Do I need to be talked off the RE ledge?

[FLSUnFIRE]

Now don't get me wrong, financially the easiest and one of best thing you could have done in the last decade and arguably the century is put your money in Vanguard Total Stock Market and forget it. But A, that is boring as hell and B. Index funding investing is no longer a secret only understood by Bogleheads. Over the last 1,000 years following the herd has not been the path to riches. So I'm skeptical this is going to end well.

Perhaps but residential real estate is hot too IMO. SFH and smaller multi-family are being snapped up in many markets by hedge funds (entire neighborhoods in some areas) and REITs seeking returns and have become very popular with individuals as well (especially in the growing FI community)... I could make an argument for that not ending well as well if the metric is interest in the asset class.



Once we stretch the scale of time to 1000's of years, individual wealth is best made by plunder (and land is expensive to defend)! In modern economies, owning means of production has worked well thus far.

 

[ERD50]

Rent prices have only had 2 down years in 70+, both very small and short drops. Housing, especially rentals, is much more stable than stocks and in the current interest rate AND inflation environment I like much much better than bonds for income and inflation protection.

That's all well and good, but it doesn't address diversification. Buying one/few properties is not the same as the averages you mention.

Just like I could point out that the stock market has always been positive over any 20+ year period, that's not true of every stock.

-ERD50

 

[NoworLater]

We are within 1-2 years of retirement .. have a “vacation rental” we did nightly rentals and had a duplex that was a college student rental. We just sold the duplex, and paid off the vacation rental, which will become our primary home when retired.

We only had the duplex for 5 years, and sold for 2x paid. But what a mess, the reason we bought was asset allocation (which as others said can be done in a fund). We had a manager, good and only 8% .. but still SOO glad to be done. Not fun, and not worth it.

We did enjoy the nightly rentals, I miss meeting all the new people and helping them have a great vacation

 

[ExFlyBoy5]

Really happy to hear this from some one with core knowledge, thanks.

In terms of the accredited route are you talking, like, hard lending etc?

That is one route you could explore. Although these days, I would be very hesitant to do any hard lending since I think RE is wildly overvalued and the "cheap" money (mortgage rates) will probably be going up. With that, the flipping could very well come to a screeching halt.

Generally speaking, being an AI opens up a LOT of doors for non-traditional investments but it also can come with extreme risk.

 

[RockyMtn]

At one point had three houses of which one was a rental. Now down to one house and am much happier. REIT's cover my real estate investment needs.

 

[ExFlyBoy5]

Perhaps but residential real estate is hot too IMO. SFH and smaller multi-family are being snapped up in many markets by hedge funds (entire neighborhoods in some areas) and REITs seeking returns and have become very popular with individuals as well (especially in the growing FI community)... I could make an argument for that not ending well as well if the metric is interest in the asset class.



Once we stretch the scale of time to 1000's of years, individual wealth is best made by plunder (and land is expensive to defend)! In modern economies, owning means of production has worked well thus far.

This x1000. DW works with these groups every day. If/when it gets bad, they may very well dump 'em all back on the market and then guess what? The number of SFHs (and MFHs) they are buying is mind boggling.

 

[clifp]

Perhaps but residential real estate is hot too IMO. SFH and smaller multi-family are being snapped up in many markets by hedge funds (entire neighborhoods in some areas) and REITs seeking returns and have become very popular with individuals as well (especially in the growing FI community)... I could make an argument for that not ending well as well if the metric is interest in the asset class.

In HCOL area, Real Estate is arguable as overpriced as stocks, or bonds.

The Case-Schiller index measures the appreciation of the same house in various cities, the baseline is 100 as of Jan 2000. Overall it is 280. Meaning a 180% increase since 2000. San Diego, LA, San Francisco, Seattle are all over 340.
Cleveland, Detroit are 158, 159 respectively. Inflation is 162, meaning that houses in those two cities, kept up with inflation. Kansas City, Omaha, Indianapolis, and many other cities in the heartland are similar.

In HCOL, rental properties are cashflow negative. In LCOL, it is actually less expensive to buy than rent, so they are cash flow positive.

To me, the fallacy of buying REITs, and saying that's my real estate exposure, is that REITs are now highly correlated to stocks. That didn't use to be true, but it is now.
https://www.morningstar.com/articles/942066/reits-arent-a-true-alternative

Is the diversification benefits worth the hassle of dealing with out of state rentals is reasonable question.

 

[Magus]

I have been a landlord since 1999, buying a duplex for DD and friend while in college. It opened my eyes to what a carefully purchased property could do in terms of cash flow and wealth. I was working 60+hours a week.
Two years later, there was a property advertised in local paper for a 4 unit townhouse style apartment building. Modeling my costs, I purchased the second property, BIG step for me and DW. A lot of work in between tenants, but totally manageable. The money invested, did not affect the money we ate and paid the bills with. BIG difference. When you need money to pay bills, and eat, you take the first person that waves fresh, green cash under your nose. When you pick a stock, you do due diligence, when picking a tenant, you do the same. I was a supervisor in over 10 industrial coal mines, supervising over 5500 men and women. I am a pretty good judge of character and work habits, I have only been burned 5 times in 23 years, for what I would have spent in fresh grapes in one season. Like any investment, you need to do your due diligence, and invest the money where you see fit. These two rentals I have, are a proverbial goldmine. It ain't for everyone, but everyone is different.

Yup - getting good tenants is the key to success as a landlord, even if it means your rate is modestly lower than market. So far I'm at 0 burned in 11 years, although I'm sure if I had been a landlord in 2008-2009 I would have likely had at least one!

 

[Magus]

In HCOL area, Real Estate is arguable as overpriced as stocks, or bonds.

The Case-Schiller index measures the appreciation of the same house in various cities, the baseline is 100 as of Jan 2000. Overall it is 280. Meaning a 180% increase since 2000. San Diego, LA, San Francisco, Seattle are all over 340.
Cleveland, Detroit are 158, 159 respectively. Inflation is 162, meaning that houses in those two cities, kept up with inflation. Kansas City, Omaha, Indianapolis, and many other cities in the heartland are similar.

In HCOL, rental properties are cashflow negative. In LCOL, it is actually less expensive to buy than rent, so they are cash flow positive.

To me, the fallacy of buying REITs, and saying that's my real estate exposure, is that REITs are now highly correlated to stocks. That didn't use to be true, but it is now.
https://www.morningstar.com/articles/942066/reits-arent-a-true-alternative

Is the diversification benefits worth the hassle of dealing with out of state rentals is reasonable question.

Some HCOL areas are probably as overvalued but unlike stocks, real estate tends to be much more stable. But who knows if 2000 is the right baseline? Also, you'd need to compare GDP and population growth for each area relative to 2000 to really tell if its overvalued or not. Rent is even more stable than valuations. Compare RRE in the US in HCOL to similar markets internationally and its actually still very reasonable.

Agreed on REITs. That's why I'm putting $ into Fundrise and Crowdstreet as well as rentals I own and manage myself.

 

[OldShooter]

OP, what problem are you trying to solve ? Your index funds almost certainly already own REITs.

 

[tmitchell]

OP, what problem are you trying to solve ? Your index funds almost certainly already own REITs.

You know this is a great question, and as I’ve been reading the comments I started asking myself the same.

There are a couple things. First I know we eventually want to move to a smaller city, but just haven’t decided where yet. Maybe that’s still a couple years away. I saved $250k for a down payment in anticipation of that move, so as one person here said it’s burning a hole in my pocket due to FOMO and rising rates etc. Essentially a worry if I don’t get a place somewhere now I may miss out entirely. So that’s a life question.

On the investing side, I see the stranded cash as losing money to inflation so that’s a worry. On the other hand I’m wondering why I’m still trying to invest at all when I have already won the game so to speak. But assuming I do invest it in RE I’d maybe be solving the first and second questions simultaneously. That is, I’d at least have a physical place that’s mine that’s also keeping up with inflation etc.

Those are my thoughts.

 

[OldShooter]

...
There are a couple things. First I know we eventually want to move to a smaller city, but just haven’t decided where yet. Maybe that’s still a couple years away. I saved $250k for a down payment in anticipation of that move, so as one person here said it’s burning a hole in my pocket due to FOMO and rising rates etc. Essentially a worry if I don’t get a place somewhere now I may miss out entirely. So that’s a life question.

On the investing side, I see the stranded cash as losing money to inflation so that’s a worry. On the other hand I’m wondering why I’m still trying to invest at all when I have already won the game so to speak. But assuming I do invest it in RE I’d maybe be solving the first and second questions simultaneously. That is, I’d at least have a physical place that’s mine that’s also keeping up with inflation etc.
...

So ... I'll ask another one: If you've "won the game" how important is it to your financial future that you come up with optimum answers to these two questions? IOW how much financial risk and personal hassle is it worth?

Our first house was a duplex and we owned small residential real estate for maybe 25 years. I always managed the properties myself because professional management would have sucked all the juice out of the deal. From that experience, the thought of an out-of-state property and hiring a manager would be an immediate non-starter for me.

As has been mentioned, lack of diversification and huge market-to-market valuation differences are another negative factor. Finally, you're gonna die some day. Do you really want to saddle your executor or your spouse with this?

I dunno. I guess, to me, retirement is the time to minimize hassles, not the time to jump into the deep end of the pool. Shallow end, REITs, is its own debate and may be attractive to some.

 

[Magus]

That's all well and good, but it doesn't address diversification. Buying one/few properties is not the same as the averages you mention.

Just like I could point out that the stock market has always been positive over any 20+ year period, that's not true of every stock.

-ERD50

True - but nearly every house has gone up in value over that 20 years, as has rents. Probably 97%+ and 99% of ones that were maintained. For stocks there are always a large chunk that go bankrupt or take it on the chin over 20 years. Put another way, your probability of losing money on a rental property is significantly lower than stocks over 20 years as most rentals had 6-10% cap rates that would provide a huge amount of income even if the property value dropped in that time.

Cap rates are a bit lower now for new investments with the massive increase in housing prices in the last 2 years (rents are up maybe half the purchase increase) so its not quite as attractive as it was, but its also possible with institutional money now getting involved, housing is early on a massive growth leg.

 

[youbet]

True - but nearly every house has gone up in value over that 20 years, as has rents. Probably 97%+ and 99% of ones that were maintained. For stocks there are always a large chunk that go bankrupt or take it on the chin over 20 years. Put another way, your probability of losing money on a rental property is significantly lower than stocks over 20 years as most rentals had 6-10% cap rates that would provide a huge amount of income even if the property value dropped in that time.

Cap rates are a bit lower now for new investments with the massive increase in housing prices in the last 2 years (rents are up maybe half the purchase increase) so its not quite as attractive as it was, but its also possible with institutional money now getting involved, housing is early on a massive growth leg.

The value of real estate may see some interesting wiggles and waggles going forward depending on climate change, demographics, fresh water shortages, business trends and those kind of things.

Ever drive through a small town in the Midwest where most of the storefronts along Main Street are boarded up? Family farms were replaced by corporate farms so the folks who shopped at those stores moved away. And the few who remained now shop at the Walmart Supercenter down the road. Massive devaluation of many homes and commercial buildings over just 2 - 3 decades.

I’ll venture to say that your estimate that only 1% - 3% of homes declined in value over any 20 year period could possibly be a tad low.

When you said “for stocks there are always a large chunk that go bankrupt or take it on the chin over 20 years” what did you mean by “large chunk?”

 

[young-ish]

No I would not buy any real estate now if I were you. You mention “passive” but Owning Property to generate rental income is a business and requires work. If you want passive why not just buy REITs?

Congratulations on quitting the rat race!

 

[friar1610]

I am glad I got out of the landlording business back in 2015. Especially given that the state and county (Montgomery County, MD) heavily favored tenants over the landlords on just about all of their policies and laws. Even moreso during Covid.

I was like the poster above. Navy guy. House in Montgomery Cty. Lived in it for 3 years. Rented it out for 5 years (3 different sets of tenants) while I was stationed elsewhere and returned to live in it for 5 years. No major issues. Sold it when I next transferred.

Subsequently, I inherited my parents’ house on Cape Cod and rented it out as a year-round rental, also while living in MD. No major issues except my tenant died after a couple of years and I didn’t want to go through the hassle of finding a new tenant from afar nor doing the updating the house really needed. So I sold it. Occasional regret that I sold it given Cape Cod RE appreciation and the fact that I’m retired back in MA.

In spite of no major issues, both generated their share of anxieties. I figure I have used up all my landlord good luck. Reversion to the mean would occur if I bought a rental now. And I’m too old now. I’ll never be a landlord again.

 

[clifp]

OP, what problem are you trying to solve ? Your index funds almost certainly already own REITs.

REITs are 3% of the S&P 500. Apple alone is over 6%.

I retired in 99/2000. At the time, my poker buddy's 50 person B2B e-commerce company that he was the VP of Engineering went public.

He gave us 100 friends/family shares at the IPO price which was $13. First day went to over $50. In trying to decide whether to sell or hold, I did some calculations. The multiple billion valuation of his company, with tiny revenue, was worth twice as much as every house that had sold in all of Silicon Valley the last 12 months. That made my decision easy, I took the money and run. He had a one-year lock-up period and a year later (end of 2000) the stock was under $1, so he made no money.

Apple is a really valuable company, but I don't think it is worth of fraction of the real estate in country.

 

[OldShooter]

Not sure what your point is. If the OP wants a tilt toward RE it is easy enough to add REITs to a portfolio. Me, I don't make sector bets.

There was a time when the grounds surrounding the Imperial Palace in Tokyo was worth more than all the land in California. These things happen, but the insanity almost always dissipates. As you found. And as Kathy Wood appears to be finding.

 

[ncbill]

Directly held real estate can be lucrative, but it's a second job...nothing passive about it.

And what I think most people ignore is the effect of COVID...i.e. you, as a landlord, can be forced to maintain property (with tenants still there) even if you receive no rent for 18 months or more.

To me that substantially raises the risk of rental residential real estate, but I don't see a proportionate increase in return.

 

[Winemaker]

I'm 63 and some of my friends own/ride motorcycles. While I always wanted to ride a dirt bike, most tell me I'm too old to start riding, my body hasn't been trained to maintain my balance, so to start now would be very slow, tedious and perhaps dangerous. So, I'm not buying a bike anytime soon.
Same with real estate, if you haven't done it for a while, and know the ropes, it would be a slow, tedious perhaps dangerous learning experience. "Just like riding a bike."

 

[clifp]

Not sure what your point is. If the OP wants a tilt toward RE it is easy enough to add REITs to a portfolio. Me, I don't make sector bets.

There was a time when the grounds surrounding the Imperial Palace in Tokyo was worth more than all the land in California. These things happen, but the insanity almost always dissipates. As you found. And as Kathy Wood appears to be finding.

Simply put, I think the insanity right now is in stocks and bonds and not real estate and we are at or approaching 1999 levels of craziness.

REITs are stocks that pay a fairly high dividend, that won't fall as fast as Tesla, or Netflix in a bear market, but they still will go down. My main REIT holding O dropped 45% during 2008/09 the same as the S&P. REIT are not a replacement for buying properties, they are a sector bet in the stock market.

Real estate provides diversification, especially outside the HCOL areas, from inflated financial assets.

I had grand total of 12 emails in 2020, and 22 emails in 2021 with my property manager, and 3-4 calls a year. I spent even less time dealing with the 8 doors in KC, Missouri.
So it's not a huge time sink. Plus I got to write off most of my trip to Vegas, last year.

 

[Rambler]

I’ve been a landlord. I will never be a landlord again, unless via REIT. People who don’t own the home they live in are really good at tearing things up.

 

[Magus]

Directly held real estate can be lucrative, but it's a second job...nothing passive about it.

And what I think most people ignore is the effect of COVID...i.e. you, as a landlord, can be forced to maintain property (with tenants still there) even if you receive no rent for 18 months or more.

To me that substantially raises the risk of rental residential real estate, but I don't see a proportionate increase in return.

The supreme court ruled against that now so it wont be the case going forward and its likely at some point the government will lose a suit on the taking clause of the constitution and be forced to repay all the landlords that effectively had income taken from them with no compensation.

But to your point, this just emphasizes how important it is to get good quality tenants in underwriting.

 

[Magus]

Simply put, I think the insanity right now is in stocks and bonds and not real estate and we are at or approaching 1999 levels of craziness.

REITs are stocks that pay a fairly high dividend, that won't fall as fast as Tesla, or Netflix in a bear market, but they still will go down. My main REIT holding O dropped 45% during 2008/09 the same as the S&P. REIT are not a replacement for buying properties, they are a sector bet in the stock market.

Real estate provides diversification, especially outside the HCOL areas, from inflated financial assets.

I had grand total of 12 emails in 2020, and 22 emails in 2021 with my property manager, and 3-4 calls a year. I spent even less time dealing with the 8 doors in KC, Missouri.
So it's not a huge time sink. Plus I got to write off most of my trip to Vegas, last year.

Yup, public REITs are not a good proxy for RRE. If you want exposure to storage or medical or data facilities, REITs are the way to go but there really isn't RRE REITs out there. In general, REITs are way too indexed to HCOL areas. Private REITs like Fundrise are changing that though. I've put about $100k into Fundrise in the last year.

I agree on work for rentals being overblown. Maybe if you select poor tenants it is. I have 9 rentals at the moment, manage them myself, and excluding the first year I buy them, probably spend about 5 to 10 hours a year per property including showings, screening/applications, cleanings, repairs etc as vacancies come up. Works out to a bit over an hour a week for me in total.

 

[Magus]

The value of real estate may see some interesting wiggles and waggles going forward depending on climate change, demographics, fresh water shortages, business trends and those kind of things.

Ever drive through a small town in the Midwest where most of the storefronts along Main Street are boarded up? Family farms were replaced by corporate farms so the folks who shopped at those stores moved away. And the few who remained now shop at the Walmart Supercenter down the road. Massive devaluation of many homes and commercial buildings over just 2 - 3 decades.

I’ll venture to say that your estimate that only 1% - 3% of homes declined in value over any 20 year period could possibly be a tad low.

When you said “for stocks there are always a large chunk that go bankrupt or take it on the chin over 20 years” what did you mean by “large chunk?”

Yes, but the # of homes you reference as a % of the total is a stupidly small fraction, a number of them (if not most) still actually did increase in nominal value over 20 years believe it or not (obviously slower than the rest of the country, and most of them have cap rates at or over 10%, meaning you made 200% in income over 20 years from rents, more than covering the cost of the property in that time just from rents even if the property declined. Very different than a 2% cap rate property in SF that is nearly entirely reliant on appreciation.

I don't have the exact % in front of me, but less than 10% of the S&P 500 companies from 1955 are still around today as an example. Consider the Nasdaq make up in 1999 vs today. The stock market goes up largely on leaders that outperform with larger and larger market caps while the losers make up a smaller and smaller % and eventually go bankrupt or get bought out (eg: Yahoo, AOL, etc).