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April 03, 2007

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I don't know what blogs your reader is reading, but I don't think the PF community has a bias against real estate investing at all. I write about my real estate investments on my blog (http://savvysaver.blogspot.com), and I read quite a few other PF blogs that talk a lot about real estate investments, both theirs and the investments of others.

If there is a bias, it is due to conservatism and value. I think the majority of PF bloggers tend to be on the more conservative side. Hence index investing over active trading, debt avoidance, and posts all over the place about the best rates for online money market accounts.

I fully plan to invest in real estate, but I will do it conservatively. I realize that I may be limiting my profit potential, but I would rather have missed out on the 2004-2006 opportunity a couple of times over the course of my life in order to avoid ever buying it at the top and riding it down. I will only invest in real estate when I have enough to put at least 20% down (not a borrowed 20% like many have done).

Very interesting question. I'll put it this way. What is more important to you, trying to be the next Donald Trump, or not being the next Casey Serrin?

What's really interesting is that I had a very similar back-and-forth between a couple of readers at my blog as well.

I don't want to necessarily say that I'm biased against RE, but I do find it a lot easier to build net worth in other areas. I think RE is a terrific investment if you have the start-up cash. I think if you go into RE you should make sure you have

(1) Enough money - If you do borrow money for flipping properties rather than putting it towards a primary residence, make sure you have enough in reserve in case the bank calls the loan.

(2) Enough knowledge - I think this is key because a lot of people think it's "easy" to get into RE when it really isn't. You may be good with numbers, but if you can't deal with challenges like market dips, long periods with no income, and tenants, it can be troublesome.

I plan to own my own home, and I actually may invest in REITs as a portion of my overall investment strategy, but in my opinion I think it's better to solidify your holdings in more accessible securities (401k, stocks, index funds, IRAs, etc) without having to sign your life over to the bank.

Just want to disagree with your point on: It's complicated (at least it is compared to investing in stocks/index funds.)

I think real estate is the easiest of investments. As long as you are not in the mindset to dream of overnight wealth. Of course, this is probably true for the stock market as well.

The thing about real estate is that over time, it will grow. I have quite a bit of real estate in my net and I feel more secure with it then the stocks in our roller coaster market. Even with a "dip" in market prices over time I have watched my property values double. Even without jumping in on the recent price lifts that everyone was striving for.

Add the value increases, to the rents received, less mortgages and expenses, then throw in my tax savings, and I'm making out. And have been for a long time.

I do agree with your fear concept though.

I would do it but it's a lot of work, complicated, and takes $$$$. No bias here, but you hit the nail on the head you can't use $5k to buy a home. Well maybe but it'd better somewhere that the rent pays 100% of the mortgage and then some.

I've noticed some of the bias towards real estate myself. It's true that it takes some start up money, and some time, but it can be far more profitable than stocks and bonds.

So many point to the fact that stocks return say 8%, while real estate returns only 4% (or something along those lines). This may be true, until you uderstand the power of leverage. Put 10% down on a property and the measly 4% turns into a 40% return on your money.

I don't think we should discount any investment vehicle really since we're all after the same thing. To increase our financial situations.

-limeade
http://fiscalmusings.blogspot.com

Perhaps there is a bias -- I am not sure. Personally I think real estate is a great investment for everybody for the long-term and for a primary residence (or in something like an REIT). However, many people jump into real estate before it's really prudent for them to do so (and the lending industry has been set up recently to encourage people to do so). THAT is my big problem with real estate.

I think for a select few speculative real estate (such as flipping) is feasible for reasons already mentioned in this discussion, but it's also become way too attractive to far too many people who most likely can't really afford to be speculating in real estate.

Personally I'm holding off on real estate until such time as I can do it right (with a sizeable down payment, aiming to pay off the mortgage quickly). My interest in moving also deters me from jumping in.

The other thing is that prices have gotten ridiculous -- in my area (Denver) it's increasingly difficult to find anything (even a condo) for under $250-300K, and that's on the cheap end. Houses have gone through the roof. To find cheaper, you're probably buying a really old, tiny place that needs a bunch of remodelling work. And I really do not want to buy a condo -- my idea of home ownership is a place with a yard. I make a decent salary and it would really be a hardship for me to pay even $250K for a home.

Sometimes I feel panicked that I'm missing the real estate boat, but I also don't want to get in over my head. At the same time I know that if all else fails, I'm set to inherit my parents' (paid for) house eventually so at some point I'll have real estate.

db
www.debtblitzkrieg.com

@Charles J:

BTW, I find real estate intensely complicated. It's really intimidating to me. I managed to inherit a land installment contract from my grandmother, and it's been horrible from the beginning -- I don't understand why it was set up the way it was, and it's a PITA to manage the thing. I can't wait until next year when the thing is paid in full and I no longer have to deal with the property or the buyers (if we haven't been forced to foreclose by then.)

From the point of view of ease, I greatly prefer the stock market.

db

P.S. -- You can implement leverage in the stock market (say, through options or trading on margin) too. Not for the risk averse though!

Leverage isn't limited to real estate, and I think it's overhyped in real estate.

db

There is definitely a bias for the reasons mentioned. But at the core of all those arguments is the idea that all debt is bad debt. Many in RE understand that debt on an income property or other asset is not the same as credit card debt or student load debt. Debt on income property where your ROI is positive is not a bad thing. Many people labor under misconception that his home that he lives in is an asset (put money in his pocket), rather than a liability (takes money out of his pocket), and that RE is risky, and stocks are safe.

I've never been a big stock girl, mainly because the market is an emotional one. I find that brokers and 'financial planners' (ahem, Ameriprise) tend to steer you towards the funds they like, which is just plain smarmy. People will always need homes to live in, but will they always need Coca-cola? One damaging health study (or Heaven forbid, a contamination like the dog food scare) and Coke's stock will plummet. Yes the RE market has slowed down, but people are still moving, relocating, having babies, and needing roofs over their heads. The need for shelter will never go away.

I think it is a mistake to compare stocks and real estate. The natural comparison is bonds, and I like real estate much more than bonds. Real estate will commonly hold its real value over the long term and increase in select areas. Leverage is really powerful in real estate. Powerful means it can be dangerous too though. You generally won't face margin calls as in stocks. Real estate is too high now though. Better to wait until the next cycle. Market timing is quite important in it.

@ Ciji:

Just don't forget that any rise in value of a piece of real estate still WILL be offset by the cost of owning that real estate (e.g., the real cost of the mortgage).

Don't forget that like any other loan, a mortgage accrues interest. When you purchase a $200,000 mortgage, for example, you won't pay $200,000 over the life of that mortgage, you'll pay MORTGAGE X INTEREST X TIME. In the long run, hopefully that number doesn't exceed the growth in value of the house.

That is one of the big arguments for paying off the mortgage earlier -- paying it off earlier reduces interest costs, so in the long run you'd earn "more" relative to if you'd held it the same amount of time but paid the mortgage back more slowly.

P.S. -- Most people lump student loan into the "good debt" category since it usually increases your ability to earn a higher salary over time.

db

Part of the perceived bias may be a matter of timing. Personal finance blogs as a genre have really come into their own in an era when real estate assets were (in general) insanely overpriced, which naturally makes them poor investment vehicles. This is not to say that the same people saying "don't invest in real estate" today won't legitimately be saying "buy real estate" a couple of years from now, when the market restabilizes...it's just that the _last_ time "buy real estate" was good advice for the average investor, there wasn't much of a PFblogging community around to be saying it.

Now, in some situations, and for some people with way-above-average levels of skill and experience in the field (and thus the ability to reliably identify properties that are still underpriced even today), real estate can still be a good investment today. But if you're one of those people, or in one of those situations, you already know that general advice given to the general public on blogs probably does not apply to you in particular.

If you're primarily after utility (that is, in the case of real estate, a house to live in yourself or other kinds of land for your own use), buying real estate even at the top of the market cycle is often a good deal. If you're after cash flow (that is, buying real estate for the purpose of renting it out) then assuming you can get cashflow-positive financing and have a reasonable belief that your vacancy losses will be low, it's usually a good deal...but given the relative prices of mortgages and rents these days, it's virtually impossible to be cashflow-positive on a property you buy today. And if you're primarily chasing capital gains...well, if you buy now you'd better be prepared for a very long wait before you see any of them, and an even longer wait before your ROI exceeds what you'd get investing the same money in the stock market.

The former condition is probably always going to be true. And the latter two are functions of the weird state of the real estate market right now. Once they don't apply, real estate will be a way better investment for most people than it is today.

I think that the bias against real estate is because it is risky and people underestimate the nature of the risk.

In the UK, property is generally a solid investment because we live on a small-ish island with restrictive planning laws and so there is a serious housing shortage.

Lots of people are counting on at most a couple of properties to pay for their retirement and I think they are the ones that underestimate the risk involved. We had a housing market crash in 1989, and it took 12 years for the market to recover in real terms (ie after inflation).

Why wouldn't you want to invest in real estate? Where else can you invest and put no money down and still get money back at the closing? Sounds like a Sweet Deal™ to me! That's why I don't own any stocks.

I'll go out on a limb and say: It depends. :)
It depends on which PF blogs you read, more than anything else. The few that I frequent are also frequented by the "absolutely no, not ever, never debt" group who even regard a home mortgage as a deal with the devil. I largely ignore these crackpots. ;)

I don't read many blogs that discuss portfolio allocation/diversification, but that doesn't mean they don't exist or that people are opposed to it. My own retirement portfolio includes a 5% allocation in a RE sector-index ETF. Next year I will likely increase that allocation, but not beyond 10%. (I don't consider my home a RE investment in the traditional sense, primarily due to the basic necessity of having a home.)

Did I just see Casey Serin above saying what a sweet deal real estate is? The same one getting foreclosed on left and right and getting all the notority for the way he arranged to finance his mortgages in the first place?

Yeah, right. Sweet deal or no Sweet deal. I'll pass.

db

When I look at my net worth statement, and knowing that I will most likely inherit more RE sometime in the next 10 to 15 years, there's no reason for me to invest any more heavily in that sector than I already am. I live in the midwest where our housing prices are NOT as insane as they are out west and I still worry that I'm slightly overinvested in RE.

I highly doubt that was really Casey Serin posting.

I will definitely be investing in real estate in my lifetime (I'm only in my 20s and my wife and I are still working on buying a house). We will probably buy a small starter home (following the MND rule for the mortgage) and live in that for a few years then turn around and buy another house and rent the first one.

Interesting discussion.
Being an out-of-the-box investment broker, I see many blogs out there about get-rich quick type of investments, where the set up is minimal, and relatively hands off.
Real Estate takes a tremendous amount of set up, and when you do execute you are doing so with large amounts of cash and then they are are typically waiting for appreciation or fix-up and then a new buyer...not exactly quick turn around, or very liquid.
As mentioned, Real Estate can be very complicated. I work with a group that takes a hands off approach, thus providing more of a passive income strategy, though the set up is still pretty labor intensive as far as paper work goes. I don't see a lot of blogs wanting to dive into this level of support. That is why I think you are picking up on the bias, which I think is real and alive, though probably more subconsciously than implied intentionally.

Thanks for the Blog.

Jeremy S.Collins

My interest is definitely sparked by the ability to use your 401k or other retirement income to buy RE. I am debating this method either to use as a down payment or pay for a smaller piece of land outright. In CO, particularly in some of the rural areas outside of Denver (within 1.5 hrs)RE values are very low ($5k-25k/acre) but are increasing at a rate of 30%/yr on average, with the treed and other nicer and more convenient properties doubling in 1-3 yrs. My 401k does around 15%/yr in the "almost" most aggressive fund. But I turn that on and forget it so the ease-of-use factor is a worthy consideration. Does anybody have experience with this technique?

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