Real estate investing....thoughts

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Five
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Real estate investing....thoughts

Post by Five » Sun Oct 23, 2016 7:23 am

Hello all,
I am writing to get an idea of what the bogleheads think about real estate investing. I have many of Larry Swedroe's books and I just ordered his latest book on Amazon Friday night. I always look forward to learning more from him. From one of his books, he feels that if one wishes to invest in real estate then investing in the REITS in the way to go. There are other books out that have been written by authors that feel investing in real estate can be done successfully by buying building and "units"/apartments/condos, even rental homes and buildings---but every purchase has to meet "certain criteria" to be successful. Location (to other businesses, schools, tourist attractions, and being in a high quality neighborhood) is one criteria. I am wondering if any of the bogleheads have had much success in real estate investing using this approach. I have spoken to a few of my colleagues (I am a physician who works 50-70 hours/week) and have received a variety of responses. One doc told me he owned some properties and was happy to have sold them and thinks that he just about "broke even" over the course of years and the money that was required to keep them liveable. Another doc still owns apartments and finds them very useful for a passive second income. He uses a good maintenance man when needed since this doc is a surgeon who also works much.
In summary, I am looking for another avenue for diversification...

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happyisland
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Re: Real estate investing....thoughts

Post by happyisland » Sun Oct 23, 2016 7:44 am

There have been many threads on this topic here on Bogleheads, with tons of good information, and different perspectives. My personal takeaway is that directly investing in real estate tends to become a second job. Is that something you want, given that you are already working quite a bit?

Five
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Re: Real estate investing....thoughts

Post by Five » Sun Oct 23, 2016 7:52 am

From what I have read, investing in real estate units/homes/buildings does become a second job if you can grow it large enough. Also, seems like real,estate can be great when "times are great"---good economy in a good location. For example, I know of someone who owns rental apartments near the large university in town....she only rents to grad students/med students/law students....no undergrads. She told me that she is always full, make a nice monthly income, and there are more people looking for an apartment than there are apartments available. I have only given some minor thought (although not much since I know nothing about real estate investing except for my readings) about "just considering" such investing when I am older and retired....a second career and a source of income. Diversification in case the market does not do as well as hoped.
Just thinking....nothing more!

Valuethinker
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Re: Real estate investing....thoughts

Post by Valuethinker » Sun Oct 23, 2016 7:53 am

Five wrote:Hello all,
I am writing to get an idea of what the bogleheads think about real estate investing. I have many of Larry Swedroe's books and I just ordered his latest book on Amazon Friday night. I always look forward to learning more from him. From one of his books, he feels that if one wishes to invest in real estate then investing in the REITS in the way to go. There are other books out that have been written by authors that feel investing in real estate can be done successfully by buying building and "units"/apartments/condos, even rental homes and buildings---but every purchase has to meet "certain criteria" to be successful. Location (to other businesses, schools, tourist attractions, and being in a high quality neighborhood) is one criteria. I am wondering if any of the bogleheads have had much success in real estate investing using this approach. I have spoken to a few of my colleagues (I am a physician who works 50-70 hours/week) and have received a variety of responses. One doc told me he owned some properties and was happy to have sold them and thinks that he just about "broke even" over the course of years and the money that was required to keep them liveable. Another doc still owns apartments and finds them very useful for a passive second income. He uses a good maintenance man when needed since this doc is a surgeon who also works much.
In summary, I am looking for another avenue for diversification...
Unless you are able to commit time & "hassle factor" DO NOT own real estate directly.

And it's very hard to rely on someone else to do that work for you. Sometimes you get lucky, but if they are good, they could probably be doing it for themself.

cherijoh
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Re: Real estate investing....thoughts

Post by cherijoh » Sun Oct 23, 2016 9:10 am

REITs give you diversification within an asset class, whereas owning a house or even a multi-unit property is concentrating your risk. If you get a good tenant who wants to stay there for a while, it can yield a good return. But just one deadbeat tenant or even high turnover of good tenants (i.e., 12 months rented, 1-2 months vacant, 12 months rented,..) can eat up your profit margin.

I rented a condo that I couldn't sell when I purchased my house. After that experience, I would never consider owning a rental property again. I would also recommend that you read this Boglehead thread that acts as a good cautionary tale.

dbr
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Re: Real estate investing....thoughts

Post by dbr » Sun Oct 23, 2016 9:26 am

Whatever amount of time and labor a person might have to supply to owning individual properties, I think this activity is better analyzed as a business than as an investment. Like any other business there has to be an acquisition of capital to do it, but there is far more than that.

That said, owning and operating real estate is certainly a bona-fide business that is successful for many people and maybe not so much for others.

Owning REIT stocks is an investment the merits of which can be considered. Larry Swedroe has a good book on alternative investments, the good, the flawed, the bad, and the ugly in which REIT stocks are in with the good. He also has a section in that discussion about home ownership, which is not exactly the same thing as investing in real estate.

Five
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Re: Real estate investing....thoughts

Post by Five » Sun Oct 23, 2016 9:31 am

Dbr, I own Larry's book on alternative investments and that is where I read the section on owning REITS over individual units/houses/buildings. I wish to thank everyone for their inputs. It helps to confirm what I already thought.

Wricha
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Re: Real estate investing....thoughts

Post by Wricha » Sun Oct 23, 2016 9:34 am

There are many ways to be involved in real estate and make/lose money. You can be an investor, a developer, construction, sale man, property manger etc. You need to decide where you want to place your time/money. As far as a REIT's go I have never been involved with one but I have sold properties to them. My limited experience has told me all the money has been divided up long before the "investor" receives the first dividend check. After those experiences I personally think REITs are one step above a scam. I am sure their are some good ones but how would one know unless they were in the room when the deal went down.
As physician you might think of your own medical office building these properties are carrying a premium in today's market.

heyyou
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Re: Real estate investing....thoughts

Post by heyyou » Sun Oct 23, 2016 4:09 pm

Owning your own income producing real estate is further from diversification than being a stockholder in one large corporation with sales diversified across multiple markets. On risk and reward, concentrated risk has concentrated rewards. You don't hear about the unsuccessful side businesses.

As an alternative, consider saving just a few percent more each year for a decade instead of taking on more concentrated risk, view it as making a payment on real estate that will be paid off when you are ready to retire. Not all mental accounting is bad.

Wouldn't it be better to keep doing what you are doing instead of having to learn to manage a new business that will use up both some of your time off, and could interrupt your work days? Some business/RE owners thrive on managing, many others just do it because it is necessary.

The best RE maintenance guy that I have heard of, is the owner's semi-retired father-in-law.

WJW
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Re: Real estate investing....thoughts

Post by WJW » Sun Oct 23, 2016 6:34 pm

If you are already working 50-70 hours a week as a physician then my advice would be to invest in REITs or just a simple portfolio of equities and bonds. These investments are more liquid and are not as aggravating as a problem tenant or a property in constant need of maintenance and repairs. I own properties but I am also a contractor and have a staff I can send to one of the properties in a moments notice. And although I have done pretty well with my real estate investments, had I discovered Bogleheads 20 years ago, I would have invested all the money I invested in properties into the stock market instead and let compounding work it's magic.
Last edited by WJW on Mon Oct 24, 2016 6:37 am, edited 1 time in total.

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Pajamas
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Re: Real estate investing....thoughts

Post by Pajamas » Sun Oct 23, 2016 8:04 pm

I second the suggestion to buy REITs or a REIT fund like VNQ instead. That gives you a more diversified, liquid investment rather than one that is illiquid, expensive to buy and sell, and a time-consuming source of hassles even in the absence of a major problem like fire, earthquake, tornado, flood, or other disaster.

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unclescrooge
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Re: Real estate investing....thoughts

Post by unclescrooge » Mon Oct 24, 2016 10:16 am

Five wrote:Hello all,
I am writing to get an idea of what the bogleheads think about real estate investing. I have many of Larry Swedroe's books and I just ordered his latest book on Amazon Friday night. I always look forward to learning more from him. From one of his books, he feels that if one wishes to invest in real estate then investing in the REITS in the way to go. There are other books out that have been written by authors that feel investing in real estate can be done successfully by buying building and "units"/apartments/condos, even rental homes and buildings---but every purchase has to meet "certain criteria" to be successful. Location (to other businesses, schools, tourist attractions, and being in a high quality neighborhood) is one criteria. I am wondering if any of the bogleheads have had much success in real estate investing using this approach. I have spoken to a few of my colleagues (I am a physician who works 50-70 hours/week) and have received a variety of responses. One doc told me he owned some properties and was happy to have sold them and thinks that he just about "broke even" over the course of years and the money that was required to keep them liveable. Another doc still owns apartments and finds them very useful for a passive second income. He uses a good maintenance man when needed since this doc is a surgeon who also works much.
In summary, I am looking for another avenue for diversification...
Having bought 18 investment properties and having sold nearly all of them for profit, I'll tell you the hassle factor isn't worth it. If you make a physician's salary, your time is worth a lot more than you'll make in RE.

I don't make a physician's salary and it's not even worth it for me. It was fine when I was young and broke, but now with a job I like and a family I love, I don't have time for it.

I just got a letter from the legal department of the water works department where I have one of my remaining rentals. The tenant stopped paying his water bill and now (with legal and court fees) owed $2,000. They were about to put a lien on my property. Guess who paid up?

One caveat is if you have a non-physician spouse. Have him/her become a licensed RE salesperson and have them invest/manage the properties. You'll save a boatload on taxes via depreciation losses. This would probably make it worthwhile.

Or, if you can get to a stage where you own a 40 unit building and can outsource all of the management, then the cashflow may be worth it. But don't think this is a hassle-free investment. You will still be heavily involved.

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ofcmetz
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Re: Real estate investing....thoughts

Post by ofcmetz » Mon Oct 24, 2016 11:47 am

OP, I work 60 to 70 hours a week as a police officer and am happy to not own or manage any real estate. I may look into this after retirement. I use the TIAA Real Estate fund for exposure, but would probably use a REIT index. My allocation is 10% of my portfolio. I think when you work serious hours for your job then direct real estate ownership my be a bit too much.
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KyleAAA
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Re: Real estate investing....thoughts

Post by KyleAAA » Mon Oct 24, 2016 12:49 pm

Real Estate investing requires skill and capital. If you are willing to invest the time and energy to acquire the skill and capital to do it properly you will tend to earn extremely attractive risk adjusted returns. Most of the people who warn you about real estate lost money because they lacked skill. Most people can learn to invest reasonably well over time if they put in the effort. Ignore those who tell you it's a bad idea based on one rental they owned for a few years because they couldn't sell an old home for whatever reason. Those people lacked skill and their experience isn't particularly relevant to you. It won't be a passive strategy, though, at least not until your operation reaches the scale required to profitably outsource management responsibilities. If you earn, say, $400k as a doctor you're probably better off working on increasing your income and saving a large portion of your salary in a passive 3 or 4 fund portfolio. Because let's be honest: you're not going to spend 15 hours per week on your real estate business after putting in 50 hours at the office: you're going to be one of those investors who lacks skill.

Five
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Re: Real estate investing....thoughts

Post by Five » Mon Oct 24, 2016 9:18 pm

Thanks for the input! Again, it helps to confirm what I thought!

ShenziNation

Re: Real estate investing....thoughts

Post by ShenziNation » Tue Oct 25, 2016 7:29 am

I have five rental properties. Purchased when the housing market was down or a distressed seller. Four are 1/1 condos, one is a 2/1 townhouse. All are constantly rented. I have a very good property manager who works for a flat fee. He also manages two condos for my in-laws, for which I have authority to make decisions.

As part of my buying process I look at association financials, and the property has to return 8-10% annually with a worst-case scenario. There are weeks/months where nothing happens. When something does, we have a list of good A/C companies and handymen to contact. My manager does everything, all I have to do is pick up the phone or reply to an email. I used to do everything for the first 3 years, now i have a young family so for a small fee I turned them over to a management firm. I spend less than a cumulative hour a week on this, this is during my regular work hours.

I look at RE as a relatively stable source of passive income that will supplement early retirement, which is targeted to commence when my children are in college in 14-16 years. I am maxing my 401K, and will be opening a Roth IRA in 2017. Plus I hoard cash to target 1-2 property purchases per year. I buy in cash. Ca$h is K1ng!

My bent is conservative, so I am about 65% RE, 35% in index funds (70/30 S/B).

Tal-
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Re: Real estate investing....thoughts

Post by Tal- » Tue Oct 25, 2016 7:54 am

To invest in property directly (i.e. rentals), you need several things, including time. In my experience, you can farm out 90% of the work once things are up-and-running, but getting in the game is a lot of work if you want to buy right.

I work reasonable hours, and real estate has been a wonderful investment for me - and will be for the foreseeable future. But, if I were working 60 hours/week and making a physician's salary, I would probably not advocate buying any rentals (for a Bogglehead).
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alaskantraveler
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Re: Real estate investing....thoughts

Post by alaskantraveler » Tue Oct 25, 2016 7:22 pm

I've read much of the commentary on real-estate investing here at Bogleheads. Investing in real-estate purley as an investment I think most of the comments are right on. This requires skill, it requires capital. Most investment properties require a 20% downpayment. On the other hand, I have invested in real-estate as a factor of wanting a primary residence. I think there are strategies that allow people to invest in realestate with fairly limited. Capital.

People who are willing to move every couple of years have the ability to buy a house with 5% down (limited capital) for a reduced interest rate (2.5% on a 15yr or 3.25% on a 30 yr). After a year or so move out, rent the old property out and buy a new property for 5% down. Is this a part time job? I currently have 2 rentals. I spend about 1-2 hours per month dealing with the property.

I bought my first house 6 years ago for $152k. Had to put 3.5% down ($5320) and put another $5k into it. My $10,320 cash investment earning a 10% return would now be worth $18,282.

I currently owe $116k and the house recently appraised for $193k. With 6% closing costs if I sold it, I would net $65,420. That is about a 36% annual return.

nova1968
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Re: Real estate investing....thoughts

Post by nova1968 » Wed Oct 26, 2016 7:13 am

Working long hours could be a disadvantage in managing a property and probably is not necessary on a Physicians salary, However I would not compare REITS to owning property directly. Owning rentals can be beneficial under the right circumstance and efforts can be rewarded.
In purchasing rentals effective market research can often land you bargains in desirable locations, Once you become an owner of the properties finding and managing tenants, maintenance and implementing a systematic process is important. I think this would be a feasible option for someone who is passionate about real estate investing and is willing to put the time and effort to make the properties a success. Its an added plus if you are a handyman and have time on your hands.

WhyNotUs
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Re: Real estate investing....thoughts

Post by WhyNotUs » Wed Oct 26, 2016 7:56 am

RE is a big field with a variety of investments- sfh, mfh, apartments, commercial, industrial, vacant land, etc. There are niches for each. The most passive are larger apartment complexes that are run by property managers and long term commercial leases with NNN. If you find your interest growing over time then you can casually mention it to colleagues and eventually you will begin to meet some physicians with property investments, there are a lot of them. Looking at their project may give you some additional data to consider. While passive RE deals tend to have a lower ROI, there are good deals to consider if one is patient (pun intended) and thoughtful. The universe of buyers for at $2M apartment complex is much smaller than a sfh and some projects are too small for REITs, thus there is a field in which 10 investors putting in $200k each can make a play.

Not suggesting that it is for you, but it is out there. The lowering of safe withdrawal rates estimates makes income producing property worth at least understanding for those with cash to invest. Highly leveraged RE is a different beast.
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