Remind me (again) how real estate isn't a GREAT investment?

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tibbitts
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by tibbitts » Sat Aug 18, 2018 3:35 pm

WanderingDoc wrote:
Sat Aug 18, 2018 3:07 pm
galeno wrote:
Sat Aug 18, 2018 2:05 pm
Passive RE investment means passive indexed REITs. Anything else means you have a new job or have new hassles.

Schwab US REIT ETF's (SCHH) SEC Yield is 3.51%. Assume USD inflation at 2% so a 1.5% expected real return.

Since USA domiciled equities have an expected real return of 1-3% and non-USA domiciled equites almost double that, equities beat should beat REITs. Better expected return. Same volatility.
No it doesn't. That's just one (inferior) way to invest. I don't considering investing in a REIT "investing in real estate". I've detailed this in many of my prior posts. That said, there are dozens of different ways to passively invest in real estate.
I do agree that REITs have limitations, but would be interested in investing in some kind of fund (doesn't have to be a REIT) that directly owns and generates income from many thousands of properties throughout the world. Sort of like TIAA RE on steroids that includes more small and mid-sized properties, and with international diversification. But I don't want to research anything, I just want you to tell me what to buy, like people here say to buy VGSLX Oh and no complicated tax implications, so it has to be something I can buy in a deferred account. And not multiple investments, just one. By saying passive you're saying the mechanism is like investing in any stock or bond or fund so that's what I'm looking for.

beezquimby
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by beezquimby » Sat Aug 18, 2018 3:53 pm

Not sure what you are talking about. If you have a mid 7 figure portfolio with no debt (from stock market investing) I can utilize the money any time by clicking a button and transferring assets.
WanderingDoc wrote:
Sat Aug 18, 2018 3:10 pm
TN_Boy wrote:
Sat Aug 18, 2018 2:52 pm
WanderingDoc wrote:
Sat Aug 18, 2018 1:38 pm

The fact that there are hundreds of teachers, police officers, and other median income earners that have reached FI with real estate in 5 years or a lot sooner, there is probably a reason for that. 99.9% is a made up number and is assuredly false. Most don't even try, because they believed the narrative that they see everywhere (TV, magazines, financial advisors and gurus, politicians, their mom and dad, etc.) that you should invest in a 401k or IRA. Is it a wonder that most Americans are struggling and hope their health holds out until age 65 when they "get" to enjoy their own money? Sad.
I don't know if you meant to say "hundreds of thousands" of teachers, etc or not. Obviously, "hundreds" wouldn't be that interesting. There are a lot of teachers and police officers in the country. Could you cite a reference on how fast people in those professions make money in real estate? FI in 5 years. Hmm.

Your claim is difficult to believe. I mean, I know people that have bought real estate for investment purposes. Smart people. RE didn't make them FI. It's a good income supplement for them. I'm sure it has made some people FI. And helped a lot of other people.

I also know plenty of people happy with their 401k balances.
Many people are happy with digits on a screen that they don't get to do anything with until they are old, less mobile, or dead. Hard to believe, but I guess so? Many of my friends and colleagues wouldn't be that happy with that arrangement. I am glad you used the term "balances". That is the operative word ;)

jalbert
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by jalbert » Sat Aug 18, 2018 5:06 pm

If you get a 0% down option, and the tenant covers the rent and maintenance costs, how is that not just flat out free money? 
Aside from the fact that FNMA-comforming lenders don't generally make 0% down investor loans, they also are unlikely to be positive cash flow investments. If they were, other investors would jump on them pushing up the price.

As far as making a down payment and borrowing to buy something that generates income to pay the loan, that is more generally called a leveraged buyout. Corporations do them all the time as a merger and acquisition strategy. By investing in stock, you have exposure to them.

Lastly, we can articulate lots of reasons pro and con for direct real estate investing. Opportunity for "free money" is not one of them.
Risk is not a guarantor of return.

WanderingDoc
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by WanderingDoc » Sat Aug 18, 2018 5:16 pm

beezquimby wrote:
Sat Aug 18, 2018 3:53 pm
Not sure what you are talking about. If you have a mid 7 figure portfolio with no debt (from stock market investing) I can utilize the money any time by clicking a button and transferring assets.
WanderingDoc wrote:
Sat Aug 18, 2018 3:10 pm
TN_Boy wrote:
Sat Aug 18, 2018 2:52 pm
WanderingDoc wrote:
Sat Aug 18, 2018 1:38 pm

The fact that there are hundreds of teachers, police officers, and other median income earners that have reached FI with real estate in 5 years or a lot sooner, there is probably a reason for that. 99.9% is a made up number and is assuredly false. Most don't even try, because they believed the narrative that they see everywhere (TV, magazines, financial advisors and gurus, politicians, their mom and dad, etc.) that you should invest in a 401k or IRA. Is it a wonder that most Americans are struggling and hope their health holds out until age 65 when they "get" to enjoy their own money? Sad.
I don't know if you meant to say "hundreds of thousands" of teachers, etc or not. Obviously, "hundreds" wouldn't be that interesting. There are a lot of teachers and police officers in the country. Could you cite a reference on how fast people in those professions make money in real estate? FI in 5 years. Hmm.

Your claim is difficult to believe. I mean, I know people that have bought real estate for investment purposes. Smart people. RE didn't make them FI. It's a good income supplement for them. I'm sure it has made some people FI. And helped a lot of other people.

I also know plenty of people happy with their 401k balances.
Many people are happy with digits on a screen that they don't get to do anything with until they are old, less mobile, or dead. Hard to believe, but I guess so? Many of my friends and colleagues wouldn't be that happy with that arrangement. I am glad you used the term "balances". That is the operative word ;)
No. If I tried utilizing my TSP balance today I would pay a 10 or 20% withdrawal penalty (I'm not over 65) and a 25% tax on traditional assets. Truly a (quality of) life-deferral plan. In a taxable account you have to pay 15-38% taxes. It's a mediocre investment for tax consideration purposes.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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tadamsmar
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by tadamsmar » Sat Aug 18, 2018 5:17 pm

I think this is a pretty good list of what being your own rental agent entails:

https://www.millhouseproperties.com/man ... -services/

Does not include your own liability insurance or taxes. An umbrella policy will cover a few rentals. Not sure what happens if you make a claim.
Last edited by tadamsmar on Sat Aug 18, 2018 5:58 pm, edited 1 time in total.

DrS
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by DrS » Sat Aug 18, 2018 5:25 pm

WanderingDoc, your post motivated me to explore more in terms of real estate opportunities. I was hoping to PM you about the referenced podcast and other topics but PM doesn’t appear allowed.
WanderingDoc wrote:
Sat Aug 18, 2018 2:05 am
TheBogleWay wrote:
Fri Aug 17, 2018 11:17 pm
Hey All,

I've been a BH'er for almost a decade now. My self taught education through this forum/others has essentially brought me to a Boglehead style investing model, I have used the lazy 3 fund portfolio with basic rules about taxable accounts/all that for many years and it's gone GREAT and I have a very solid nest egg now approaching $1m very soon. All of my spare money and mental effort just goes into these stock/bond investments.


However... sometimes I have FOMO and wonder if I'm making a mistake by not investing in real estate. Here's what I'm wondering.

Pretty frequently I'll hear people say they "bought" a rental property, and the tenant's rent covers the entire mortgage payment. It sounds like that's not uncommon at all. In fact, it sounds more common that rent covers the mortgage payment than the opposite. Many even say it covers the mortgage as well as common upkeep/maintenance costs for the home.

How is that not free money? Granted, sometimes you'd want to put down 20% and that 20% is money you could have had invested in stocks, but that 20% doesn't have to be a big amount, and you can often get mortgage loans with 0% down.

If you get a 0% down option, and the tenant covers the rent and maintenance costs, how is that not just flat out free money? The tenant is paying towards your equity and you're not shelling out money yourself, it's almost as if someone is just adding to your net worth every month (minus whatever effort is required to be a landlord and purchase/maintain).

A possible response I'm predicting and my reply:

A) it's uncommon that the rent actually covers mortgage and the maintenance costs. - I could just be in a unique real estate area (PNW) but nearly every homeowner I have spoken with and believe their word has told me it covers the mortgage. Assuming I pick a spot in a decent RE market, it doesn't sound hard to achieve this, right?


Thanks guys, help cure my FOMO and guide me :)
I can tell you unequivocally and without reservation that real estate indeed is a phenomenal investment. Personally, I went from a negative net worth to a seven-figure net worth in 3.5 years by buying several rental properties, reinvesting the cash flows and tax incentives into more passive and active real estate investment.

It's fundamental to know the difference between an asset and a liability. Specifically, the house that you live in is never an asset, whether you buy or rent. The book Rich Dad Poor Dad actually conveys this very well.

Secondly, it is important to realize that real estate pays you in at least five ways. I've explained this several times on this forum but if you don't own real estate for several years and really get deep into this, you will never understand how this works. Equities pay you in one way only, capital appreciation. I won't count a 1.8% dividend as cash flow.

Thirdly, index fund investing specifically in retirement accounts is a life deferral plan. What I mean by this, is that it takes money out of your paycheck and sends it into the ether, never at any point putting money back into your bank account that you can use today - thus decreasing your quality of life.

Real estate has the opposite effect. Money comes out to buy the asset, however I am getting a 20-22% dividend in the form of cash flow, principal paydown by tenants, amortisation, and tax incentives - which snowball really fast and those are reinvested into yet even more real estate. Approximately 10-12% of this dividend is in the form of cash flow, the remainder consists of the other profit centers of real estate. I am not counting capital appreciation in this calculation.

Every single month, money comes out of my account and goes to the TSP. I never ever see this money come back to me, maybe I will if I wait 40 years. This, by definition, is a life deferral plan.

On the other hand, every single month, $4K-$5K in net income flows into my account from real estate Investments. This is more than enough to cover my basic living expenses. This is a fundamental difference that takes a while getting used to, if people ever do. This is a red pill that isn't easily swallowed.

When looking for the ideal investment vehicle, you have to look at pluses and minuses of each. There's a great podcast comparing the benefits and drawbacks of equities versus Real Estate. It talks about roughly 30 different criteria, and I believe real estate had the advantage in 25 or 26 of them versus investing in the stock market. If anyone is interested, private message me and I can try digging up this podcast.

in summary, real estate is a very forgiving investment that requires very little brain power and business knowledge and math knowledge to get right. See my signature. I bought and managed most of my properties while studying in a competitive medical residency and having an active social life during a 5-year span. The benefits of leverage in real estate cannot be overstated, as most of the profit centers originate directly from the ability to leverage and the specific terms that US based investors have access to are sweet indeed. If you want Financial Freedom, you will be waiting a very long time investing in retirement accounts and using the 4% rule, even if you fund $23,000 every single year, which is hard for many Americans. Math doesn't lie. I have truly enjoyed my real estate journey but this is only the beginning.

michaeljc70
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by michaeljc70 » Sat Aug 18, 2018 5:36 pm

I think OP is right in saying it really depends on the area to cover your expense with rents. Where I live, I generally don't think that has been the case in decades. I have friends that have quite a bit of real estate, but most was bought long ago. It also depends on the type of property. Condos where I live, given the high assessments, are really hard to come close to break even.

I wanted to buy a rental property years ago, but nothing I looked at came close to break even. Best bet was if bought a 3 flat, I lived in it and rented out the other 2 units. At least I had a place to live and rental income. On the other hand, most of the 3 flats where I live (Chicago) are old and have a bad layout (small bedrooms, not open concept, no closets), no central heat/air, etc.
Last edited by michaeljc70 on Sat Aug 18, 2018 5:55 pm, edited 1 time in total.

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tadamsmar
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by tadamsmar » Sat Aug 18, 2018 5:53 pm

One thing about DIY real estate management, you may get old and not want to do it anymore or be unable to do it well. You can try to find a rental agent that is reliable and not too expensive.

The ideal situation is to have kids that you trust who want to take over.
Or you can sell out and pay the cap gains.

You don't face this dilemma with a REIT investment (for instance).
Last edited by tadamsmar on Sat Aug 18, 2018 5:56 pm, edited 1 time in total.

TN Bogle
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by TN Bogle » Sat Aug 18, 2018 5:56 pm

I guess my only issue with most of the discussion is that it doesn't have to be a one or the other. Both types of investments can be profitable (RE and index funds). I understand this is a board of indexers and will have a bias toward indexing. I think indexing is great, I do it too. I just also think that RE investment also has many positives and many different avenues for making money.

To me, investing in real estate is additional diversification that is more heavily weighted to my ability to find deals and manage a business. There are certainly risks. It is definitely more work than automatically putting money into VTSAX once a month (which I also do). However, if you're willing to work hard, research and learn a new skill it can be a very profitable portion of your portfolio.

Put it in perspective, most medical students graduate school and go to residency with 100-300k in debt. Because I was involved with real estate investing during those years I finished with no debt and nearly a million dollars of assets. I was told my MANY people it was too risky, I would not be able to do it and of coarse the whole you'll get called at 3am for a blocked up toilet thing.

These are just my personal experiences. BOTH forms of investing are beneficial and profitable with knowledge of the tool. Which is why I do both.

michaeljc70
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by michaeljc70 » Sat Aug 18, 2018 6:00 pm

tadamsmar wrote:
Sat Aug 18, 2018 5:53 pm
One thing about DIY real estate management, you may get old and not want to do it anymore. It helps to have kids that you trust that want to take over. Or you can try to find a rental agent that is reliable and not too expensive.

Or you can sell out and pay the cap gains.
I have a friend that has 60+ rental units along with some commercial properties. He is in his 60s, no kids. His sisters will inherit it and they are all around his age or older. I know he has enough money to retire and have brought up the fact that his sisters will 1) not want to manage the properties (or probably even hire someone to do so) and 2) may sell them as quick as possible at less than market since they don't know their worth and there are other dynamics that occur in these types of inheritance situation. He pointed out that most he has owned for decades and the capital gains would be enormous. At death the basis would be stepped up and there would essentially be no taxes (I believe he is under put pushing the $5.5M estate tax exemption). So, I think a lot of people wind up keeping their rentals even if they don't want to for tax purposes (or do 1031 exchanges which doesn't get them out of the property mgmt business).

WanderingDoc
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by WanderingDoc » Sat Aug 18, 2018 6:07 pm

michaeljc70 wrote:
Sat Aug 18, 2018 6:00 pm
tadamsmar wrote:
Sat Aug 18, 2018 5:53 pm
One thing about DIY real estate management, you may get old and not want to do it anymore. It helps to have kids that you trust that want to take over. Or you can try to find a rental agent that is reliable and not too expensive.

Or you can sell out and pay the cap gains.
I have a friend that has 60+ rental units along with some commercial properties. He is in his 60s, no kids. His sisters will inherit it and they are all around his age or older. I know he has enough money to retire and have brought up the fact that his sisters will 1) not want to manage the properties (or probably even hire someone to do so) and 2) may sell them as quick as possible at less than market since they don't know their worth and there are other dynamics that occur in these types of inheritance situation. He pointed out that most he has owned for decades and the capital gains would be enormous. At death the basis would be stepped up and there would essentially be no taxes (I believe he is under put pushing the $5.5M estate tax exemption). So, I think a lot of people wind up keeping their rentals even if they don't want to for tax purposes (or do 1031 exchanges which doesn't get them out of the property mgmt business).
You think a $5.5MM in real estate equity 1031'd into a $20MM Class A 200 unit apartment building (in say, Tampa, FL) with on-site management, leasing office, and professional property management doesn't get them out of the property management business? Of course it does.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

Wricha
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Wricha » Sat Aug 18, 2018 6:07 pm

OP real estate is viable way of making money. There is absolutely no question about it. Does everyone make money of course not. Things happen it’s called life. This thread, particularly folks that claims real estate is a bad idea, it appears to me that they are talking more about their fears and less about advice. Sort through the information here throw out the fears they are useless and look for the advice and go for it.
Full disclosure:
I really like real estate you can create/structure all kinds of creatives deals - lots of fun. My parents thought real estate was very risky and insisted that college was the way to go. So I went to school, graduated science/engineering and a few masters degrees later I was rewarded with a very good career and lifestyle. I recently commented to relative (who is a stockbroker) had I gone into real estate instead of consulting you would need an appointment to talk to me! What do you have to lose by trying it. You put most of your money in the stock market knowing a 20% plus correction is likely.

michaeljc70
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by michaeljc70 » Sat Aug 18, 2018 6:17 pm

WanderingDoc wrote:
Sat Aug 18, 2018 6:07 pm
michaeljc70 wrote:
Sat Aug 18, 2018 6:00 pm
tadamsmar wrote:
Sat Aug 18, 2018 5:53 pm
One thing about DIY real estate management, you may get old and not want to do it anymore. It helps to have kids that you trust that want to take over. Or you can try to find a rental agent that is reliable and not too expensive.

Or you can sell out and pay the cap gains.
I have a friend that has 60+ rental units along with some commercial properties. He is in his 60s, no kids. His sisters will inherit it and they are all around his age or older. I know he has enough money to retire and have brought up the fact that his sisters will 1) not want to manage the properties (or probably even hire someone to do so) and 2) may sell them as quick as possible at less than market since they don't know their worth and there are other dynamics that occur in these types of inheritance situation. He pointed out that most he has owned for decades and the capital gains would be enormous. At death the basis would be stepped up and there would essentially be no taxes (I believe he is under put pushing the $5.5M estate tax exemption). So, I think a lot of people wind up keeping their rentals even if they don't want to for tax purposes (or do 1031 exchanges which doesn't get them out of the property mgmt business).
You think a $5.5MM in real estate equity 1031'd into a $20MM Class A 200 unit apartment building (in say, Tampa, FL) with on-site management, leasing office, and professional property management doesn't get them out of the property management business? Of course it does.
Who wants to take on that kind of leverage at retirement age? They worked their whole lives to pay off these properties! That is "getting out"? Buying in an area you haven't even stepped foot in your whole life? Quite a drastic change with a lot of risk. All the heirs would still probably want their $$$$ causing a quick sale at what might be an undesirable time to sell.

Stormbringer
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Stormbringer » Sat Aug 18, 2018 6:44 pm

TheBogleWay wrote:
Fri Aug 17, 2018 11:17 pm
Remind me (again) how real estate isn't a GREAT investment?
It can be. Or it can ruin you.

I starting buying properties when I was 24 years old, and 25 years later I own 15 buildings and a management company that manages a little over 3,800 residential units. I've done quite well, but I've made more managing properties for others than owning them myself.

I've worked with many investors. They always come in with these deals that look great on paper, and sometimes they are great for a few years -- until they have a string of vacancies, a roof starts leaking or the boiler goes or some crack forms in the foundation wall. If they stick with it and don't overextend themselves, they usually do well in the long run, but it isn't like the guy on late night TV makes it out to be.

I personally know several real estate guys who were absolutely wiped out in the recession by being over-leveraged. Millions of dollars (for two of them, tens of millions) ... *poof* gone. I know others who teetered on the edge.

The past eight years have been amazing for real estate. Low vacancy rates, insanely low interest rates, and prices rising rapidly from the depths of the recession. But for people getting in now, it's going to be a tougher road ahead.
"Compound interest is the most powerful force in the universe." - Albert Einstein

acegolfer
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by acegolfer » Sat Aug 18, 2018 6:45 pm

Simple answer: Comparative disadvantage

If a BH is investing in real estates, he is competing against professional real estate investors, who are likely better than an average BH.

golfCaddy
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by golfCaddy » Sat Aug 18, 2018 6:50 pm

In the last crash, housing declined 35% in major metropolitan areas. If you had a LTV of 65% or more, you would have lost all your equity in the property. If it was non-recourse, you could walk away. If you were highly leveraged in RE and had recourse loans, your net worth went into negative territory. A lot of people made their fortunes in RE, but it's crazy to pretend it's not risky.

Stormbringer
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Stormbringer » Sat Aug 18, 2018 7:04 pm

Here are Charlie Munger's thoughts on investing in real estate: https://www.youtube.com/watch?v=KZtGpUl ... e=youtu.be

Warning: Language and witty comments.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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catalina355
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by catalina355 » Sat Aug 18, 2018 7:09 pm

WanderingDoc wrote:
Sat Aug 18, 2018 2:05 am
TheBogleWay wrote:
Fri Aug 17, 2018 11:17 pm
Hey All,

I've been a BH'er for almost a decade now. My self taught education through this forum/others has essentially brought me to a Boglehead style investing model, I have used the lazy 3 fund portfolio with basic rules about taxable accounts/all that for many years and it's gone GREAT and I have a very solid nest egg now approaching $1m very soon. All of my spare money and mental effort just goes into these stock/bond investments.


However... sometimes I have FOMO and wonder if I'm making a mistake by not investing in real estate. Here's what I'm wondering.

Pretty frequently I'll hear people say they "bought" a rental property, and the tenant's rent covers the entire mortgage payment. It sounds like that's not uncommon at all. In fact, it sounds more common that rent covers the mortgage payment than the opposite. Many even say it covers the mortgage as well as common upkeep/maintenance costs for the home.

How is that not free money? Granted, sometimes you'd want to put down 20% and that 20% is money you could have had invested in stocks, but that 20% doesn't have to be a big amount, and you can often get mortgage loans with 0% down.

If you get a 0% down option, and the tenant covers the rent and maintenance costs, how is that not just flat out free money? The tenant is paying towards your equity and you're not shelling out money yourself, it's almost as if someone is just adding to your net worth every month (minus whatever effort is required to be a landlord and purchase/maintain).

A possible response I'm predicting and my reply:

A) it's uncommon that the rent actually covers mortgage and the maintenance costs. - I could just be in a unique real estate area (PNW) but nearly every homeowner I have spoken with and believe their word has told me it covers the mortgage. Assuming I pick a spot in a decent RE market, it doesn't sound hard to achieve this, right?


Thanks guys, help cure my FOMO and guide me :)
I can tell you unequivocally and without reservation that real estate indeed is a phenomenal investment. Personally, I went from a negative net worth to a seven-figure net worth in 3.5 years by buying several rental properties, reinvesting the cash flows and tax incentives into more passive and active real estate investment.

It's fundamental to know the difference between an asset and a liability. Specifically, the house that you live in is never an asset, whether you buy or rent. The book Rich Dad Poor Dad actually conveys this very well.

Secondly, it is important to realize that real estate pays you in at least five ways. I've explained this several times on this forum but if you don't own real estate for several years and really get deep into this, you will never understand how this works. Equities pay you in one way only, capital appreciation. I won't count a 1.8% dividend as cash flow.

Thirdly, index fund investing specifically in retirement accounts is a life deferral plan. What I mean by this, is that it takes money out of your paycheck and sends it into the ether, never at any point putting money back into your bank account that you can use today - thus decreasing your quality of life.

Real estate has the opposite effect. Money comes out to buy the asset, however I am getting a 20-22% dividend in the form of cash flow, principal paydown by tenants, amortisation, and tax incentives - which snowball really fast and those are reinvested into yet even more real estate. Approximately 10-12% of this dividend is in the form of cash flow, the remainder consists of the other profit centers of real estate. I am not counting capital appreciation in this calculation.

Every single month, money comes out of my account and goes to the TSP. I never ever see this money come back to me, maybe I will if I wait 40 years. This, by definition, is a life deferral plan.

On the other hand, every single month, $4K-$5K in net income flows into my account from real estate Investments. This is more than enough to cover my basic living expenses. This is a fundamental difference that takes a while getting used to, if people ever do. This is a red pill that isn't easily swallowed.

When looking for the ideal investment vehicle, you have to look at pluses and minuses of each. There's a great podcast comparing the benefits and drawbacks of equities versus Real Estate. It talks about roughly 30 different criteria, and I believe real estate had the advantage in 25 or 26 of them versus investing in the stock market. If anyone is interested, private message me and I can try digging up this podcast.

in summary, real estate is a very forgiving investment that requires very little brain power and business knowledge and math knowledge to get right. See my signature. I bought and managed most of my properties while studying in a competitive medical residency and having an active social life during a 5-year span. The benefits of leverage in real estate cannot be overstated, as most of the profit centers originate directly from the ability to leverage and the specific terms that US based investors have access to are sweet indeed. If you want Financial Freedom, you will be waiting a very long time investing in retirement accounts and using the 4% rule, even if you fund $23,000 every single year, which is hard for many Americans. Math doesn't lie. I have truly enjoyed my real estate journey but this is only the beginning.
Can you explain how you got to a seven-figure net worth in 3.5 years with rental properties. It would be interesting to see the numbers.

michaeljc70
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by michaeljc70 » Sat Aug 18, 2018 7:47 pm

Stormbringer wrote:
Sat Aug 18, 2018 7:04 pm
Here are Charlie Munger's thoughts on investing in real estate: https://www.youtube.com/watch?v=KZtGpUl ... e=youtu.be

Warning: Language and witty comments.
That was interesting. Munger telling people that there are pros in real estate that have a hand up over you. In stocks, he says, that isn't so. Yet look at all the sweetheart deals Buffet has made, particularly during the crisis. I don't have a staff to research companies and scoop them up. I don't get preferred stock with warrants when I invest in Goldman. I haven't been able to buy B of A preferred stock with a 6% dividend.

MrBeaver
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by MrBeaver » Sat Aug 18, 2018 8:13 pm

As others have said, great returns come from luck/timing + managing yourself (job). For the most part, I prefer REITs + stocks, though I might jump in on RE if we had another big downturn in RE like 2008-2009.

I can see myself buying properties in whatever town(s) my two kids go to college, but putting their names on the deed and loan in addition to mine (joint ownership). I’d pay for their rent out of my 529, and pay them to manage the property and collect rent from roommates so they can start a Roth IRA. They would gain confidence of the ‘I can do this stuff without dad there’ variety and get a head start on their credit score. Once they graduate, I’d have them refinance it and relinquish my half so they can sell it owing no capital gains, or stay there. They get a 50k headstart on net worth, practice on how to maintain a property, and four years of Roth IRA contributions, on top of the value of their education.

I’d also make an exception if I had an on-site second unit. I’d have no problem renting and managing that because it would just feel like maintaining my own home.

patrick
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by patrick » Sat Aug 18, 2018 8:58 pm

WanderingDoc wrote:
Sat Aug 18, 2018 5:16 pm
No. If I tried utilizing my TSP balance today I would pay a 10 or 20% withdrawal penalty (I'm not over 65) and a 25% tax on traditional assets. Truly a (quality of) life-deferral plan. In a taxable account you have to pay 15-38% taxes. It's a mediocre investment for tax consideration purposes.
The penalty actually goes away sooner -- at 59 and a half. Furthermore, the penalty can often be avoided even before that (the contribution amount in a Roth is always penalty free to withdraw, and traditional balances can be converted to Roth and then the conversion amount is penalty free after 5 years).

TN_Boy
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by TN_Boy » Sat Aug 18, 2018 9:51 pm

WanderingDoc wrote:
Sat Aug 18, 2018 3:10 pm
TN_Boy wrote:
Sat Aug 18, 2018 2:52 pm
WanderingDoc wrote:
Sat Aug 18, 2018 1:38 pm

The fact that there are hundreds of teachers, police officers, and other median income earners that have reached FI with real estate in 5 years or a lot sooner, there is probably a reason for that. 99.9% is a made up number and is assuredly false. Most don't even try, because they believed the narrative that they see everywhere (TV, magazines, financial advisors and gurus, politicians, their mom and dad, etc.) that you should invest in a 401k or IRA. Is it a wonder that most Americans are struggling and hope their health holds out until age 65 when they "get" to enjoy their own money? Sad.
I don't know if you meant to say "hundreds of thousands" of teachers, etc or not. Obviously, "hundreds" wouldn't be that interesting. There are a lot of teachers and police officers in the country. Could you cite a reference on how fast people in those professions make money in real estate? FI in 5 years. Hmm.

Your claim is difficult to believe. I mean, I know people that have bought real estate for investment purposes. Smart people. RE didn't make them FI. It's a good income supplement for them. I'm sure it has made some people FI. And helped a lot of other people.

I also know plenty of people happy with their 401k balances.
Many people are happy with digits on a screen that they don't get to do anything with until they are old, less mobile, or dead. Hard to believe, but I guess so? Many of my friends and colleagues wouldn't be that happy with that arrangement. I am glad you used the term "balances". That is the operative word ;)
You crack me up, you really do. You avoid answering the question, and throw up a (false) argument against market investing.

It's ridiculous to suggest a middle income person can easily become "FI" in five years .... or LESS! Maybe you could walk me through the numbers. Tell me where the money comes from to buy the properties. For example, if you make 60k a year, how much will banks lend you to buy investment property? Sure if you make 300k you can get large loans, but I am curious what you know (since you made the claim) about loans to people without large incomes.

I have tax-deferred and taxable investment accounts so I can get to lots of money before I am all that old. Even without the taxable accounts I can withdraw tax-deferred money (401k, etc) before I'm 59 without penalty, as can anyone else (look it up). Where do you get the 65 anyway? How much do you know about 401 and IRA withdrawal rules? I won't even go into things like ROTH IRAs, backdoor ROTHs, etc.

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HomerJ
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by HomerJ » Sat Aug 18, 2018 10:59 pm

WanderingDoc wrote:
Sat Aug 18, 2018 5:16 pm
In a taxable account you have to pay 15-38% taxes. It's a mediocre investment for tax consideration purposes.
It's 0%-20% for long-term capital gains (money held for more than 1 year).

If your income is below $38,000 (single) or $77,000 (married), it's 0%. And that's AFTER the standard deduction of $12,000 (single) or $24,000 (married)

If your income is above $425,000 (single) or $479,000 (married), it's 20%

Otherwise it's 15%.

I will likely be paying 0% capital gains on most of the money in my taxable account.
The J stands for Jay

gotester2000
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by gotester2000 » Sun Aug 19, 2018 12:14 am

TN_Boy wrote:
Sat Aug 18, 2018 9:51 pm
WanderingDoc wrote:
Sat Aug 18, 2018 3:10 pm
TN_Boy wrote:
Sat Aug 18, 2018 2:52 pm
WanderingDoc wrote:
Sat Aug 18, 2018 1:38 pm

The fact that there are hundreds of teachers, police officers, and other median income earners that have reached FI with real estate in 5 years or a lot sooner, there is probably a reason for that. 99.9% is a made up number and is assuredly false. Most don't even try, because they believed the narrative that they see everywhere (TV, magazines, financial advisors and gurus, politicians, their mom and dad, etc.) that you should invest in a 401k or IRA. Is it a wonder that most Americans are struggling and hope their health holds out until age 65 when they "get" to enjoy their own money? Sad.
I don't know if you meant to say "hundreds of thousands" of teachers, etc or not. Obviously, "hundreds" wouldn't be that interesting. There are a lot of teachers and police officers in the country. Could you cite a reference on how fast people in those professions make money in real estate? FI in 5 years. Hmm.

Your claim is difficult to believe. I mean, I know people that have bought real estate for investment purposes. Smart people. RE didn't make them FI. It's a good income supplement for them. I'm sure it has made some people FI. And helped a lot of other people.

I also know plenty of people happy with their 401k balances.
Many people are happy with digits on a screen that they don't get to do anything with until they are old, less mobile, or dead. Hard to believe, but I guess so? Many of my friends and colleagues wouldn't be that happy with that arrangement. I am glad you used the term "balances". That is the operative word ;)
You crack me up, you really do. You avoid answering the question, and throw up a (false) argument against market investing.

It's ridiculous to suggest a middle income person can easily become "FI" in five years .... or LESS! Maybe you could walk me through the numbers. Tell me where the money comes from to buy the properties. For example, if you make 60k a year, how much will banks lend you to buy investment property? Sure if you make 300k you can get large loans, but I am curious what you know (since you made the claim) about loans to people without large incomes.

I have tax-deferred and taxable investment accounts so I can get to lots of money before I am all that old. Even without the taxable accounts I can withdraw tax-deferred money (401k, etc) before I'm 59 without penalty, as can anyone else (look it up). Where do you get the 65 anyway? How much do you know about 401 and IRA withdrawal rules? I won't even go into things like ROTH IRAs, backdoor ROTHs, etc.
I agree with you entirely. WanderingDoc must be either lucky or a real estate investing genius to be FI in 5 years - negative to 7 figures. People can claim anything on anonymous forums.
I have a portfolio that is 30% real estate and gold and am not a 100% BogleHead. I dont believe that common man can make money passively in real estate to be FI in 5 years. The only point I agree is stock indexing is deferred wealth generation.
To the OP - Nothing comes free and you need to know where to invest like stocks. There is a case of investing where rent > mortgage and holding costs.

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tadamsmar
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by tadamsmar » Sun Aug 19, 2018 2:23 am

This shows the percentage of homes in various markets where rent covers fixed costs:

https://www.zillow.com/research/where-r ... age-15624/

But this does not include maintenance or opportunity costs for the down payment and assumes the property is always rented.

Still not clear how often the cash flow is negative.

Dandy
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Dandy » Sun Aug 19, 2018 6:39 am

over the long term real estate generally keeps up with inflation. there are many exceptions but real estate isn't a guaranteed investment winner. Lots of work, lots of expenses and maybe a nice return. Some people seem to do fairly well. Sometimes it is a really GREAT investment.

Also what seems like a significant appreciation can be misleading. Bought my home for 50k in 1974. Could probably sell it for 450k today. Seems like a barn burner but really that would be a bit more than 5% compounded -- not adjusting for any expenses.

Stormbringer
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Stormbringer » Sun Aug 19, 2018 6:41 am

tadamsmar wrote:
Sun Aug 19, 2018 2:23 am
But this does not include maintenance or opportunity costs for the down payment and assumes the property is always rented.
Yeah, that's a terrible omission. People always underestimate maintenance and vacancies. I budget about $1.50 per sq ft per year for maintenance, and 5% for vacancies.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Jack FFR1846
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Jack FFR1846 » Sun Aug 19, 2018 7:27 am

TN Bogle wrote:
Sat Aug 18, 2018 11:52 am
It's certainly not a free lunch to make money in real estate, but the profits can be enormous. I'm curious about the people who share stories of toilets clogging in the middle of the night have actually had this experience or just repeating stories they have heard. I've done this for 12 years and never once received a call in the middle of the night, but as they say past performance does not gaurentee future results.

The poster who commented earlier about the more immediate benefits of real estate is correct IMO. I have made a considerable amount of money with real estate and the majority of that money either through rent, development, sale after appreciation, flipping etc is useable today for further investment or just enjoying life now. I have money in the market and max all available retirement vehicles every year but I look at real estate (both rental and rural) as diversification of my portfolio which most bogleheads subscribe to.

Some people go all in on RE or all in the stock market. I personally believe there are merits to both and therefore use both.
Here ya go. I rented my house out while my company sent me to graduate school. I hired a property manager to handle "everything". I get a call from the manager at 3am (why I use that time) saying that the tenants report sewage backed up, coming back out the drain for the washer and it's going to cost $1000 to have an emergency pump out and clean up.

So much for "passive", even with a paid manager.
Bogle: Smart Beta is stupid

Stormbringer
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Stormbringer » Sun Aug 19, 2018 7:40 am

Jack FFR1846 wrote:
Sun Aug 19, 2018 7:27 am
Here ya go. I rented my house out while my company sent me to graduate school. I hired a property manager to handle "everything". I get a call from the manager at 3am (why I use that time) saying that the tenants report sewage backed up, coming back out the drain for the washer and it's going to cost $1000 to have an emergency pump out and clean up.

So much for "passive", even with a paid manager.
My company has seven property managers. There is always one of them, plus a maintenance guy, on call 24/7. In our contract with the property owners, we negotiate a threshold, below which we have complete discretion to authorize repairs, and above which we have to get permission from the owner. This allows the owner to control how many calls they get. The contract authorizes us to perform repairs for emergency situations even it goes above that amount.

In your scenario, under our contract, we would have performed the repair and let you know about it in the morning.
"Compound interest is the most powerful force in the universe." - Albert Einstein

BrooklynInvest
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by BrooklynInvest » Sun Aug 19, 2018 7:48 am

I have a 2-family house and the rent now covers our mortgage and taxes. Yay me.

BUT . . . in the 11 years that I've had the house, I've refinanced (no cash out) at lower rates three times (luck), rents have doubled (luck + significant renovations to the apartment) and halved the pretty significant principal I owed (cash, lots of cash)

Downside: Three things -

1. The opportunity cost of the money I've put into the house versus a diversified portfolio

2. My time. I've had a part time job for the last 11 years in addition to my full time gig

3. Hassle. Sometimes the aggravation is significant.

Upside:

1. We live in a nice brownstone for free

2. Rents index to inflation, give or take, while my mortgage doesn't

3. Leverage on the house itself. Rent allowed me to buy more property than I personally needed. Capital gain is amplified

Suggestion - don't disregard luck in my simplistic analysis above. Works both ways. Good luck!

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jharkin
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by jharkin » Sun Aug 19, 2018 8:12 am

WanderingDoc wrote:
Sat Aug 18, 2018 5:16 pm
beezquimby wrote:
Sat Aug 18, 2018 3:53 pm
Not sure what you are talking about. If you have a mid 7 figure portfolio with no debt (from stock market investing) I can utilize the money any time by clicking a button and transferring assets.
WanderingDoc wrote:
Sat Aug 18, 2018 3:10 pm
TN_Boy wrote:
Sat Aug 18, 2018 2:52 pm
WanderingDoc wrote:
Sat Aug 18, 2018 1:38 pm

The fact that there are hundreds of teachers, police officers, and other median income earners that have reached FI with real estate in 5 years or a lot sooner, there is probably a reason for that. 99.9% is a made up number and is assuredly false. Most don't even try, because they believed the narrative that they see everywhere (TV, magazines, financial advisors and gurus, politicians, their mom and dad, etc.) that you should invest in a 401k or IRA. Is it a wonder that most Americans are struggling and hope their health holds out until age 65 when they "get" to enjoy their own money? Sad.
I don't know if you meant to say "hundreds of thousands" of teachers, etc or not. Obviously, "hundreds" wouldn't be that interesting. There are a lot of teachers and police officers in the country. Could you cite a reference on how fast people in those professions make money in real estate? FI in 5 years. Hmm.

Your claim is difficult to believe. I mean, I know people that have bought real estate for investment purposes. Smart people. RE didn't make them FI. It's a good income supplement for them. I'm sure it has made some people FI. And helped a lot of other people.

I also know plenty of people happy with their 401k balances.
Many people are happy with digits on a screen that they don't get to do anything with until they are old, less mobile, or dead. Hard to believe, but I guess so? Many of my friends and colleagues wouldn't be that happy with that arrangement. I am glad you used the term "balances". That is the operative word ;)
No. If I tried utilizing my TSP balance today I would pay a 10 or 20% withdrawal penalty (I'm not over 65) and a 25% tax on traditional assets. Truly a (quality of) life-deferral plan. In a taxable account you have to pay 15-38% taxes. It's a mediocre investment for tax consideration purposes.
Those penalty’s where created to protect people from their own bad decisions and short term thinking. 90% of the population will spend today with zero thought for tomorrow if you let them.

The inventor of 401ks is, rightly, upset because they are not being used properly. And the reason for that is pitifully poor financial education, badly designed plans and lack of access.

Since we seem to have no collective societal will to fix these issues, then yes a return to defined benefit plans is probably better for most average working people.

Turbo29
Posts: 184
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Turbo29 » Sun Aug 19, 2018 8:36 am

WanderingDoc wrote:
Sat Aug 18, 2018 1:03 pm

in summary, real estate is a very forgiving investment that requires very little brain power and business knowledge and math knowledge to get right.
So if it doesn't need brains or knowledge to get right, maybe you were just lucky investing at the right time.

I know several people invested in real estate who lost everything in the crash 10 year ago. In one case it not only destroyed their wealth, but destroyed their marriage and family too.

I suspect timing has a lot to do with your alleged success. What year did you start investing in real estate?

michaeljc70
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by michaeljc70 » Sun Aug 19, 2018 9:02 am

tadamsmar wrote:
Sun Aug 19, 2018 2:23 am
This shows the percentage of homes in various markets where rent covers fixed costs:

https://www.zillow.com/research/where-r ... age-15624/

But this does not include maintenance or opportunity costs for the down payment and assumes the property is always rented.

Still not clear how often the cash flow is negative.
It also uses Zillow estimates which I have found to be suspect in some cases.

986racer
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by 986racer » Sun Aug 19, 2018 9:25 am

WanderingDoc wrote:
Sat Aug 18, 2018 1:03 pm
12 years is a long time to sacrifice. It come down to basic math.

$1M index fund portfolio
- At least half is trapped in retirement accounts
- Doesn't pay YOU every month. I mean, it doesn't deposit real cash into your bank account that you can use today. Wealth to me is no good if its just digits on a screen you can't use (ie. a 401k)
- tax treatment stinks

$1M real estate portfolio
- Pays my $80K per year NET into my bank account. I can (and do) use this money now, whether its for leisure, trips, or reinvestment
- 5 profit centers of real estate. Real estate pays you in other ways that stocks don't
- I haven't payed any taxes on my rental income yet, legally
- Leverage reduces legal risk, spreads risk over multiple properties, multiple markets, multiple geographies. Leveraged real estate is an inflation hedge.
- The banks (80% - give you the loan) and tenants (20% - pay your principal) pay for my property

Sure the returns are higher in real estate. Sure it pays me money I can use now and not some random date in the future decades from now. Sure the tax benefits are far and away more attractive. But when it comes down to it, being free in several years - not several decades - is the crux of the matter.
I'm not sure why you put the restriction on the index fund portfolio that it has to be in a deferred account but you didn't do the same with the real estate portfolio. That feels a bit like an apples to oranges comparison. If the index fund investor uses a taxable account, then he has lots of access to the cash. He can take margin loans at some place like IBD that charges around 3% on the money. These are better rates than the cash out refinancing that a RE investor would use.

Anyhow, before I ask my questions about the RE investing, here are the numbers that I'm using:
  • 1MM real estate portfolio is leveraged to 5MM of actual real estate (I.e., you have invested 1MM but own 5MM of property)
  • 4MM mortgage at 4% for 30 years translates into a monthly mortgage payment of $19K. Annual payment of $228K. The interest amount that is paid on year 1 is about $200K
  • If you are getting 80K net, that means you are receiving $308K annually. (I've excluded property taxes from this discussion. I'll just assume that they are added to both the revenues and the costs and so the 80K net still holds)
  • Depreciation of 5MM in property is $182K (over a 27.5 year schedule)
Onto the questions...
  1. On your quote of "I haven't paid any taxes on my rental income yet", I'm guessing that the key word is "yet". Am I correct in understanding that you can deduct both the interest and the depreciation up to the max of your cash inflows? I.e., you have a potential of about $382K of deductions. Since you receive less than that ($308K), the cash inflows are not taxed?
  2. What happens to the excess depreciation? (In the scenario above, that would be about $74K). Do you use that for times when you have a large expense, such as a replacing a roof or some other major renovation?
  3. Where does the money come from for major repairs and renovations (or from bad tenants or long periods of vacancy)? Is this when you would use a cash out refinance? Are those expenses deductible or do those need to be depreciated over 27.5 years?
  4. What happens when you are further into the mortgage and much of the payment is used for principal rather than interest? Is that where the deferred depreciation helps offset the tax ramifications? Or is that when you do a cash out refinance so that you can have more of your payments be interest payments?
  5. What is the exit plan? It seems that if you hold the property for 27.5 years, wouldn't you have to pay taxes on the entire sale amount? I assume these are still considered LTCG (similar to stock investments). However, with the property fully depreciated, your basis is 0. If the strategy is to constantly refinance, it seems likely that you could end up in a place where the sale of a property would be to pay off your tax bill and leave you with nothing. E.g., if you had a 1MM property that has been fully depreciated, then your tax bill when you sell would be approximately 200K. Coincidentally, if you have been refinancing the whole time, you would own about 200K and the mortgage would be 800K. After you sell, you would be left with nothing (actually, after broker fees, you may end up owing money).

michaeljc70
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by michaeljc70 » Sun Aug 19, 2018 9:45 am

986racer wrote:
Sun Aug 19, 2018 9:25 am
WanderingDoc wrote:
Sat Aug 18, 2018 1:03 pm
12 years is a long time to sacrifice. It come down to basic math.

$1M index fund portfolio
- At least half is trapped in retirement accounts
- Doesn't pay YOU every month. I mean, it doesn't deposit real cash into your bank account that you can use today. Wealth to me is no good if its just digits on a screen you can't use (ie. a 401k)
- tax treatment stinks

$1M real estate portfolio
- Pays my $80K per year NET into my bank account. I can (and do) use this money now, whether its for leisure, trips, or reinvestment
- 5 profit centers of real estate. Real estate pays you in other ways that stocks don't
- I haven't payed any taxes on my rental income yet, legally
- Leverage reduces legal risk, spreads risk over multiple properties, multiple markets, multiple geographies. Leveraged real estate is an inflation hedge.
- The banks (80% - give you the loan) and tenants (20% - pay your principal) pay for my property

Sure the returns are higher in real estate. Sure it pays me money I can use now and not some random date in the future decades from now. Sure the tax benefits are far and away more attractive. But when it comes down to it, being free in several years - not several decades - is the crux of the matter.
I'm not sure why you put the restriction on the index fund portfolio that it has to be in a deferred account but you didn't do the same with the real estate portfolio. That feels a bit like an apples to oranges comparison. If the index fund investor uses a taxable account, then he has lots of access to the cash. He can take margin loans at some place like IBD that charges around 3% on the money. These are better rates than the cash out refinancing that a RE investor would use.

Anyhow, before I ask my questions about the RE investing, here are the numbers that I'm using:
  • 1MM real estate portfolio is leveraged to 5MM of actual real estate (I.e., you have invested 1MM but own 5MM of property)
  • 4MM mortgage at 4% for 30 years translates into a monthly mortgage payment of $19K. Annual payment of $228K. The interest amount that is paid on year 1 is about $200K
  • If you are getting 80K net, that means you are receiving $308K annually. (I've excluded property taxes from this discussion. I'll just assume that they are added to both the revenues and the costs and so the 80K net still holds)
  • Depreciation of 5MM in property is $182K (over a 27.5 year schedule)
Onto the questions...
  1. On your quote of "I haven't paid any taxes on my rental income yet", I'm guessing that the key word is "yet". Am I correct in understanding that you can deduct both the interest and the depreciation up to the max of your cash inflows? I.e., you have a potential of about $382K of deductions. Since you receive less than that ($308K), the cash inflows are not taxed?
  2. What happens to the excess depreciation? (In the scenario above, that would be about $74K). Do you use that for times when you have a large expense, such as a replacing a roof or some other major renovation?
  3. Where does the money come from for major repairs and renovations (or from bad tenants or long periods of vacancy)? Is this when you would use a cash out refinance? Are those expenses deductible or do those need to be depreciated over 27.5 years?
  4. What happens when you are further into the mortgage and much of the payment is used for principal rather than interest? Is that where the deferred depreciation helps offset the tax ramifications? Or is that when you do a cash out refinance so that you can have more of your payments be interest payments?
  5. What is the exit plan? It seems that if you hold the property for 27.5 years, wouldn't you have to pay taxes on the entire sale amount? I assume these are still considered LTCG (similar to stock investments). However, with the property fully depreciated, your basis is 0. If the strategy is to constantly refinance, it seems likely that you could end up in a place where the sale of a property would be to pay off your tax bill and leave you with nothing. E.g., if you had a 1MM property that has been fully depreciated, then your tax bill when you sell would be approximately 200K. Coincidentally, if you have been refinancing the whole time, you would own about 200K and the mortgage would be 800K. After you sell, you would be left with nothing (actually, after broker fees, you may end up owing money).
Those are some good points. To really compare apples to apples, you also need to include the costs of a property manager (or your time). Pretending like owning $5M in real estate is the same effort as owning a $1M (or $5M) 3 fund portfolio or target fund is nonsense. As to the basis, it would be lower, but not zero. You don't depreciate the land and that can be significant depending where the property is. Oh, and don't forget closing costs. Where I live, the county and city have fixed % amounts on top of legal fees, brokerage commissions, title insurance, etc.

In the end, we are comparing two different things. Even if you hire a property manager, they aren't going to go out and find a property for you to buy. You are going to have to find a property manager and still have contact with them (and the less contact/interaction, probably the more it is going to cost you). Equities/bonds are much more passive than rental property.

Some of the people I know that have been very successful in rental properties have their own other businesses. This seems to help as they have the flexibility in their schedules to show apartments, handle issues, etc.
Last edited by michaeljc70 on Sun Aug 19, 2018 10:08 am, edited 2 times in total.

AZAttorney11
Posts: 481
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by AZAttorney11 » Sun Aug 19, 2018 10:06 am

Where are the posts from 2008 - 2011 from landlords in places like California, Arizona, Nevada, and Florida?

onourway
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by onourway » Sun Aug 19, 2018 10:18 am

Whether real estate is or isn't a great investment depends entirely on your vantage point. Some people will be fortunate to be in the right market at the right time, make a bunch of money, and have an overly positive outlook. Others will get burned from the opposite conditions. Most people will end up falling somewhere in the middle - and you need to be aware of that fact. The same dichotomy exists in picking individual stocks. Someone who bought and held Apple in the '90's probably thinks indexing is crazy. Someone who held Enron is likely to have an opposite opinion.

When you have an intersection of someone in the right place in the right time who happens to like the work involved in handling real estate as a business, you get a zealot like @wanderindoc who can't possibly fathom why everyone else isn't seeing the same thing they do.

My experience in discussion with the general population on this subject is that the vast majority of small real estate investors don't track costs terribly well and believe that equity is the golden goose and cashflow is secondary.

Me? I like owning my own home, but not the work that comes with maintaining it, and have a job that I look forward to going to every day and pays me handsomely. I have no interest in taking on the work and liabilities of additional property ownership when my other investments have reached critical compounding mass while I do nothing.

MrJones
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by MrJones » Sun Aug 19, 2018 10:36 am

AZAttorney11 wrote:
Sun Aug 19, 2018 10:06 am
Where are the posts from 2008 - 2011 from landlords in places like California, Arizona, Nevada, and Florida?
They're still too busy rebuilding their lives....

Nate79
Posts: 3589
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Nate79 » Sun Aug 19, 2018 10:40 am

The most glaring problem of this discussion is the complete ignoring of the risk associated with the use of leverage to boost real estate returns. Certainly due to the nature of the loans it is not the same risk compared to margin loans to invest in stocks but still there is risk. The idea of paying cash for a rental is so blasted these days in favor of taking on leverage up to the max. But there are still some wise real estate investors out there preaching against this strategy.

Stormbringer
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Stormbringer » Sun Aug 19, 2018 10:49 am

986racer wrote:
Sun Aug 19, 2018 9:25 am
Onto the questions...
  1. On your quote of "I haven't paid any taxes on my rental income yet", I'm guessing that the key word is "yet". Am I correct in understanding that you can deduct both the interest and the depreciation up to the max of your cash inflows? I.e., you have a potential of about $382K of deductions. Since you receive less than that ($308K), the cash inflows are not taxed?
  2. What happens to the excess depreciation? (In the scenario above, that would be about $74K). Do you use that for times when you have a large expense, such as a replacing a roof or some other major renovation?
  3. Where does the money come from for major repairs and renovations (or from bad tenants or long periods of vacancy)? Is this when you would use a cash out refinance? Are those expenses deductible or do those need to be depreciated over 27.5 years?
  4. What happens when you are further into the mortgage and much of the payment is used for principal rather than interest? Is that where the deferred depreciation helps offset the tax ramifications? Or is that when you do a cash out refinance so that you can have more of your payments be interest payments?
  5. What is the exit plan? It seems that if you hold the property for 27.5 years, wouldn't you have to pay taxes on the entire sale amount? I assume these are still considered LTCG (similar to stock investments). However, with the property fully depreciated, your basis is 0. If the strategy is to constantly refinance, it seems likely that you could end up in a place where the sale of a property would be to pay off your tax bill and leave you with nothing. E.g., if you had a 1MM property that has been fully depreciated, then your tax bill when you sell would be approximately 200K. Coincidentally, if you have been refinancing the whole time, you would own about 200K and the mortgage would be 800K. After you sell, you would be left with nothing (actually, after broker fees, you may end up owing money).
1. Depreciation can be used as an expense against any profits.
2. Excess depreciation carries over to future years.
3. If someone needs to refinance to replace a roof, that is a major red flag that've built themselves a house of cards. The transactional cost of refinancing in non-trivial, and the interest rate risk is substantial. What good is pulling $20K out of your property when your interest rate jumps from 4 to 7%? Also, lenders are wary of cash-out refinances. The terms are usually less favorable than with a purchase money mortgage.
4. Often people do a 1031 tax-deferred exchange into a bigger property. Your return on equity decays as the property deleverages.
5. It depends on the situation. If you have children, you can hang on to properties until you die, and then they get a step-up in basis that effectively wipes out the capital gain. Liquidating a fully depreciated property would be painful -- brokers fee + capital gains + depreciation recapture. Another option would be a 1031 exchange into an Umbrella Partnership REIT (UPREIT).
"Compound interest is the most powerful force in the universe." - Albert Einstein

sillysaver
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by sillysaver » Sun Aug 19, 2018 10:55 am

Nate79 wrote:
Sun Aug 19, 2018 10:40 am
The most glaring problem of this discussion is the complete ignoring of the risk associated with the use of leverage to boost real estate returns. Certainly due to the nature of the loans it is not the same risk compared to margin loans to invest in stocks but still there is risk. The idea of paying cash for a rental is so blasted these days in favor of taking on leverage up to the max. But there are still some wise real estate investors out there preaching against this strategy.
+1

Miakis
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by Miakis » Sun Aug 19, 2018 10:58 am

CPA here - I do tax returns for many landlords.

I'm sure it's highly regional, but most residential landlords are cash-flow positive around here, even those that utilize a management company. The ones that use a management company tend to be happier landlords, but their profits are lower. Every year I see a couple of properties that get their profits for the past five years eradicated by a bad tenant. Unfortunately, a bad tenant tends to stop paying, refuses to move out, causes the landlord to incur legal costs and then trashes the property, causing a ton of damage. It usually only takes one or two bad tenants for a hobby-landlord to decide to sell out of rental properties. There are only certain people who have the personality to build a book of residential rental properties and everyone else just finds it stressful and time consuming.

Also - landlording isn't for the kind-hearted. There are always family members and friends who are having a hard time and who want to move into your rental property to "get on their feet." These people never pay market rent and usually take a long time to move on.

Landlording isn't for people who move around a lot. I have some clients who keep moving states, then to simplify their lives, they 1031 exchange into a new property in the new state, then another one two years later, then another one three years after that. The transaction costs of repeatedly buying and selling the properties have quickly eroded any real investment potential.

My commercial landlords don't complain. I rarely see commercial landlords divest themselves of their properties. And all of my clients who have a portfolio of both have eventually sold all of their residential properties and kept their commercial properties. They have also expressed that they would buy more commercial properties when the right opportunities come up. It seems to come down to a difference in tenants and lease terms. Bad tenants are easy to evict, good tenants stay a long time and take good care of the property.

InvestInLife
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by InvestInLife » Sun Aug 19, 2018 10:59 am

Yes it can cover the mortgage payment, depending on circumstances.
IMO IT's not unlike putting funds into TSM and watching it go up. How is that not "free money"?
But RE is more like buying an individual dividend stock. It's a single entity subject to its own particularities. It yields a monthly dividend as rent if you put work into it.

I just bought my first rental sfh last month in a nearby B class suburb. I had looked in 2016 with a realtor who was great at finding properties, but slow with paperwork and closing deals. So I made offers on three, and lost all of them, and decided to discontinue looking. Two years later these properties have appreciated fifty percent (as have mortgage rates, I think)... so timing/luck makes a difference of 25k or so in my case. I still decided to go forward with it now since the cap rate is acceptable at around 8%. But biting my thumb a little. My interest was kindled by WanderingDoc's helpful suggestion a while back on one of my posts, and a cousin who retired at 35 from his properties who told me "any idiot" can make money investing in real estate...just do it!

I bought at 75k with 25% down, rent will be 925/mo, mortgage is 584/mo. Will need a new roof in about five years but I am prepared for that. I spent last month fixing it up, installing flooring, fixtures, and plumbing. I figure 55% as a net return on rent to allow for expenses, vacancy, taxes, insurance, and management.
Last edited by InvestInLife on Sun Aug 19, 2018 11:39 am, edited 9 times in total.

stoptothink
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by stoptothink » Sun Aug 19, 2018 11:01 am

Turbo29 wrote:
Sun Aug 19, 2018 8:36 am
WanderingDoc wrote:
Sat Aug 18, 2018 1:03 pm

in summary, real estate is a very forgiving investment that requires very little brain power and business knowledge and math knowledge to get right.
So if it doesn't need brains or knowledge to get right, maybe you were just lucky investing at the right time.

I know several people invested in real estate who lost everything in the crash 10 year ago. In one case it not only destroyed their wealth, but destroyed their marriage and family too.

I suspect timing has a lot to do with your alleged success. What year did you start investing in real estate?
I was WanderingDoc during the last RE crash. I was in my mid-20's and telling my mom that in a few years she'd never have to work. I was also recently married and my wife knew I had been quite fortunate (to that point). I am very debt-averse and wasn't leveraged at all, and I also was very young and had a 9-5 which could pay the bills, so when '07 happened I lost most of my life savings but I wasn't totally financially devastated. My two partners were in their 40's and had been in residential RE their entire life; both were "worth" well into 7-figures. Both ended up divorced, bankrupt, and living with their parents. One of them has recovered (sort of), the other hasn't. I learned a lesson and have since recovered, but it is still hard sometimes to look back and think that had I not gotten into RE (and faced divorce a few years later which was directly related to suddenly not being able to provide the lifestyle my wife expected), I'd likely be FIRE right now (at 37) just from working, saving, and index investing.

You either have to be lucky or really know what you are doing. I, like most people who get involved, didn't really know what I was doing. RE absolutely can be an amazing investment, but WanderingDoc's hyperbole about how many "normal" people out there do it with amazing results and the suggestion that anybody can do it and be FI in 5yrs is hilariously ridiculous (and I think he knows this). Of the handful of people around me who still have some stake in RE, I suspect most of them (at this point) have either lost money or would have been far better off with a basic 3-fund portfolio.

sillysaver
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by sillysaver » Sun Aug 19, 2018 11:08 am

onourway wrote:
Sun Aug 19, 2018 10:18 am
When you have an intersection of someone in the right place in the right time who happens to like the work involved in handling real estate as a business, you get a zealot like @wanderindoc who can't possibly fathom why everyone else isn't seeing the same thing they do.
Either a zealot who had great timing or someone who recently drank the kool-aid and started listening to RE podcasts (people ultimately making $ by selling turnkey investments and mortgage loans) and reading bullish articles on Bigger Pockets. I noticed Doc throws out a lot of quotes and talking points that sound like they came straight out of one of these shows.

I know someone who was "in the right place at the right time". He was getting bonuses at work and throwing all his money into syndications back in '11 or so, and now he is a millionaire at a relatively young age.

If you bought the S&P 500 back at the bottom during the GFC, you also would be doing very well. You'd be up well over 300% as of today, so if you started with a quarter million, you'd be a millionaire, looking like a genius and stocks would be the "best investment".

They're different vehicles, but they're influenced by the same economics (low interest rates, crisis level valuations, etc.). To say one is better because it pays you more income, or because you get paid "5 different ways" is silly. In the rear view mirror, they are both great because if you bought them at the right time, you could have become very wealthy. That doesn't mean either stocks or RE is a great investment *today*.

The pro-formas on RE deals today look great on paper, much higher than expected returns on equities. But those are projections. You won't know if these were good until you sell. You can also lose everything in a highly-leveraged deal. People somehow think X (insert real estate, trend following, whatever), with higher than average returns, is a magic profit generating machine divorced from business fundamentals and the economy.

That said, I own both. I like RE syndications as they are passive. However, I'm not sure how safe these are. I'm sure that these will be affected by a recession just like equities.

yearzero
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by yearzero » Sun Aug 19, 2018 11:16 am

MrBeaver wrote:
Sat Aug 18, 2018 8:13 pm
As others have said, great returns come from luck/timing + managing yourself (job). For the most part, I prefer REITs + stocks, though I might jump in on RE if we had another big downturn in RE like 2008-2009.

I can see myself buying properties in whatever town(s) my two kids go to college, but putting their names on the deed and loan in addition to mine (joint ownership). I’d pay for their rent out of my 529, and pay them to manage the property and collect rent from roommates so they can start a Roth IRA. They would gain confidence of the ‘I can do this stuff without dad there’ variety and get a head start on their credit score. Once they graduate, I’d have them refinance it and relinquish my half so they can sell it owing no capital gains, or stay there. They get a 50k headstart on net worth, practice on how to maintain a property, and four years of Roth IRA contributions, on top of the value of their education.

I’d also make an exception if I had an on-site second unit. I’d have no problem renting and managing that because it would just feel like maintaining my own home.

Great idea. This is something I've thought about a lot also. Are there any rules against using one a child's 529s to pay for rent on properties they own half of via some formal ownership structure?
"Don't waste your time, or time will waste you"- Muse-Knights of Cydonia

sillysaver
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by sillysaver » Sun Aug 19, 2018 11:18 am

stoptothink wrote:
Sun Aug 19, 2018 11:01 am
RE absolutely can be an amazing investment, but WanderingDoc's hyperbole about how many "normal" people out there do it with amazing results and the suggestion that anybody can do it and be FI in 5yrs...
This is the pitch from Lifestyles Unlimited. All you have to do is follow our program and in 5 years you can retire.

Oh, did we forget to mention that you need capital to do this? ;)

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tadamsmar
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by tadamsmar » Sun Aug 19, 2018 11:34 am

You are comparing leveraged apples to apples when you compare mortgaged real estate to stock investing.

You could juice the return on stocks with leverage.

You could buy some stock and leverage it up to the point where the dividends equaled the loan interest.

You could hock your house and buy stock with it to get a low after-tax interest rate that was covered by the dividends.

JackoC
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by JackoC » Sun Aug 19, 2018 11:58 am

nisiprius wrote:
Sat Aug 18, 2018 11:27 am
Tell me the name of a mutual fund or ETF that directly invests in one- and two-family homes, is geographically diversified across the United States, qualifies as a "diversified" fund under the Investment Company Act of 1940, and affords me the benefits and protections of the 1940 act, including daily liquidity... and promise that I'll never have to make an emergency call to a plumber or spend a day in small claims court... and I'll be happy to read the factsheet and the prospectus.
There are several REIT's which specialize in Single Family Rental, some are mentioned here
https://www.reit.com/news/reit-magazine ... al-segment

You don't, IMO, really need the diversification among dozens of such securities in an ETF if your portfolio otherwise is well diversified. If you have several dozen securities across all the funds/ETF's in your portfolio, in a reasonable cross section of sectors, countries etc. you're diversified. Each sector, country, etc. does not have to have dozens of securities, the math says.

I'm not necessarily seriously suggesting this, but it could be a useful exercise for people inclined to get into DIY real estate investing to analyse the numbers for those REIT's and get an idea how much value is skimmed off to make it diversified (as far as the properties, you do have concentrated risk in any one REIT to the *management*) and hands off. Which you could then compare at least roughly to the own-labor-value-added, typically concentrated risk* model of DIY in general.

On own labor, some people are semi-retired or otherwise not fully employed and looking after properties is an opportunity to use a bit of their labor, other people are super busy with a lucrative career and it makes no sense to take anything else on. That's even besides how 'inclined' one is, since it's not one thing. There's paper work and dealing with city authorities (some places that's significant), it's not the all one skill set of 'fixing clogged toilets'.

Also I think getting into DIY/direct RE requires being willing to somewhat put aside BH type attitudes, at least with RE hat on, about value and trust yourself to identify relatively better opportunities in some properties than others, negotiating better deals (lenders, contractors), and so forth. Of course not everyone can do that, but in small scale RE you're not competing against the best minds with instant reach to every corner of the market the way you are if assuming you can pick stocks.

*though same principal holds. Let's say 20% of one's assets are in 4 similar value rental properties, with otherwise highly diversified financial (ie paper) assets. That's not a worrisome risk concentration IMO especially if a lot of the other 80% is the stock market which can always crash at very high correlation among stocks and it's not actually written anywhere in stone 'it always comes back'. But if the 4 properties represented 80% of your assets...
Last edited by JackoC on Sun Aug 19, 2018 12:11 pm, edited 3 times in total.

JackoC
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Re: Remind me (again) how real estate isn't a GREAT investment?

Post by JackoC » Sun Aug 19, 2018 12:02 pm

duplicate sorry
Last edited by JackoC on Sun Aug 19, 2018 12:03 pm, edited 1 time in total.

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