This is a great post... Thanks for posting.WildBill wrote: ↑Tue Jun 26, 2018 6:39 pmHowdy
I have been and still am an investor in both real estate and securities, including index funds, individual stocks and various flavors of bonds.
My experience in making money with real estate over 40 years is that:
Purchases of raw land can produce substantial capital gains, generally in line with equity investments, sometimes better. This is my favored real estate investment. Minimum work or management after the purchase, however patience may be required. You also need about 50% for a down payment, as you don’t get loans on raw land. Well you might, but it is rare.
Commercial property can be an excellent investment, if bought at the right price and if managed by yourself. As a limited partner in a commercial property investment it usually is in line with a 5-7% real return, with an accompanying nice inflation hedge. The K 1 s are annoying, and the general partner is always going to be late with them and mess up your tax preparation, but that is how it goes.
Residential property bought at decent prices is equivalent to a medium coupon inflation indexed bond bought in 2000, ie 3-4 % real return with a nice accompanying inflation hedge. Alas, those 4% inflation indexed bonds have gone the way of the dodo.
Residential real estate requires work and attention unless there is a property manager. If there is a property manager you are typically paying 10%, which is a lot, maybe all of your margin on the property.
All real estate investments have the following characteristics:
- It is an inflation hedge, as long as you have bought a good property in a good area, and not an office complex in Detroit in 1960. In my view this inflation hedge is the most attractive feature for an individual investor who remembers the 1970s and 12% inflation.
- It is illiquid.
- it is expensive to buy and sell. At least a 10% hair cut on a round trip.
- The tax benefits are real, but not as attractive as the OP states. You cannot write off losses above a certain income (last I remember it was $150K per year). You can carry the losses forward, which is good as capital gains taxes are higher than on equity sales. In effect you recapture the depreciation when and if you sell. Big deal.
You can depreciate the property and then do a like kind exchange, but you have just postponed taxation and not created liquidity. Of course, it is great for your heirs, as they get a stepped up basis when you die.
As my real estate mentor was fond of saying “ Real estate is a treadmill where you break even, and you make your money when you die.” This is overstating it, as commercial property can yield excellent cash flows, as a business that you manage. Residential not so much, and definitely not with a property manager.
-To make money in anything other than raw land, leverage is required, in terms of a mortgage. This requires paying the mortgage, regardless of the income from the property. If you do not pay the mortgage, the lender takes the property. To achieve superior returns, increased leverage, and risk, are necessary.
The OP stating above a plan (scheme) to leverage a daisy chain of properties over five years to become financially independent is extremely risky and requires a buoyant real estate market and economy, an understanding and generous lender (best of luck), a strong and stable economy and good execution. A difficulty with one of the leases or properties would lead to the loss of income that could very likely lead to the loss of all of the properties. This is not a course I would advise. It is somewhat akin to buying stocks on margin, only nobody is going to loan you 80% on margin for stocks. They will on appraised real estate, because when you can’t pay they take the property.
People have made money leveraging up real estate like this , but people have also made fortunes in Las Vegas betting on black. There are any number of seminars, books and courses to teach you to do this, but my experience is that the people teaching the courses and writing the books are the only ones making the money.
To digress, all of these courses focus on “find a motivated seller”. So the dutiful student researches the market, looks for tenant occupied housing, and writes the owner in the faux handwritten form provided by the course, offering cash for the property. I get 5 or 6 of these homely missives a month. They have not motivated me yet.
Real estate is a business and it requires knowledge of value, financial acumen, luck, discipline and excellent execution.
Good luck to all.
I do want to point out that saying "as long as you buy a good property in a good area" is a lot like saying "as long you buy a good stock, everything's great"
And an office complex in Detroit in 1960 WAS considered a good property in a good area. At the time.