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.
9 Responses to “Real Estate: To Invest or Not to Invest? That is the Question.”
Next: Ask the Readers: Do You Have a Will or a Trust? Why?