residential real estate as an investment,

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Clearly_Irrational
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Re: residential real estate as an investment,

Post by Clearly_Irrational » Tue Dec 10, 2013 10:36 pm

travellight wrote:
but a leveraged purchase crushes market returns
It seems to me the majority here would disagree with that (I am not one of them). I have seen it stated that real estate in general and over time does not do as well as the market. Can you prove your position?
I think when people say that they mean un-leveraged real estate, on which point I would agree.

What sort of proof would you accept?

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Re: residential real estate as an investment,

Post by travellight » Wed Dec 11, 2013 3:15 am

I think when people say that they mean un-leveraged real estate, on which point I would agree.

What sort of proof would you accept?
well, you are preaching to the choir. Real estate makes a lot of sense to me, and I feel that I am winning even with un-leveraged real estate. I just wonder if it can be proven to convince those who are so against real estate.

Dxbinvestor
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Re: residential real estate as an investment,

Post by Dxbinvestor » Wed Dec 11, 2013 6:34 am

travellight wrote:well, you are preaching to the choir. Real estate makes a lot of sense to me, and I feel that I am winning even with un-leveraged real estate. I just wonder if it can be proven to convince those who are so against real estate.
You can do math yourself, but on an 'average' single family rental with no value add, I think you make about 12% compounded. I ran #'s from 1983 until now.

Where you make money is the value add opportunities.. there are plenty of these that are easily available in real estate vs finding an undervalued security. I think this is clearly illustrated by the number of real estate millionaires and billionaires vs the number of stock market millionaires and billionaires who made money strictly by trading for their own account (i.e. excluding financiers)

Example of value add: buy something for $100k that is worth $120k, get an 80% loan at market value appraisal and you have no money into it, so your return is infinite.

You DO NOT make enough of a premium off real estate vs the market if you pay retail! You might make an extra 1% but that's just compensation for your time vs a passive market strategy.

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Re: residential real estate as an investment,

Post by travellight » Wed Dec 11, 2013 10:47 am

Example of value add: buy something for $100k that is worth $120k, get an 80% loan at market value appraisal and you have no money into it, so your return is infinite.
But they make loans based on 80% of the purchase price, no? Aren't you usually in for 20% these days?

I do this myself by making a self funded loan using my heloc of no money down for the full amount using a 15 year mortgage metric I run through bankrate.com to figure out the monthly payment and I set rent above that level (of course, I only buy properties that I know will fetch that rent). It IS great.

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Re: residential real estate as an investment,

Post by Dxbinvestor » Wed Dec 11, 2013 11:13 am

travellight wrote: But they make loans based on 80% of the purchase price, no? Aren't you usually in for 20% these days?
Nah, after 6 months you can get a new appraisal and do a cash out refinance. So you have to pay cash for 6 months and then you get your loan.

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Re: residential real estate as an investment,

Post by garlandwhizzer » Wed Dec 11, 2013 11:31 am

call_me_op wrote
by Call_Me_Op » Thu Feb 02, 2012 8:27 pm

I do not see the advantage of leverage mentioned. If I could put 20% down on an asset that appreciates at the inflation rate + 1%, that is an annual return of about 20% real on my original investment. Not too shabby.
Actually if you put 20% down on a property your leverage is 100/20 or 5 to I. If it appreciates at the inflation rate +!% your annual real return is 5% not 20% of your original investment as you claim. Simple math. The problem is that you borrowed 80% of purchase price, let's say your loan was at 5%, higher than current rates but much lower than long term average mortgage rates. That costs you and additional 4% of purchase price (.80 X 5%). Therefore your real annual return after paying for mortgage is 1% (5% -4%). Over the long run maintenance costs and insurance costs will be at least 1%, meaning your real return after all outflows is 0%, plus you get the deal with renters, plumbers, electricians, contractors, etc.. It doesn't look like an attractive deal to me.

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Clearly_Irrational
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Re: residential real estate as an investment,

Post by Clearly_Irrational » Wed Dec 11, 2013 11:47 am

garlandwhizzer wrote:Actually if you put 20% down on a property your leverage is 100/20 or 5 to I. If it appreciates at the inflation rate +!% your annual real return is 5% not 20% of your original investment as you claim. Simple math. The problem is that you borrowed 80% of purchase price, let's say your loan was at 5%, higher than current rates but much lower than long term average mortgage rates. That costs you and additional 4% of purchase price (.80 X 5%). Therefore your real annual return after paying for mortgage is 1% (5% -4%). Over the long run maintenance costs and insurance costs will be at least 1%, meaning your real return after all outflows is 0%, plus you get the deal with renters, plumbers, electricians, contractors, etc.. It doesn't look like an attractive deal to me.

Garland Whizzer
Are you suggesting that leverage doesn't magnify returns?

Anecdotally, I own a duplex in California that I paid about $5000 out of pocket for in 1999 using a zero down VA loan. Over the years rents and costs have essentially canceled each other out, however tax write offs and appreciation have netted me a tidy sum. At a rough calculation it's about $310k nominal, or $230k real, so that's like what a 29% real return annually? Oh, and eventually the mortgage will be paid off and I'll have a tidy income stream to go with my capital gains.

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Re: residential real estate as an investment,

Post by Dxbinvestor » Wed Dec 11, 2013 12:31 pm

garlandwhizzer wrote:call_me_op wrote
by Call_Me_Op » Thu Feb 02, 2012 8:27 pm

Actually if you put 20% down on a property your leverage is 100/20 or 5 to I. If it appreciates at the inflation rate +!% your annual real return is 5% not 20% of your original investment as you claim. Simple math. The problem is that you borrowed 80% of purchase price, let's say your loan was at 5%, higher than current rates but much lower than long term average mortgage rates. That costs you and additional 4% of purchase price (.80 X 5%). Therefore your real annual return after paying for mortgage is 1% (5% -4%). Over the long run maintenance costs and insurance costs will be at least 1%, meaning your real return after all outflows is 0%, plus you get the deal with renters, plumbers, electricians, contractors, etc.. It doesn't look like an attractive deal to me.

Garland Whizzer
1% is not the average inflation rate. The past decade has been 2.3%, and the 90s was 3%. Use 2% and you get 10% appreciation on your money. The mortgage is irrelevant because it is paid by renters. Any decent rental will provide you 2-3% over the market mortgage payment (P+I) on average with your rent increasing with inflation, but your mortgage payment staying constant. Capital expense on a residential rental will be 1-2% annually, so you are net 1-2% on the rent including capital reserves (i.e., 5% to 10% cash on cash) going into the deal, and your rent/mortgage spread just goes higher and higher the more rents increase. After 10 years, inflation adjusted, your rental yield should be about 5% higher than your mortgage payment, and 20 years later about 10% higher.

Sample #s:

100k - Purchase price
80k - Mortgage
20k - Down

7.5k - Rent (gross rent circa 12k, costs circa 4.5k)
-5k - Mortgage (4k interest, 1k principal)
-1.5k - Capital reserve

Net rent: 1k (5% on your cash)
Appreciation: 2k (2%, 10% on your cash)

So you have 15% in the first year.. let's do the math 10 years from now assuming just 2% inflation:

120k - value
64k - mortgage balance
56k - equity (~11% compounded before rent)

9k - Rent (gross rent circa 14k, costs circa 5k)
-5k - Mortgage
-1.8k - Capital reserves
2.2k - Net cash

You earn about 16k rent in the 10 years.... so bottom line:

Starting: 20k
Ending: 92k
Compounded rate: 16.5%

This is just on an average deal.. as stated above, it's really not hard to find good deals in real estate, it's actually surprisingly easy. It is entirely realistic to find something for 90% of market value. Pay cash, refinance at 20% loan to value after 6 months of seasoning, and then you are in for 10%. Run the #'s at 10% leverage and the returns are ridiculous.

Caveats:

* Real estate growth is non-linear. This would be an average over 10 years
* The more your mortgage is paid down, the less return you get, so it's necessary to refinance every 10 years or so to get your cash out to maintain high returns. Or don't worry about cashing out and just let the tenant keep paying off your loan so you have an investment that is more stable than a bond with a huge cash on cash return from your original principal.

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Re: residential real estate as an investment,

Post by garlandwhizzer » Wed Dec 11, 2013 6:01 pm

Dxbinvestor wrote that I was mistaken that the inflation rate was 1%. I didn't say it was. I meant to write inflation rate plus 1%, but I mistyped and it came out + !%. Anyway the point is that given mortgage loan costs, maintenance, taxes, insurance, and real estate commissions when you sell the place not to mention the hassle involved with renters, repairs, etc, given all that, rental real estate does not appeal to me.

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Clearly_Irrational
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Re: residential real estate as an investment,

Post by Clearly_Irrational » Wed Dec 11, 2013 6:09 pm

garlandwhizzer wrote: Anyway the point is that given mortgage loan costs, maintenance, taxes, insurance, and real estate commissions when you sell the place not to mention the hassle involved with renters, repairs, etc, given all that, rental real estate does not appeal to me.

Garland Whizzer
If you're just saying that your prefer fully passive investments to semi-passive ones even though they have a lower rate of return, that's a reasonable preference. It sounded to me like you were arguing that leveraged real estate has a lower rate of return than a market portfolio, and that I don't agree with. (given the caveats of a positive rates of inflation and population growth)

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Re: residential real estate as an investment,

Post by garlandwhizzer » Wed Dec 11, 2013 7:29 pm

Clearly_Irrational wrote:
Are you suggesting that leverage doesn't magnify returns?

Anecdotally, I own a duplex in California that I paid about $5000 out of pocket for in 1999 using a zero down VA loan. Over the years rents and costs have essentially canceled each other out, however tax write offs and appreciation have netted me a tidy sum. At a rough calculation it's about $310k nominal, or $230k real, so that's like what a 29% real return annually? Oh, and eventually the mortgage will be paid off and I'll have a tidy income stream to go with my capital gains.
You are of course cherry picking the years in your anecdote but that's okay. In the decade of the 1990 - 2000 southern california real estate, where you live, did not go up at all in real inflation adjusted dollars. It was flat for a decade. Starting in 2000 the so. cal. real estate market began a boom which went on for 16 years of outsized returns until it busted in 2007, a period you greatly benefitted from and one which is extremely unlikely to be repeated from here.

As for leverage, you got into a property for 5 K, which is nice in a bull market like the one you've been through. In an up market leverage works for you big time. In a down market leverage kills you. Just ask the 30%+ California homeowners with zero rate mortgages who were "underwater" during the worst of the real estate collapse, many of whom still are, and the many leveraged So. Cal. real estate investors who went bankrupt during that real estate collapse. They won't sing you pretty songs about the benefits of leverage.

Since you're cherry picking dates in real estate, I'll do the same with my true anecdote from the stock market. I bought a 40K position in CSCO stock in 1993. The stock split so many times in the next 6.5 years that my average cost per share dropped $1.17/share and my share number had increased to about 35,000 shares. In 2000, the stock price hit 70+ dollars per share, a gain of 6000 % in 6.5 years that netted me more than 2.4 million dollars with no leverage, no dealing with renters, plumbers, electricians, insurance, mortgage, or other hassles. That single 40K investment allowed me to retire very comfortably in less than 7 years without any work. Had I leveraged my investment by margin buying like you did with real estate I would have made over 20 million dollars, but at the time I didn't want to take that risk. If you're claiming that leveraged investment positions in any asset be it real estate or stock don't have increased risk, I disagree, as would most financial professionals. Had you instituted your real estate leveraged strategy in 2007 your results wouldn't shine so nicely.

Both of us are cherry picking our anecdotes to demonstrate enormous outsized gains that were likely the result of luck, being in the right place at the right time and seizing an opportunity when it appeared. Neither result is re-produceable going forward. Both CSCO and California costal real estate have gone through boom bust cycles. We just happened to climb on board just before the rocket ship took off. If you're comfortable with real estate investing that's fine. I'm comfortable with stocks. I believe that the risk-adjusted return of investing in real estate over the long haul is lower than with broad market stock index exposure and I put my money where my mouth is on this question.

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Re: residential real estate as an investment,

Post by Clearly_Irrational » Thu Dec 12, 2013 12:47 am

garlandwhizzer wrote:You are of course cherry picking the years in your anecdote but that's okay.
Well, I did say it was an anecdote, but although yes I benefited from the boom, I also felt the pain of the bust. I only own two properties so that's not a lot of data even anecdotally, but my other place has worked out about the same. I paid about $10k to get into the place in 2009, rents have basically canceled costs, appreciation and tax write off has gained me roughly $26k for about 27% real return annually. I've done better than the average in both cases, but I don't count on that. A couple of years ago I did a fairly fancy comparison of 40 year returns for real estate vs. a 60/40 portfolio and my spreadsheet suggested I should expect roughly 15% returns on leveraged properties as long as inflation and population growth remain positive and roughly in traditional ranges. If I were living in Japan I wouldn't touch Real Estate with a ten foot pole.
garlandwhizzer wrote:If you're claiming that leveraged investment positions in any asset be it real estate or stock don't have increased risk, I disagree, as would most financial professionals.
I'm not, in fact I've said several times in this thread that the extra returns are not free. In my opinion stocks come pre-leveraged, whereas with real estate you have to do it yourself.
garlandwhizzer wrote: Had you instituted your real estate leveraged strategy in 2007 your results wouldn't shine so nicely.
Perhaps not, though we won't know until 2021. Besides, that's kind of like saying stocks suck because you bought in at the 1999 peak and got crushed. Point in time choices can vary wildly from the overall normal results.
garlandwhizzer wrote:I believe that the risk-adjusted return of investing in real estate over the long haul is lower than with broad market stock index exposure and I put my money where my mouth is on this question.
Well, your stock picking worked out better than my real estate buying, but if we're talking broad averages I have to disagree. A market portfolio is less risky and more passive, which is why it pays less. Obviously you don't like my numbers so let's use something a bit more un-biased. Using the data from the JonoJono spreadsheet (formerly Simba) the CAGR of TSM is 9.68 while REITS are 11.75, with the sharpe ratios being 0.34 vs. 0.45 respectively. In my opinion REITs actually produce a lower return than individually held properties with less alpha, though they do lower concentration risk and ownership annoyance enormously. Considering that the 1972-2012 period includes a massive bull run in stocks I think it's reasonable to say it's not a cherry picked data range in favor of real estate.

Congratulations on the early retirement by the way. I was in Marine Corps boot camp in 1993 and pretty much flat broke so stock market investing wasn't really on the horizon at that time.

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Re: residential real estate as an investment,

Post by docneil88 » Thu Dec 12, 2013 2:32 am

Clearly_Irrational wrote:In my opinion stocks come pre-leveraged, whereas with real estate you have to do it yourself.
Agreed, though with a 20% down payment on a home, one's leverage upon purchase is 5 to 1. Only a small percentage of stocks have built-in leverage that high or higher. (My measure of the true built-in leverage of a stock is the enterprise value divided by the market cap.) Also, only a minority of public companies can borrow at rates as low as the average home loan with a similar maturity date. (Lenders make highly leveraged home loans partly because the loan is secured by the property and partly because the buyer's income is sufficient to cover the mortgage and other standard living expenses.) Best, Neil

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Re: residential real estate as an investment,

Post by IlliniDave » Thu Dec 12, 2013 6:09 am

To my way of reckoning, owning residential rental properties blurs the line between an investment and a small business venture. At this stage of my life it just doesn't fit. But it's something I keep in the back of my mind for semi-retirement. I'm leery of building a leveraged empire as it's a bit too high risk for my tastes, but owning a second single-family home near my own home is something I would at least consider if the right situation presented itself. In the future I'm likely to become a part owner of some farmland that my family has rented out for decades. Haven't really thought through that situation much. Nobody's getting rich off of it, but the rents cover the taxes and provide a small annual profit, and it's zero maintenance, which I like--just deposit one check a year and reflected it properly on your income tax.
Don't do something. Just stand there!

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Re: residential real estate as an investment,

Post by 3CT_Paddler » Thu Dec 12, 2013 7:30 am

Dxbinvestor wrote:100% sure residential real estate gets you better return than market under these conditions:

* you buy 20% under market after all rehab costs
* 20% leverage with fixed rate loan
* 2-3% positive spread between net rent and mortgage interest, including management fee allowance and capital reserve allowance
* you buy in a growing city

All of these things are absolutely doable fairly easily.

If you do the opposite.. Pay retail, pay cash, declining city, you are better buying market.
Outside of an exception or two, this conclusion would not have been valid 2005-2012 in the US real estate market.

I think you will see people start to praise real estate again like they did prior to the recent recession as those who bought in 2010-2012 start to see good returns on their money.

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Re: residential real estate as an investment,

Post by Bustoff » Thu Dec 12, 2013 7:46 am

My neighbor owns 10 rental homes that were acquired over six years. They are all mortgaged and insured. They are all rented. The average home cost around $40,000.
She rents them for around $800/mo
She clears around $400/mo
The extra $40,000/year in rental income allowed her to retire at 52.

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Re: residential real estate as an investment,

Post by garlandwhizzer » Thu Dec 12, 2013 11:22 am

Clearly_Irrational wrote:
Congratulations on the early retirement by the way. I was in Marine Corps boot camp in 1993 and pretty much flat broke so stock market investing wasn't really on the horizon at that time.
You have done very, very well, Clearly_Irrational, with your real estate investing. Congratulations on that and congratulations on being a Marine. All of us in this great country owe our service men and women our gratitude and admiration.

Before I switched to stock investing, I tried real estate investing through a limited partnership from a "friend" which in fact turned out to be a Ponzi scheme. I lost everything, and that experience left a bad taste in my mouth on real estate. I had a terrible result on that real estate investment, partly because I was very naive, very busy at the time, too busy in fact to check out the real estate investment details myself. I believed what I was told which was a grave mistake, one that managing it yourself, you haven't made. I was unlucky with real estate, lucky with stocks. I believe that blind luck plays a larger role in our investing results than many of us admit to, which is why for stock investors it's best to be very widely diversified in equities and always to hold some high quality bonds in case the bottom falls out. The future is and always will be an unknown.

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Re: residential real estate as an investment,

Post by Clearly_Irrational » Thu Dec 12, 2013 11:59 am

garlandwhizzer wrote:Before I switched to stock investing, I tried real estate investing through a limited partnership from a "friend" which in fact turned out to be a Ponzi scheme. I lost everything, and that experience left a bad taste in my mouth on real estate. I had a terrible result on that real estate investment, partly because I was very naive, very busy at the time, too busy in fact to check out the real estate investment details myself. I believed what I was told which was a grave mistake, one that managing it yourself, you haven't made. I was unlucky with real estate, lucky with stocks. I believe that blind luck plays a larger role in our investing results than many of us admit to, which is why for stock investors it's best to be very widely diversified in equities and always to hold some high quality bonds in case the bottom falls out. The future is and always will be an unknown.

Garland Whizzer
Talk about a bad experience, that would have soured me on the whole thing too. My dad got some really bad advice when he retired in the late 90s that led to him losing a hefty chunk of change in the stock market and he just refuses to invest in it at all. As far as he's concerned the whole thing is rigged. For me, I look at what successful people are doing and try and reverse engineer that. When I was doing my research I kept reading over and over again things like "Well, I made my first money in real estate, but now I do X", I couldn't find many people that said they made their money in stocks & bonds. *shrug* I do both so hopefully one of them will work out well.

I completely agree that real estate takes personal involvement, if you don't have the time to do the proper research you're going to lose money big time and should stay the heck away from it. It's probably more comparable to stock picking (though with better odds) than buying an index fund in that way.

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Re: residential real estate as an investment,

Post by Dxbinvestor » Tue Dec 17, 2013 8:14 am

3CT_Paddler wrote:
Dxbinvestor wrote:100% sure residential real estate gets you better return than market under these conditions:

* you buy 20% under market after all rehab costs
* 20% leverage with fixed rate loan
* 2-3% positive spread between net rent and mortgage interest, including management fee allowance and capital reserve allowance
* you buy in a growing city

All of these things are absolutely doable fairly easily.

If you do the opposite.. Pay retail, pay cash, declining city, you are better buying market.
Outside of an exception or two, this conclusion would not have been valid 2005-2012 in the US real estate market.

I think you will see people start to praise real estate again like they did prior to the recent recession as those who bought in 2010-2012 start to see good returns on their money.
Well, my example was 10 year hold period. It looks like it would be valid from 2005 - 2015 if things don't crash in 2014.

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Re: residential real estate as an investment,

Post by docneil88 » Fri Dec 20, 2013 4:47 am

Dxbinvestor wrote:100% sure residential real estate gets you better return than market under these conditions:

* you buy 20% under market after all rehab costs
* 20% leverage with fixed rate loan
* 2-3% positive spread between net rent and mortgage interest, including management fee allowance and capital reserve allowance
* you buy in a growing city

All of these things are absolutely doable fairly easily.

If you do the opposite.. Pay retail, pay cash, declining city, you are better buying market.

I have large real estate portfolio and have analyzed numbers over and over.

Main thing that makes real estate better is stable leverage for fixed rate residential loans. If you could buy stocks on margin and not have to worry about mark to market margin call risk, then stocks would definitely be better.
Hi Dxbinvestor, Even with all-cash offers, I did not find it fairly easy to buy a home at 20% below its current fair market value (FMV) after all rehab costs. I tried for about a year and a half to attain that magic 20% discount in the buyer's market of 2011 and early 2012 in California and had several all-cash offers rejected, and had to walk away from one after inspection showed rehab costs would be too high. (All-cash offers are generally worth about a 5-10% discount on top of whatever other discount the seller may be willing to let a home go for.) I finally closed on a townhome that I thought was 20% below, but many unexpected things after the purchase drove up rehab costs to a point where I paid about fair market value after rehab costs, including the value of my time to manage the rehab. The only place where I reliably found homes that were maybe going for around 15-20% below FMV after rehab was at foreclosure auctions, but you needed cash on the barrel head, and you usually had to evict the prior owners, and you couldn't get inside the home to inspect it before the auction. So the cost to rehab was a huge unknown.

"2-3% positive spread between net rent and mortgage interest, including management fee allowance and capital reserve allowance ." That's doable in some areas in the country with low price to rent ratios, but almost impossible in the vast majority of California. Best, Neil

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Re: residential real estate as an investment,

Post by travellight » Fri Dec 20, 2013 5:40 am

Yes, California does not work for me either. Prices are too high. It can work in other parts of the country. I bought a house in 2011 for 270 that is worth 505 now (according to zillow). They had started asking around 330 to 350k back then. They took my offer because it was all cash and I could close in 2 weeks.

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Re: residential real estate as an investment,

Post by Dxbinvestor » Tue Dec 24, 2013 12:39 pm

docneil88 wrote:
"2-3% positive spread between net rent and mortgage interest, including management fee allowance and capital reserve allowance ." That's doable in some areas in the country with low price to rent ratios, but almost impossible in the vast majority of California. Best, Neil
Yeah, I think you have to stick with mid-priced growth cities -- Charlotte, Austin, Las Vegas 12 months ago, etc.

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Re: residential real estate as an investment,

Post by Valuethinker » Thu Dec 26, 2013 4:54 am

garlandwhizzer wrote: I was unlucky with real estate, lucky with stocks. I believe that blind luck plays a larger role in our investing results than many of us admit to, which is why for stock investors it's best to be very widely diversified in equities and always to hold some high quality bonds in case the bottom falls out. The future is and always will be an unknown.

Garland Whizzer
How do we make this an 'all time greatest post'?

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Re: residential real estate as an investment,

Post by Valuethinker » Thu Dec 26, 2013 4:55 am

3CT_Paddler wrote:
Dxbinvestor wrote:100% sure residential real estate gets you better return than market under these conditions:

* you buy 20% under market after all rehab costs
* 20% leverage with fixed rate loan
* 2-3% positive spread between net rent and mortgage interest, including management fee allowance and capital reserve allowance
* you buy in a growing city

All of these things are absolutely doable fairly easily.

If you do the opposite.. Pay retail, pay cash, declining city, you are better buying market.
Outside of an exception or two, this conclusion would not have been valid 2005-2012 in the US real estate market.

I think you will see people start to praise real estate again like they did prior to the recent recession as those who bought in 2010-2012 start to see good returns on their money.
+1

The experience here is that whenever we have 2 good consecutive years in an asset class, its fans emerge with it as the 'solution' to investment problems.

The rules of thumb DXbinvestor expresses are pretty good ones (I know people in the UK who go by similar assumptions) .

The tricky one to me is
* you buy 20% under market after all rehab costs
That, I would think is hard to do. Here in the UK unless you have access to cheap builders (family etc.) then it's very hard to do if not impossible. Too many investors out there trying to do the same thing.

Also
* 20% leverage with fixed rate loan
I assume he means *80%* leverage, ie $100k house, $20k cash, $80k mortgage?

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Re: residential real estate as an investment,

Post by WhyNotUs » Thu Dec 26, 2013 10:07 am

There is an ongoing desire to compare the apples and oranges of index investing and rental properties. They are so different that comparisons are meaningless in my mind. One maximizes diversification, is completely passive, relatively liquid, little transaction basis, does not rely on leverage/credit, and is completely out of one's control. The other is non-diversified, active, illiquid, leverage is what makes it most interesting, and requires analytic, marketing, market analysis, and tenet management skills.

Even within real estate there are sub-markets that offer very different types of opportunities- commercial vs. apartments with property mgmnt vs up to four units. Each come with different metrics, liquidity, lending issues/costs, and management issues. In addition, many of us live in different markets- investing in the midwest is often not betting on appreciation so can flow is king and the 1% "rule" comes in to play. In other markets, one anticipates some appreciation to justify cap rates that will not match a deal in Ohio.

I own rental and index funds and am bemused by the ongoing attempts to compare such incomparable subjects. There are many (most?) for whom rental RE will not have any interest, regardless of the anecdotes about the guy who "retired" at 50 by renting 7 sfhs. Indexes make sense for just about everyone that has the ability to invest while rental real estate is for a particular group of people. One circle is much larger than the other, if you, like me, own rental real estate with some success then I would give serious consideration about diversifying some of the proceeds into index funds so that the circle overlap.
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White Coat Investor
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Re: residential real estate as an investment,

Post by White Coat Investor » Fri Dec 27, 2013 2:24 am

WhyNotUs wrote:
I own rental and index funds and am bemused by the ongoing attempts to compare such incomparable subjects. There are many (most?) for whom rental RE will not have any interest, regardless of the anecdotes about the guy who "retired" at 50 by renting 7 sfhs. Indexes make sense for just about everyone that has the ability to invest while rental real estate is for a particular group of people. One circle is much larger than the other, if you, like me, own rental real estate with some success then I would give serious consideration about diversifying some of the proceeds into index funds so that the circle overlap.
That's such a great post I'm going to steal it and post it as a comment on my recent blog post on Stocks vs Real Estate.

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Re: residential real estate as an investment,

Post by gte939h » Fri Dec 27, 2013 3:12 am

Dxbinvestor wrote:100% sure residential real estate gets you better return than market under these conditions:

* you buy 20% under market after all rehab costs
* 20% leverage with fixed rate loan
* 2-3% positive spread between net rent and mortgage interest, including management fee allowance and capital reserve allowance
* you buy in a growing city

All of these things are absolutely doable fairly easily.

If you do the opposite.. Pay retail, pay cash, declining city, you are better buying market.

I have large real estate portfolio and have analyzed numbers over and over.

Main thing that makes real estate better is stable leverage for fixed rate residential loans. If you could buy stocks on margin and not have to worry about mark to market margin call risk, then stocks would definitely be better.
I completely agree with this!

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Re: residential real estate as an investment,

Post by cowboyinasia » Fri Dec 27, 2013 2:04 pm

A few posters are obviously comfortable and happy with their real estate investments, spanning multiple properties and multiple years.

Has anyone has taken the 1031 route, when selling one property and buying another(s)? If not, why not?

Thanks.

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Re: residential real estate as an investment,

Post by WhyNotUs » Fri Dec 27, 2013 7:30 pm

cowboyinasia wrote:A few posters are obviously comfortable and happy with their real estate investments, spanning multiple properties and multiple years.

Has anyone has taken the 1031 route, when selling one property and buying another(s)? If not, why not?

Thanks.
Not me, I have had clients that have used them though. In both cases it was multi-million $$ commercial property. Worked out for those owners but was not a simple process.

There are lots of obstacles to using the process, repurchase timing issues, accounting issues, tax timing issues, etc. that limit the applicability. Historically there was confusion about second homes. We are in a period of very low taxation that some people think will not last and they would rather deal with the taxes now.
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