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wzd 03-09-2003 10:05 PM

Real estate as an investment
 
I've been reading the various posts on TIPS, international investing, and the 1966-82 topics, and wanted to start a new discussion on real estate. In particular, I am semi-retired and have invested some money in an apartment building. I find that it has some very nice characteristics: Tax deferal, current income stream, long term appreciation, and inflation protection.

Tax deferal - The tax code allows '1031' exchanges. I had a 4 plex that I sold and exchanged it into a 20 unit building. I used $200,000 in the exchange, but due to tax deferal, the after tax value, if I did not exchange but cashed out was $100,000. This means that I have $100,000 of my money, and $100,00 of Uncle Sam's money invested in the building. I also get to depreciate the new building, and that shelters the current income partially (fully in the early years). Then when the building is sold the bill comes due - unless you exchange it again into more or bigger buildings.

Current income - I get $1,000 to $2,000 a month from it. Currently I am managing it myself and getting $2000 per month, but I could have a professional property manager manage it and get $1,000 a month from it. Also, I mostly pick the hours to work, and how much to hire out versus do myself. Of course, one has to continously make that decision, time or money. But the point is that the decision is there, it is yours to make, and you are working for yourself if you chose to do the work. I spend a lot more time out hiking, biking, etc. than I did when I had a 50-60 hour a week computer job.

Long term appreciation - not much to say here, real estate seems to have gone up with small exceptions over the years I am aware of. Yes there is talk of a bubble, and some areas have gone up and then come back down some...but the overall trend is up. Very little new land is being made, and that new land is very expensive (see Japan for details).

Inflation protection - you are collecting rent, and paying utilities, taxes, etc. But since they all go up with inflation, and the rent is greater than the costs, the profit or cash flow goes up with inflation (or faster if you have fixed debt service (aka mortgage) costs).

I have friends that invested in larger buildings several years ago, and the cash flow from their investments replaced their salaries....they are now retired early.

So yes, there are risks - but there are a number of offsetting paybacks. Especially since I can paint, hammer nails, fix doors, floors, etc. I have ways to cut costs if things get tight, and can relax more if they don't. For me it seems to be an ideal investment. I still have more $$ invested in bonds and stocks (both individual and funds). Just one investment vehicle is risky...

Wayne

MRGALT2U 03-10-2003 07:59 AM

Re: Real estate as an investment
 
For me, real estate is also the answer assuming that
I wanted to work that hard. If I was ever forced back
into some sort of gainful employment I am sure it
would be real estate investment. The biggest
downside for me would be illiquidity. I have dabbled in real estate my whole life, but never really got
into it in a big way. Now, it no longer fits with our
"dream", a slightly different version of Dory36. Speaking of this, I just returned from a week in Florida
where I mostly looked for a place to reside and keep the
boat. Think we have it narrowed down to central Fla.
near the St. Johns River, or near the Panhandle Gulf Coast.

Michael 03-10-2003 03:43 PM

Re: Real estate as an investment
 
Low cost REIT index funds have about the same inflation protection, and an income stream roughly comparable to what you would get if you hired a professional property manager to manage your property for you. Since I have no desire to manage a building myself, a REIT index fund would seem to me to be a better choice for me, since it offers much greater diversification and liquidity than an individual building. I may not understand all of the benefits of owning a building directly, but this is my thinking for now.

wzd 03-11-2003 07:05 PM

Re: Real estate as an investment
 
I've looked over the REIT's and they seem to have a lower cash flow than a managed building. They are also open market stocks, and the value goes up and down with the stock market. Owning a building or part of one directly doesn't have the 'already bid up' component of stocks.

But that is not the main attraction for me. I can switch on extra income by managing it myself, and it is pretty much a self directed job where I set my hours and contract out as little or as much as I want. I consider it as similar to reducing expenses during a bear market as mentioned on some other boards here. I still have young kids, so spending time on MY schedule is important. I suppose it is like a job, but I am the boss....

The other advantage is that the income is largely tax sheltered by depreciation, so the equivelent return is about 16%/year.

Wayne

MRGALT2U 03-12-2003 03:04 AM

Re: Real estate as an investment
 
Wzd, you have thought it through well. Me too!
I see deals (mostly real estate) all over the place that
kick in my entrepreneurial juices. When I first retired,
I had to pull myself back from the brink several times.
In short, I think it's the way to go for me and probably
always has been, if I wanted to be actively employed. Not at this stage of my life though. I'm just hanging on until SS starts up :).

John_T 03-12-2003 06:10 AM

Re: Real estate as an investment
 
Short tidbit before I leave. Real estate is a great investment for the long term indeed if one has the money to pay cash for purchases and don't rent them. I once rented a house and managed it myself for 10 years and the aggravation I encountered during that time dealing with renters was definitely not worth the capital gain. I carried a mortgage on it and socked away funds for repairs from the rent profit. Sure I had a nice tax shelter but not much usable income. But real estate is an appreciating asset but it takes time to realize. Dealing with the renting public is not for me though, especially not at my age. Just my 2 cents.

J. Seagull 03-14-2003 05:52 AM

Re: Real estate as an investment
 
Nice discussion,

I too have thought many times of jumping into the Carlton Cheets lifestyle. There are many positives of using real estate as an investment vehicle and for every positive experience there is a negative one out there.

My experience shows that the rewards of real estate are in the increasing of equity over the years. It hits you when you wake up 25 years later and find your property is now worth 100s of thousand outright and your mortgage just about paid off. Lots of blood, sweat, and tears in the interim and if you don't mind that I believe this investment vehicle is great.

Since I can't stand dealing with smucks :-X, I'll keep my money in stocks and bonds. Best of luck to those that go this route.

JS

MRGALT2U 03-14-2003 06:28 AM

Re: Real estate as an investment
 
If you know how to avoid dealing with smucks (real
estate or no) I would like to know your secret. Years
ago, before I abandoned the "Carlton Sheets"
idea (which had been bouncing in my brain for years)
I would get into a discussion where someone would ask
"Isn't that (real estate investing) a lot of work and bother, what with the temants and all?" Well of
course it is. But, in spite of all the ways to make money,
the "free lunch" is still pretty elusive. Most of us just
have to choose our poison and hope we get lucky.

Barnstormer 03-14-2003 10:17 AM

Re: Real estate as an investment
 
John,

I avoid schmucks by being an island and keeping relatively to myself and my family (who I must say married into some schmucks) >:(. Your points of poison was very true and the fact that there is no free lunch.

My sister and husband bit the Sheets bullet and own 2 rental properties with a total of 11 units. I can say it is a struggle for them and the schmucks are everywhere. A lot of headaches for sure. Hopefully it'll work out well for them.

As for me I'm happy with my measerly gov't pension which enables me to sit around all day and complain about the gov't. What can be wrong with that?

JS

Barnstormer 03-14-2003 10:18 AM

Re: Real estate as an investment
 
I guess I'm signed in on one computer and not the other.

Barnstormer 03-14-2003 10:19 AM

Re: Real estate as an investment
 
BTW,

Our local book club will be reading Altas Shrugged this summer so I'll be reintroduced to this John Galt guy.

JS

MRGALT2U 03-14-2003 11:03 AM

Re: Real estate as an investment
 
Re. "sitting around all day and complaining, etc.", it's
a tough job but someone has to do it :).

Atlas Shrugged is a tough read for most people. Guess I've read it a dozen times at least. As far as "reintroduced", you
are corresponding with the real life John Galt, just
not as good looking and a lot more cynical.


Barnstormer 03-14-2003 11:27 AM

Re: Real estate as an investment
 
Well in that case...it's a pleasure Mr Galt. And don't sell yourself short, you're a tremendously looking gent. And cinisism is all relative.

I agree it is a tough read, but IMO well worth the effort. After all most people don't get, but could benefit greatly, from understanding that A is A.

Nice to meet you.

JS

MRGALT2U 03-15-2003 02:28 AM

Re: Real estate as an investment
 
One of the arguments for real estate investment
(or common stock for that matter) is that your money will show long term appreciation.
I no longer have a "long term" to work with.
It's not all gloom and doom though, as knowing this
helps me to eliminate a bunch of potential investments
that I might have considered 20 years ago. In that
sense, getting older is a real time saver, along with
all of the stuff you can no longer do physically. Like other changes which we must reluctantly accept as time passes, many can be a blessing if viewed from the
proper angle.

wzd 03-15-2003 03:25 PM

Re: Real estate as an investment
 
I hear you on the shmuck factor....I can put up with it for a while. 15 years ago, I first went into rental real estate with 2 4-plex's with 2 other couples(for 10k each). We managed it hands on for a couple of years (till the cash flow turned positive - we got in at the worst time!), and then we had a management company run it. I traded my share of that for a 20 unit building a few months ago. My goal is to put up with the shmucks for a while, but if I get sick of it, I can turn it over to a management company earlier. I'm viewing it as a part time job for now.

Hoping it can push me and my portfolio over the hump to fully retired with the income I want.

Wayne

MRGALT2U 04-24-2003 04:39 AM

Re: Real estate as an investment
 
Well, I may yet be back in the landlord business. After
trying a FSBO (I had little patience for this and am basically lazy anyway) and going through 2 realtors
(neither all that sharp), I am seriously considering
just leasing our house when we head south. It's a
great location (for Illinois) and we can take some pressure off the timing of our "escape". So...................
think we will find a place to live in the south first, then finish liquidating our
"stuff" and move at our leisure. We had an offer on the house which we accepted. Buyer got buyer's remorse and backed out. I was relieved because we only had 60 days to get out and I almost had a nervous breakdown
trying to cram everything to be done within the 60 days.
I have crunched the numbers on a lease and have a
good chance to do better financially than if we sold.
The key, of course is finding the right tenant as we will
be living 1000 miles away.

wzd 04-24-2003 07:04 AM

Re: Real estate as an investment
 
My sister tried the long distance landlord thing. It does have it's pitfalls, but she does ok. Since it will be in an area you lived in and know people in, you will have contacts in the area. Despite that, I strongly suggest setting up people to help you before you leave. Someone you know who will watch the property, and is responsible enough to deal with any emergency - like no heat. The person should also have keys to the property. A general contractor or handyman you know would also be a good bet to have an arrangement with.

You know my view - owning some real estate is a good investment to complement traditional investments. Single family residence is not the best cash flow rental investment but I think it has more potential for appreciation.

The other issue to look out for is the tax one. I know there are tax breaks for selling your primary residence, and I don't know if you lose them if you rent it for a number of years before selling it. I fear you might and you really should check that angle out closely. It can be a lot of dollars! Especially if you have owned the place a long time.

Wayne

JWR1945 04-27-2003 11:53 AM

Re: Real estate as an investment
 
I know that there are some special rules about renting out your old house while you are trying to find a buyer. The general idea hinges upon whether collecting rents is just a interim situation or whether you have decided to convert the house permanently to a rental.

Be careful. Big bucks are involved.

Have fun.

John R.

MRGALT2U 05-01-2003 04:49 AM

Re: Real estate as an investment
 
Hi John R.

Here is my set up. The house is owned by a small company which I own 100% (leftover from my
"Captain of Industry" period). So, I rent it from myself
in a manner of speaking. Thus, my little company gets
to deduct depreciation and a lot of other stuff, while
I have a friendly landlord. Also, once we become
snowbirds, a reasonable number of trips back here
will also become deductible by the corp. If I owned
the house directly, I would lose more than I would gain,
especially since in my scaled down condition I always
take the standard deduction on my taxes. That alone is a major plus as I hate recordkeeping of any kind.
I want to be out having fun, not paying bills and filing.

wzd 05-01-2003 06:23 AM

Re: Real estate as an investment
 
Hi John -

The downside of what you are doing (other than the tax man possibly frowning on the setup) is the loss of the exclusion on capital gain on sale of personal residence. As hypothetical examples:

Using a holding/management company:
purchase in 1980's $50,000
depreciation $40,000
adjusted basis $10,000
Sale price - 2003+ $150,000
proceeds subject to tax $140,000!!!!

Holding it in your own name and living in it:
purchase in 1980's $50,000
Sale price - 2003+ $150,000
proceeds subject to tax $0!!!

The proceeds alone will push you up to a high tax bracket. You do get to use uncle Sam's money (via depreciation) in the first scenerio, but the payback is quite severe.

When you do get ready to sell it, I suggest you have a tax advisor look over any options. There is a loophole, called a 1031 exchange(see https://63.123.136.2:28122/index.htm for some info), which can be used to defer the taxes due, and there are investment companies that facilitate exchange into their products (see www.myips.com for an example of one local to me). It takes some w*rk to find a good company, assuming you are inclined to go that way.

There may also be a way to salvage the personal residence exclusion - you should check with a competent tax advisor if you are interested.

As John R says, there are big bucks at stake. Do the research and planning first, as you can easily get stuck with a big bad tax bill.

Wayne

MRGALT2U 05-01-2003 10:06 AM

Re: Real estate as an investment
 
Hi Wayne! Thanks for your input. You don't have all the details, but that's because I did not provide them.
Anyway, you make a good case for just keeping the
house as rental property when we get done using it
ourselves. That would avoid any capital gains
tax issues indefinitely.

Mike M. 05-02-2003 12:43 AM

Re: Real estate as an investment
 
This may be the only message I write here, and I'm not
too good with computers, but here goes. After I finished
college I worked a bunch of jobs at the same time to save some money. This was in silicon valley before the house prices went crazy(graduated with a degree in marine biology in 1985). I first bought one rental house, then had my parents trade some land for a four-plex. After a couple of years we traded both for a 14 unit apartment. After about 5 years we traded into part ownership of a 68 unit building. Right after that the rents went crazy! We didn't gouge our tenants though. When I was 35, and my first child was due in two weeks, I quit! I hated my low paying job, and we got by on a tight budget. Within a year the rental income was about 5 times my income. Now it's almost 10 times. It's been 5 years, we have a 4 year old and a 1 year old keeping us so busy!!!! All my real estate deals did not make money, but if you're in the right property at the right time it can work. Good luck

thebacchus 07-20-2003 08:08 AM

Re: Real estate as an investment
 
Real Estate definately isn't for everyone, although neither are stocks, bonds, cd's, etc.

I have been slowly building a small real estate company while running the other company that supports us and our investment strategy. Currently we are only up to three properties (1 commercial, 2 residential). My hope is to sell my other company in 3-5 years and live off our investments as well as run this company 20-30 hours per week. (Yes, this is ER for the workaholics among us that work 60-80/wk.)

In my current position, the tax advantages make the income form this company very advantagis. My hope is that this entity will also produce tax advantages that will help further in the ER stage while we live off our portfolio income.

Are tenants a pain? They can be, but aren't most people who are paying you money? (ie. job?)

Regards & Best Wishes,

Bob

:)

RYD 07-20-2003 06:22 PM

Re: Real estate as an investment
 
Has anyone has found a web site for small RE investors. We hae some residential rentals but have never found a site that address this market.


RYD

wzd 07-20-2003 07:25 PM

Re: Real estate as an investment
 
RYD - Not a lot of info, but I have used landlord.com to look up some rule in CO, and for browsing thru information.

Also loopnet.com has real estate listings, which I use for information. You have to subscribe to get full listings, but the free ones are fine for my purposes.

You didn't say what kind of info you were looking for - property info, management info, etc. I found the book 'every landlords legal guide" useful.

There are also landlords associations, but I have not pursued joining any of them. The one near me sounds good, but I'm not sure it is worth the expense.

Wayne

thebacchus 07-27-2003 06:59 AM

Re: Real estate as an investment
 
I haven't found a ttuly "solid" website in and of itself for Real Estate investing. I think the old adage holds true, anyone on the internet can claim to be an expert.

Mostly, I model the successes of others that have been there. Seems to be working so far. My current venture is single family HUD foreclsures, of which there are quite a few these days.

Perhaps this forum would serve us well as a new website?

MRGALT2U 07-27-2003 09:06 AM

Re: Real estate as an investment
 
Although a fair amount of my meager pile was the
result of real estate investing, I was never involved in a big way, at least as far as my day to day activities were concerned.
I always felt comfortable with real estate, but mostly just "danced around the edges" and got lucky a few times. I thought at one time that this would be my
"part time work" after I semiretired. Didn't turn out that
way. Although I am still most interested in real estate
in all its forms, any active participation is behind me now. It's mostly an age/energy level thing. Interesting
that I feel like I built up a huge stockpile of real estate
knowledge. Probably enough for a couple of books at least. Alas, too lazy now to write them.

baanista 07-27-2003 06:04 PM

Re: Real estate as an investment
 
We have been working with someone who manages a number of rentals. What we have learned is that we have neither the people skills or the handyman skills to be effective at this. If all you can bring to the table is money, you should probably stick to REIT's.

BUM 03-20-2004 12:17 PM

Re: Real estate as an investment
 
I'm considering a "fixer-upper" deal. Buy a single family home in coastal carolina $150k or so... landscape, new kitchen, some paint, carpets. List for $225K six months later.

SOMEBODY talk me out of it!

BUM

JWR1945 03-20-2004 12:30 PM

Re: Real estate as an investment
 
Here are two points to talk you out of it.

Can you fix it up and sell it before hurricane season?

Fixer-uppers can be profitable, but not if you sell them as fixer-uppers.

I have known several people who have overestimated their willingness to finish the job. They got exhausted about a third of the way through. Don't buy something challenging. Buy something very simple. It will turn out to be as much as you can handle.

Have fun.

John R.

wabmester 03-20-2004 06:40 PM

Re: Real estate as an investment
 
My rule of thumb is to buy properties where most of the value is in the land rather than in the house, and that's generally the case with anything "coastal". The other nice thing about costal land is supply and demand. I've never seen the supply go up or the demand go down.

As far as fixers go, my only caveat would be to watch out for water damage. It's amazing how pervasive water damage can be. Inevitably, it'll have destroyed something structural. And if you thought building a house from scratch was hard, try replacing structural members while the structure is already in place.

John Galt 03-21-2004 06:33 AM

Re: Real estate as an investment
 
I have owned all kinds of real estate in four different states. Through good luck (or maybe I made my own luck), in recent years it has been mostly waterfront
or at least water view. We currently own our main home
on a big river in Illinois, a condo we just bought in Texas
which is a chip shot from the largest lake in the state,
and the "Ranch", also in Texas and close to the same lake. No water on that property unless you count the 2 stock ponds
which are real pretty except in dry seasons. This stuff is about 50% of my net worth and currently has a negative
cash flow. However, it is all well located and "bought right" so I am quite comfortable with it. Can see why
others might not be however.

John Galt

John Galt 04-11-2004 06:00 AM

Re: Real estate as an investment
 
This happened yesterday. I noticed that one of the
neighbors has put their place up for sale, so I stopped and picked up an info sheet from the little box attached
to the "FOR SALE" sign. 200 feet of river frontage
and 2 cottages (smaller but nice) for $129,900!!!!!!!!!!!
When I got home and showed my wife, she says
"Let's buy it, that's the deal of the century!" Well, I agree it's the deal of the century, or something close.
However (A) I am "land poor" at the moment (B)
I am trying to simplify my life and (C) No matter how you
slice it this looks like work to me. Ten years ago
the sellers would have had my offer by now. Five
years ago I would have been crunching numbers
furiously. Now, I will happily let someone else buy it.

John Galt

cute fuzzy bunny 04-11-2004 10:21 AM

Re: Real estate as an investment
 
On the other hand, what you've been doing so far has been working for you...so why change now :)

Place needs work? Find a nice couple that you can let live in the property rent free in exchange for a maintenance and repair schedule. Hire a management company to rent it out.

Just buy it, tweak it a little, raise the sales price to make a small profit and wait for the sale.

John Galt 04-11-2004 04:51 PM

Re: Real estate as an investment
 
Hello Cut-throat! I owned a bunch of land here in
Illinois. We only used it for hunting and I don't hunt any more. I sold it all over the past 2 years and moved all
the money into Texas real estate, which entails more
bother and more expense. However, I think it will work out just
fine. Stay tuned for periodic updates.

John Galt

honobob 09-28-2008 05:43 PM

Quote:

Originally Posted by John Galt (Post 267880)
I sold it all over the past 2 years and moved all
the money into Texas real estate, which entails more
bother and more expense. However, I think it will work out just
fine. Stay tuned for periodic updates.
John Galt

John
Sounds like you made the right move when everybody else was zagging. Seems like Texas real estate has been achieving a steady double digit appreciation and has kept that up through the "bubble". Would love to hear an update.

cute fuzzy bunny 09-28-2008 06:03 PM

That'd be tough since the guy hasnt posted here in about 3 years.

Nothing else to do with your day, I take it?

I can help you with the end result though. [moderator edit]

I guess that real estate ownership thing isnt all its cracked up to be.

Rich_by_the_Bay 09-28-2008 06:23 PM

Quote:

Originally Posted by honobob (Post 722069)
John
Sounds like you made the right move when everybody else was zagging. Seems like Texas real estate has been achieving a steady double digit appreciation and has kept that up through the "bubble". Would love to hear an update.

So, you are replying to a post that's over 4 years old?! Slow day?

honobob 09-28-2008 06:25 PM

Quote:

Originally Posted by cute fuzzy bunny (Post 722077)
That'd be tough since the guy hasnt posted here in about 3 years.

Nothing else to do with your day, I take it?

[moderator edit]

I guess that real estate ownership thing isnt all its cracked up to be.

Well obviously more time than someone keeping up to the minute dossiers on posters 3 years long gone.:)

Well Eagle Eye, you do make a strong argument for keeping the mortgage. They would have required flood insurance. And don't fault the plan or product when the only problem was implementation. Are you sure your intel is correct? I'd like to think even Wab/Twaddle is lurking still looking for tips to 50% off beach front property.

cute fuzzy bunny 09-28-2008 06:28 PM

Quote:

Originally Posted by honobob (Post 722090)
Well obviously more time than someone keeping up to the minute dossiers on posters 3 years long gone.:)

Yeah, but that infos a year old and I only knew about it because they interviewed him on the news.

G'bye Boob

honobob 09-28-2008 06:30 PM

Quote:

Originally Posted by John Galt (Post 267880)
Stay tuned for periodic updates.

John Galt

Maybe people with patients can be more patient. I wanted my periodic update now! Galt Gone? Who knew?:angel:

calmloki 09-28-2008 06:47 PM

Quote:

Originally Posted by cute fuzzy bunny (Post 267866)
On the other hand, what you've been doing so far has been working for you...so why change now :)

Place needs work? Find a nice couple that you can let live in the property rent free in exchange for a maintenance and repair schedule. Hire a management company to rent it out.

Just buy it, tweak it a little, raise the sales price to make a small profit and wait for the sale.

In keeping with the conversation over time theme: Rentals! that's the ticket for BIG MONEY! Why, here's a nice Houston unit one could probably get for not too much - just back up the truck and invest!

How can anyone live like this? (pics)

honobob 09-28-2008 07:10 PM

Quote:

Originally Posted by calmloki (Post 722109)

OK let's get this thread legal. Is that bacon on the floor?:o

cute fuzzy bunny 09-28-2008 07:36 PM

Only one part of the pig that you're due, and its not bacon. PM me if you'd like a picture.

honobob 09-28-2008 07:40 PM

Did anybody hear an "oink"?

cute fuzzy bunny 09-28-2008 07:49 PM

Hmm...Lower.

honobob 09-30-2008 11:04 AM

Quote:

Originally Posted by cute fuzzy bunny (Post 722093)
Yeah, but that infos a year old and I only knew about it because they interviewed him on the news.

G'bye Boob

And yet it was edited and the reason was "not public info". What radio are you listening to? The shortwave from the mother country:)?

We must both be boobs then. Don't we make quite a pair?:2funny:


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