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May 07, 2007


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I'm as critical of real estate investment as the next fellow but when the article states, "[T]he two houses are expected to appreciate only about 3 percent a year - the couple can do better than that with Treasuries" it makes an unreasonable comparison.

The 3% appreciation is leveraged, thereby making the actual return is much higher. For a recent purchase you may only own 20% of the principal but the appreciation is for the entire amount. It must also be said that leverage cuts both ways, but article makes an unreasonable comparison to the rate of return between real estate and treasuries.

Although I agree with your sentiment, I have to add that in some regions of the country $150K per year may not be as much as it sounds. Silicon Valley and Manhatten are two such regions that come to mind.

This is doubly true if you are raising multiple kids.

Duane, you have to remember that they are going to be paying 6% on the 80% they borrowed. I'd argue the actual return is much lower than treasuries (somewhat mitigated by any rental income they'd receive).

3% is expected return, not actual return.

When you are leveraged, your expected return goes up but the standard deviation of return also goes up. You are not being compensated for the additional risks that you are taking when you factor in the mortgage interest.

These stories remind me that money doesn't build wealth, good financial planning does.

Some of you should try calculating the IRR or NPV on a few solid real estate investment properties. You'll find that returns that rival the stock market can be gained over time. Have you ever stopped to think about the fact that REITs make returns that rival the stock market? How are they doing it if real estate only gains 3% per year?

On second thought, keep doing what you're doing. More for me...

No matter how you calculate it, the pertinent part of this article is that THIS family got themselves into a mess with their real estate investment schemes. It clearly states that they aren't finding tenants for their investment properties and don't have the same rosy glasses on about how profitable it would be when they first got into it.

It seems to me that they bit off more than they could chew. In this situation, wouldn't they have been better off to either have put that money into the bank or equities (or even an REIT), or stuck to one investment property instead of jumping into two?

Personally, I think a significant number of people who jump into real estate investing would do far better to just stick their money in the REIT and save themselves the headache. While also sidestepping the ludicrous run-up in home values.

OK, veering off topic so I'll shut up.


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