Real Estate (the real real, not a REIT)

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tigerhartt
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Real Estate (the real real, not a REIT)

Post by tigerhartt »

How does real estate fit into a BOGLEHEAD's investment portfolio? I am thinking of purchasing an investment property. The cost of this would probably approximate 50 percent of my total investment porfolio, not to mention it would be at least partially funded by a fixed rate home loan. I am single, 45 years old in the 28 percent tax bracket, with basically no deductions other then my current almost paid off home mortgage, and am need of some tax relief, as well as some income. I was interested in how you all use real estate (as opposed to REIT's) in your portfolio....thanks

P.S. I am truly sorry if this is a repetitive or seen as a dumb question, I'm kinda new here..
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
avalpert
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Post by avalpert »

I can't speak for bogleheads bu generally I view individual real estate as a highly undiversified entry into an asset class that can serve as a diversifier for your portfolio but is not going to drive high returns.

To invest in a single property as 50% of your total protfolio then, to me, sounds fairly risky with low expected reward.

The question I would ask is what makes you think this aprticular investment property is a better investment than all the other options out there? Are you looking to get into real estate, have you considered a reit? Are you looking for a home run investment? Have you looked at individual stocks, particularly penny stocks or microcaps? What is the goal here and how do you think this investment helps you get there?
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Post by Gregory »

I don't consider my RE within my AA. I would certainly not put all my eggs into that one basket.

Greg
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus
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tigerhartt
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Post by tigerhartt »

I'm not sure if I stated my question correctly so I'll be more specific. My total portfolio is presently around 315K, and even a townhome in the Los Angeles area would be around that much, so I would have to take a home loan out to fund what would approximately be the same as all my mutual funds combined.

As far as putting my eggs in one basket, that is true, but I have been told that real estate is such a great investment , yada yada....anyways, I'm continuing to see what you guys think...
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
avalpert
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Post by avalpert »

tigerhartt wrote:I'm not sure if I stated my question correctly so I'll be more specific. My total portfolio is presently around 315K, and even a townhome in the Los Angeles area would be around that much, so I would have to take a home loan out to fund what would approximately be the same as all my mutual funds combined.

As far as putting my eggs in one basket, that is true, but I have been told that real estate is such a great investment , yada yada....anyways, I'm continuing to see what you guys think...
I do approach primary residence and real estate differently from a portfolio perspective. Your primary residence is not an investment - it is consumption. The choice of buying that should be made relative to other options for consuming shelter (including renting) and the various levels of utility you get from it.

On the other hand, invetment property should be considered part of your investment portfolio and should fit into it appropriately. And the best advice I can give is stop listening to the yada, yada, yadas - too much noise interferes with rational decision making.
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Post by tigerhartt »

Thanks avalpert and you are right, a home is not an investment. I am not looking at buying a home but an investment property. I am reading the WSJ book on real estate investment...I wouldnt buy it to "flip" it ...but use it as a source of income and tax deduction.
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by gassert »

There are many on this board with lots of experience in RE. My opinion is that RE does not have a high long term return above inflation. Further, RE rental investment should more appropriately be viewed as taking a second job - not making an investment. You may well purchase the property for X, invest Y and sell for Z in many years, but that is not the real cost. Your time, money, vacancy loses, etc are part of the pciture.

I would not purchase a RE investment that didnt cash flow +, which means probably 50% down. And even then you are probbaly breaking even on cash flow with your time and resources providing the extra return you think you'll be making. Maybe not any more than getting a second job and earning a few hundred a week.
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Post by Gekko »

what happened to chipmunk/dan? i miss his insights on RE.
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Post by Schooly D »

David Swensen, who manages Yale's endowment, suggests allocations to real estate of up to 20% in his model portfolios. If you can obtain low-cost exposure to diversified holdings of commercial real estate, then I don't think 10-20% is unreasonable, but the TIAA Real Estate Fund is the only investment vehicle I'm aware of that offers retail investors exposure to this asset class.
Cheers, | | David
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Post by tigerhartt »

thanks David...but the real real estate i was thinking about was an actual investment property..not a REIT, which I already have exposure to in my ROTH....

but thanks for your response :)
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by avalpert »

tigerhartt wrote:Thanks avalpert and you are right, a home is not an investment. I am not looking at buying a home but an investment property. I am reading the WSJ book on real estate investment...I wouldnt buy it to "flip" it ...but use it as a source of income and tax deduction.
What is your expected income and what are your annualized costs (including mortgage interest, insurance, taxes, maintenance - this is always understimated, management costs either hiring someone or in your time, marketing costs to find renters, risk of nonpayment etc.). What is the expected ROI? What other investment oppurtunities are you forgoing, so they have larger expected returns?

You can make money owning rental properties, most people don't make much doing it though...
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Schooly D
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Post by Schooly D »

tigerhartt wrote:thanks David...but the real real estate i was thinking about was an actual investment property..not a REIT, which I already have exposure to in my ROTH....

but thanks for your response :)
The TIAA Real Estate fund is not a REIT, it's direct ownership of commercial property, and its shares are not traded on any exchange, but it still may not be what you're thinking about.
Cheers, | | David
bb
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Post by bb »

Woudn't it be fair to say the expected return of real estate
(as an asset class) should be expected to fall somewhere
between the return of bonds and the return of stocks?
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tigerhartt
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Post by tigerhartt »

My bad David....again my ignorance is for all to see! If you dont mind my asking what's the different between a REIT and the TIAA product?
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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marbleous
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Post by marbleous »

I recently considered doing something similar.

We had owned our home outright and were moving out of state for a new job. The good news was was that the company was going to help us relocate which included buying out our old house if it did not sell. The bad news was that it was not going to sell (at least anywhere near what paid for it six years ago). If we had sold it two years ago we would have made 20%, but it looks like we are going to lose 20% instead.

Long story short, we also considered keeping it and renting it out. We ran the numbers and conservatively estimated making about a 2% annual return (this included insurance, taxes, maintenance, risk of nonpayment etc. and excluded any mortgage) before any appreciation. We concluded that in the near term we did not expect appreciating home values to add to that 2% return significantly, and decided to take the company buy out and invest our money elsewhere. The fact that we would have had to manage this property from out of state made this decision even easier to make.

I'll probably put some of that money into REITs instead.

P.S. If you do go ahead with this investment make sure you know the tax code inside and out (like how to depreciate assets & improvements and know the difference between those and maintainence).
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Post by tigerhartt »

thanks Marbelous...that seems to be the common opinion of the posters so far..I love the insight everyone has!
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by Schooly D »

tigerhartt wrote:My bad David....again my ignorance is for all to see! If you dont mind my asking what's the different between a REIT and the TIAA product?
Check out the explanations on the following two threads:

http://www.bogleheads.org/forum/viewtop ... light=tiaa

http://www.bogleheads.org/forum/viewtop ... light=tiaa
Cheers, | | David
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Investment property needs a long horizon

Post by bozo »

My wife and I bought a condo in Maui in 1989 for $550K (at the Kaanapali Alii). The market proceeded to tank, and within three years, it was worth 60% of the purchase price. Oh well. We then decided to upgrade the unit and, to the tune of $250K, gutted it and turned it into a showcase (of sorts).

Now, the assessed value is $1.8 million, and it's renting for about $550/night. If you do the math, we could have done equally as well on a CD.

You just have to have patience, a bit of liquidity (if you need to renovate), and more patience.

It took us over 15 years to get anywhere near cash-flow positive, so be warned. Investment real estate is not for the weak. There are tax benefits, but unless you really, really, want to own the place (in our case, it is our retirement home), real estate investments are for the professionals.

Yours,

Bozo
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Post by Dale_G »

I owned apartment buildings from the fifties to the eighties. I'm not complaining, aside from the thousands of hours of sweat equity, I did OK.

4-plex, 8-plex, 16-plex and up 64-plex apartments can work for small investors. Warehouses, small strip-malls and small office buildings can also work. In most cases though, you will be up against professionals. If you are willing to outbid the pros, you'll have to wonder what they know that you don't.

Duplexes are fine if you live on one side. They are a great way for a little guy to get started.

Single family homes are generally lousy investments for rental purposes. Why? Because the prices are set by buyers who place an intangible value on the dwelling that is higher than the shelter value. They want to "own"; to paint the place pink if they like; replace the lawn with pansies or whatever. Renters are unlikely to benefit from these intangibles and are willing to pay rent only for the shelter value.

And in the single family arena, be aware that you are competing with amateurs, not businessmen. The amateurs are desperate for some cash flow, don't understand the time value of money, or don't understand opportunity cost. The rental income cannot service the debt, pay expenses and provide a profit.

In my area (central Florida), foreclosures of single families are going for about 2/3rds of their 2005 selling prices. They need an additional haircut of about 40% before I will buy one as an investment rental.

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Post by tigerhartt »

thanks Dale..and Dave and Bozo...all very interesting!! You have lot of experiences...
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by norak »

Buy a house to live somewhere. As an investment, real estate can be risky because you're putting a lot of money into just one house. What if something happens to this house? Zoning law changes might put it near a factory, erosion might destroy the soil, etc. If you put money into REITs or an equity index fund you'll be invested in hundreds or thousands of different companies.

Economist Gary Shiller shows that median price increases in American property in the last century has averaged 0.2 per cent per annum in real terms, hardly beating inflation.
"Divide what you have into seven parts, or even into eight, because you don't know what disaster may happen on earth." Ecclesiastes 11:2
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Post by Prokofiev »

As has been posted many times before . . .

Rental real estate is a job - not an investment. If you have knowledge of the local RE market and can handle repairs and have the patience to deal with renters and leases and late nite calls, then maybe it is a good idea.

On the other hand if you are a professional with a good education, a good job and advancement opportunities, I would tell you to simplify (and diversify) your portfolio by NOT having rental units and concentrate on your profession. In the end, life will be much easier and you'll make more money.

Good Luck, -P
Everything should be made as simple as possible, but not simpler - Einstein
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Post by trefoil »

I want to add one more word: liquidity. You can't easily buy into it gradually or sell out gradually, or rebalance between this property and other asset classes. You also don't know how much it's really worth until you've actually sold it, whereas with mutual funds or shares you can, and of course there are delays and expenses in selling.

So $500k in eg Vanguard can be turned into $500k cash, plus or minus a couple of percent, within a day or two. A condo nominally worth $500k might take months to sell and you may get only 80% of what you expected, not to mention costs of selling. To me this is worth something even if I knew the condo would have a higher average return.

To some extent debt against a real property can simulate liquidity, and an advantage here is that (maybe until recently) debt backed by real estate got better conditions than leveraged equities. But if you already own a home perhaps you've got those two covered.
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Post by BigJimmy »

My brother works as a real estate broker in Florida and he keeps complaining and complaining. He claimed that there is simply nobody who is willing to buy there.
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Post by Tramper Al »

tigerhartt wrote:I'm not sure if I stated my question correctly so I'll be more specific. My total portfolio is presently around 315K, and even a townhome in the Los Angeles area would be around that much, so I would have to take a home loan out to fund what would approximately be the same as all my mutual funds combined.
Unless I am not understanding your math, this sort of RE investment would not then represent 50% of your investment portfolio, but actually 100%. Crazy indeed.

Right now you are +$315 prudent, liquid investments right?

Buying an "investment" townhome would make you (approximately to be round numbers, bear with me):

+$315K prudent, liquid investments
+$315K "investment" townhome
-$315K debt

Is that about right, ballpark, then?

In my book this is 200% invested, and thus 100% in "investment" townhome. The portfolio of RE and liquid investments is highly leveraged, but I think you know that. You could end up with more "tax relief" than you ever dreamed of.
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Post by tigerhartt »

haha...well i get the gist of it Tramper...I am very thankful again for all of the good points....

makes me wonder why people are always saying that RE is so great ...
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by avalpert »

tigerhartt wrote:haha...well i get the gist of it Tramper...I am very thankful again for all of the good points....

makes me wonder why people are always saying that RE is so great ...
Because people are constantly paying them for there "system" exploiting real estate...
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Post by tigerhartt »

no i mean people who arent on late night TV..speaking of which where did those midgets go?
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by Prokofiev »

tigerhartt wrote:no i mean people who arent on late night TV..speaking of which where did those midgets go?
You mean these guys??

Think Big!

http://www.cashflowgenerator.com/orland ... eakers.htm
Everything should be made as simple as possible, but not simpler - Einstein
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Post by tigerhartt »

haha....you're amazing...those are financial mentors...think big, buy high, sell low!
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by psteinx »

I generally agree with the other posters here.

When I was fresh out of college (early 90s), 4 family units in a livable, but not great part of town around here went for around $60K, give or take. I bought one, lived in one unit, and rented the others. It was cash flow positive and went pretty smoothly, as 2 of the 3 units were occupied by long-ish term renters and I was able to keep the other unit rented out consistently too.

A bit later, I took a job that had me out of town most of the time, but also around that time I foolishly bought another 4-flat. The second 4 flat was a nightmare. I tried to use an agent to manage and rent the units out, but it had lots of vacancies, bled money, and was a general headache.

After a while, I became a "don't want-er" and sold both units at a loss.

Had I been in-town and willing to commit the time, I think I could have done fine with them, keeping them both cash-flow positive. It wouldn't have taken a great deal of expertise, but would have taken time.
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Post by q man »

Tigerhart:

Through the years my wife and I have dabled in rental properties with some sucess. We have been involved in both commerical and residential. My thoughts are since you aren't putting up all your assets and it seems you have done your home work and are willing to work. I say why not. The more of the work you do yourself the more money you will make. Through the years you will get some good tax write offs plus some appreciation in value plus the income. Remember the folks posting on this thread telling you not to invest in realestate have never done it nor will they every. These off the wall replies make for good reading.
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Post by trefoil »

q man wrote:Remember the folks posting on this thread telling you not to invest in realestate have never done it nor will they every.
That is obviously not true. Some respondents say they have owned real estate, and for others such as myself you have no idea whether they do or not. If you're going to post please respond to the question rather than attacking other participants.

To tigerhartt: John T Reed <http> says something interesting which is that in the normal case, residential real estate will have negative cashflow: the interest on the mortgage will be less than you earn in rent, especially once other costs are taken into account. Otherwise, the resident would be better off paying the mortgage themselves. Note that this is only speaking about cashflow, not possible long-term appreciation.

There can be exceptions to this normal case: if you're renting to short term tenants, or people with poor credit who couldn't get a mortgage, or if you buy at an especially good price or manage to keep costs very low. Having a big deposit is not an exception because you have to offset the income you would otherwise have made from that money.

I thought this was an interesting way to look at it. I don't have the numbers to hand but I have read previously that the majority of rental properties are in fact cash-flow negative.
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Post by Prokofiev »

q man wrote:Tigerhart:

Remember the folks posting on this thread telling you not to invest in realestate have never done it nor will they every. These off the wall replies make for good reading.
Not sure which replies are "off the wall", but I have managed a condominium complex for 25 years and have owned a rental unit. My parents, brother and father-in-law have lots of experience in owning rental units, houses and commercial RE. You can do well if you have the right skill set and mind set, but IMO it is a job more than an investment.

Without knowing what other opportunities a person has, it is difficult to give decent advice. Someone without a college degree and a promising profession may well find RE a resonable venture - and I have known many people for whom this is true (such as my father). But for someone with a good career, I would seriously consider putting my time and energy into my profession and keep my portfolio as diversified and liquid as possible.

One final note . . . Nothing could make the risk of undiversified RE clearer to me than an event like Hurricane Katrina. I have several friends who were wiped out by this "balck swan" event. Their home, investments and job were all under water . . . quite literally.
Last edited by Prokofiev on Wed Jun 25, 2008 11:51 am, edited 1 time in total.
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Post by trefoil »

tigerhartt wrote:makes me wonder why people are always saying that RE is so great ...
I can think of a few reasons.

As others said, some of them are saying it because they make lots of money when you buy it. I've never heard a realtor say it's a lousy time to buy.

People are generally emotionally much more willing to take high leverage on real estate, and banks are more willing to give it to you. So even if the average returns are mediocre, if you're applying it to a 10x or 20x larger base it may perform better. Of course you don't get something for nothing, as we have recently seen in the news.

Because of this it's easy for Kiyosaki and co to project high returns for people investing in highly leveraged property. The boglehead projection that you might make about 10% pa in the long term is pretty boring.

We probably are coming off the end of a long bull run in investment properties. You can find the data elsewhere but basically the growth in house prices compared to income has been very high for many years. So people who bought over ten years ago may genuinely have done well, but this probably implies lower rather than higher returns going forward.

I think many people have more comfort in real estate investment as compared to a single stock or mutual fund. You can get a warm glow looking at your rental property and see it's still standing upright and the tenants are looking after it. With a mutual fund you can look at a shopping mall or google.com and know you own one billionth of it, but that's not quite the same feeling. :-) With equities or funds you can see (and worry about) the value fluctuating every day. Because property is not marked to market the fluctuations still happen but are hidden. Companies sometimes collapse and make the headlines, and scare people off stocks. A house might collapse, be resumed by the state, or need expensive remediation and this can be devastating to the owner but rarely makes the news.

Also: if you take any half-decent strategy, not necessarily the best, and keep putting money into it for years or decades, you'll probably end up better off. So it's easy for people to say "it worked for me" about residential real estate, stock picking, market timing or whatever. They are be telling the truth but they don't look at what was down the road not taken, and whether that road might be a better course for someone else.

So that's why I think people are more keen on it than the numbers suggest is justified.
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Post by Prokofiev »

trefoil wrote:
tigerhartt wrote:makes me wonder why people are always saying that RE is so great ...
I can think of a few reasons . . .
. . . So that's why I think people are more keen on it than the numbers suggest is justified.
I think an even bigger reason is that most people have no clue what their compounded ROR is . . . not for their portfolios and especially not for any RE investment.

Most remember what they paid for the property and what they sold it for years later. Paid $100k and sold for $200k. Doubled their money. Cool!

But they forget closing costs, financing costs, RE taxes, repairs, legal fees and selling commisions, etc. Trying to actually compute your ROR in RE is difficult and usually over-estimated.

Also you hear from the winners (and promoters) but seldom from the losers. RE returns are VERY time period dependent. I bought a condo in 1983 for $90k. By 2000, it was worth $80k (17 years). But by 2007 it was worth $190k. Those who bought in 2000 and sold recently are very vocal about their gains. But the previous 17 years saw many owners and investors take a bath in our RE market.
Everything should be made as simple as possible, but not simpler - Einstein
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tigerhartt
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Post by tigerhartt »

well one of the reasons I was told to buy some RE was to get the tax deduction, as I said in one of my first posts, I'm single with no kids and am on the tail end of my home's 15 year fixed mortgage..so almost out of any really good source of tax deduction..
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by kerry75 »

My wife and I own a small commercial building currently rented to a building trades organization. We originally bought it for our own use as a retail store but later decided to simply rent it out.

Our property is located in a resort area close to New York City where a paucity of commercial property and restrictive zoning have severely limited opportunities for businesses to open. While we have had periods of vacancies, in general it has a good rental history as a triple-net property (taxes, insurance, utilities and minor upkeep paid by tenants), rent escalation clauses in multi-year leases, etc. We write a tight, building-specific lease that we have found addresses those eventualities that we have encountered as well as those that we can forsee. Nevertheless, there will always be unforseen issues.

It's our belief that commercial properties located in good locations are usually in demand and it's also a lot easier to evict a commercial tenant than it is to evict a family with children from a rental home. We get large cash deposits and offer a lease on a "take it or leave it" basis knowing that there are few alternatives for businesses. We treat our tenants fairly but firmly but make them understand that we're in charge so they realize that the continuance of their operation requires them to honor our lease and respect our property.

Commercial tenants would rather stay than constantly move and disrupt their commerce so five and seven year leases seem to be the norm. We get inquiries from organizations looking to buy, lease or redevelop our property, a situation that is not that frequently encountered with houses. This, we feel, indicates that our property has greater marketability and enhances our options in the future. We would consider further properties like this if were we so inclined but being semi-retired and simply looking to give the property to our son upon our deaths, we'll hold on to it as long as it makes sense.
Last edited by kerry75 on Thu Jun 26, 2008 7:20 pm, edited 4 times in total.
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tigerhartt
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Post by tigerhartt »

thanks Kerry its an interesting insight in the differences between commercial and residential.....i'm sure there are alot of laws/codes/regulations (like handicapped laws for example) that make them different from residential...I'd love to have your experience and know how!
All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince. | Plato
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Post by smithdad »

makes me wonder why people are always saying that RE is so great ...
I agree it is because people either tend to pay attention to real estate or they tend to only own real estate as an appreciable asset. Some people either do not invest or do not keep up with their investments over time (i.e. they just stash money away in whatever junk mutual fund is in their 401-k and view it as a chore to put away money). I have heard "I bought this house 30 years ago for only $30k and now is it worth $100k!" so many more times than "I invested $30k 30 years ago and now it is worth $600k". I know which looks better to me!

Only problem is that 30k-100k on the house everyone is so amazed by was only a 4% return not including the interest you paid in the mortgage, the taxes, the insurance, maintenance, etc. I think it is a big misunderstanding in the time value of money in a large percentage of folks floating around out there.
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sperry8
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Land?

Post by sperry8 »

Very interesting post re RE. I am considering buying a vacant lot/land and holding it. It would be land that is within 5 miles of a major city. Other than property taxes (which are 1% in CA) I dont believe there are any costs to hold. Does anyone have any experience with this type of RE investment?
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BigJimmy
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Post by BigJimmy »

I had been thinking about getting myself some land as well (always wanted to get some nice Florida property where I could spend the rest of my life) but I'm still afraid to really invest my money into RE.
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Post by trefoil »

smithdad wrote:I have heard "I bought this house 30 years ago for only $30k and now is it worth $100k!" so many more times than "I invested $30k 30 years ago and now it is worth $600k". I know which looks better to me!
Coincidentally just the other day someone was telling me how their house doubled in value in 10 years, and they were very pleased by that. Rule of 72.
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White Coat Investor
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Re: Land?

Post by White Coat Investor »

sperry8 wrote:Very interesting post re RE. I am considering buying a vacant lot/land and holding it. It would be land that is within 5 miles of a major city. Other than property taxes (which are 1% in CA) I dont believe there are any costs to hold. Does anyone have any experience with this type of RE investment?
The problem with this type of real estate is there is no income. In fact, there is negative income when you consider property taxes, liability insurance, and transaction fees. So you are relying ONLY on growth in value of the property. As real estate growth has been pretty high the last decade, it seems reasonable that future growth will be at a lower rate.

Choose the property VERY carefully unless it is a property you plan to build your future home on later.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Land?

Post by Valuethinker »

sperry8 wrote:Very interesting post re RE. I am considering buying a vacant lot/land and holding it. It would be land that is within 5 miles of a major city. Other than property taxes (which are 1% in CA) I dont believe there are any costs to hold. Does anyone have any experience with this type of RE investment?
Think about who you will sell it to, and whether they will be able to develop it.

In CA this means 1). zoning and 2). water. These are critical. If there is no prospect of zoning, and no access to water rights (or no prospect) then you have a problem.

Right now, with the housebuilders being crushed and lots of forced liquidations, properties are probably relatively cheap.

However:

- you will have to hold the land for some time (I would guess 5 years +)

- the value will be volatile (rough rules of thumb: 1/3rd of the value of a house is the cost of building the house, 1/3rd is site costs like access, sewerage etc., 1/3 is land cost)-- if the price of a $1m house falls by $100k, the site and building costs will likely not fall, so the land under the new house is now worth only $200k

- you have agents fees both ways

- you could get squeezed: if some developer buys the land around you, you can really only sell to him. In my experience, zoning decisions go with the big guns with the best (and most expensive) lawyers: see the wonderful John Sayles film 'Sunshine State' for an example of poor people being squeezed by a Florida developer

- of course you have liability and insurance issues. Some kids break into your land on quad bikes, have an accident, 16 year old is paralyzed for life. Are you then liable for the $2m or so to keep that kid in a wheelchair for the next 60 years? I believe in at least one case, even though access was obtained illegally, the answer was yes.

So this is kind of a business, rather than a diversified investment per se. Needless to say, it is not remotely diversified.

If you think you want to go into the land ownership and trading business, this could be a good move. I'm pretty bullish about California housing, long run (as opposed to the likely disaster for the next 2-3 years perhaps).
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