Because real estate markets are generally local, they are probably not necessarily as efficient and therefore higher returns could be captured.
4) There are a wide array of tax benefits specifically associated with residential real estate ownership.
5) I perceive inflation as a real and serious threat in the near term and real estate would be a strong hedge against inflation risk.

Please critique my reasoning.
What skills do you have that would make you successful at real estate? It may be that local RE markets aren't as efficient, but that's different than saying you have the ability to capitalize on that inefficiency.
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