Catherine S. McBreen and George H. Walper Jr.’s book may be misleading
Every now and again, publishers sense me books to read. More often than not it takes me a long time to read them. I was sent Get Rich, Stay Rich, Pass It On: The Wealth-Accumulation Secrets of America’s Richest Families
The last couple of days, I carved out a few minutes to look at the book. As I write this I’ve completed on the first 28 pages. This is why I call it a mini review. I wouldn’t normally try to review a book after reading a little more than 15% of it, but this is an exception. The authors have repeated pelted me over the head a hundred times with the same concept… lasting wealth is built through real estate and owning a business that reinvents itself.
Building Wealth Through Real Estate: Is It Really the Answer?
The book takes a historical look at what has worked for the richest families in the past. In just the 28 pages I’ve read, there have been numerous stories about people who have either gotten rich or protected their wealth through real estate. Did we forget about Casey Serin and how he had 8 houses that all foreclosed on him?
I have my own real estate story. I bought a home in the summer of 2004. It’s valued at less 10% of what I paid for it. At the time, I bought it a little below market value – not a great deal, but not the worst one. I don’t mind that it’s valued at less since I continue to rent it out at break even costs. It’s worth noting that it isn’t building me lasting wealth. Perhaps in 30 years when it’s paid off largely through my tenant’s rent it will be worth something. I’ll have spent a good deal of money renovating it though.
I’m not going to say that real estate doesn’t work to build wealth. I think it can, but I’m not necessarily convinced that the historic performance is going to be indicative of future performance. I don’t believe it’s a given that real estate is the key.
I do have to agree on the second point. Constantly reevaluating your business is key. I don’t see this as a big secret. Perhaps reading the rest of the book will flesh out the ideas in this area. If so, it might be worth the $7.00 that Amazon is currently charging for the hardcover version of the book.
LazyMan,
I agree. I myself am pretty skeptical about real estate in the future. The biggest reason is simple math to me. Now I’m talking very generalized percentages here, but if they are even close to the numbers I’m about to say than you’ll see where my confusion stems from.
I was listening to a radio ad the other day and it said over the past 30 years home values have doubled approximately every 10 years. There is a formula to calculate the yearly percentage increase but to keep things simple it comes to about 7% every year.
My knowledge of economic history tells me that an average year of inflation is approximately 3%. Wages typically increase with inflation. So, if wages go up 3% per year but home prices increase 7% per year there will have to be a breaking point. I think this is why we are seeing real estate, both in buying and lending, becoming a huge stresser on our economy. Simple math tells me that unless people start buying lesser and lesser homes that they won’t be able to afford homes.
I myself am an example. I make very good money, probably the top 10% in my town. Me and my wife bought our first house 2 years ago. And to tell you the truth, the payment is more than I’m truly comfortable with. The bad part is its $30k less than the median home price here. So, how do people here and in other places who make an average wage buy a home? Crazy mortgages. I think that real estate will be a poor investment for at least the next 10 years. It needs to so everyone can catch up.
Good call KingTut57. I think switch from one income to two income families helped make the 7% growth viable in the past. I don’t foresee families adding another income any time soon, so it should fall back in line with wages as you suggest.
Oh, I hadn’t thought about the two incomes in one household deal. Makes more sense to me now, but you are right, there has to be a tipping point.
I just sold a real estate deal I made in 2005 (so about the same as you) and I made about $70K net profit after all fees. I borrowed everything including the downpayment so the rate of return is nearly infinite.
I think a sample of one (neither yours nor mine) doesn’t tell the whole story about whether real estate is good or not.
I have 4 more properties and if I make $$ on them all then I would certainly declare that real estate investment is a perfect way to make money. However, I KNOW that I’m a very small player so I have the greatest confidence that real estate is making some people very rich.
Any type of investment is going to be about value. Whether it is real estate, stocks, or baseball cards. If you can get a good price and know that other outside conditions are going to affect the value positively then you have a good investment.
A good example would be the house my wife and I purchased. It was a foreclosure that that we bought for 30% below market value for our neighborhood. It needs some repairs that will total about 10% of the final market value. This means once we fix it up and sell it we will make a 25% profit on our investment (that is if we paid the house off in the mean time).
There is always money to be made in any investment arena as long as you do your homework and find value.
Freak: If you have a mortgage then you will have made more. The beauty of real estate is the extent to which you can leverage. If you borrow 75% of the money, then your 25% return becomes 100%, which is pretty darn fantastic.
From reading most of the book, I believe one of the main points that people overlook is that whether it is real estate or a small business….they are not liquid investments. If allowed to continue to operate, they produce cash stream for generations to come.
Stocks, bonds, CDs, annuities are all somewhat liquid with taking a small hit to principle. That is where the “shirtsleeves to shirtsleeves in three generations” comes in. As future generations inherit there parents and grandparents wealth in these liquid investments, they cash them in to take the fancy vacation or buy the new car, etc.
Families that understand the value of these cash producing assets, can sustain this wealth for many generations. If one generation does not teach the younger generation the value of these assets, they will surely sell (sometimes at a low price due to the illiquidity) and spend through the money like a lottery winner.
Compare real estate/small business (RESB)ownership to the stock market. RESB can be leveraged and while the leverage is in place, the note (asset) is being paid down by a renter/customer until the note (asset) is paid off.
First off, you cannot leverage stocks but only to a point. If the stock (asset) price goes down, you will have a margin call – meaning you will have to put more money into the asset just to continue with the original value. Also, you don’t have anyone paying down on the loan for this asset. In fact, you will have interest payments that you will have to pay or the principle value will be liquidated to cover it. And if you pass this on to the kids, they will more than likely sell it to consume.
Don’t get me wrong, I think you can make money in the stock market and that they can give decent returns. I just see too many people put money in the market with false expectations. Let’s be real, if you throw money in a market and expect it to magically grow and provide for you and your family for generations to come, that truely is the lazy man’s way to make money!
LazyMan,
I kind of agree and disagree wih Real estate in today’s down market. I believe that a historical look at real estate is a key factor at least to educate the typical wealth building real estate investor. But, if people are using the past as the only reference to building real estate wealth, then they will most likely be lost and fall into the dismal, I cannot make any money, pit. Decent returns can be had quickly as well as slowly depending on your solution to gaining wealth.