Real Estate Investments

[MrX123]

I know this question depends on personal preference on how much “hassle” one wants to tolerate, but I’m beginning to regret not owning real estate early. First of all, I started investing late (late 30s to early 40s) so I feel that I’m tolerating more risk to get to my target number. I’m 43 now and planning on retiring in my late 50s. I have about a 95% equity (total US stock market and total international) to 5% bond asset allocation with only about a 300K total asset. I’m maxing my TSP at work and my IRA, and just started a taxable account. Now I’m thinking I should start looking at real estate when the opportunity presents itself (definitely not now!). After hearing landlord horror stories though, I don’t even know if I should. Or maybe I can find something along the lines of AirBNB instead. I know about REITs also, but the return of the total stock market is just much more appealing to me so I’ve been putting money on that in my taxable account. Any advice here?

[retiredjg]

I think owning real estate is fine for people who are interested in getting into that arena. It is NOT fine for people who think they "should" invest there, even if they are not very interested. If you don't have a passion for real estate...I suggest you skip it.

You also sound like you are feeling a bit desperate and that seems unnecessary to me. You will have a pension and SS and you already have $300k saved...and another 10+ years to go.

I don't think you are nearly as "behind" as you think you are. I suppose if you have a very expensive lifestyle, you might be. But if that's the case, the solution is to spend less, not try to swing for the fences with your investments.

I probably don't have to tell you that 95/5 is very aggressive for a person who is 43. Since it is unlikely you experienced the very real portfolio losses starting in 2007, I suspect you have no idea what your risk tolerance is even though you probably think you do.

You should consider if you may be investing beyond your tolerance because there is a good chance that is exactly what you are doing. You have not really had the opportunity to know what your risk tolerance actually is.

[MrX123]

All points well taken. I definitely haven’t experienced a real downturn so I think I can handle more risk. But then again, with my timeframe, I feel that I still can. I will probably re-evaluate in 5 years. This total is both for my spouse and I so I feel that we’re behind. My spouse’s only retirement vehicle is the 6K annual Roth contribution that I provide.

[Sandtrap]

I know this question depends on personal preference on how much “hassle” one wants to tolerate, but I’m beginning to regret not owning real estate early. First of all, I started investing late (late 30s to early 40s) so I feel that I’m tolerating more risk to get to my target number. I’m 43 now and planning on retiring in my late 50s. I have about a 95% equity (total US stock market and total international) to 5% bond asset allocation with only about a 300K total asset. I’m maxing my TSP at work and my IRA, and just started a taxable account. Now I’m thinking I should start looking at real estate when the opportunity presents itself (definitely not now!). After hearing landlord horror stories though, I don’t even know if I should. Or maybe I can find something along the lines of AirBNB instead. I know about REITs also, but the return of the total stock market is just much more appealing to me so I’ve been putting money on that in my taxable account. Any advice here?

Are you interested in being a "business person" owning and running your own "business"?

Are you keenly interested, almost passionate, about learning everything about all aspects in detail about "Residential Real Estate Income Property", and all the other areas needed to make that a successful personal business investment?
Including: All aspects and everything connected to it. From formal business knowledge to taxes to legal to business planning, etc.

Are you fine and eager to "think about your new "business" late into the night and on weekends, and vacations, and so forth?
(because most successful sole business owners (non employee) are very conscious of their business 24/7, and don't mind)
(or do you need a known and predictable work schedule and work expectations and a predictable paycheck?)

Are you nearly ruthlessly ambitious to do anything and everything that it takes to accumulate very substantial wealth and work 24/7 to do so, in the Physically Held and Physically Owned Residential (and/or commercial) Real Estate Income Property and R/E Development and Property Management "Business"?

Or, do you prefer a "passive", "hands off", "uninvolved", financial investment that is closer to having funds in your portfolio at Vanguard, Fidelity, etc?
And, being able to sleep at night without worrying about your Real Estate Residential rental properties (business).

j

dis laimer: the above is an example of "extremes" VS the broad range of the bell curve of personal and business experiences from having a few to several to more to substantial R/E holdings. And, a zillion opinionizations to the above as always, this is only one.

[annu]

Landlord horror stories while true, you can minimize risk by investing Class A properties only, screening renters well, and treating like others have also said treating buying house as a business, where your renters are your customers and you treat them with respect.

Real estate investment, are definitely not passive and do not compare to stocks at all, but at the same time it is not like you will get calls non stop on random issues popping up. You can hire a management company, who will act as buffer for you, but for the service they provide, they will take fee, just like working with money managers for your investment...

Also Airbnb is a lot more work, than long term rentals. Look into roofstock.com, they let you look at inspection reports of homes and also give overview of things like cashflow, building class etc.

We have rental homes, while I do not enjoy fixing toilets, have a handyman for that, I do enjoy the process of finding properties and doing minor repairs when renters change and before a new one comes in....The max I have done myself, is installing an electric cooking range and a microwave...

[Kandinsky]

I am in the same boat as OP. I formed an LLC early last year and I was ready to go full speed ahead into RE investing. I got a very nicely maintained 5 unit building under contract but then pulled out due to cold feet. I do have some regrets about not seeing it through but my index fund "muscle" keeps pulling me back. It's just what I've been used to doing for so long. Plus RE doesn't excite me that much but I keep telling myself once I see some cashflow I may change my mind about it. The problem is I don't really want to deal with people - that's renters or even a PM company who can have their own drama.

So one option I've started to look at is real estate syndications. You are a passive investor on a deal that generally lasts about 5 years on average. The general partner is the active manager that takes care of procuring the property, generally doing some sort of upgrade to improve rents, and then an exit sale. During that time you get a K-1 statement every year with accelerated depreciation benefits for taxes, rent payments, and hopefully a capital gain if they were successful in improving the property enough during the exit sale.

[Aged Maduro]

I have been in the commercial and residential real estate industry for fifteen years. In my opnion, mom and pop landlording isn't worth it. It takes an enormous amount of time and has so many costs ie broker fees, closing costs, maintenance, repairs and added legal and accounting fees that most don't factor in. If you want to pass off work to a property management company it will cost you at least 10% of gross profits when it is all said and done. Would any Boglehead pay an investment advisor 10% to manage their stock portfolio? Of course not. The returns just aren't that great.

Broadly speaking there are two types of people who do well in real estate investing...Contractors who can do their own work and build sweat equity or people who are already rich and can immediately scale my buying large commercial buildings with favorable financing terms. In other words, professional real estate investors...and even they fail all the time. The vast majority of people would be better off just buying and holding passive index funds...Why? Because 1) its easy and 2) it works. Real estate investing is not easy and does not always work.

[Sandtrap]

I know this question depends on personal preference on how much “hassle” one wants to tolerate, but I’m beginning to regret not owning real estate early. First of all, I started investing late (late 30s to early 40s) so I feel that I’m tolerating more risk to get to my target number. I’m 43 now and planning on retiring in my late 50s. I have about a 95% equity (total US stock market and total international) to 5% bond asset allocation with only about a 300K total asset. I’m maxing my TSP at work and my IRA, and just started a taxable account. Now I’m thinking I should start looking at real estate when the opportunity presents itself (definitely not now!). After hearing landlord horror stories though, I don’t even know if I should. Or maybe I can find something along the lines of AirBNB instead. I know about REITs also, but the return of the total stock market is just much more appealing to me so I’ve been putting money on that in my taxable account. Any advice here?

To op:
Suggestions
1
Read "The Ages of the Investor: Life Cycle Investing" by W. Bernstein (softcover Amazon aboid kindle version)
*95%? ... read sequence of returns risk during retirement transition.
2
Physically self owned R/E income property whether SFH or multi unit or high rise, investing and property development and management, is a business for experienced business people. (helps if they are also lic gen cont as well)
Do you have that background, skills, passion, inner toughness, and instinct?

j

[Sandtrap]

I have been in the commercial and residential real estate industry for fifteen years. In my opnion, mom and pop landlording isn't worth it. It takes an enormous amount of time and has so many costs ie broker fees, closing costs, maintenance, repairs and added legal and accounting fees that most don't factor in. If you want to pass off work to a property management company it will cost you at least 10% of gross profits when it is all said and done. Would any Boglehead pay an investment advisor 10% to manage their stock portfolio? Of course not. The returns just aren't that great.

Broadly speaking there are two types of people who do well in real estate investing...Contractors who can do their own work and build sweat equity or people who are already rich and can immediately scale my buying large commercial buildings with favorable financing terms. In other words, professional real estate investors...and even they fail all the time. The vast majority of people would be better off just buying and holding passive index funds...Why? Because 1) its easy and 2) it works. Real estate investing is not easy and does not always work.

+1
Great points from real experiences.
Well said

Did you work for a R/E corporation or own your own?

great input
j

[familythriftmd]

Seems like some people on the fence start RE investing by renting out their current home if they upgrade or do a cross-town move to a more optimized home for primary use.

[Harry Livermore]

Excellent comments by all, especially (as usual) Sandtrap. I would say it's worth it if you are local, handy, and have a flexible work schedule.
We had a very nice run of 11 years renting our former residence. We had several very nice tenants, good tax-free income, and some foibles but no real horror stories. Now that our kids are in and exiting college, and we are dialing back all manner of complexity in our lives, it felt like time to exit the business.
We are closing on its sale later this week and couldn't be happier (it is bittersweet as it is a former residence where I asked my spouse to marry me and all of our kids spent early childhood)
Now we just have our vacation rental, currently managed by the HOA, so close to zero work.
OP, it can definitely be profitable and rewarding. But it is work.
Cheers

[carminered2019]

I have a chunk of real estate, unless you pay cash you will not see positive return for 20 years in state of California. We had to come out of pocket in 2008 recession to cover mortgages.

[Oddball]

I know this question depends on personal preference on how much “hassle” one wants to tolerate, but I’m beginning to regret not owning real estate early. First of all, I started investing late (late 30s to early 40s) so I feel that I’m tolerating more risk to get to my target number. I’m 43 now and planning on retiring in my late 50s. I have about a 95% equity (total US stock market and total international) to 5% bond asset allocation with only about a 300K total asset. I’m maxing my TSP at work and my IRA, and just started a taxable account. Now I’m thinking I should start looking at real estate when the opportunity presents itself (definitely not now!). After hearing landlord horror stories though, I don’t even know if I should. Or maybe I can find something along the lines of AirBNB instead. I know about REITs also, but the return of the total stock market is just much more appealing to me so I’ve been putting money on that in my taxable account. Any advice here?

Do you own your primary residence? Have you considered a "house hack" where you buy a multi unit (2-4 unit) property, live in one unit and rent the other units out? That is what we do, and it has worked out very well for us.

[Aged Maduro]

I have been in the commercial and residential real estate industry for fifteen years. In my opnion, mom and pop landlording isn't worth it. It takes an enormous amount of time and has so many costs ie broker fees, closing costs, maintenance, repairs and added legal and accounting fees that most don't factor in. If you want to pass off work to a property management company it will cost you at least 10% of gross profits when it is all said and done. Would any Boglehead pay an investment advisor 10% to manage their stock portfolio? Of course not. The returns just aren't that great.

Broadly speaking there are two types of people who do well in real estate investing...Contractors who can do their own work and build sweat equity or people who are already rich and can immediately scale my buying large commercial buildings with favorable financing terms. In other words, professional real estate investors...and even they fail all the time. The vast majority of people would be better off just buying and holding passive index funds...Why? Because 1) its easy and 2) it works. Real estate investing is not easy and does not always work.

+1
Great points from real experiences.
Well said

Did you work for a R/E corporation or own your own?

great input
j

Thanks Sandtrap. I worked for six years as a commercial real estate agent and 9 years managing real estate transactions for a government agency. I have also owned and managed several rental properties.

[mikeyzito22]

I have a chunk of real estate, unless you pay cash you will not see positive return for 20 years in state of California. We had to come out of pocket in 2008 recession to cover mortgages.

I bumped this thread as it was interesting. Although real estate goes through phases, the above comment makes me think of the risks of rental real estate ownership. Coming "out of pocket" as you mention makes me think that an investor in RE:

1. May need to have a large enough "moat" or substantial assets to cover emergencies or crisis, including long term vacancies (X2).

2. May need to know (or at least understand) if your local market is desirable or not. Yes, I know it changes.
Certain parts of California are becoming cheaper currently because of known factors.

3. May need to hire a CPA to do taxes (because often, older folks who are not as tech savvy may need to help, no shame).

4. Be able to travel (ideally within a mile) to the property to see how things are going.

Mind my bias. I have family that has bought properties within a three minute walk. For the individual who does take on the challenge of rental real estate, local is local.

Any other advice from the community is welcome!

[White Coat Investor]

There are lots of ways to invest in real estate without being the classic landlord.

[Hoggrad]

There are lots of ways to invest in real estate without being the classic landlord.

Why not share those while also mentioning it?

[White Coat Investor]

There are lots of ways to invest in real estate without being the classic landlord.

Why not share those while also mentioning it?

I feel like I have ad nauseum and I'm not allowed to post links to my website where I have also explained this many, many times. Briefly, there is a spectrum ranging from ground up construction to a mutual fund of publicly traded REITS. As you move along the spectrum, you will require less expertise, acquire more liquidity, and reduce hassle. You probably also reduce control, tax benefits, and rate of return.

Ground up construction ---> Fix and Flip ----> Short Term Rentals without a manager-----> Long Term Rentals without a manager --------> Short Term Rentals with a manager ----> Long term rentals with a manager ------> Turnkey investments ------> Syndications --------> Private Funds and REITS ------> Publicly traded REITs ----------> Publicly traded REIT mutual fund

I would argue the entire right half of that spectrum does not require you to be a classic landlord. Some of those investments (syndications and private funds) require you to be an accredited investor, but that bar is getting lower all the time as the qualifying income/assets were not indexed to inflation.

[travellight]

With picking the right properties and location and doing as much as possible yourself, there are tremendous gains to be had. I have invested in residential real estate, single-family homes and manage them myself long distance. It’s not a tremendous amount of work. I do my own taxes and bookkeeping. I hire specialists to fix things that are outside of my capabilities. If you want tremendous gains, and yet be very hands off, this wouldn’t be the right pathway. I’m very much a DIY person so it suits me well.