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Real Estate: To Invest or Not to Invest? That is the Question.

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My friend, J$ (pronounced "Jay Money") over at Budgets are Sexy recently wrote an article about investing in real estate and it triggered a few thoughts from me. After all, my wife and I own three investment properties. The first thought is that J$ has watched one too many episodes of Barter Kings if he wants to trade an online property for a real world property. As my wife has said in the past, "Everyone takes George Washington Points" (referring to cash). With that out of the way, I'd like to dig into the great real estate investment points that he brought up.

Before I get into my thoughts, I do have to bring up a disclaimer. Each of the properties we own were bought with the intention of living in them ourselves. Life takes crazy turns sometimes and you can find yourself needing to move while living in a property that isn't worth what you paid for it (i.e. the situation that I imagine many, many people are in). In this case it may be better to rent it out. That's what we did. Another idea is to capitalize on what looks like a great buying opportunity such as now... lower prices, lower interest rates, high rents.

Now on to J$, article. One of the great points was this one:

"...every time I read an article on how millionaires got to where they did, 50% of the time it had something to do with real estate. That can’t be coincidence, right? I mean, I don’t know *that* many people that do own more than one home in general, but those I do I’d consider more well off than those who don’t, that’s for sure. So I think there’s really something pretty telling there."

I don't think it is coincidence. A ton of money was made in real estate in the from the 1980's (or before). I have an older friend who bought a house in Silicon Valley in 1969 for $100,000 and it's probably worth $3 Million today. I think he'd be a millionaire anyway, but he could clearly take his real estate gains and retire elsewhere with his millions just from that one real estate purchase.

However, the problem with this thinking is highlighted in mutual fund prospectuses everywhere... "Past performance is no indicator of future success." Those who bought real estate from 2003 to about 2007 can tell you this from first-hand experience. It's speculation that read estate prices will grow. They should with inflation, but maybe they won't. Who knows for sure? No one.

As for the analysis of those who own more than one home being better off than most, it seems like a mix-up of cause and effect. Are the people really better off financially because they have multiple homes or do they have multiple homes because they are better off financially. I lean towards the later. I think we learned from Casey Serin that a bunch of real estate properties doesn't necessary lead to riches.

The other quote of J$'s article that really struck a chord with me was this one:

"Someone else would be paying off your mortgage!! I mean, how awesome is that?? Even if you don’t make ANY money off the monthly rent checks, you’d still be dwindling down your main mortgage and after 15-30 years depending on how you set it up you’d own it outright! And do you know what that means?? You’d have almost 100% pure cash flow coming in after that – crazy! (Minus any expenses and taxes and all that of course) Then you could sell it!"

With our three investment properties this is exactly the scenario we are in. In 15 years they will all be paid for... mostly from our renters. At that point, if we use today's dollars we'll have about $5500 of cash coming in. Perhaps well live in our best property. If we do that we'll give up a $3000 in income, but you know what will be awesome consolation in that scenario? Not paying a mortgage or a rent and still having $2500 of income coming in from the other properties.

When it comes down to it, I view real estate investing as the ultimate in forced savings. We had to come up with the down payments and we lose a couple hundred dollars a month. (That negative cash flow was a consequence of buying at the height of the market for reasons other than "investing.") The expected result in 15 years is profound. It is a significant portion of our early retirement planning and it provides great diversification of our income in the future.

My advice to J$ is, "Don't be scared about buying a investment property." It's a rough road if you don't have a property manager, but we do a decent job of it even 3000 miles away. There are typically 1 or 2 days a year that suck in my experience. We have a property manager with one property and zero days suck. If you have the emergency fund to cover times when you don't have a renter, that alleviates most concerns. What you are left with, is something that should be a great investment.

Posted on August 20, 2012.

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9 Responses to “Real Estate: To Invest or Not to Invest? That is the Question.”

  1. Steve says:

    Investment in real estate is like any other bet: it may be +ev but only if you can survive the swings without losing your bankroll.

  2. Cassie says:

    Lazy man,

    I too have over the years owned investment real estate; some on purpose and some like you by accident. I would emphasize to J$ your requirement of an emergency fund. By this I would mean an emergency fund strictly for the investment property. Stuff breaks, vacancies happen and it always seems to happen at the most inopportune moment.

    Additionally, I would encourage J$ to really think about his strengths and weaknesses. I once, by accident, became a residential landlord and found that I am not well suited to collecting rent from the woman who’s husband has walked out leaving her to support 3 little ones. I do however have the skills and temperament to manage commercial rentals.

    Finally J$, 15 years is a long, long time.

  3. Contrarian says:

    If you believe debt doesn’t matter (western worlds total credit market debt is $54 trillion) and IF you assume the next 30 yrs will be roughly the same as the last 30 yrs, then my advice is: lever up! Buy real-estate! Go long risk assets! However, if you believe the next 30 yrs will be significantly different from the last (as I do) and the global debt bubble is in the process of imploding (which it is), then capital preservation (not growth of capital) ought to be your first, second and third priority.

    Intelligent and successful investing (real-estate, gold, stocks, etc.) always comes down to knowing what a thing is worth, and buying it for less. The problem with investing right now is there is no way for ANYONE to know what ANYTHING is worth because the worlds financial markets have been so grotesquely distorted by government interventions.

    As for real-estate, the current situation can be best described as: Massive Fed stimulus + government induced foreclosure abatement’s = soft temporary stabilization. Any description of the current real-estate market that goes beyond that statement falls between wishful thinking and a guess. And successful investors don’t guess!

    The history of financial crisis’s proves that each new crisis is worse and larger than the last. The exponential growth in the debt-based financial system combined with regulatory failures, fraud, leverage, contagion, and policy makers ineptitude and refusal to address the underlying structural problems has made each successive crisis more dangerous than the last. And now we have reached a profound point in economic history where the truth is unpalatable to the political class – and that truth is that the scale and magnitude of the problem is larger than their ability to respond. The noose is tightening around the debt ridden western economies, and I believe that financial markets are single-digit years away from a 1930’s style crash that will present investors with opportunities of a lifetime.

    So Lazy, to to your headline question: “to invest or not to invest?” My answer is: Not yet.

  4. […] Real Estate: To Invest or Not to Invest? That is the Question. @ Lazy man and Money […]

  5. J$ says:

    Thanks for this!!! And not bashing me all the way, haha… It’s def. something that will be on my mind for a while here, until I finally make a decision. And even then it’ll probably be on it ;)

    I’m pretty impressed y’all own 3 of them right now, that’s awesome. Didn’t know that about you guys.

    • Lazy Man says:

      Did I bash you half way? Maybe the beginning of the article was a little rough, but hey, anyone following you on Twitter knows how much you like shows like Barter Kings. I would never have watched it, if not for you.

  6. […] Real Estate: To Invest or Not to Invest? That is the Question. @ Lazy Man and Money […]

  7. John says:

    I think real estate is a great investment, but people have to invest at the right time. First they should pay off their own mortgage, and then go ahead and purchase rental property. It seems so many people get this out of order. Thanks for the article!

  8. Philip Hecht says:

    My wife and I purchased our first home not too long ago back in early May. Ever since day one, our intentions have been to eventually put the house up for rent once we receive orders to move to someplace else. When we bought the house, we used the mentality of buying a home that we could live in and be content with, just in case if the other potential rental properties that we purchase don’t work out and we have to come back to the original home that we purchased in the first place. I like the idea of having someone else pay your mortgage for you and at some point, having what the renters pay come directly to you.
    I guess to make things easier for yourself, best case is to plan, plan, and plan some more. If you have an idea of what you want and what you need to to get it, I’m pretty sure that you’ll be set up a lot better than most real estate owners or buyers. I like what Cassie said about the emergency fund. You can plan as much as you want to, but you can never really be prepared enough.

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