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
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