Is there any reason to invest in real estate?

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bantam222
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Is there any reason to invest in real estate?

Post by bantam222 » Tue Nov 28, 2017 2:52 am

Suppose I have the following investment options for my non-retirement savings:
- Option A: Index funds (US + International + Bond) - typical Boglehead 3 fund portfolio
- Option B: Invest in individual real estate (purchase property and rent / hold for appreciation)
- Option C: Invest in REIT funds

Many people invest in the real estate market as part of their investment portfolio. I am trying to decide if it is worth looking into this area as a possible investment, but I am having a hard time convincing myself it is profitable. Please review my thinking and let me know if you have any counterpoints.

My logic is as follows:
- Suppose Bob is your typical real estate investor - purchases one or two additional properties and rents them out
- Suppose there are 1000 of other people in the country, doing the same thing as Bob
- It seems REIT funds are essentially pooling the 1000 investors money, making essentially the same purchases, then giving each investor 1/1000th of each property. It seems like this REIT fund would have to be better than the individual investors. It has many benefits such as increased diversification (seems very important for real estate), can hire a few experts that make all the purchases rather than having 1000 individual investors try to learn. Have more capital to get in on more expensive properties that may have more revenue potential (thinking condo or apartment complexes). The downside would be the management fee of these experts to run the REIT, but that cost seems like it would not outweigh the benefits.

Therefore, it seems like we can conclude investment option C (REIT) > investment option B (individual real estate)

Furthermore, the general advice on Bogleheads seems to be that Index funds (total us stock + total intl + bond) portfolio is better than REITs. I hardly ever see REITs recommended on this board for any reason.

Therefore, it seems like we can conclude investment option A (3 fund portfolio) > investment option C (REIT)

Therefore:
investment option A (3 fund portfolio) > investment option C (REIT) > investment option B (individual real estate)

Therefore, there is no reason to diverge from the recommended Boglehead 3 fund portfolio.
Q.E.D.

Thoughts? Please poke holes in my logic. This is obviously very high level comments but I hope I have not missed any major points. I am looking for ways to further optimize my portfolio but not seeing any justification to move out of the stock market right now.

bogglehead125
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Re: Is there any reason to invest in real estate?

Post by bogglehead125 » Tue Nov 28, 2017 3:20 am

Is it obvious that REITs are better than individual real estate holdings? REITs are better diversified, I agree! But some people seem very certain that there is tax magic to actually owning real estate (1029 exchanges, depreciation, etc.).

Another argument you will see here is that much real estate is privately held, so TSM underweights. It's unclear how compelling this is. It's not obvious, for example, that REITs are a good random sample of all real estate -- I get the sense that REITs are mostly commercial leases and shopping malls.

FWIW, I don't have any REITs or real estate.

magneto
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Re: Is there any reason to invest in real estate?

Post by magneto » Tue Nov 28, 2017 3:34 am

Diversification.
Won't always work when you need them as Stocks slump.
But did work extremely well for us with yields on RE at one point (when Stocks were severely over-valued) exceeding 10X yields of Stocks.
RE valuations (not pricing) like Stocks move in cycles. Sometimes the cycles coincide, sometimes not.
That's useful :happy
'There is a tide in the affairs of men ...', Brutus (Market Timer)

Valuethinker
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Re: Is there any reason to invest in real estate?

Post by Valuethinker » Tue Nov 28, 2017 5:45 am

bogglehead125 wrote: โ†‘
Tue Nov 28, 2017 3:20 am
Is it obvious that REITs are better than individual real estate holdings? REITs are better diversified, I agree! But some people seem very certain that there is tax magic to actually owning real estate (1029 exchanges, depreciation, etc.).

Another argument you will see here is that much real estate is privately held, so TSM underweights. It's unclear how compelling this is. It's not obvious, for example, that REITs are a good random sample of all real estate -- I get the sense that REITs are mostly commercial leases and shopping malls.

FWIW, I don't have any REITs or real estate.
There's a decent chunk of apartment buildings in the US REIT index. Around 20% (without checking). And the most stable in terms of returns- -when the housing market is doing well, people cannot afford to buy. When it is doing badly, they go back to rental accommodation or continue to live in it.

Given the fall in value of retail, I suspect the majority is offices (including healthcare). Distribution centers a growing proportion.

By definition these are commercial leases.

dbr
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Re: Is there any reason to invest in real estate?

Post by dbr » Tue Nov 28, 2017 10:10 am

You can read the many threads and sections of books and blogs on possible diversification benefits of investing in REIT stocks, which are not actually real estate themselves.

There have also been many threads on holding actual real estate, whether houses, apartment buildings, etc. There are a number of posters on the forum who do so and are apparently successful at it. We have also occasionally heard from posters who seem to proposing relatively unadvisable schemes involving real estate. A lot of people would suggest that owning individual real estate is more akin to operating a business than holding an asset. Others may demur on that.

Swedroe includes real estate among the "good" in his book: https://www.amazon.com/Only-Guide-Alter ... lternative

racy
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Re: Is there any reason to invest in real estate?

Post by racy » Tue Nov 28, 2017 10:20 am

FWI ... half the Lazy Portfolios have a REIT fund, averaging about 10% of the portfolio. https://www.marketwatch.com/lazyportfolio

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Svensk Anga
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Re: Is there any reason to invest in real estate?

Post by Svensk Anga » Tue Nov 28, 2017 11:25 am

My take is that un-levered real estate has very unimpressive returns. Property generally appreciates at the rate of inflation or a bit more (and maybe a lot more in some locales.) Rental income will provide whatever the local market will bear. May be good, may be poor, may be cyclical.

Lever it up and your return on equity can be pretty good. Of course your risk level goes up as well. It seems less risky to lever real estate than equities. One does have to worry about vacancy rates and pricing pressure on rental income.

REITS ought to return like levered real estate and did 20 or so years ago. No longer, as hordes of folks chasing yields have bid up REIT prices to where expected returns are poor. We have seen this before. Make an asset class easier to invest in and returns shrink from the levels in the historical record.

I suspect that directly held real estate is one area where the small investor can do well by executing proper due-diligence and patient trading. That is, learn the nuances of your local market so you can spot good deals, maybe offer on a dozen properties before you luck onto a desperate seller willing to take your low-ball bid, similarly find the price-insensitive tenant. But all of this is work and risk and should usually (not always) be rewarded.

Anyone thinking of becoming a real estate investor should read "The Great Depression: a Diary" by Benjamin Roth. If you thought you were safe from the stock market crash of 1929 because you were heavy in real estate rather than equities, you were wrong. Rents were often noncollectable. Prospective tenants had no income or else had no job stability. There was deflation, so your loan payments were higher every year in real terms. Property tax and maintenance bills just kept coming.

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Sandtrap
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Re: Is there any reason to invest in real estate?

Post by Sandtrap » Tue Nov 28, 2017 1:12 pm

Suppose I have the following investment options for my non-retirement savings:
- Option A: Index funds (US + International + Bond) - typical Boglehead 3 fund portfolio
- Option B: Invest in individual real estate (purchase property and rent / hold for appreciation)
- Option C: Invest in REIT funds
You may be comparing apples and oranges.

A: is an investment in funds. The Boglehead path is proven.

B: is a business. Do you want to be in business. R/E income property done correctly is a fully immersive business in which you must be a consummate professional. Those that do not learn and apply what they learn diligently will get burned. It is not as passive as it may seem on paper or in a book. Rent and the all famous "leverage" and appreciation is not a given. A 6% net CAP and 5-10% annual appreciation is not a given, sometimes "blue sky". (Although R/E income property does sell a lot of books and seminars.) B. May also have less of a correlation to market movement as A. & C.

C: REITs are closer to A.

As in all investing, it depends on your risk tolerance and how much you want to get involved/immersed.
j :D
Last edited by Sandtrap on Tue Nov 28, 2017 1:19 pm, edited 1 time in total.

Jack FFR1846
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Re: Is there any reason to invest in real estate?

Post by Jack FFR1846 » Tue Nov 28, 2017 1:17 pm

I'll take none of the above, thanks. And that's exactly what I do. My taxable is all in broad market US stock ETFs. (VTI and SCHB). I balance into a 3 fund using my tax advantaged accounts. If I want another job, I'll go out and find a part time second job that I can quit anytime I want with zero obligation and zero skin in the game. Can't do that by buying real estate. You could by buying REITs but I'm not a fan of the taxation, risk, volatility and complexity. SCHB and VTI have all the real estate I need, aside from my house and the surrounding forest land.
Bogle: Smart Beta is stupid

miamivice
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Re: Is there any reason to invest in real estate?

Post by miamivice » Tue Nov 28, 2017 1:18 pm

Purchasing actual real estate provides a number of perceived benefits:

1) If it is rentable property, it can provide an additional income stream.

2) It usually appreciates in value, at a steady and relatively consistent rate, so that particular asset can smooth out instability of stock market fluctuations.

3) It is less liquid than stocks/cash/bonds, which is a benefit to a person who might be tempted to spend liquid assets.

There are also perceived downsides but I think those have been hashed out enough.

With that said, I am not a fan of rental property for asset accumulation. My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords.

I am a supporter of purchasing vacant land in certain parts of the country. It requires little to no work, carries low liability, and generally appreciates (but at a slower rate than the stock market).

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Sandtrap
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Re: Is there any reason to invest in real estate?

Post by Sandtrap » Tue Nov 28, 2017 1:22 pm

miamivice wrote: โ†‘
Tue Nov 28, 2017 1:18 pm
Purchasing actual real estate provides a number of perceived benefits:

1) If it is rentable property, it can provide an additional income stream.

2) It usually appreciates in value, at a steady and relatively consistent rate, so that particular asset can smooth out instability of stock market fluctuations.

3) It is less liquid than stocks/cash/bonds, which is a benefit to a person who might be tempted to spend liquid assets.

There are also perceived downsides but I think those have been hashed out enough.

With that said, I am not a fan of rental property for asset accumulation. My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords.

I am a supporter of purchasing vacant land in certain parts of the country. It requires little to no work, carries low liability, and generally appreciates (but at a slower rate than the stock market).
Interesting observation.. . . very interesting. . . . where have these observations been made?
j

miamivice
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Re: Is there any reason to invest in real estate?

Post by miamivice » Tue Nov 28, 2017 2:36 pm

Sandtrap wrote: โ†‘
Tue Nov 28, 2017 1:22 pm
miamivice wrote: โ†‘
Tue Nov 28, 2017 1:18 pm
Purchasing actual real estate provides a number of perceived benefits:

1) If it is rentable property, it can provide an additional income stream.

2) It usually appreciates in value, at a steady and relatively consistent rate, so that particular asset can smooth out instability of stock market fluctuations.

3) It is less liquid than stocks/cash/bonds, which is a benefit to a person who might be tempted to spend liquid assets.

There are also perceived downsides but I think those have been hashed out enough.

With that said, I am not a fan of rental property for asset accumulation. My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords.

I am a supporter of purchasing vacant land in certain parts of the country. It requires little to no work, carries low liability, and generally appreciates (but at a slower rate than the stock market).
Interesting observation.. . . very interesting. . . . where have these observations been made?
j
Online forums, co-workers, friends, colleagues. And on here some.

Other than Bogleheads, I don't know anyones actual net worth. So I can't say definitively. But I have the definite impression that a lot of landlords are that way because an opportunity fell in their lap (perhaps they were renters of a duplex and then the landlord decided to sell the place, so they bought it and now lease 1/2 of the duplex), or perhaps they couldn't sell their house when they upgraded and decided to rent instead. Or perhaps they inherited a house and decided to rent it out. In other words, it seems that a lot of landlords I know are not far removed from being renters themselves.

The impression that I have of most landlords is NOT that they have a $1,000,000 (or whatever) in investable assets, and they sat down one day to decide how to invest the money, and they decided to purchase 4 homes and rent them out. That would definitely NOT reflect my impression of most landlords. (Although, I'm sure there are a few that have done that.)

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4nursebee
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Re: Is there any reason to invest in real estate?

Post by 4nursebee » Tue Nov 28, 2017 2:47 pm

My 3 rentals have returned at least 20% ROI, nuff reason for me! I expect they have significantly appreciated also.
4nursebee

KyleAAA
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Re: Is there any reason to invest in real estate?

Post by KyleAAA » Tue Nov 28, 2017 2:48 pm

REITs buy you diversification and liquidity, but tend not to be especially highly leveraged (typically under 50% vs 80% for small landlords) and tend not to invest in the types of properties small landlords invest in (single family homes, duplexes, etc). By necessity, REITs tend to invest exclusively in commercial properties (including large apartment buildings), although I think there are one or two SFH REITs these days. They also can't get financing at rates as low and with terms as favorable as small landlords are able to because small landlords can get owner-occupied financing for at least some of their properties. One does not necessarily replace the other. It would be reasonable to invest in SFHs and duplexes directly but add a REIT allocation to cover the commercial space and many people do. A skilled investor can generally do significantly better with direct investment while unskilled investors will tend to do better with REITs.

Stormbringer
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Re: Is there any reason to invest in real estate?

Post by Stormbringer » Tue Nov 28, 2017 8:24 pm

I own 15 rental properties. They are a pain, but I've managed to get an 18% return on average over the past 23 years. It's very different from investing in listed securities, and not for everyone.
"Compound interest is the most powerful force in the universe." - Albert Einstein

technovelist
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Re: Is there any reason to invest in real estate?

Post by technovelist » Tue Nov 28, 2017 8:42 pm

As some famous person said (paraphrased), "If you want to invest in real estate, buy an REIT. REIT's never call you up in the middle of the night because their toilet isn't working."
In theory, theory and practice are identical. In practice, they often differ.

Matt Y.
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Re: Is there any reason to invest in real estate?

Post by Matt Y. » Tue Nov 28, 2017 10:42 pm

Stormbringer wrote: โ†‘
Tue Nov 28, 2017 8:24 pm
I own 15 rental properties. They are a pain, but I've managed to get an 18% return on average over the past 23 years. It's very different from investing in listed securities, and not for everyone.
Hi Stormbringer:
Is that an 18% annualized ROI (compounded/ averaged) for all 15 properties over the 23 years --- or --- an 18% ROI over the total 23 year period?

Growing up, my parents owned several rental properties - some with over a dozen units. It was a lot of work and at times a pain. Some variables include socioeconomics of tenants/ neighborhood, age of structure, number of units, etc...

20-years after sale of a good sized property, when the seller financed loan had been paid off at year 18, fuel was discovered to have contaminated the soil beneath the property via an underground leaky tank from an adjacent gas station.

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Sandtrap
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Re: Is there any reason to invest in real estate?

Post by Sandtrap » Tue Nov 28, 2017 11:16 pm

miamivice wrote: โ†‘
Tue Nov 28, 2017 2:36 pm
Sandtrap wrote: โ†‘
Tue Nov 28, 2017 1:22 pm
miamivice wrote: โ†‘
Tue Nov 28, 2017 1:18 pm
Purchasing actual real estate provides a number of perceived benefits:

1) If it is rentable property, it can provide an additional income stream.

2) It usually appreciates in value, at a steady and relatively consistent rate, so that particular asset can smooth out instability of stock market fluctuations.

3) It is less liquid than stocks/cash/bonds, which is a benefit to a person who might be tempted to spend liquid assets.

There are also perceived downsides but I think those have been hashed out enough.

With that said, I am not a fan of rental property for asset accumulation. My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords.

I am a supporter of purchasing vacant land in certain parts of the country. It requires little to no work, carries low liability, and generally appreciates (but at a slower rate than the stock market).
Interesting observation.. . . very interesting. . . . where have these observations been made?
j
Online forums, co-workers, friends, colleagues. And on here some.

Other than Bogleheads, I don't know anyones actual net worth. So I can't say definitively. But I have the definite impression that a lot of landlords are that way because an opportunity fell in their lap (perhaps they were renters of a duplex and then the landlord decided to sell the place, so they bought it and now lease 1/2 of the duplex), or perhaps they couldn't sell their house when they upgraded and decided to rent instead. Or perhaps they inherited a house and decided to rent it out. In other words, it seems that a lot of landlords I know are not far removed from being renters themselves.

The impression that I have of most landlords is NOT that they have a $1,000,000 (or whatever) in investable assets, and they sat down one day to decide how to invest the money, and they decided to purchase 4 homes and rent them out. That would definitely NOT reflect my impression of most landlords. (Although, I'm sure there are a few that have done that.)
That is quite interesting.
Thank you for sharing.
j :D

WanderingDoc
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Re: Is there any reason to invest in real estate?

Post by WanderingDoc » Wed Nov 29, 2017 12:55 am

There are plenty of reasons. INCOME, and not having to work for 30-40 years are just two.

I have just started my career post training, but my monthly net real estate income already cover my basic expenses. I pay little to no tax on rentals legally. Tenants and the bank do all of this for you.

If I just invested 20% of my income into 401k and IRA mutual funds, I'd be waiting a long time (decades) before having the option to go part time or pursue other passions.

My real estate investments pay a >20% annualized return on the low end. On the high end, I have pulled refi'd all my "all in" on a deal, yielding a return of infinity. Its just math. Try doing that with an index fund.
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

CurlyDave
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Re: Is there any reason to invest in real estate?

Post by CurlyDave » Wed Nov 29, 2017 3:53 am

miamivice wrote: โ†‘
Tue Nov 28, 2017 1:18 pm
... My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords..
My observation is exactly the opposite, except at the very top of the population, where Warrant Buffet and Bill Gates have higher net worth than Donald Trump.

I know DW and I have both stocks and real estate, and we have done better in real estate in terms of money invested vs. current value.

The big advantage of RE is that I can put sweat equity into rental properties. When we bought fixer-uppers, we would get the whole family (DW, myself, stepson, daughter, and daughter's boyfriend) over working on the place. Nights, weekends, etc. I can't do that with stocks or REITs.

But, every successful small-time RE investor I have known has not been afraid of hard work and was willing to put in extra hours. If I have the down payment and a few thousand for materials, I can paint, improve, landscape, re-roof, etc. with our own labor. In a month I have added $20-25K to the value of the property and made it much more rentable.

The whole idea is that it is a family business. DW and I get the benefits first, and eventually the kids inherit their part.

The other part is that in RE, market timing worked for us. I would spend years watching the local RE market, and when it looked to be in a big slump, we would spend many hours each weekend driving to look at properties. Buying fixer-uppers in a depressed market was a great way to go.

Stormbringer
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Re: Is there any reason to invest in real estate?

Post by Stormbringer » Wed Nov 29, 2017 4:41 am

Matt Y. wrote: โ†‘
Tue Nov 28, 2017 10:42 pm
Is that an 18% annualized ROI (compounded/ averaged) for all 15 properties over the 23 years --- or --- an 18% ROI over the total 23 year period?
That would be annualized. It has done fairly well over the years. I bought my first 4-unit apartment building when I was 24 years old (my parents freaked out).

I am guilty of some market timing. I sold about half of my properties in 2006-07 after they had rapidly doubled in value (I was a little early) and then starting buying again in 2010.
Matt Y. wrote: โ†‘
Tue Nov 28, 2017 10:42 pm
Growing up, my parents owned several rental properties - some with over a dozen units. It was a lot of work and at times a pain. Some variables include socioeconomics of tenants/ neighborhood, age of structure, number of units, etc...
Yes, fortunately I also own a property management company that does all the work.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Stormbringer
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Re: Is there any reason to invest in real estate?

Post by Stormbringer » Wed Nov 29, 2017 4:45 am

CurlyDave wrote: โ†‘
Wed Nov 29, 2017 3:53 am
The big advantage of RE is that I can put sweat equity into rental properties.
There is a guy in my town who continuously buys foreclosures in his self-directed Roth IRA, fixes them up, and flips them. That sweat equity is essentially a stealth way to contribute more to his Roth.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Is there any reason to invest in real estate?

Post by technovelist » Wed Nov 29, 2017 9:01 am

CurlyDave wrote: โ†‘
Wed Nov 29, 2017 3:53 am
miamivice wrote: โ†‘
Tue Nov 28, 2017 1:18 pm
... My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords..
My observation is exactly the opposite, except at the very top of the population, where Warrant Buffet and Bill Gates have higher net worth than Donald Trump.

I know DW and I have both stocks and real estate, and we have done better in real estate in terms of money invested vs. current value.

The big advantage of RE is that I can put sweat equity into rental properties. When we bought fixer-uppers, we would get the whole family (DW, myself, stepson, daughter, and daughter's boyfriend) over working on the place. Nights, weekends, etc. I can't do that with stocks or REITs.

But, every successful small-time RE investor I have known has not been afraid of hard work and was willing to put in extra hours. If I have the down payment and a few thousand for materials, I can paint, improve, landscape, re-roof, etc. with our own labor. In a month I have added $20-25K to the value of the property and made it much more rentable.
Have you considered the value of your labor in calculating your returns?

If not, then you aren't comparing apples and apples, because stocks and REITs don't require labor.
In theory, theory and practice are identical. In practice, they often differ.

protagonist
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Re: Is there any reason to invest in real estate?

Post by protagonist » Wed Nov 29, 2017 9:05 am

One could argue the reason is diversification.

But I consider my home diversification enough. It's a fair chunk of my "net worth". If I 'invested" in real estate, my portfolio would become lopsided

https://observationsandnotes.blogspot.c ... -1900.html
Last edited by protagonist on Wed Nov 29, 2017 9:15 am, edited 2 times in total.

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Re: Is there any reason to invest in real estate?

Post by technovelist » Wed Nov 29, 2017 9:10 am

Stormbringer wrote: โ†‘
Wed Nov 29, 2017 4:41 am
Matt Y. wrote: โ†‘
Tue Nov 28, 2017 10:42 pm
Is that an 18% annualized ROI (compounded/ averaged) for all 15 properties over the 23 years --- or --- an 18% ROI over the total 23 year period?
That would be annualized. It has done fairly well over the years. I bought my first 4-unit apartment building when I was 24 years old (my parents freaked out).

I am guilty of some market timing. I sold about half of my properties in 2006-07 after they had rapidly doubled in value (I was a little early) and then starting buying again in 2010.
Matt Y. wrote: โ†‘
Tue Nov 28, 2017 10:42 pm
Growing up, my parents owned several rental properties - some with over a dozen units. It was a lot of work and at times a pain. Some variables include socioeconomics of tenants/ neighborhood, age of structure, number of units, etc...
Yes, fortunately I also own a property management company that does all the work.
Now you're talking! Why didn't we think of that? :oops:
In theory, theory and practice are identical. In practice, they often differ.

dbr
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Re: Is there any reason to invest in real estate?

Post by dbr » Wed Nov 29, 2017 9:12 am

protagonist wrote: โ†‘
Wed Nov 29, 2017 9:05 am
One could argue the reason is diversification.

But I consider my home diversification enough. If I 'invested" in real estate, my portfolio would become lopsided.
This is reasonable. The main reason for most people who read a forum centered on investing in stock and bond mutual funds to also invest in real estate is diversification. And I agree in a broad sense that owning a home does provide some diversification overall even though most people would not include a home, or probably any real estate, as part of a portfolio that is conceived as stocks and bonds.

There are people who invest in real estate as a business venture that has nothing to do with diversification. That is a fine undertaking for those who are able and willing to make a success of it. There are also people who own real estate willy-nilly perhaps as part of a family legacy or because it was a business but the asset is still there.

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Re: Is there any reason to invest in real estate?

Post by KyleAAA » Wed Nov 29, 2017 10:18 am

WanderingDoc wrote: โ†‘
Wed Nov 29, 2017 12:55 am
My real estate investments pay a >20% annualized return on the low end. On the high end, I have pulled refi'd all my "all in" on a deal, yielding a return of infinity. Its just math. Try doing that with an index fund.
An infinite return is mathematically impossible. If you have no money in the deal, the return is undefined, not infinite. Dividing a number by zero does not equal infinity. It may sound like semantics but it's not. If you truly had an infinite return you would be richer than Bill Gates off a single deal.

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Re: Is there any reason to invest in real estate?

Post by miamivice » Wed Nov 29, 2017 10:44 am

CurlyDave wrote: โ†‘
Wed Nov 29, 2017 3:53 am
miamivice wrote: โ†‘
Tue Nov 28, 2017 1:18 pm
... My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords..
My observation is exactly the opposite, except at the very top of the population, where Warrant Buffet and Bill Gates have higher net worth than Donald Trump.
The big advantage of RE is that I can put sweat equity into rental properties. When we bought fixer-uppers, we would get the whole family (DW, myself, stepson, daughter, and daughter's boyfriend) over working on the place. Nights, weekends, etc. I can't do that with stocks or REITs.

But, every successful small-time RE investor I have known has not been afraid of hard work and was willing to put in extra hours. If I have the down payment and a few thousand for materials, I can paint, improve, landscape, re-roof, etc. with our own labor. In a month I have added $20-25K to the value of the property and made it much more rentable.
You can disagree with my observation if you like, but I stand by it.
The other part is that in RE, market timing worked for us. I would spend years watching the local RE market, and when it looked to be in a big slump, we would spend many hours each weekend driving to look at properties. Buying fixer-uppers in a depressed market was a great way to go.
As far as market timing, that's a double edge sword. To make it work, you essentially have to be better at predicting the future than others around you. Plenty of others have failed as well...failing at real estate (since usually people owe big on real estate) can have catastrophic results.

I can say that my crystal ball is broken, sadly, so I don't try to predict the future.

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Re: Is there any reason to invest in real estate?

Post by Sandtrap » Wed Nov 29, 2017 10:50 am

CurlyDave wrote: โ†‘
Wed Nov 29, 2017 3:53 am
miamivice wrote: โ†‘
Tue Nov 28, 2017 1:18 pm
... My observation in life is those who have the highest net worth are stock market investors while those with the least net worth are landlords..
. . . . .
The big advantage of RE is that I can put sweat equity into rental properties. When we bought fixer-uppers, we would get the whole family (DW, myself, stepson, daughter, and daughter's boyfriend) over working on the place. Nights, weekends, etc. I can't do that with stocks or REITs.

But, every successful small-time RE investor I have known has not been afraid of hard work and was willing to put in extra hours. If I have the down payment and a few thousand for materials, I can paint, improve, landscape, re-roof, etc. with our own labor. In a month I have added $20-25K to the value of the property and made it much more rentable.
The whole idea is that it is a family business. DW and I get the benefits first, and eventually the kids inherit their part.

Congratulations on your successes. :sharebeer
Yes. It absolutely does work and can be a very profitable business path provided one has the skillset, intellect, and business instincts.
Personally, it's also challenging and gratifying.
But, it is not for everyone as it is, a business.
j :D

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Re: Is there any reason to invest in real estate?

Post by CurlyDave » Wed Nov 29, 2017 11:31 am

technovelist wrote: โ†‘
Wed Nov 29, 2017 9:01 am

...Have you considered the value of your labor in calculating your returns?

If not, then you aren't comparing apples and apples, because stocks and REITs don't require labor.
To me that is a feature, not a bug. There is no way for me to put my own labor into stocks and REITs.

What is the value of your spare time? There are a lot of ways to try to put a value on free time, but the practical aspect is that if I am not working on something to advance myself economically, I am going to be spending money on some kind of entertainment.

If you cut your own lawn, do you view that as "lost" free time, or as not having to pay a landscaper?

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Re: Is there any reason to invest in real estate?

Post by KyleAAA » Wed Nov 29, 2017 11:38 am

CurlyDave wrote: โ†‘
Wed Nov 29, 2017 11:31 am
technovelist wrote: โ†‘
Wed Nov 29, 2017 9:01 am

...Have you considered the value of your labor in calculating your returns?

If not, then you aren't comparing apples and apples, because stocks and REITs don't require labor.
To me that is a feature, not a bug. There is no way for me to put my own labor into stocks and REITs.

What is the value of your spare time? There are a lot of ways to try to put a value on free time, but the practical aspect is that if I am not working on something to advance myself economically, I am going to be spending money on some kind of entertainment.

If you cut your own lawn, do you view that as "lost" free time, or as not having to pay a landscaper?
I think technovelist's point is that you have to subtract out the value of the labor capital you inject into your real estate business before calculating returns to get a valid comparison. If you spend 10 hours on a weekend doing work, it is invalid to count the value of that labor as an investment return because it isn't: labor is capital. It is true that the ability to add value via labor is a feature, but you have to account for it when calculating return on investment because labor capital is part of the investment.

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Re: Is there any reason to invest in real estate?

Post by Sandtrap » Wed Nov 29, 2017 11:47 am

dbr wrote: โ†‘
Wed Nov 29, 2017 9:12 am
protagonist wrote: โ†‘
Wed Nov 29, 2017 9:05 am
One could argue the reason is diversification.

But I consider my home diversification enough. If I 'invested" in real estate, my portfolio would become lopsided.
This is reasonable. The main reason for most people who read a forum centered on investing in stock and bond mutual funds to also invest in real estate is diversification. And I agree in a broad sense that owning a home does provide some diversification overall even though most people would not include a home, or probably any real estate, as part of a portfolio that is conceived as stocks and bonds.

There are people who invest in real estate as a business venture that has nothing to do with diversification. That is a fine undertaking for those who are able and willing to make a success of it. There are also people who own real estate willy-nilly perhaps as part of a family legacy or because it was a business but the asset is still there.
Absolutely!
And vs vs.
j :D

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Re: Is there any reason to invest in real estate?

Post by randomguy » Wed Nov 29, 2017 11:50 am

CurlyDave wrote: โ†‘
Wed Nov 29, 2017 11:31 am

To me that is a feature, not a bug. There is no way for me to put my own labor into stocks and REITs.

I work 100 hours, get 10000 bucks and buy stocks. Isn't that putting labor into stocks?:)

Now I will say it is a lot easier to generate alpha in real estate investing than by being a stock market picker.

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Re: Is there any reason to invest in real estate?

Post by psteinx » Wed Nov 29, 2017 12:22 pm

Stormbringer wrote: โ†‘
Tue Nov 28, 2017 8:24 pm
I own 15 rental properties. They are a pain, but I've managed to get an 18% return on average over the past 23 years. It's very different from investing in listed securities, and not for everyone.
I'd be interested in a somewhat more detailed accounting. Cash on cash? Full IRR computation with inflows/outflows? Did you value your time and count that as an input?

I understand if you don't want to spend vast amounts of time documenting and backing up a claim in an online forum - I'm not necessarily asking for that (though it'd be really interesting if you wanted to share). Rather - are you really confident that the 18% claim is accurate and can be benchmarked against a return figure for a passive investment such as an equity index fund?

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Re: Is there any reason to invest in real estate?

Post by technovelist » Wed Nov 29, 2017 12:31 pm

KyleAAA wrote: โ†‘
Wed Nov 29, 2017 11:38 am
CurlyDave wrote: โ†‘
Wed Nov 29, 2017 11:31 am
technovelist wrote: โ†‘
Wed Nov 29, 2017 9:01 am

...Have you considered the value of your labor in calculating your returns?

If not, then you aren't comparing apples and apples, because stocks and REITs don't require labor.
To me that is a feature, not a bug. There is no way for me to put my own labor into stocks and REITs.

What is the value of your spare time? There are a lot of ways to try to put a value on free time, but the practical aspect is that if I am not working on something to advance myself economically, I am going to be spending money on some kind of entertainment.

If you cut your own lawn, do you view that as "lost" free time, or as not having to pay a landscaper?
I think technovelist's point is that you have to subtract out the value of the labor capital you inject into your real estate business before calculating returns to get a valid comparison. If you spend 10 hours on a weekend doing work, it is invalid to count the value of that labor as an investment return because it isn't: labor is capital. It is true that the ability to add value via labor is a feature, but you have to account for it when calculating return on investment because labor capital is part of the investment.
Yes, exactly. Otherwise we are dealing with something like Beardstown accounting, which I assume most people here would consider invalid.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Is there any reason to invest in real estate?

Post by miamivice » Wed Nov 29, 2017 1:16 pm

KyleAAA wrote: โ†‘
Wed Nov 29, 2017 11:38 am
CurlyDave wrote: โ†‘
Wed Nov 29, 2017 11:31 am
technovelist wrote: โ†‘
Wed Nov 29, 2017 9:01 am

...Have you considered the value of your labor in calculating your returns?

If not, then you aren't comparing apples and apples, because stocks and REITs don't require labor.
To me that is a feature, not a bug. There is no way for me to put my own labor into stocks and REITs.

What is the value of your spare time? There are a lot of ways to try to put a value on free time, but the practical aspect is that if I am not working on something to advance myself economically, I am going to be spending money on some kind of entertainment.

If you cut your own lawn, do you view that as "lost" free time, or as not having to pay a landscaper?
I think technovelist's point is that you have to subtract out the value of the labor capital you inject into your real estate business before calculating returns to get a valid comparison. If you spend 10 hours on a weekend doing work, it is invalid to count the value of that labor as an investment return because it isn't: labor is capital. It is true that the ability to add value via labor is a feature, but you have to account for it when calculating return on investment because labor capital is part of the investment.
Keep in mind, CurlyDave not only includes his labor but that of his family, including his daughter's boyfriend. They apparently don't get paid today, but are promised a future inheritance and are willing to put in manual labor today so they have a better inheritance years from now.

Honestly, the tasks (construction work)that CurlyDave saves money by doing himself are not highly paid tasks. Roofer's, for example, don't make a lot of money. I do far better working longer weeks at my day job than trying to be a construction worker on the side. And then there is the issue of supervision and quality of work that the daughter's boyfriend is doing. It's nice he's working for free or inexpensive rates, but that roof needs to be installed right. And he can't get injured in the process, otherwise, there is a potential liability claim.

So while I do consider real estate (landlording and flipping homes) to be one avenue of making money, and perhaps a desirable one for many, I will reiterate that those around me with the greatest net worth generally are not landlords and house flippers. If they happen to own a rental property it often is out of coincidence rather than intent.

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Re: Is there any reason to invest in real estate?

Post by miamivice » Wed Nov 29, 2017 1:24 pm

technovelist wrote: โ†‘
Wed Nov 29, 2017 12:31 pm
KyleAAA wrote: โ†‘
Wed Nov 29, 2017 11:38 am
CurlyDave wrote: โ†‘
Wed Nov 29, 2017 11:31 am
technovelist wrote: โ†‘
Wed Nov 29, 2017 9:01 am

...Have you considered the value of your labor in calculating your returns?

If not, then you aren't comparing apples and apples, because stocks and REITs don't require labor.
To me that is a feature, not a bug. There is no way for me to put my own labor into stocks and REITs.

What is the value of your spare time? There are a lot of ways to try to put a value on free time, but the practical aspect is that if I am not working on something to advance myself economically, I am going to be spending money on some kind of entertainment.

If you cut your own lawn, do you view that as "lost" free time, or as not having to pay a landscaper?
I think technovelist's point is that you have to subtract out the value of the labor capital you inject into your real estate business before calculating returns to get a valid comparison. If you spend 10 hours on a weekend doing work, it is invalid to count the value of that labor as an investment return because it isn't: labor is capital. It is true that the ability to add value via labor is a feature, but you have to account for it when calculating return on investment because labor capital is part of the investment.
Yes, exactly. Otherwise we are dealing with something like Beardstown accounting, which I assume most people here would consider invalid.
Agreed. Adding value to a investment property through time contributions results in distortion of returns. While the value added based on one's time can be figured in one's net worth calculation, it is incorrect to consider that as part of the ROI on an investment for investment comparison purposes.

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Re: Is there any reason to invest in real estate?

Post by BogleMelon » Wed Nov 29, 2017 1:36 pm

Same reason why people open their small coffee shops instead of buying Starbucks shares. And the reason why car dealers open up their local dealership instead of investing in a fund that covers the whole Auto industry. It is more risk, but could be way more rewarding specially if the landlord has experience on how to handle his property and wiling to deal with all kind of tenants stuff.
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Re: Is there any reason to invest in real estate?

Post by magneto » Wed Nov 29, 2017 1:45 pm

technovelist wrote: โ†‘
Tue Nov 28, 2017 8:42 pm
As some famous person said (paraphrased), "If you want to invest in real estate, buy an REIT. REIT's never call you up in the middle of the night because their toilet isn't working."
Come on now TN :D
Let's demolish this oft repeated 'Straw Man' (or 'Red Herring' if preferred) once and for all.
If your toilet isn't working in the middle of the night, who do you phone :?:
If your tenant's toilet isn't working in the middle of the night, who do they phone :?:
Might it be the same contact number?
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: Is there any reason to invest in real estate?

Post by djpeteski » Wed Nov 29, 2017 1:51 pm

CurlyDave wrote: โ†‘
Wed Nov 29, 2017 3:53 am
The big advantage of RE is that I can put sweat equity into rental properties.
What is stopping someone from putting sweat equity into the market?

I am able to work overtime at my job, a portion of that goes into my after tax account. Monday night, I picked up a discarded dishwasher, I pulled out the wires, and the motor and will take them to the scrap yard that I drive by every day. That cash will go directly into my after tax account. Sweat equity is a great thing brother, but can be used in both real estate or investing.

I will agree that the is more immediate gratification when you do home repairs for yourself. That plummer is going to charge you $800 to change a water heater, and you do it in 2 hours for less than $300. You just earned $250/hour.

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Re: Is there any reason to invest in real estate?

Post by 3funder » Wed Nov 29, 2017 2:57 pm

My wife and I own our home (or will, at some point). That's enough real estate exposure for me. Count me in for Option A.

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Re: Is there any reason to invest in real estate?

Post by spdoublebass » Wed Nov 29, 2017 3:24 pm

magneto wrote: โ†‘
Wed Nov 29, 2017 1:45 pm
technovelist wrote: โ†‘
Tue Nov 28, 2017 8:42 pm
As some famous person said (paraphrased), "If you want to invest in real estate, buy an REIT. REIT's never call you up in the middle of the night because their toilet isn't working."
Come on now TN :D
Let's demolish this oft repeated 'Straw Man' (or 'Red Herring' if preferred) once and for all.
If your toilet isn't working in the middle of the night, who do you phone :?:
If your tenant's toilet isn't working in the middle of the night, who do they phone :?:
Might it be the same contact number?
As a renter I have to call the landlord, he then calls the plumber. It's in the lease. Renters do not pay for that (assuming it's a standard lease) type on stuff which is why that quote is accurate to me.
Resist much, obey little.

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Re: Is there any reason to invest in real estate?

Post by Meg77 » Wed Nov 29, 2017 3:39 pm

bantam222 wrote: โ†‘
Tue Nov 28, 2017 2:52 am
My logic is as follows:
- Suppose Bob is your typical real estate investor - purchases one or two additional properties and rents them out
- Suppose there are 1000 of other people in the country, doing the same thing as Bob
- It seems REIT funds are essentially pooling the 1000 investors money, making essentially the same purchases, then giving each investor 1/1000th of each property. It seems like this REIT fund would have to be better than the individual investors. It has many benefits such as increased diversification (seems very important for real estate), can hire a few experts that make all the purchases rather than having 1000 individual investors try to learn. Have more capital to get in on more expensive properties that may have more revenue potential (thinking condo or apartment complexes). The downside would be the management fee of these experts to run the REIT, but that cost seems like it would not outweigh the benefits.

Therefore, it seems like we can conclude investment option C (REIT) > investment option B (individual real estate)
Nope. Lots of flaws in this logic.
1. REIT funds are NOT making the same purchases as small investors. Their scale means that small residential properties are not worth the hassle of acquiring and managing; most REITs are heavily focused in various large commercial property. Which is arguably an entirely different asset class compared to the duplex or SF home in your neighborhood you might buy and rent out.

2. REIT investors do NOT technically own 1/1000s or any percentage of any actual property. If they did, they'd receive a K1 statement annually which outlines their portion of all income and all expenses. That is a much preferable way to invest in RE. My husband and I invested in several commercial RE partnerships (LLCs) where we actually do own 5% or so of some apartment buildings. This is much preferable to a REIT which gives you exposure to the risks of RE without the benefit of the tax advantages which flow through via K1.

3. Leverage - especially long term low rate fixed debt - is a huge reason that individual RE purchases can be better than REITs. You can put down $20K and buy a $100K property. So for 20% of the cost, you get the appreciation on the full $100K property. Even if that's only 2% a year, that's $2000 - a 10% return on your money before we even factor in rental income.

4. You can't deduct depreciation or any other expense on a REIT. Let's say you rent the $100K house out for $1000 a month and your net rental income is $150 a month after mortgage, property taxes, maintenance, etc. That's an extra $1800 a year in cash flow - but that's not taxable income. You have to add the portion of your mortgage payment that went to principal ($1200 say) but you get to subtract depreciation expense. This is a non cash expense allowed on investment assets - equipment, buildings, computers, etc. Basically you get to expense the cost of the building (not land) over 27.7 years. So in this case you might deduct $3000 in depreciation each year. Meaning your net taxable rental income is ZERO even though you're pocketing an extra $1800 a year.


I own four rentals and my annual ROI over the last 5 years on each is 2.7%, 12.9%, 11.9% and 18%. That's my return on investment (down payment and closing costs) not including appreciation. I have a property manager on three of them, and the other one is very low maintenance. The 2.7% ROI much lower due to substantial improvements I've made over time, but it's also appreciated the most (30% in 5 years).

That said, the stock market has done about as well as I have, and if I'd left my money in stocks I'd be just as well off, at least over the last decade. And without the hassle factor of tenants (I still have to get involved when there's an eviction or insurance claim). That may not always be the case though. If stocks fall 30% next year, my rental income will keep rolling in.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Is there any reason to invest in real estate?

Post by jadedfalcons » Wed Nov 29, 2017 4:15 pm

Way too many comments for me to read, but I'll comment on option B.

Option B can make you a lot more money than A & C.

Focus on the word "can" there.

It's a lot of headaches, even if a property manager is used, and in my experience, the extra money I can make, as compared to index/REIT investments, isn't enough more to justify the time you spend on it. Having said that, if you want to do it as a job, there's nothing wrong with that, I just don't think it lends itself nearly as well to "side investments" as people think, and I'm "blessed" in that our commercial real estate is right next to our business where I'm at 60+ hours a week anyways.

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Re: Is there any reason to invest in real estate?

Post by Stormbringer » Wed Nov 29, 2017 4:18 pm

psteinx wrote: โ†‘
Wed Nov 29, 2017 12:22 pm
I'd be interested in a somewhat more detailed accounting. Cash on cash? Full IRR computation with inflows/outflows? Did you value your time and count that as an input?

I understand if you don't want to spend vast amounts of time documenting and backing up a claim in an online forum - I'm not necessarily asking for that (though it'd be really interesting if you wanted to share). Rather - are you really confident that the 18% claim is accurate and can be benchmarked against a return figure for a passive investment such as an equity index fund?
18% is somewhat of a back of the envelope calculation. Thanks to some sweet bonuses I got from the software company I worked for, I started with $25,000 in 1994 and was very aggressive with leverage (2nd mortgages, cash out refinances, HELOC, etc.) which was pretty easy to do back then, and especially with the run up in values in the early 00's. I've had a number of 1031 exchanges into better properties as well. I kept reinvesting all the profits. Here is what the portfolio looks like now:

Image

In addition to the equity, I have $64K cash in the property account for a total of about $1.17 million. My back of the envelope calculation for the 18% is $25,000 x (1.18^23) = $1.125 million.

There are a couple things this doesn't account for. One is that I sold about half of them in 2006 and paid the capital gains, and then sat on the proceeds (about $250K if I remember correctly) which I then reinvested after the crash, starting in 2010. The other is that I have a tax benefit (depreciation) each year that isn't modeled in this calculation. I never cared enough to go back and try to figure it out.

I do mark my properties to market about once a year. I generally use the tax assessment, unless I have a recent appraisal from a mortgage.

I don't count my own time, which is limited to the financial aspects of it -- looking at properties and buying (or selling) them. I have a 50% interest in a property management company that does all the management and maintenance, so day to day it is passive to me other than occasionally approving a major expenditure like a roof.

In retrospect, what I did was incredibly risky because I got started when I was 24 and didn't have very deep pockets at all. But when you are 24 you think differently I guess. :) I got lucky to buy in the years before the housing bubble, and again by selling before it popped, and then yet again to have the cash to buy some good deals in the years after the recession. These days I don't see it as risky any more at all, because I have nice properties in good condition, plenty of equity and cash, a healthy positive cash flow, and a management company to deal with all the headaches.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Is there any reason to invest in real estate?

Post by CMD1 » Wed Nov 29, 2017 4:21 pm

There are lots of good reasons to invest in rental property. But if your not inclined to want to manage a rental business it might not be for you. If your not flush with cash likely you will rely on leverage which can be good and bad. But having your tenant pay off YOUR property isn't all that bad even if it takes 15 or 30 years. Its certainly true in many markets its slow and steady at the rate of inflation and its a long term game but even then you'll have more revenue streams down the road.

Or if you get lucky with your timing in a HCOL area perhaps you hit gold. If you had purchased a house in Seattle say round 2013 for $350k that house is almost certainly worth $600-700k today, netting you a quick $300k in equity. If you had put 20% down it may take a bit longer to grow that $70k to $300k. Or maybe you buy stock on margin so its a moot point.

Also, if your a high earner like many on here, the tax benefits can really help, even if you have to recapture that later when you sell.

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Re: Is there any reason to invest in real estate?

Post by TropikThunder » Wed Nov 29, 2017 9:13 pm

spdoublebass wrote: โ†‘
Wed Nov 29, 2017 3:24 pm
magneto wrote: โ†‘
Wed Nov 29, 2017 1:45 pm
technovelist wrote: โ†‘
Tue Nov 28, 2017 8:42 pm
As some famous person said (paraphrased), "If you want to invest in real estate, buy an REIT. REIT's never call you up in the middle of the night because their toilet isn't working."
Come on now TN :D
Let's demolish this oft repeated 'Straw Man' (or 'Red Herring' if preferred) once and for all.
If your toilet isn't working in the middle of the night, who do you phone :?:
If your tenant's toilet isn't working in the middle of the night, who do they phone :?:
Might it be the same contact number?
As a renter I have to call the landlord, he then calls the plumber. It's in the lease. Renters do not pay for that (assuming it's a standard lease) type on stuff which is why that quote is accurate to me.
I was going to say the same thing. If I own a house and the toilet breaks, I call a plumber. If I'm renting a house and the toilet breaks, I call maintenance/property management/the owner. It's a completely valid comparison. There's now way I'm calling a plumber at 3 am (and paying him or her) for a rented property.

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Re: Is there any reason to invest in real estate?

Post by WanderingDoc » Wed Nov 29, 2017 9:57 pm

Meg77 wrote: โ†‘
Wed Nov 29, 2017 3:39 pm
bantam222 wrote: โ†‘
Tue Nov 28, 2017 2:52 am
My logic is as follows:
- Suppose Bob is your typical real estate investor - purchases one or two additional properties and rents them out
- Suppose there are 1000 of other people in the country, doing the same thing as Bob
- It seems REIT funds are essentially pooling the 1000 investors money, making essentially the same purchases, then giving each investor 1/1000th of each property. It seems like this REIT fund would have to be better than the individual investors. It has many benefits such as increased diversification (seems very important for real estate), can hire a few experts that make all the purchases rather than having 1000 individual investors try to learn. Have more capital to get in on more expensive properties that may have more revenue potential (thinking condo or apartment complexes). The downside would be the management fee of these experts to run the REIT, but that cost seems like it would not outweigh the benefits.

Therefore, it seems like we can conclude investment option C (REIT) > investment option B (individual real estate)
Nope. Lots of flaws in this logic.
1. REIT funds are NOT making the same purchases as small investors. Their scale means that small residential properties are not worth the hassle of acquiring and managing; most REITs are heavily focused in various large commercial property. Which is arguably an entirely different asset class compared to the duplex or SF home in your neighborhood you might buy and rent out.

2. REIT investors do NOT technically own 1/1000s or any percentage of any actual property. If they did, they'd receive a K1 statement annually which outlines their portion of all income and all expenses. That is a much preferable way to invest in RE. My husband and I invested in several commercial RE partnerships (LLCs) where we actually do own 5% or so of some apartment buildings. This is much preferable to a REIT which gives you exposure to the risks of RE without the benefit of the tax advantages which flow through via K1.

3. Leverage - especially long term low rate fixed debt - is a huge reason that individual RE purchases can be better than REITs. You can put down $20K and buy a $100K property. So for 20% of the cost, you get the appreciation on the full $100K property. Even if that's only 2% a year, that's $2000 - a 10% return on your money before we even factor in rental income.

4. You can't deduct depreciation or any other expense on a REIT. Let's say you rent the $100K house out for $1000 a month and your net rental income is $150 a month after mortgage, property taxes, maintenance, etc. That's an extra $1800 a year in cash flow - but that's not taxable income. You have to add the portion of your mortgage payment that went to principal ($1200 say) but you get to subtract depreciation expense. This is a non cash expense allowed on investment assets - equipment, buildings, computers, etc. Basically you get to expense the cost of the building (not land) over 27.7 years. So in this case you might deduct $3000 in depreciation each year. Meaning your net taxable rental income is ZERO even though you're pocketing an extra $1800 a year.


I own four rentals and my annual ROI over the last 5 years on each is 2.7%, 12.9%, 11.9% and 18%. That's my return on investment (down payment and closing costs) not including appreciation. I have a property manager on three of them, and the other one is very low maintenance. The 2.7% ROI much lower due to substantial improvements I've made over time, but it's also appreciated the most (30% in 5 years).

That said, the stock market has done about as well as I have, and if I'd left my money in stocks I'd be just as well off, at least over the last decade. And without the hassle factor of tenants (I still have to get involved when there's an eviction or insurance claim). That may not always be the case though. If stocks fall 30% next year, my rental income will keep rolling in.
Meg, I have typed out something similar on at least 3 occasions. Unfortunately, folks on here will continue to think that investing in a REIT = investing in real estate. When in fact, it couldn't be further from the truth. I applaude you for fighting the good fight :happy
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

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Sandtrap
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Re: Is there any reason to invest in real estate?

Post by Sandtrap » Wed Nov 29, 2017 10:11 pm

WanderingDoc wrote: โ†‘
Wed Nov 29, 2017 9:57 pm
. . . . . .
Meg, I have typed out something similar on at least 3 occasions. Unfortunately, folks on here will continue to think that investing in a REIT = investing in real estate. When in fact, it couldn't be further from the truth. I applaude you for fighting the good fight :happy
Very true. One is an passive investment, the other a "business". And, you have excelled at both.

Bogleheads is an investment finance forum. Bigger Pockets is hard R/E oriented with focus on income property. There is some overlap. One who's ballpark is investment finance would have good advice in Bigger Pockets as well as much to learn in R/E. Conversely, one who's ballpark is in hard R/E income property would have good practical advice in an investment finance forum with much to learn and gain from that forum.

The information and shared experience of the Bogleheads is priceless to a savvy R/E investor who, once learning and growing in finance, can keep a foot grounded in both ballparks, and succeed tremendously.

The education and sharing here is a wonderful thing indeed.
j :D

JBTX
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Re: Is there any reason to invest in real estate?

Post by JBTX » Wed Nov 29, 2017 10:23 pm

KyleAAA wrote: โ†‘
Wed Nov 29, 2017 10:18 am
WanderingDoc wrote: โ†‘
Wed Nov 29, 2017 12:55 am
My real estate investments pay a >20% annualized return on the low end. On the high end, I have pulled refi'd all my "all in" on a deal, yielding a return of infinity. Its just math. Try doing that with an index fund.
An infinite return is mathematically impossible. If you have no money in the deal, the return is undefined, not infinite. Dividing a number by zero does not equal infinity. It may sound like semantics but it's not. If you truly had an infinite return you would be richer than Bill Gates off a single deal.
WD have discussed a related issue before - my observation is if you can get 20% annualized returns, you could be wildly rich in no time flat. You are doubling your money every 3-4 years. The issue is you aren't typically reinvesting those gains, as you would with stocks. The returns become cash flow, and to an extent are compensation for the effort you put into it.

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