Get Rich Fast (you chump)

[windsurf]

Tonight I was chatting with tennis buddies over cold ones and asked one of the guys who teaches econ what he thought of the interest rate adjustment. Talk turned to money market returns, the bump today in the market and prospects over time. After awhiie of this, the econ prof looked at me, chuckled and said, "You need to stop worrying about five percent, six percent, seven percent. That's nothing . . . that's other people using your money. You should be in real estate and looking to double your money every couple of years." When I asked who does that, he said, "I do. It's a matter of leverage." Apparently he has been buying and selling a lot of local properties over the years and has done well. But, was he blowing smoke? Are there really lots of people out there who constantly and inexorbably get rich by buying up with borrowed money one 100 k property after another and then double their out of pocket when they sell it off? My assumption would be that for every person who does that successfully, many do not. I drove home feeling like a chump thinking maybe I should have been trolling for properties the past few years rather than agonizing over money market and index fund yields.

 

[dex]

I think you are correct. There is one thing to remember. People tell you about their successes not their failures.

The concept of leverage is simple; but difficult in practice. I wonder if that econ professor really made that much money after all the expenses associated with the sale. The hurtles are high.

Fix up costs
Interest
Selling commission
Closing Costs

It needs to be in a hot market to make it work or over several years. Do the math and you will see what I mean.

 

[bssc]

Our friends did well buying and selling single family homes but then they decided to branch out into apartment complexes and it hasn't worked out as they planned.

 

[honobob]

I drove home feeling like a chump thinking maybe I should have been trolling for properties the past few years rather than agonizing over money market and index fund yields.

Well I'm not an econ teacher but that was my major. I invested in two properties recently, one in 2003 for $200K+ and again in 2004 for almost $300K. Together they are worth over $800K turning my almost $100K into $325K for a profit of $225K. If I'd invested that same amount in the market and got 12% returns I'd have less than $75K profit. That's leverage.

I wouldn't worry about the past but you would be a chump IMHO if you didn't look at the possibility of trolling for properties over the next few years.

 

[Nords]

Do the math and you will see what I mean.

Tell him you'd love to look over his tax returns to see how those numbers worked out... especially the Schedule E expenses/writeoffs and the Schedule D capital gains.

It's all about the leverage. Watch the house-flipping shows on HGTV, A&E, and TLC. Even Trademark Properties ("The Real Estate Pros") screws one up every now & then. I'd say that the flippers are adequately-- but not stupendously-- compensated for their effort and their risks.

 

[macdaddy]

Property values can fall...
You can be sued by anyone who interacts with the property...
You may rent to tenants who don't pay their rent (or destroy the place)...
Your tenants can take you to court for random reasons...
Your property can develop problems like mold which are expensive but necessary to fix...
You need to hire a property company to fix problems or else you are on call 24/7...
Property taxes can rise, rents can fall...
The area can become less desirable, vacancies will rise...
Usually there is a 5% (at least) cost to sell (commissions)...

There are a lot of ways that real estate can sink you. It's a very active investment. I like it but it's not comparable to an index fund in any way, shape, or form. Plan to spend 1-2 hours per week on each property you buy - forever - if you want to do it yourself.

 

[chinaco]

Are you sure he wasn't being sarcastic?

I agree with your comment. I believe a few make it work, but... I am a bit skeptical about doubling the money... in a short period (i.e., the flip).


Time will tell... Let us know if your Econ buddy is rolling in money and FIRES in the next few years... or if he is still slogging it out at the black board.

 

[Sandy]

If it was so easy, everyone would do it. It has always looked like too much work and risk for me given full time employment, family, and fun.

Maybe the prof has a more flexible schedule that lets him put in the time and effort to do it right.

 

[windsurf]

Are you sure he wasn't being sarcastic?

No, I think he was bragging a bit. He said he has no money in the market. He just retired from full time teaching and has a class now as a part-timer. He is drawing his pension and has a spouse with one, too. At some point, though, unless he spends all the real estate money, he will have to confront what to do with it, no? He will need to make decisions about money funds, stocks and the like. I am assuming (but didn't ask) that he keeps cycling his profits back into holdings. The local market (our county) had been the fastest growing one in the state for the past decade. Now, it is overbuilt in places and houses are staying on the market much longer.

 

[FinanceDude]

Never argue with a business professor, just nod and say "that's great", and move on............

 

[windsurf]

$75K profit[/B]. That's leverage.

Is that profit in your pocket or is it still in potentia (a matter of the market value of properties you are still holding)?

 

[RunningBum]

You can get similar leverage in the stock market too, by going heavily on margin, buying options, etc. Similar risk too. Nowadays you can only go about 50% on margin on stocks vs. 95% or so on real estate, so you're unlikely to owe more than you own even if the stock tanks, but a margin call on a dip can force you to sell when you'd really rather be buying more.

 

[Robert the Red]

Isn't this discussion kind of the same idea as the What will the next bubble be? thread? In that during the bubble-up phase, buying and flipping (e.g., day trading in the days of yore) has the potential to be very profitable. Now that real-estate is in the 'pop' phase, the prof's advice isn't so cogent.

 

[MasterBlaster]

Real estate had its turn. Now I wouldn't touch real estate, at least not for the foreseeable future.

I would much rather be in stocks, bonds, and mutual funds today than in real estate. That leverage is a two edged sword. Sure it's great when prices are rising. But when prices are falling.... Ouch !!!

Minus the leverage, real estate has been an average (at best) investment. Over the long haul I expect that stocks will beat the pants off real estate.

 

[tryan]

Property values can fall...
You can be sued by anyone who interacts with the property...
You may rent to tenants who don't pay their rent (or destroy the place)...
Your tenants can take you to court for random reasons...
Your property can develop problems like mold which are expensive but necessary to fix...
You need to hire a property company to fix problems or else you are on call 24/7...
Property taxes can rise, rents can fall...
The area can become less desirable, vacancies will rise...
Usually there is a 5% (at least) cost to sell (commissions)...

Been there, done those things ... but you left out a few: mice, roaches, fleas, bees, bats, squirels, skunks, racoons; then there's the human equivalent: drug users/dealers, prostitues, exotic dances ... Not that there's anything wrong with that.

I wouldn't follow the mob at this jucture ... toooo late. Save your pennys; better deals lie ahead.

 

[retire@40]

Kind of on topic...

According to the study, home values underperformed stocks and bonds over every five- and 10-year period from 1963 to 2005.

Report finds residential real estate underperforms other assets - MarketWatch

 

[CybrMike]

With all the recent foreclosures, there are a lot of deals out there. Unfortunately there is also a lot of competition.

My current deal I bought for $37K, put $45K into it and it was just appraised for $135K. Its listed at $110K.

May end up renting it out because its tough for folks to get approved for a loan right now. Will be a great rental though because its 2 units. Should get $1300 per month on it until I'm able to sell it.

 

[audreyh1]

I love being a passive investor - i.e. loaning other people "use" of my money. That means I can leisurely enjoy my retirement. Stock market returns are not so bad for letting other people do the W-O-R-K.

Leverage works both ways too! If the underlying value of your assets goes down, you can lose far more than your initial investment. You have to be very, very careful choosing your projects and with your timing. Same with buying stocks on margin!!!

I think your professor's argument is more philosophical than anything. Sure the best way to make outsized returns on capital is to borrow money, invest in a profitable business/project, and pour a huge amount of sweat equity and savvy into it. Luck helpls too! But is that really your goal in life? For most of us here, ER is precisely about getting away from that! Of course, it is a great way to achieve wealth/ER if you are willing to put in the huge amount of works and take those risks.

I found your professors comments to be rather condescending. I think if someone said something like that to me, I would talk about all the non-work things I enjoy doing. Of course the fact is that I don't need additional sources of income, and I relish not having to work. I wonder how much of your professor's approach is really due to the fact that he does need to supplement his pension to pay for his current lifestyle?

Audrey

 

[honobob]

$75K profit[/b]. That's leverage.

Is that profit in your pocket or is it still in potentia (a matter of the market value of properties you are still holding)?

No, I'm still holding. I could sell today and put most of that in my pocket but don't see anything earning anywhere near as much. Historical appreciation has been 9% a year and I don't see that changing much.

At some point I will want to harvest cash from the properties. When I make my rent and appreciation projections and the mortgage debt reduction it makes a strong argument for keeping the properties and getting cash thru equity loans paid by rent increases. They are very easy to rent and manage.

At some point I may occupy each for the two required years to take $250K capital gains tax free and 1031 the excess into another rental property.

I know a few deep pocket people who jump in when they feel prices are ready for a surge, buy a few properties and sell when they are satisfied with the profits and pocket the money. If you have cheap access to mortgage money this is a great way to go. You can accomplish the same if you're willing to do hard money or the low or no money down way but if you can't back it up when the money's due you take a larger risk than I'm comfortable with.

 

[dex]

I love being a passive investor - i.e. loaning other people "use" of my money. That means I can leisurely enjoy my retirement. Stock market returns are not so bad for letting other people do the W-O-R-K.

Leverage works both ways too! If the underlying value of your assets goes down, you can lose far more than your initial investment. You have to be very, very careful choosing your projects and with your timing. Same with buying stocks on margin!!!

I think your professor's argument is more philosophical than anything. Sure the best way to make outsized returns on capital is to borrow money, invest in a profitable business/project, and pour a huge amount of sweat equity and savvy into it. Luck helpls too! But is that really your goal in life? For most of us here, ER is precisely about getting away from that! Of course, it is a great way to achieve wealth/ER if you are willing to put in the huge amount of works and take those risks.

I found your professors comments to be rather condescending. I think if someone said something like that to me, I would talk about all the non-work things I enjoy doing. Of course the fact is that I don't need additional sources of income, and I relish not having to work. I wonder how much of your professor's approach is really due to the fact that he does need to supplement his pension to pay for his current lifestyle?

Audrey

I'm wiht you Audrey on all points.

 

[FIREd]

The thing with leverage is that it cuts both ways: Buy a $200,000 house with 10% down. If the property value increases by only 10%, you look like a genius who just earned a 100% return on his money. If the property value decreases by only 10%, you look like a sucker who just lost 100% of his initial investment. As you can see it does not take much to go from the genius to sucker status when you use that kind of leverage...

 

[bongo2]

Tonight I was chatting with tennis buddies ... [one] said, "You should be ... looking to double your money every couple of years." ... rather than agonizing over money market and index fund yields.

If your friend can double his money every couple years he will be a billionaire in what, 20 years? And own the world a few years after that. Keep close so that he will invite you to play tennis on his yacht.

 

[ziggy29]

People want to believe they can get what they want without hard work, sacrifices
and patience. They want to believe they can safely lose 50 pounds overnight by taking a pill with no exercise or dietary changes required. They want to believe they can safely get rich quickly without taking chances of losing everything.

The snake oil salesmen prey on this instant-gratification-without-sacrifice desire in a big way. And people who buy into these schemes -- great when they work -- could find themselves in a world of hurt if things turn around as if they don't think the gravy train will ever derail...

 

[lets-retire]

I not going to say I doubled my money with each sale of my houses (because I didn't put anything down on any of them). I will say I've earned a lot of money without putting to much of my own money into a place. The first house I owned was IIRC $100 cheaper per month in payments and was more energy efficient than the place I was renting. The second place I owned for just over two years and walked away with only 20k after expenses, because I gave my sister-in-law a very sweet deal on it. If I sold it at market price I should have been able to receive at least another 15k. The place after that I owned for four and a half years and walked with about 24k after expenses. The most recent was a house I owned for three years I put about 15-20K into it, paid less per month than the rental a couple doors down, and walked away with over 80k in my pocket after expenses.

None of these houses had any down payments on them. The second and fourth house required some fixing, but the first and third were clean to start with. So yes during the bubble money was there to be made, now it will require more shrewed investing and plan to be in it for several years.

 

[unclemick]

Yawn - location, location, location and er heh heh heh -decade,decade,decade.

Some of us ER's are approaching 'old phart status' - the 60's, 70's, early 80's real estate was king and we dufus dollar cost averaging stock cats were a lesser breed.

I remember talking to my apartment building owner in the 70's(he owned 8 bldg's around Denver) saying he gave his Son an apartment blg for his 21st birthday.

Ya gotta work at acquiring the skill - I owned a Duplex for 15 years in New Orleans - did fine - but it cured me of wanting to become a landlord/real estate mogul. Knew many a person who funded their retirement via RE over the years from raw land to landlords. BTY - the fix and flippers - at least in New Orleans burnt out the fastest/had the highest attrition rate - aka got easier jobs.

Looks cool on tv though!

heh heh heh -