I was at brunch with a friend recently and she commented to some of our friends
“Damien REALLY likes real estate investing!”
The comment caught me off guard. If asked, I would say I believe in it, trust it, and like it. But the “REALLY” felt out of place. But after thinking about it more … she might not have been too far off.
My initial hesitance was because I know so many people with much higher ambitions. They are flipping homes, looking to quit their jobs to do real estate only, attend weekly sessions with local investors, and driving around neighborhoods looking for homes to buy.
That is not me …
My beliefs are more moderate. My basics views around real estate investing are simple:
If you have a reasonable amount of money to invest, buy & hold real estate is a great place to put some of your money.
Let me dissect this a little bit.
Reasonable amount of money to invest
If you are in a ton of debt and struggle to make ends meets … my advice isn’t for you. What I’m saying applies once you are comfortable investing excess money.
I didn’t inherit millions or sell a business in my 20’s. But, I have earned high incomes for years and saved. I have always had extra money that I put into investments and budget to make that happen. The idea of investing a few thousand isn’t insurmountable.
Buy & Hold Real Estate
There is a wide world of ways to invest in real estate. My affinity and experience is in buying a property to keep and rent out. I’m not talking about flips, REITs, or commercial … yet. The home you buy and live in forever doesn’t count.
great place to put some of your money
I believe in a balanced portfolio. Relying on one income stream and one asset class is risky, very risky. Therefore, I’m not proposing to sell everything and go full in on real estate (although it’s not a bad idea for some), but I firmly believe it’s something to add to your mix of investments.
Now … there are a concrete set of reasons why I like having real estate as part of my investment mix. These things are why I’m willing to spend the time and effort to invest.
Leverage, in financial terms, is the ability to borrow money (debt) in order to invest. This is how you use $20k to buy a $100k property.
Compared to other common investments (stocks), you won’t get the same favorable terms you get with real estate. For example, stocks can be bought on margin, allowing you leverage. But, for online brokerages, interest rates are 6%-9% and are usually limited to 50% leverage (50% in cash, 50% borrowed).
Real estate, on the other hand, has lower rates, 3.5-6% in my experience, and allow leverage from 0% to 25%, depending on the loan and property.
I also consider it “lower risk” compared to stocks. Your debt is backed by a real asset that won’t drop 30% in value overnight. And, even if it did drop, you aren’t required to invest more capital (margin call with stocks) and there are gov’t and bank sponsored ways to get out of the investment.
Income Generation (Cash Flow)
I like the idea of money coming in. I can use this money for investing in the stock market, put into more real estate, or pay off the current mortgage. Or … take a vacation.
This adds a real liquid component with flexibility. I haven’t seen this easily replicated in other asset classes and the same level of initial investment.
Core principle of investing: “Don’t put all your eggs in one basket”
Everything shouldn’t be in one stock. Everything shouldn’t be in one asset class. Everything shouldn’t be in one country. It’s impossible to predict what will happen with any investment, so investing across asset classes will lower your overall risk without hurting your returns. Real estate is another asset class providing additional diversification.
A house doesn’t drop 40% because of a bad earnings call.
I once read a quora post from a high-networth individual (read: rich). He decided to keep a large portion of his assets in real estate, while a friend went with all stocks. His friend had to stomach short term fluctuations making his paper networth drop and rise by up to 20% in a day. These are temporary as stocks are great long term, but it can play with your mind.
Real estate doesn’t move this violently. This makes it easier to make smart decisions driven by knowledge instead of knee jerk reactions driven by emotion.
You make money even when you don’t
Let’s say you judge wrong and rents or expenses are higher than you expected. Instead of $500 a month in extra income, you are making $0.
Good news … you are still winning.
One thing I find a lot of people ignore is that someone else is paying your mortgage. If the house never appreciates, but simply holds it’s value … you will own the entire place in 30 years, having only spent your down payment. This is not a bad scenario.
Any chart comparing home prices to the S&P 500 … stocks win hands down.
But, as mentioned there is leverage and cash flow to think about. This analysis over a hypothetical 30 years shows with leverage and cash flow, real estate beats stocks, and loses without leverage.
I’m not saying one is better than the other … I am saying real estate stacks up to stocks. So don’t think putting money into the market consistently returns more.
All the Tax Deductions
If you are an out of town landlord, did you know that travel to your property is a business expense and a deduction? This is a nice perk.
My parents live nearby my properties. And while I am going to do work on my investments, I always make sure to see them. It feels good to know that I can save on my taxes while investing in myself and seeing my family.
I like that it’s real. I can touch it. I can see it.
In the case hackers take down our modern electronic financial institutions, it feels good to know I own something physical with my name on the deed.
History of Success
American History is filled with business men who made their money in real estate, or are public advocates of investing in real estate. Buffet recently advised that now is a good time to get into real estate. American history is littered with those who have made money in real estate, including Arnold Schwarzenegger. This isn’t a new financial derivative, it’s old, boring, and proven.
Simple to start, Complicated to master
It’s easy to get started. And if you want it to stay easy … no problem. Just rinse and repeat simple things. If you find yourself looking to get creative and maximize returns, the rabbit hole goes deep.
There are turnkey companies who will find a property, repair it, find a tenant, manage the tenant, and then sell you the property with nothing to do but collect rent. Your ROI will suffer for the convenience, but it doesn’t get easier. The other extreme is sending mail flyers to get purchase leads and managing your own construction crew to do 100 properties a year.
Both of these extremes and everything in between is available. I like that I can put in the amount of work and mastery I want and will see my returns directly impacted.
So … yes. I do like real estate as an investment. But … not sure about “really”.