$10 million+ - Still Working and LBYM

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HomerJ
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Re: $10 million+ - Still Working and LBYM

Post by HomerJ » Wed Oct 04, 2017 10:42 am

psteinx wrote:
Wed Oct 04, 2017 10:26 am
I think there are some natural constraints, including that companies will increasingly arbitrage wage differentials - they may be willing to tolerate a labor force costing 1.5X the national average for a given profession, to be in the Bay Area. Maybe 2X. But at 3X, 4X, 5X, I think companies will begin to realize that programmers can program quite effectively in Denver, Austin, or Boston. I believe it's even possible to program in the Midwest - fancy that!
This was my next point. Telecommuting is becoming more and more common. Even right now, there's a lot of real estate pressure. $1 million in SF gets you a 1950s 1200 square-foot starter home. That same starter home will only cost $150k in the rest of the country. Or you could get a nice new 4000 square-foot mansion for $350k.

If SF keeps growing at 10% a year, the disparity will just get more ridiculous. We already have people here with $400k salaries worried they can't afford SF housing. Yes, it's nice to have all your people under one roof, but I think many companies will see the benefits of having 10 programmers tele-commuting at $200k each instead of 2 programmers in-house making $1 million each.

Because if prices keep going up, it won't be long before programmers living in SF have to make $1 million each. Does investing in that scenario sound like a risk-free plan?

WanderingDoc
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Re: $10 million+ - Still Working and LBYM

Post by WanderingDoc » Wed Oct 04, 2017 10:58 am

psteinx wrote:
Wed Oct 04, 2017 10:26 am
WanderingDoc wrote:
Wed Oct 04, 2017 9:57 am
To your last point, yes I do. Why, because I have talked to many landlords in SF and Honolulu. They thought the same thing as you. They bought a place in 1978. It rented for $175 in 1980. Then it rented for $350 in 1990. $750 in 2000. $1200 in 2010. $1900 now. That's called rent growth. Prices and rents have doubled every 10 years. For all 40 years, they thought the same thing: how is someone going to afford this? They always do :)
I'm not an expert on this stuff, but I doubt there were a lot of quality apartments in SF or Honolulu renting for $175 in 1980 or $350 in 1990**.

There's little doubt that rents have soared in these places, but I think your claims are exaggerated.

More generally, rents are constrained by incomes. In a tight market, a tenant may pay 40 or 45% of their income in rent, versus a more comfortable 25-30%. But they're unlikely to pay 80% of their income and almost certainly not going to pay 150% or 300%.

I suspect rents are already at or close to the top of realistic %s of income in many of these places. Beyond that, rent growth would depend on higher incomes or more intensive usage (including, for instance, multiple people sharing an apartment). Income growth may be somewhat above average in these locales in the next 10-20 years in these locales, but I think there are some natural constraints, including that companies will increasingly arbitrage wage differentials - they may be willing to tolerate a labor force costing 1.5X the national average for a given profession, to be in the Bay Area. Maybe 2X. But at 3X, 4X, 5X, I think companies will begin to realize that programmers can program quite effectively in Denver, Austin, or Boston. I believe it's even possible to program in the Midwest - fancy that!

** Edit - A personal experience/memory:
In the summer of 1990, I was looking for a short term rental in San Francisco proper. While I had a few constraints that meant I didn't get the absolute best deal, I think I paid ~$500/month for a small, somewhat dingy studio apartment with basic furnishings, on the 600 block of Post street. Again, a studio.
Actually. That's what a 1BR condo rented for in Honolulu/Waikiki/Diamondhead in ~1980.

I know, I understand what you are saying - it's exactly what I told their gray-haired landlords. They all thought "how are people going to afford double these rents in 10 years? Yet it happened, every 10 years rents went up about 6% year over year.

A 2BR condo I own in Honolulu now rents for $3050. That same condo rented for $1600 in 2008. If you figure someone can afford 1/3 of their gross income on rents, it would mean in 10 years people would have to come along making $18K per month to afford a condo for $6K a month. Seems doubtful, but so was everyone going back 50 years when these trends started. Those who sat on the sidelines missed out big time.
One day it suddenly dawned on me that I had won the real estate lottery. | I'm not looking to get rich quickly. I'm not looking to get rich slowly. I'm looking to get rich for sure.

WanderingDoc
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Re: $10 million+ - Still Working and LBYM

Post by WanderingDoc » Wed Oct 04, 2017 11:11 am

zaboomafoozarg wrote:
Wed Oct 04, 2017 10:32 am
WanderingDoc wrote:
Wed Oct 04, 2017 9:57 am
The problem with MFs? INCOME. A average 1.5-2% dividend among S&P stocks in a joke. MFs are the 'work for 25-50 years' plan. Nothing wrong with that but that's what it is. Stocks don't pay you any income. And the paltry dividend they pay you, it's either taxed heavily or locked in a retirement account so you can't actually use the money to eat or take a vacation today.
As Larry Swedroe posted many times, it's not dividends that matters, it's total return. There's nothing stopping people from selling some shares to make money, except for an unfounded psychological aversion to doing it.
I'm with you. The thing is, I've only been a real estate investor since 2013. I have generated a real income of $4K per month from my single properties and an additional $~3K every 3 months from my passive K-1 partnerships. That's about $60K which is enough for me to live on. Very little of it is taxed, and I am not even aggressive with expenses.

There is no mathematical way even a high income earner who puts $18K into a 401k, $5.5K into a Roth IRA, and I'll even give you $10K a year in a taxable account to generate $5K per month in mailbox INCOME from their equities investments. If there was, I would be all in.

You might say "well you took more risk with real estate than indexing".. that depends on the knowledge and skill of the investor. I like to be creative and add value. I see putting money into a retirement account as almost a "hope and pray" strategy. Trust me, I am trying really hard to see the merits because I would love more passive investments.
One day it suddenly dawned on me that I had won the real estate lottery. | I'm not looking to get rich quickly. I'm not looking to get rich slowly. I'm looking to get rich for sure.

chicagoan23
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Re: $10 million+ - Still Working and LBYM

Post by chicagoan23 » Wed Oct 04, 2017 11:50 am

WanderingDoc wrote:
Wed Oct 04, 2017 10:17 am
chicagoan23 wrote:
Wed Oct 04, 2017 6:55 am
WanderingDoc wrote:
Wed Oct 04, 2017 12:31 am
chicagoan23 wrote:
Tue Oct 03, 2017 5:12 pm
visualguy wrote:
Tue Oct 03, 2017 3:53 pm
And you're right - I don't see real estate in good areas of NYC/SF/LA as being "risky". Sure, anything could happen, but losing money on that would be at the very bottom of my worry list when considering history.
Must be recent history.....NYC real estate was destroyed in the 70s and 80s; an old neighbor of mine in Chicago lost 30% on his NY co-op that he sold in the early 80s and vowed never to return to that city. SoCal real estate was similarly crushed in the housing bust (down 50%) and was crushed in the early-mid 90s after Japanese investors dried up and the defense industry contracted (down 35%). Both places were still "the most desirable areas for the educated, creative, entrepreneurial, and wealthy" at the time that the real estate market was crashing.

Investing in real estate is not "safe" when compared to bonds. Not saying you shouldn't do it, especially if you make that your career and know what's a good deal and how to maintain properties, but based on the history I've seen, I would expect 20%-50% losses for real estate in each of those areas at some point.

I doubt you'll ever see anything close to that type of decline in bonds, which means putting several million in bonds, as opposed to a concentrated real estate position, is actually likely to lead to more wealth for descendants. If it were that easy and/or guaranteed, everyone would do it. It's not.
You are just wrong.

Real estate in NYC, SF, LA, San Jose, and Honolulu has returned 9-11% YoY in capital appreciation and 6%+ in rent growth, over the last 40-50+ years. Year over year. This includes the downturns!! This is publicly available data.

Real estate has benefits stock and mutual funds can't touch.

1) Very easy to leverage. Let the bank take the risk.
2) Ability to make an infinite return (buy at 70% LTV or ARV, rehab or wait, pull out 80% or less of LTV or ARV = infinite return).
3) Insider trading is not only legal, it's encouraged.
4) Ability to increase your returns at whim like choosing to self-manage instead of hiring a PM in lean times
5) Paying $0 or less in taxes on rentals while actually earning a good return.
6) Ability to retire in 3-5 years on a teacher's salary and a teachers IQ. Happens every day with real estate. Try doing that with mutual funds and a 401k lol.

I could go on but my fingers are getting sore. I have done # 1 - 5 of the above. I cannot say I have done # 6 since I'm not a teacher.. ;)
OK, thank you for correcting me. It's gone up 10% per year for 50 years, so you can't lose. Go ahead and put everything you have into SF rentals and enjoy your guaranteed windfall.

Sorry for making you hurt your fingers to correct my misguided suggestion that it is possible to see significant declines in real estate.
It's no problem. Already did and already FI in my early 30s. Stocks can go to zero, real estate can't. Also, many areas actually see a lower vacancy during downturns. It's a more forgiving investment imo.

I am now diversifying into mutual funds but I dont see it anything other than a long and slow investment. Please correct me if I am wrong.
If you are FI in your early 30s, then let's say you started building your real estate empire in 2009 at the bottom of the financial crisis. According to this data and again here, the S&P CoreLogic Case-Shiller San Francisco Home Price NSA Index bottomed out at about 120 or so. It's now at 245. Great, that's more than doubling up in only 8 years, with a lot of income coming in from rents. Of course, the S&P 500 has gone from 685 to 2540, a 3.5x increase. A small cap index (say, VB) has done even better; you'd have earned 4x your money.

Some people don't want income; they want appreciation. Income thrown off by real estate is not helpful to them, even if they are taking generous depreciation deductions to avoid taxes for now. They'd rather have the faster appreciation. And over the last 40 or 50 years, small caps destroy real estate in any locale as an investment. (Tip: That doesn't mean you should put 100% of your investment portfolio into small caps).

I am not trying to discourage anyone from investing in real estate; if you like it and you're good at it, I'm happy for you. You can make a lot of money. But I think it is wrong for someone to claim that, for an investor with $10+ million, putting $3 million into SF real estate is safer and makes more sense than putting that money into bonds, with the balance in equities. There is ample Nobel Prize winning evidence on portfolio theory and the efficient frontier proving that keeping some bonds in your portfolio will reduce your risk without costing you much in return. That's why everyone here does it. Over long periods of time and several boom and bust cycles, you will likely come out ahead with the diversified approach. And that ignores the many hassles of managing a real estate portfolio (Tip: If you are monitoring your property manager only a few minutes per month, there is a good chance someone is stealing from you).

I'm glad you are diversifying into mutual funds, and don't disagree that it is a long and slow investment. That's basically the point. You will be happy that you have money in a diversified portfolio when the next real estate crash comes, and it will come. I recommend that you take advantage of some of the non-Millennial wisdom from this group, you'll be happy you did.

KyleAAA
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Re: $10 million+ - Still Working and LBYM

Post by KyleAAA » Wed Oct 04, 2017 12:06 pm

chicagoan23 wrote:
Wed Oct 04, 2017 11:50 am
If you are FI in your early 30s, then let's say you started building your real estate empire in 2009 at the bottom of the financial crisis. According to this data and again here, the S&P CoreLogic Case-Shiller San Francisco Home Price NSA Index bottomed out at about 120 or so. It's now at 245. Great, that's more than doubling up in only 8 years, with a lot of income coming in from rents. Of course, the S&P 500 has gone from 685 to 2540, a 3.5x increase. A small cap index (say, VB) has done even better; you'd have earned 4x your money.

Some people don't want income; they want appreciation. Income thrown off by real estate is not helpful to them, even if they are taking generous depreciation deductions to avoid taxes for now. They'd rather have the faster appreciation. And over the last 40 or 50 years, small caps destroy real estate in any locale as an investment. (Tip: That doesn't mean you should put 100% of your investment portfolio into small caps).
Not that I'm advocating putting all your money in real estate, but you aren't being fair in your analysis. RE prices may have only doubled since the bottom, but at that time cap rates were quite high. You could easily find 10%+ cap rates in my area and sometimes even higher. So your unleveraged return would have been more like 15-20% taking income into account. And many real estate investors would have been leveraging up towards the bottom. Even if you assume a conservative position of 3:1 leverage and borrowing at hard money rates of 8-10% rather than a 5% mortgage, the return on a real estate investment at the bottom in 2009 has absolutely blown away that of small caps several times over. Even if you assume cap rates never hit 10% in SF, there's still a lot of outperformance there.
chicagoan23 wrote:
Wed Oct 04, 2017 11:50 am
And over the last 40 or 50 years, small caps destroy real estate in any locale as an investment. (Tip: That doesn't mean you should put 100% of your investment portfolio into small caps).
Not when you take leverage into account, which most real estate investors use. If you want to use an apples-to-apples comparison you HAVE to include leverage. What's the average debt-to-equity ratio of the companies in VB? It ain't 0.

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Re: $10 million+ - Still Working and LBYM

Post by KyleAAA » Wed Oct 04, 2017 12:08 pm

WanderingDoc wrote:
Wed Oct 04, 2017 12:31 am
2) Ability to make an infinite return (buy at 70% LTV or ARV, rehab or wait, pull out 80% or less of LTV or ARV = infinite return).
That is not an infinite return. Dividing a number by zero does not equal infinity. What you really mean is "it is a very high return," so say that.

chicagoan23
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Re: $10 million+ - Still Working and LBYM

Post by chicagoan23 » Wed Oct 04, 2017 12:24 pm

KyleAAA wrote:
Wed Oct 04, 2017 12:06 pm
chicagoan23 wrote:
Wed Oct 04, 2017 11:50 am
If you are FI in your early 30s, then let's say you started building your real estate empire in 2009 at the bottom of the financial crisis. According to this data and again here, the S&P CoreLogic Case-Shiller San Francisco Home Price NSA Index bottomed out at about 120 or so. It's now at 245. Great, that's more than doubling up in only 8 years, with a lot of income coming in from rents. Of course, the S&P 500 has gone from 685 to 2540, a 3.5x increase. A small cap index (say, VB) has done even better; you'd have earned 4x your money.

Some people don't want income; they want appreciation. Income thrown off by real estate is not helpful to them, even if they are taking generous depreciation deductions to avoid taxes for now. They'd rather have the faster appreciation. And over the last 40 or 50 years, small caps destroy real estate in any locale as an investment. (Tip: That doesn't mean you should put 100% of your investment portfolio into small caps).
Not that I'm advocating putting all your money in real estate, but you aren't being fair in your analysis. RE prices may have only doubled since the bottom, but at that time cap rates were quite high. You could easily find 10%+ cap rates in my area and sometimes even higher. So your unleveraged return would have been more like 15-20% taking income into account. And many real estate investors would have been leveraging up towards the bottom. Even if you assume a conservative position of 3:1 leverage and borrowing at hard money rates of 8-10% rather than a 5% mortgage, the return on a real estate investment at the bottom in 2009 has absolutely blown away that of small caps several times over. Even if you assume cap rates never hit 10% in SF, there's still a lot of outperformance there.
chicagoan23 wrote:
Wed Oct 04, 2017 11:50 am
And over the last 40 or 50 years, small caps destroy real estate in any locale as an investment. (Tip: That doesn't mean you should put 100% of your investment portfolio into small caps).
Not when you take leverage into account, which most real estate investors use. If you want to use an apples-to-apples comparison you HAVE to include leverage. What's the average debt-to-equity ratio of the companies in VB? It ain't 0.
You can leverage stocks too using margin. You can use options. But that''s not the point I am trying to make. Real estate is not, historically, a "safe" investment.

wrongfunds
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Re: $10 million+ - Still Working and LBYM

Post by wrongfunds » Wed Oct 04, 2017 12:33 pm

He could counter that "do you think you could get 4% 30 year loan from bank" if you want to do options trading using margin? Remember, his point was that he was using the bank's money and scheming the gains!

psteinx
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Re: $10 million+ - Still Working and LBYM

Post by psteinx » Wed Oct 04, 2017 12:36 pm

wrongfunds wrote:
Wed Oct 04, 2017 12:33 pm
He could counter that "do you think you could get 4% 30 year loan from bank" if you want to do options trading using margin? Remember, his point was that he was using the bank's money and scheming the gains!
Do you think you could have gotten a 4% 30 year loan from the bank in spring of 2009, at 3:1 leverage, for a purely commercial investment? (i.e. not your primary residence or even an apartment building with one unit owner-occupied)

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Re: $10 million+ - Still Working and LBYM

Post by KyleAAA » Wed Oct 04, 2017 12:52 pm

chicagoan23 wrote:
Wed Oct 04, 2017 12:24 pm
You can leverage stocks too using margin. You can use options. But that''s not the point I am trying to make. Real estate is not, historically, a "safe" investment.
You can't leverage on terms anywhere near as advantageous with stocks. I guess it depends on your definition of "safe," but you'll be hard-pressed to convince most competent real estate investors that a diversified and modestly-leverage real estate portfolio isn't safER than stocks, even taking 2008 into account. I just don't think you'll win that argument with data.
psteinx wrote:
Wed Oct 04, 2017 12:36 pm
Do you think you could have gotten a 4% 30 year loan from the bank in spring of 2009, at 3:1 leverage, for a purely commercial investment? (i.e. not your primary residence or even an apartment building with one unit owner-occupied)
Probably not, but you could have gotten money at high single digit rates. With cap rates as high as they were in many parts of the country, it would have turned out to be a good deal to borrow even at 10%. It would have been considered a risky move at the time, but nothing ventured nothing gained.

lhl12
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Re: $10 million+ - Still Working and LBYM

Post by lhl12 » Wed Oct 04, 2017 1:02 pm

WanderingDoc wrote:
Tue Oct 03, 2017 2:41 am
investing1012 wrote:
Mon Oct 02, 2017 7:26 pm
TomatoTomahto wrote:
Mon Oct 02, 2017 7:12 pm
investing1012 wrote:
Mon Oct 02, 2017 6:25 pm
It’s not an investment if you live in the home
Wrong. It’s not an investment if you must continue to live in the home.
I beg to differ.
You're both wrong. It's not an investment if it doesn't pay you every month. So by default, investing1012 is actually right.

Since 401k and IRA don't pay you every month (until you retire), I am not convinced that these are actually investments. Folks on here will of course disagree.
Is Berkshire Hathaway common stock an investment? It doesn't pay a dividend...

I don't think the test of whether something is an "investment" or not is whether it pays you every month. There are lots of things that are investments that don't have regular cash flow.

Many different sorts of assets have different liquidity characteristics. Vanguard mutual funds and individual common stocks are highly liquid at or near their last publicly quoted valuation. Residential real estate is much less liquid. 401K's and IRA's are highly liquid but have tax characteristics that in practice reduce their liquidity somewhat (as would significant embedded gains in a taxable account).

In the OP's case, I would think of the primary residence as having two characteristics. One is that portion of the home value that is the minimum he feels he would reasonably need to spend to have a roof over his head in his desired location under any circumstances. In this example, let's say that's $2 million of the $8 million value. The remainder (the other $6 million) is an investment. However that "investment" is extremely illiquid and has significant price risk if he needed to sell. Perhaps a conservative value might be $0.25 on the dollar, in which case his "residence" is worth $500,000 and his "investment" is worth $1.5 million.

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Taylor Larimore
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Invest in Real Estate or Stock and Bond Markets?

Post by Taylor Larimore » Wed Oct 04, 2017 2:47 pm

Bogleheads:

During the first half of our lives together (we were married 62 years), Pat and I invested in Florida real estate. During the second half of our lives we invested primarily in stock and bond mutual funds. We made money and lost money in both.

We found it was much easier and more profitable to invest in broad market index funds.

Thank you, Jack!

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: $10 million+ - Still Working and LBYM

Post by LadyGeek » Wed Oct 04, 2017 3:35 pm

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