You’re saying that they would have been better to put the cash in a passive equity index instead? One of the advantages of real estate is leveraging, especially when you are buying after a recession and at record low rates.
Edit: not worth arguing with someone who posts like Blake.
^i think he was being facetious.
Except I think TF actually has a portfolio of investment properties if I remember correctly from other threads.
OFF TOPIC, but whatever happened to these guys?
User AF Points JoeyDVivre 8,356 Black Swan 7,097 mwvt9 6,320
JoeyDVivre allegedly works with Obama’s economic team.
again, this is probably really good in theory–nearly impossible in practice.
it’s just funny how you guys think an entire asset class worth trillions of dollars is ‘not worth it’. all those owners of real estate must be idiots to rather own property than invest in stocks.
All these factors are the reason that the baby Jesus invented triple-net commercial properties.
^none of these zips know what NNN means.
A REIT is levered, it can also be levered even more by the holder, and it can be sold in a heart beat. Best of all your REIT won’t call at 1am on a Sunday saying their toilet is plugged because they ate some disgusting Indian takeout.
I’d never argue against the asset class. I’d argue against the value of buying property yourself, unless you’ve got a portfolio of 20 or 30 mil and can dedicate several million to the asset class. Otherwise, the time is just not worth it. Same reason why it’s stupid to go buy a single oil well. Just buy an oil company. Unless you’ve got big enough scale to make it fly.
Why don’t you buy some pieces of land??Accounting says lands donot depriciate.
On a serious note:I have no experience in real estates.My dad loves to invest in real estate properties and he has made some serious money from this hobby.
The only reason land doesn’t depreciate in accounting is because the rules say you can’t depreciate it. Doesn’t mean it can’t go down in value in real life. Plus raw land has taxes and carrying costs, while it often won’t produce income.
I think to make money in real estate, particularly rental, you need to be able to fix a lot of stuff on your own or have scale to have issues at one property offset another. If you’re always paying retail prices for contractors and such you’ll burn lots of money. I was discussing this with a colleague who has owned and still owns one rental property, with only one its easy to go cash flow negative if your tenant moves out unexpectedly and you can’t replace them quickly. He also said having friends who were electricians, etc and willing to do stuff for cheap was a huge help in making the finances work.
I’ve never invested in real estate but from my limited understanding of the mechanics, it’s less of a headache to leverage compared to stocks assuming you have a long time frame. This is just from what I learned in the CFA curriculum and going to those real estate seminars (hosted for free by those MLM real estate investing schools that I knew better not to join in the end):
With real estate, you can put, say, 20% down. If it falls more than 20%, your mortgage is underwater but the bank doesn’t care as long as you make the mortgage payments. It’s not a good situation to be in but if you’re in it for the long term and can collect rent on the tenants, you’ll probably get through it fine.
With stocks, you need to put 50% down and if it falls more than 50%, you get a margin call and the broker sells your stocks to pay off the loan.
So you buy a $100k house, finance $80k, and your payments are $800. You charge $1000 per month for rent.
All of a sudden, the market tanks, and the same house is now worth 80k. The client realizes that he can either conitnue to pay you $1000 per month, or he can buy the house next door for $800 per month and get his own equity in the house.
Sure, some people would rather pay extra so they’re not tied down, or don’t have to mess with big problems (broken A/C, etc.), but in my experience, most people would rather buy their own place.
spoken like a true accountant. please enlighten me as to what asset class is immune to the risk of “all of a sudden, the market tanks”. this is not a valid argument against real estate. you’re using an unsophisticated argument that applies to every asset class. now if you want to talk about the returns available in real estate versus the risk profile, we can have that debate if you have a meaningful point to make. otherwise, go back to counting your company’s beans.
The tenent still has to be able to come up with the down payment to move next door for $800 per month. The people I know who rent either rent because they want some flexibility, or because they haven’t been able to save enough for the down payment.
There’s an intelligent remark!
My post wasn’t meant to be an all-encompassing cross-sectional analysis of the risk and return of the real estate market vs. the stock market. It wasn’t my PhD thesis. It was simply there to illustrate that it’s easy to say, “Just collect more in rent than you pay in expenses.” It’s a lot harder to do in practice.
Certainly no asset class is immune to market downturns. But at least if I plop $100k down in a stock mutual fund, and all of a sudden it drops to 80k, I don’t have to worry about buying insurance on it. Or paying property taxes on it. Or fixing its furnace and plumbing. Or mowing its grass. With stocks, you’re reasonably assured that you won’t have negative monthly cash flows. Not true with real estate.
And as a CPA in a PUBLIC PRACTICE who prepares TAX RETURNS for PEOPLE WHO OWN RENT HOUSES, I can assure you–I have NEVER seen somebody who’s getting rich off of rent houses. NEVER. Sure, along with their Social Security, they might generate enough positive monthly cash flow to get enough to pay their bills, but nobody’s blowing through the roof with rental real estate.
Show me a person who got rich off of rental real estate and I’ll show you ten who got rich with stocks.
I never said that. One of the first things I did out of college was purchase real estate. That being said, I come across lots of commercial real estate deals and see the financials of the principals. There are very notable exceptions, but the majority of those guys aren’t making tons of cash flow. They live and die by the leverage afforded to them in the deal. I think it’s foolish to say anyone can get into commercial real estate and have an execssive amount of cash flow. I think it’s more reasonable to expect a 1.25 DSCR, which compared to other industries is quite low.
Ohai,
So I usually don’t end up on this forum but I guess I’m just too loopy from studying and need a break. For what it’s worth here is my take on the Real Estate question.
No, you should probably not get involved in real estate if you are operating in the one or two property level. The issue is that this is a play for construction type guys, not finance type guys – you need to know people so you don’t get stuck paying retail and you need to know how to do the work yourself. For most of us the effort just won’t be worth the return. If you can get the count up to more like 10 or so properties then economies start to make a little more sense and economic pain of vacancies starts to average out. I realize that the draw with real estate is the leverage but in this game you have to have money to make money. Yes, there are always exceptions; if you can find a property way below market value then it starts to make sense…
As others here have said most of the value is from capital appreciation, realized at the exit. So timing is important, and right now residential cap rates are just absurdly low, you aren’t going to make scratch buying at the prices that are out there now. But, as always there are options to try to find yield. If you have $ you can look into moving down the trough into more of a value-add or opportunistic play. Okay so maybe this is getting into even more of a headache so unless you are pretty handy this may not be an option either.
So now if you are still thinking direct ownership of real estate you need to look at investment vehicles. This route will reduce your headache, but then again you aren’t going to be calling the shots. The most “private” way to do this would be to get buddy buddy with a developer or private equity investor and invest with them through some sort of “Friends and Family” structure. Failing this you start to get a little more “public” there are funds out there that will buy directly into real estate that can be bought into. As others here have mentioned you can invest in REITS, the problem here is that they tend to behave more like stocks than real estate so the exposure really isn’t the same.
For what my advice is worth I would say that you should avoid direct ownership in your current situation, if you really want exposure you can go the more public route (unless you know somebody in the biz). There are always going to be stories of the guy who bought up some farm land and twenty years later the nearest city expanded and all of a sudden his cow pasture is the next office park and is worth a boat load; but for most of us we are stuck at the cap rate number, and right now it isn’t pretty.