Do I need to be talked off the RE ledge?

[friar1610]

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Originally Posted by HawkeyeNFO 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]

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Originally Posted by OldShooter 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]

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Originally Posted by 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.

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]

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Originally Posted by 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.

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]

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Originally Posted by clifp 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]

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Originally Posted by youbet 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).

[OldShooter]

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Originally Posted by Magus 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. ...

A couple of things: First, I don't think the OP is skeptical that money can be made in real estate, so this line of argument is not too relevant.

Second, I think a form of the Efficient Market Hypothesis applies here. Real estate is relatively easy to leverage, has a pretty good value growth track record, and in the big picture is not high risk, but it has serious negatives too. For example poor liquidity, high transaction costs, vulnerability to economic and regulatory problems, etc. But the biggest (speaking as a 25 year landlord) is the management hassle. These factors combine to get you prices with fairly attractive cap rates. That's what it takes to attract buyers. IOW I don't think there is any magic here; RE prices reflect all the negatives and all the positives, with netting out to the market demanding a pretty good rate of return due to the negatives. For the OP, I would suggest that enduring the negatives is not worth gaining the opportunity to make money that he does not need.

[Magus]

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Originally Posted by OldShooter A couple of things: First, I don't think the OP is skeptical that money can be made in real estate, so this line of argument is not too relevant. Second, I think a form of the Efficient Market Hypothesis applies here. Real estate is relatively easy to leverage, has a pretty good value growth track record, and in the big picture is not high risk, but it has serious negatives too. For example poor liquidity, high transaction costs, vulnerability to economic and regulatory problems, etc. But the biggest (speaking as a 25 year landlord) is the management hassle. These factors combine to get you prices with fairly attractive cap rates. That's what it takes to attract buyers. IOW I don't think there is any magic here; RE prices reflect all the negatives and all the positives, with netting out to the market demanding a pretty good rate of return due to the negatives. For the OP, I would suggest that enduring the negatives is not worth gaining the opportunity to make money that he does not need.

Agreed to a large degree, but with technology and trends, a lot of that has or is changing (hassle is lower to find quality tenants, collect rents, to sell you can get down to 4% costs now vs 6%+, time to sell is much lower, etc), especially with institutional money for the first time in our country's history getting involved in RRE.

15-20 years ago think about how difficult it would be for a mom and pop to 1) accurately gauge how much to charge rent +-5% to market (check newspaper ads, let it set vacant for ages, etc) 2) market that property for rent 3) be able to screen tenants for credit and background 4) collect rent.

Today, I can get 50+ applicants on Zillow (+Trulia, Hotpads,etc) for free or close to it in a single day via email, quickly access potential tenants credit history and background history in a click as well as income details and job history, know within about $100/month what I should charge for rent for it to rent fairly quickly and can collect rent electronically or by check. I have a reasonable idea what my property is worth at any moment and can easily check recently sold properties to get an even better idea if needed. Friction in rentals and residential real estate is rapidly going away.

Simply put, running rentals today is just not nearly as difficult as it used to be. Put in some basic simple guard rails for renters like I do (700+ credit score and minimum 2.75x income to rent and target 3.5x) and your odds of issues drops further.

[clifp]

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Originally Posted by OldShooter For the OP, I would suggest that enduring the negatives is not worth gaining the opportunity to make money that he does not need.

Fair enough, that's why we have a discussion forum, Magus and I disagree.

I picked up this line from the OP's first post.

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My career was intense and I was always on the road so I never got into the RE game. But now I have time to study and think about getting a SFH rental out of state. I would definitely hire a manager if I did that because I don’t really want to be a landlord on call.

This was exactly why I never got into real estate when I was working. I find RE investing interesting since I'm in the investing as a hobby crowd. I used to pick individual stocks, but that ended when after years modestly beating the indexes, I've trailed the indexes the last few years, and with even value stock expensive, I couldn't find any stocks that screamed bargains.

There is a good chance my prediction of a 50-75% drop in stocks and bonds will happen after I'm dead, and using real estate in LCOL states as a diversification strategy will have been pointless. But, I won't regret the time I've spent on it.

[youbet]

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Originally Posted by Magus a number of them (if not most) still actually did increase in nominal value over 20 years .

Actually, that isn’t true. Not sure where your numbers are coming from, so I’ll just back out of this discussion.

[BGH1]

We bought 4 rentals 6 years ago, passively managed with a property manager, and managed the property manager activities as other have said.

We had some decent tenants, and one terrible tenant. We sold all 4 this past year, and it was the best investment ever, the market went crazy, my best half wanted to simplify, and the timing was perfect.

It’s not for everybody, just like timeshares, but for us a very positive experience overall.

[Winemaker]

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Originally Posted by youbet Actually, that isn’t true. Not sure where your numbers are coming from, so I’ll just back out of this discussion.

Rentals are locally priced using a blend of construction/replacement costs and the local rent multiplier, similar to a P/E ratio.

For example, to buy a SFH/duplex in the nearest town would run no more than $100,000. To rebuild my duplex, it would run $205,000, to use LRM, $1375*12*LRM( I'm using 8)=$132,000. Another method is rent=1% of purchase price; in my case $1375 ===$137,500.

[ERD50]

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Originally Posted by Magus ... 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. ...

But this is totally irrelevant to the discussion.

We are not talking about investing in individual stocks and taking specific stock risk, We are talking about investing in a broad index (hundreds or thousands) of stocks. Those broad indexes have done well over the long run, and that accounts for the companies that went under.

When you invest in specific properties, instead of hundreds/thousands in a REIT, you are taking some specific risk. This is apples-oranges to an index investor.

-ERD50

[youbet]

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Originally Posted by Winemaker Rentals are locally priced using a blend of construction/replacement costs and the local rent multiplier, similar to a P/E ratio. For example, to buy a SFH/duplex in the nearest town would run no more than $100,000. To rebuild my duplex, it would run $205,000, to use LRM, $1375*12*LRM( I'm using 8)=$132,000. Another method is rent=1% of purchase price; in my case $1375 ===$137,500.

Can’t see how that relates to my example. What is the local rent multiplier when there is an extremely high vacancy rate and extremely low possibility of ever finding a tenant?

[Magus]

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Originally Posted by ERD50 But this is totally irrelevant to the discussion. We are not talking about investing in individual stocks and taking specific stock risk, We are talking about investing in a broad index (hundreds or thousands) of stocks. Those broad indexes have done well over the long run, and that accounts for the companies that went under. When you invest in specific properties, instead of hundreds/thousands in a REIT, you are taking some specific risk. This is apples-oranges to an index investor. -ERD50

Not all stock investors invest in broad indexes, just not like all landlords buy a single property without any diversification of type or geographically. So I would disagree with your statement both ways. Right now I can drop $10k into 150 different residential properties across the country on Fundrise.com if you are so inclined for diversification. But either way, I again reiterate nearly ALL housing goes up over 20 years (plus cap rates are WAY higher than stock dividend yields so you are far less reliant on appreciation). The same is not true for stocks.

[Magus]

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Originally Posted by youbet Actually, that isn’t true. Not sure where your numbers are coming from, so I’ll just back out of this discussion.

I checked several po-dunk towns of < 5000 pop between Greensboro or Charlotte and Charleston/HHI in the backwaters in the Carolinas and Zillow has had the prices ~double in the last year and more than double over the last 20 years. /Shrug Add in a 10% rental cap rate annually and you've done very well on rentals in those markets.

Commercial real estate is another story.