Joe 401k?

[Bloat]

Definately an anti-Stock Market bias here:

“The stock market is nothing more than gambling and a legalized pyramid scheme”

“the stock market is simply based on the greater fool theory”

Probably lost a good chunk during 2000-03 (as I did on paper). Still, neither of the above quotes are true about the “Stock Market”. For some companies and some market sectors, for sure. But, if you can avoid the “hype”, “the flavor of the day” and “not chase last years returns” it is fairly easy to do well in the market OVER TIME, by picking a good no load, low fee fund (as surveyor suggested), not trading it and reinvesting the distributions.

I read that RE as an asset has only beat inflation by 1-2% for the last 100 years, but the S&P has done +7%. True, RE has the advantage of greater leverage and potentially better cashflow (which adds it’s own risks). The S&P PE is now around 17 which is the historical mean. The PE of SD RE is what?, maybe 20 or 25? And on a rent growth rate of only 3% versus corp earnings growth of 10%. I say how can you not buy shares of solid companies?

Investing in stocks (funds) is buying a piece of paper, but so is the deed to a house (and a dollar bill, or a bank statement, for that matter) it’s all representative paper, pick your poison.

BTW: my favorite funds, buying since 1994 are DODGX and RPMGX. I have no plans to ever sell them.

[Bloat]

Definately an anti-Stock Market bias here:

“The stock market is nothing more than gambling and a legalized pyramid scheme”

“the stock market is simply based on the greater fool theory”

Probably lost a good chunk during 2000-03 (as I did on paper). Still, neither of the above quotes are true about the “Stock Market”. For some companies and some market sectors, for sure. But, if you can avoid the “hype”, “the flavor of the day” and “not chase last years returns” it is fairly easy to do well in the market OVER TIME, by picking a good no load, low fee fund (as surveyor suggested), not trading it and reinvesting the distributions.

I read that RE as an asset has only beat inflation by 1-2% for the last 100 years, but the S&P has done +7%. True, RE has the advantage of greater leverage and potentially better cashflow (which adds it’s own risks). The S&P PE is now around 17 which is the historical mean. The PE of SD RE is what?, maybe 20 or 25? And on a rent growth rate of only 3% versus corp earnings growth of 10%. I say how can you not buy shares of solid companies?

Investing in stocks (funds) is buying a piece of paper, but so is the deed to a house (and a dollar bill, or a bank statement, for that matter) it’s all representative paper, pick your poison.

BTW: my favorite funds, buying since 1994 are DODGX and RPMGX. I have no plans to ever sell them.

[surveyor]

RE vs. SM

Most people, when looking at real estate as an investment, look only appreciation. However, appreciation is only one aspect to real estate investing. There are four aspects of real estate that contribute to its return:

1. Appreciation
2. Cash Flow
3. Loan Reduction (which tends to be really low, so it can be ignored)
4. Tax benefits

Cash flow and tax benefits tend to vary per person so it’s difficult to just plop them into a return. Appreciation, true it tends to follow inflation, but take a look at this calculation:

S&P: $40,000 stuffed into index fund. Average 10% per year.

Real Estate: $40,000 downpayment on a $200k property, at a tax rate of 25%, appreciation is 4% per year, cash flows at 0.

Year 1
S&P(10%)=40k*0.1=4000
Real Estate(4%)=$200k*0.04=8000

Real Estate even at inflation is giving you almost twice the amount of money as the S&P. Imagine that over ten years and the gap is actually quite large.

Let’s take it further:

Return on S&P (one year) = 10%

Return on real estate = (AP+CF+LR+TX)/DOWNPAYMENT =

(8000+0+0+200000/27.5*0.25) = 9818/40000 = 24%.

(by the way, these are numbers from my south carolina fourplex, so i’m not making up numbers. i did change the tax rate because my tax rate is actually at 33%).

So, S&P 10%, Real Estate 24%.

Still think the stock market makes your money work harder?

I’m not dissing the stock market. I still invest in it as much as I can. I just run the numbers and real estate performs better. Also, I understand real estate better than the stock market. So to each his own.

[surveyor]

RE vs. SM

Most people, when looking at real estate as an investment, look only appreciation. However, appreciation is only one aspect to real estate investing. There are four aspects of real estate that contribute to its return:

1. Appreciation
2. Cash Flow
3. Loan Reduction (which tends to be really low, so it can be ignored)
4. Tax benefits

Cash flow and tax benefits tend to vary per person so it’s difficult to just plop them into a return. Appreciation, true it tends to follow inflation, but take a look at this calculation:

S&P: $40,000 stuffed into index fund. Average 10% per year.

Real Estate: $40,000 downpayment on a $200k property, at a tax rate of 25%, appreciation is 4% per year, cash flows at 0.

Year 1
S&P(10%)=40k*0.1=4000
Real Estate(4%)=$200k*0.04=8000

Real Estate even at inflation is giving you almost twice the amount of money as the S&P. Imagine that over ten years and the gap is actually quite large.

Let’s take it further:

Return on S&P (one year) = 10%

Return on real estate = (AP+CF+LR+TX)/DOWNPAYMENT =

(8000+0+0+200000/27.5*0.25) = 9818/40000 = 24%.

(by the way, these are numbers from my south carolina fourplex, so i’m not making up numbers. i did change the tax rate because my tax rate is actually at 33%).

So, S&P 10%, Real Estate 24%.

Still think the stock market makes your money work harder?

I’m not dissing the stock market. I still invest in it as much as I can. I just run the numbers and real estate performs better. Also, I understand real estate better than the stock market. So to each his own.

[HLS]

I didn’t lose a good chunk or a small chunk on stocks.

IN ANY MARKET, A Loss “ON PAPER” is still a loss, which may or may not ever come back.

Past returns are no indication/guarantee of future returns.

Survey and I are on the same page.
Neither one of us is talking about SD RE PE.

You have your points. My poison has been chosen.

The returns that you quote are typical MSM kool-aid.

There is NO WAY that the S&P has compounded 7% Year over year for 100 years. Just isn’t possible. $1 invested at 7% compounded over 100 years would net almost $900.
The S&P hasn’t gone up 900X

That also doesn’t account for taxes paid on realized gains which can be deferred forever with 1031 exchanges.

There hasn’t been a generation that has comfortably retired en masse on stocks. The test is coming and I won’t be a large part of it. I’ll be watching from a distance, hopefully collecting rent from tenants monthly.

I am NOT saying that one cannot make money holding/trading stocks. I AM saying that thinking they will only go up and that index funds are security for the future is misleading…. sounds like propaganda for buying a house.

Real estate isn’t without its risks either.

It would be interesting to compare the net worth of a RE investor who leveraged properly and deferred taxes paid to the net worth of a stock market investor after 20-30 years.

It’s not about what you make,, it’s about what you keep.

“The stock market is nothing more than gambling and a legalized pyramid scheme”

“the stock market is simply based on the greater fool theory”

Many people WILL get burned in the stock market.
Some wont.

[HLS]

I didn’t lose a good chunk or a small chunk on stocks.

IN ANY MARKET, A Loss “ON PAPER” is still a loss, which may or may not ever come back.

Past returns are no indication/guarantee of future returns.

Survey and I are on the same page.
Neither one of us is talking about SD RE PE.

You have your points. My poison has been chosen.

The returns that you quote are typical MSM kool-aid.

There is NO WAY that the S&P has compounded 7% Year over year for 100 years. Just isn’t possible. $1 invested at 7% compounded over 100 years would net almost $900.
The S&P hasn’t gone up 900X

That also doesn’t account for taxes paid on realized gains which can be deferred forever with 1031 exchanges.

There hasn’t been a generation that has comfortably retired en masse on stocks. The test is coming and I won’t be a large part of it. I’ll be watching from a distance, hopefully collecting rent from tenants monthly.

I am NOT saying that one cannot make money holding/trading stocks. I AM saying that thinking they will only go up and that index funds are security for the future is misleading…. sounds like propaganda for buying a house.

Real estate isn’t without its risks either.

It would be interesting to compare the net worth of a RE investor who leveraged properly and deferred taxes paid to the net worth of a stock market investor after 20-30 years.

It’s not about what you make,, it’s about what you keep.

“The stock market is nothing more than gambling and a legalized pyramid scheme”

“the stock market is simply based on the greater fool theory”

Many people WILL get burned in the stock market.
Some wont.

[gn]

surveyor,

It sounds like you’ve been investing in RE for a long time.

1. When you were starting out, how many times did you visit a city before deciding to buy a multi-unit property there ?

2. How did you go about selecting a property manager at that city ?

3. If you are interested in growing your porfolio, would you invest in a city that has the following attributes ?
a. Excellent cash flow
b. Little/no appreciation
In this case, you can use the proceeds from the cash flow to buy additional properties. Is is a good strategy ?

[gn]

surveyor,

It sounds like you’ve been investing in RE for a long time.

1. When you were starting out, how many times did you visit a city before deciding to buy a multi-unit property there ?

2. How did you go about selecting a property manager at that city ?

3. If you are interested in growing your porfolio, would you invest in a city that has the following attributes ?
a. Excellent cash flow
b. Little/no appreciation
In this case, you can use the proceeds from the cash flow to buy additional properties. Is is a good strategy ?

[bsrsharma]

HLS & Surveyor: Thanks for all the interesting info on selecting out of State real estate for investment. It does sound challenging, but definitely has its rewards. One aspect is as inflation hedge – real estate is pretty good as non-fiat money, even with illiquidity and bubbles. I don’t know how well stock market is for that purpose. For the average investor who may not want to mess with gold, oil or currency, real estate is probably the better hedge. Of course, nothing beats the 250K/500K tax exemption on primary residence, even ignoring mortgage interest deduction. That alone should motivate everyone to buy a home during a recession and sell when the bubble matures.

[bsrsharma]

HLS & Surveyor: Thanks for all the interesting info on selecting out of State real estate for investment. It does sound challenging, but definitely has its rewards. One aspect is as inflation hedge – real estate is pretty good as non-fiat money, even with illiquidity and bubbles. I don’t know how well stock market is for that purpose. For the average investor who may not want to mess with gold, oil or currency, real estate is probably the better hedge. Of course, nothing beats the 250K/500K tax exemption on primary residence, even ignoring mortgage interest deduction. That alone should motivate everyone to buy a home during a recession and sell when the bubble matures.

[kewp]

Open a savings account at a Canadian bank.

[kewp]

Open a savings account at a Canadian bank.

[surveyor]

gn:

1. From my real estate seminars, first you think what kind of market do you want and then look at the city. For example, do you have a family and are on a single income? You probably need something that is definitely safe and cash flows. So you would choose based on that. If your household income was high and could take a little negative cash flow, you could choose a high appreciation location.

Once you choose a city and do your research, I would recommend finding a real estate agent there who would have a list of properties for you to look at. I’m in a real estate investing network, so we have specific requirements for our agents, but generally they are well versed in investor real estate issues, and for the most part are real estate investors themselves. Anyways, peruse the choices, and sometimes one visit is all it takes, assuming you’ve done the research and the numbers are ok with you.

2. If you chose a good real estate agent who is also an investor, ask for three property managers that they can recommend (if they can’t recommend two, that’s a warning sign). A lot of these agents have property managers or are property managers themselves. Once you have a list, you will have to interview them and ask them specific questions on what services they are expected to give to you.

3. It all depends on what you have already, what your personal situation is, what your time frame is, and how your financial situation is structured.

If you have a house or investment property here in San Diego, it is probably cash flow negative (especially if you leverage). So you would probably go find a place that has good cash flow and low appreciation to offset that negative cash flow.

If you are close to retirement (within 10 years) you should probably get a high cash flow property that won’t see much appreciation because you need the income.

If you have a family, you will need something that does cash flow a little, but has good appreciation and growth potential.

If you’re single and have little to no obligations, you can buy a high appreciation and no cash flow property.

Ideally you should have a good mix of appreciation and cash flow properties. They should complement each other and minimize the risk. If at the end of your real estate venture, the properties are giving you good cash flow, certainly you could buy more properties and keep going. You can also upgrade and get bigger and better properties as time goes on. I do recommend using your cash flow to build up your cash positions in order to help you manage turbulent times. Also, if your cash flow is good enough, you can start maxing out your Roth IRA’s and 401k’s (which is also a good way to diversify your money).

Honestly I have not been investing in real estate for a long time. It is just that I have learned a lot with the seminars and books that I have been reading. While I did start renting out my previous residence in 2002, realistically I only started pushing my real estate investor potential about 2.5 years ago. However, my occupation does deal a lot with land and real estate, so I didn’t have as much to learn as most people. I used to have a real estate license in my previous location (Guam) but I just did it more as a lark as opposed to trying to make it my profession. Also I suck at sales…

[surveyor]

gn:

1. From my real estate seminars, first you think what kind of market do you want and then look at the city. For example, do you have a family and are on a single income? You probably need something that is definitely safe and cash flows. So you would choose based on that. If your household income was high and could take a little negative cash flow, you could choose a high appreciation location.

Once you choose a city and do your research, I would recommend finding a real estate agent there who would have a list of properties for you to look at. I’m in a real estate investing network, so we have specific requirements for our agents, but generally they are well versed in investor real estate issues, and for the most part are real estate investors themselves. Anyways, peruse the choices, and sometimes one visit is all it takes, assuming you’ve done the research and the numbers are ok with you.

2. If you chose a good real estate agent who is also an investor, ask for three property managers that they can recommend (if they can’t recommend two, that’s a warning sign). A lot of these agents have property managers or are property managers themselves. Once you have a list, you will have to interview them and ask them specific questions on what services they are expected to give to you.

3. It all depends on what you have already, what your personal situation is, what your time frame is, and how your financial situation is structured.

If you have a house or investment property here in San Diego, it is probably cash flow negative (especially if you leverage). So you would probably go find a place that has good cash flow and low appreciation to offset that negative cash flow.

If you are close to retirement (within 10 years) you should probably get a high cash flow property that won’t see much appreciation because you need the income.

If you have a family, you will need something that does cash flow a little, but has good appreciation and growth potential.

If you’re single and have little to no obligations, you can buy a high appreciation and no cash flow property.

Ideally you should have a good mix of appreciation and cash flow properties. They should complement each other and minimize the risk. If at the end of your real estate venture, the properties are giving you good cash flow, certainly you could buy more properties and keep going. You can also upgrade and get bigger and better properties as time goes on. I do recommend using your cash flow to build up your cash positions in order to help you manage turbulent times. Also, if your cash flow is good enough, you can start maxing out your Roth IRA’s and 401k’s (which is also a good way to diversify your money).

Honestly I have not been investing in real estate for a long time. It is just that I have learned a lot with the seminars and books that I have been reading. While I did start renting out my previous residence in 2002, realistically I only started pushing my real estate investor potential about 2.5 years ago. However, my occupation does deal a lot with land and real estate, so I didn’t have as much to learn as most people. I used to have a real estate license in my previous location (Guam) but I just did it more as a lark as opposed to trying to make it my profession. Also I suck at sales…

[Raybyrnes]

Surveyor

I understand your formula but you have not included any expenses for managing the property, upkeep, insurance, etc. These costs far exceed the 10th of 1% management fee that one could pay for an ETF. Additionlly if one wants to participate in Leverage you could buy options or buy on margin. The bottom line is that if you are looking to optimize real estate you better be willing to get your hands dirty.

Property mangement companies don’t exist because they save owners money. They exist because owners get tired of doing everything themselves.

[Author]

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