Who here does some real estate investing?

[Obnoxious Dad]

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none of the above. They are the largest by far and handle the biggest companies in town and have a great record with audits. And I'm generating all sorts of K1 income from different places. The actual cost of doing the return to them is minimal. We also use them for our corporate accounting for our business generating >$100M in revenue per year (although my personal returns predate our corporate relationship).

CPA firms often overcharge closely held companies for audits and tax accounting, which is effectively fully deductible at the corporate level, and they discount the prep fees for shareholders and officers because the shareholders and officers won't get a tax benefit due to the AMT and the 2% of AGI threshold for miscellaneous deductions. The fact that your returns with them predate the corporate relationship is probably meaningless because the CPA firm was probably trying to hook your company as a client. Most physicians can't take advantage of that sort of discounting.

You say you are getting K1 income from lots of places. Is that firm of yours filing state income tax returns for that out of state income? If the income is substantial or if you are carrying suspended losses in other states, you better check on that.

 

[Mman]

CPA firms often overcharge closely held companies for audits and tax accounting, which is effectively fully deductible at the corporate level, and they discount the prep fees for shareholders and officers because the shareholders and officers won't get a tax benefit due to the AMT and the 2% of AGI threshold for miscellaneous deductions. The fact that your returns with them predate the corporate relationship is probably meaningless because the CPA firm was probably trying to hook your company as a client. Most physicians can't take advantage of that sort of discounting.

You say you are getting K1 income from lots of places. Is that firm of yours filing state income tax returns for that out of state income? If the income is substantial or if you are carrying suspended losses in other states, you better check on that.

your assumptions remain simply incorrect. All income from same state so I have no other worries to check out. And rest assured, they did not give me a discount to woo our business years before I was a partner in that business. It simply should not cost much to file a return. Congrats on getting what you can for something I find most don't have to pay too much for.

 

[s109442]

For the sake of illustration...

Revenue: 70K

Expenses
Mortgage: 48K
Property management: 10K
taxes: what 6-8K per year??
insurance: ???
I assume you are also responsible for upkeep like buying new things when old stuff breaks

So you probably clear about what, $5K per year? How much was the downpayment to purchase the house, maybe $100K? That would be about a 5% return per year on invested money excluding gains in equity but also ignoring maintenance costs and insurance.

Taxes are included in that 4K. We love the area, it’s beautiful and fun. it’s nice to basically have a place that is paid for by others. It’s a special property, the geography limits how many waterfront properties there can be. There are none left. I think this place is worth a lot of money 30 -40 years from know. My boat is 20 yards away. We are thrilled to own it and feel lucky.

 

[sevoflurane]

Taxes are included in that 4K. We love the area, it’s beautiful and fun. it’s nice to basically have a place that is paid for by others. It’s a special property, the geography limits how many waterfront properties there can be. There are none left. I think this place is worth a lot of money 30 -40 years from know. My boat is 20 yards away. We are thrilled to own it and feel lucky.

That’s the intangible aspect of rental ownership. One of my properties is nestled in a spectacular town in the San Juan Mountains. It’s just awesome.

My wife will never let me sell it.

 

[s109442]

That’s the intangible aspect of rental ownership. One of my properties is nestled in a spectacular town in the San Juan Mountains. It’s just awesome.

My wife will never let me sell it.

If ya ever wanna trade week for your’s for mine let me know. San Juan’s are spectacular. 807 Lake St. Saugatuck mi.

 

[epidural man]

I like real estate investments because of the risk/reward profile.

Since the stock market has significant risks and is not efficient despite most saying it is efficient, I don't like too much money there, although I do have some. I can't shake the thoughts about the feds unwinding a 4 trillion balance sheet (50 billion a month...10x the cost of a border wall...each month).

The BEST investment is business (starting a business), but as a physician, I don't have time, nor do I have the cleverness to figure out how to sell hoses or trinkets on Amazon.

Real estate seems great. I only own one rental property currently, but hope to buy more and more. I know the math gets rather complicated, but I like to keep it simple. This is what I think...when I look at the bill, I first think..."holy cow, interest and escrow costs a lot of money!" But then I think - "well i'm not paying it." Then I see the principle and think..."Wow. this guy just basically gives me $800/month and I don't have to do anything." Someday, when the house is paid off, I'll be getting a check for quit a bit of money each month. And if I buy a few more, they will be paid off around my retirement time, and I'll be getting lots of checks forever and it didn't cost me much to start with.

 

[acidbase1]

You may think you are educated but what have you actually learned about real estate investing? Do you have a law degree or an MBA? This is not for amateurs.
If you just sock money away in your tax sheltered vehicle at work and invest in a few index funds, preparing your own tax return is not all that hard with good software. If you start investing in real estate and have lots of properties, you can run up a tax prep bill in the thousands due to tax elections, potential audits, tax projections, estimated payments etc. I know. I've sent some of those bills out. That eats into your return on investment.
I tried to point out that there are differing tax rates depending on the nature of the asset sold and the length of time it was held and depreciated. Not all capital gains are taxed equally. Some are taxed at ordinary rates. Some are taxed at the lowest cap gain rate. Some are in the middle. Can you define and discuss unrecaptured 1250 gain?
You need to understand that it was a real estate bubble that almost sent the world's economy into the crapper 10 years ago. Lehman Brothers bet on mortgage backed securities. Look at Merrill Lynch. That is the universe. A few braggarts don't make the market. I presume that you haven't spoken with the tens of thousands of people who invested in property in 2005 and threw the keys at the bank in 2010.

Damn dude, I must’ve really offended you. I actually have a BBA and a MBA. I’m being mentored by someone with over 50M in RE. We discussed each purchase at great length to ensure it was a smart invenstment. So I may be an “amateur”, but you have to start somewhere. And I’m not exactly doing it alone.

Not sure why some of you are coming at me. Show me another investment strategy where you can get a guaranteed 10% ROI and I’m all ears.

I’m looking into getting into some commodity trading with an ortho friend of mine as well, just don’t have the same level of comfort with it yet. I’ll continue to study just like he did. I’m sure you will tell me I’m an idiot for even considering such.

 

[Obnoxious Dad]

your assumptions remain simply incorrect. All income from same state so I have no other worries to check out. And rest assured, they did not give me a discount to woo our business years before I was a partner in that business. It simply should not cost much to file a return. Congrats on getting what you can for something I find most don't have to pay too much for.

OK, I'll jump in again. I originally warned physicians against "active" real estate investments which means holding individual properties as a sole owner in fee simple. Apparently you have a bunch of real estate investments through partnerships and you are a limited partner in those partnerships. The income and/or LOSSES on your share of those partnerships are reported to you on a K1. All of these partnerships, apparently, do their business in your state of residence. Is that correct?

If I now have it right then the price you are being charged for your return (assuming you are well organized) is a normal price in a medium sized city provided you have not taken losses or partnership distributions in excess of your original investment plus reported earnings. If you are underwater then there may be at risk/basis limitations with those investments which might involve some tweaking of your return and therefore a higher prep fee.

 

[Obnoxious Dad]

Damn dude, I must’ve really offended you. I actually have a BBA and a MBA. I’m being mentored by someone with over 50M in RE. We discussed each purchase at great length to ensure it was a smart invenstment. So I may be an “amateur”, but you have to start somewhere. And I’m not exactly doing it alone.

Not sure why some of you are coming at me. Show me another investment strategy where you can get a guaranteed 10% ROI and I’m all ears.

I’m looking into getting into some commodity trading with an ortho friend of mine as well, just don’t have the same level of comfort with it yet. I’ll continue to study just like he did. I’m sure you will tell me I’m an idiot for even considering such.

You didn't offend me. The Donald says he's worth a $billion. Is he? There is nothing guaranteed about these investments until you cash out. If the promoters are so smart, why are they paying hundreds of basis points above the market?

So, you are going to trade commodities hey? Since you have a business education you probably are wise enough to keep the risk to a minimum. I rarely see dabblers make money on this stuff. The dabblers are at the mercy of the quants in Chicago. I hope you get lucky.

 

[acidbase1]

You didn't offend me. The Donald says he's worth a $billion. Is he? There is nothing guaranteed about these investments until you cash out. If the promoters are so smart, why are they paying hundreds of basis points above the market?

So, you are going to trade commodities hey? Since you have a business education you probably are wise enough to keep the risk to a minimum. I rarely see dabblers make money on this stuff. The dabblers are at the mercy of the quants in Chicago. I hope you get lucky.

A bit abrasive my friend. You make a bunch of misguided assumptions without knowing details. The individual I’m speaking of has a broker who does the leg work, ortho doc checks in 5-10 times per day. (In between cases usually). Made 35% last year.

It seems a bit risky for me, I’m just getting started so I’m sticking with the lower risk investments (ie real estate)

You wanna know what is guaranteed in RE? My cap rate regardless of the appreciation/depreciation of the property.

I’m not knocking any kind of investing. If we had a large market correction/crash (ie 2008), id take every penny and dump it into the SM.

 

[Mman]

OK, I'll jump in again. I originally warned physicians against "active" real estate investments which means holding individual properties as a sole owner in fee simple. Apparently you have a bunch of real estate investments through partnerships and you are a limited partner in those partnerships. The income and/or LOSSES on your share of those partnerships are reported to you on a K1. All of these partnerships, apparently, do their business in your state of residence. Is that correct?

If I now have it right then the price you are being charged for your return (assuming you are well organized) is a normal price in a medium sized city provided you have not taken losses or partnership distributions in excess of your original investment plus reported earnings. If you are underwater then there may be at risk/basis limitations with those investments which might involve some tweaking of your return and therefore a higher prep fee.

My comments about the cost of filing a tax return had nothing to do with real estate.

 

[Obnoxious Dad]

My comments about the cost of filing a tax return had nothing to do with real estate.

My comments did.

 

[Mman]

My comments did.

I know. I disagreed with what you think a tax return costs. Unless you want to argue that real estate is insanely more complicated on taxes than anything else. But I didn't think you wanted to go there.

 

[Impromptu]

Bigger profits are made in real estate using leverage (debt) rather than cash. But bigger losses are also possible. Leverage could also be used in the stock market, but that is also risky.

I do not invest in rental properties due to a few reasons. The most important reason is that should I suddenly die, I want my wife to easily be able to pick up all of our finances, including investing the life insurance money. She knows where our 2 accounts are located and how to invest in a 3 fund portfolio, or even just an all inclusive portfolio. The most complicated item for her would be to do the taxes for our latest backdoor roth conversion, and she knows how to do that.

The second reason is that using the Bigger Pockets rules of thumb have not found me any good deals in my area.

The third reason is that "hustle" is a second job, and I have limited free time that I want to spend with wife and young children.

 

[AKMD_1984]

the only real estate 'investment' i have is my home. and even that is a money drain. Its a pain to manage my own home on going expenses - snow removal, landscaping, painting, appliances, etc...i cant imagine being responsible for it for someone else. Commerical real estate makes sense to some degree but that initial cost is high and also if you move from the area, you are stuck with a property that may take long time to sell.

Over long term, stocks will beat real estate (20 years plus horizon - similar to mortgage) with far less hassle, ability to stay liquid and have that money truly belong to you. i dont really look at real estate investing as investments simply because you own the mortgage, not the asset in a true sense - after you have paid off the property, you still have to pay taxes on the property. its an on going expense. if you are smart about stocks (not implying picking stocks - but keep index funds with little or no dividends in taxable and keep high dividend stocks in your HSA, 401K and Roth), the chances are you will still beat leveraged real estate simply because expenses are far lower.

 

[s109442]

Location, location, location.

 

[emergentmd]

You have to look past just the ROI of an investment. Lets assume 8% return in the market historically. Assume you have 100K to invest in a stock with 8% and didn't touch it, you would double it in 9 Years and have 200K. You pay 20% long term on the gains and you are left with $180K in your pocket or 80K profit.

These are real world returns on my investments that are typical. All of my properties are low maintenance b/c I hire a property manager

#1 Bought 2 duplexes at 150K each. Put 50K down on each about 3 yrs ago. My Yearly NOI is about 2.5K per duplex. So I have pocketed 7.5K and have paid zero taxes b/c depreciation. In 3 Yrs, the property is valued at about 215K. If I sold today and after all expenses to sell (15K), I would have 200K-100K (mortgage balance) and have 100K per duplex in my Pocket. After long term cap gain of 20% on 57.5K (depreciation cost basis) =46K. 46K+42.7K (cost basis) + 7.5K (NOI) = 96.2K x 2 duplexes = 192.4K in my bank.

SO in 3 yrs, I am ahead of a typical market run out at year 9. I don't need the money and want to avoid any taxes and do a 1031 into another property and avoid capital gains. So I essentially have 107.5K per duplex x 2 = 215K I can move to another property.

The value of real estate investment is
1. Leverage with a low down payment
2. Depreciation and thus avoid taxes on NOI
3. 1031 to avoid taxes
4. Property appreciation magnified byleverage. A 150K property with a 20% down cost only 30K. If property sells for after all costs fo 170K in 3 yrs, your 30K is 50K. A small % bump in value but a big % bump Equity multiple

Not to mention all of the business deductions you can take such as home office, dry cleaning, cell phone, etc.... You have a business now.

There are risk if you are leveraged and it all depends how risk tolerant you are.

If you want low risk, do bonds
If you want low risk, pay for real estate in cash - Dave Ramsey

The stock market has moderate risks and significant psychological burdens. When the Nasdaq dropped 70+% in 2001, how many people could sit and watch the knife continue to fall? Many sold off and never caught the upwave. Imagine 1 mil in your retirement down to 250K. The psychological strain is signficant.

Leveraged real estate has higher risk but less psychological burdens. If you put in 200K to buy a 1 mil home and the market tanks, you are down only 200K vs 750K with the nasdaq.

 

[emergentmd]

I also invest in Apartment syndications with a limited partnership

Invested in a property 3 yrs ago and 1st property I put in 100K.
8% preferred yearly = 8K - again no taxes as it is written off with depreciation/expenses
50% supplemental loan at yr 2 = 50K - again no taxes as it is off my 100K tax basis
Sold at yr 3 with 190K to me thus a 90K profit on my equity.

So after 3 yrs, my 100K is 190+50+24=264K or an equity multiple of 2.64x in 3 yrs. Fantastic investment. Again, I paid no taxes as I rolled it over to other syndications.

I also invested in a homeaway property. In year #1, I broke even but my mortgage/property tax was paid for. Plus I get to enjoy 6 vacations for free which would have cost me 15K to rent. Not a great monetary investment but a fantastic personal investment.

 

[urge]

You have to look past just the ROI of an investment. Lets assume 8% return in the market historically. Assume you have 100K to invest in a stock with 8% and didn't touch it, you would double it in 9 Years and have 200K. You pay 20% long term on the gains and you are left with $180K in your pocket or 80K profit.

These are real world returns on my investments that are typical. All of my properties are low maintenance b/c I hire a property manager

#1 Bought 2 duplexes at 150K each. Put 50K down on each about 3 yrs ago. My Yearly NOI is about 2.5K per duplex. So I have pocketed 7.5K and have paid zero taxes b/c depreciation. In 3 Yrs, the property is valued at about 215K. If I sold today and after all expenses to sell (15K), I would have 200K-100K (mortgage balance) and have 100K per duplex in my Pocket. After long term cap gain of 20% on 57.5K (depreciation cost basis) =46K. 46K+42.7K (cost basis) + 7.5K (NOI) = 96.2K x 2 duplexes = 192.4K in my bank.

SO in 3 yrs, I am ahead of a typical market run out at year 9. I don't need the money and want to avoid any taxes and do a 1031 into another property and avoid capital gains. So I essentially have 107.5K per duplex x 2 = 215K I can move to another property.

The value of real estate investment is
1. Leverage with a low down payment
2. Depreciation and thus avoid taxes on NOI
3. 1031 to avoid taxes
4. Property appreciation magnified byleverage. A 150K property with a 20% down cost only 30K. If property sells for after all costs fo 170K in 3 yrs, your 30K is 50K. A small % bump in value but a big % bump Equity multiple

Not to mention all of the business deductions you can take such as home office, dry cleaning, cell phone, etc.... You have a business now.

There are risk if you are leveraged and it all depends how risk tolerant you are.

If you want low risk, do bonds
If you want low risk, pay for real estate in cash - Dave Ramsey

The stock market has moderate risks and significant psychological burdens. When the Nasdaq dropped 70+% in 2001, how many people could sit and watch the knife continue to fall? Many sold off and never caught the upwave. Imagine 1 mil in your retirement down to 250K. The psychological strain is signficant.

Leveraged real estate has higher risk but less psychological burdens. If you put in 200K to buy a 1 mil home and the market tanks, you are down only 200K vs 750K with the nasdaq.

Sort of. You forgot your 3.8% Obamacare tax on investments.

And, do you think 215 appreciation from 150 is a normal market or a bubble, considering real estate barely outpaces inflation in the long run? Basically you are saying "if you buy and there is a bubble afterwards you make out big."

And, do you think in 3 years the 215 will have turned into 307, and in another 3 years 440? I don't think so. You have had great earnings now which means you will have no earnings for many years. You might want to cash out while you are ahead.

 

[Obnoxious Dad]

[QUOTE="Leveraged real estate has higher risk but less psychological burdens. If you put in 200K to buy a 1 mil home and the market tanks, you are down only 200K vs 750K with the nasdaq.[/QUOTE]

That ain't necessarily so. If you finance the home with a loan from a bank and you are personally liable on the note, your loss equals the drop in value from purchase to disposition plus or minus the cash flow in the interim plus or minus the tax impact. Almost all bank loans require the borrower to guarantee the loan. Bank examiners hate nonrecourse loans.

I'm sure that 20 years ago people thought investing in shopping centers was a can't miss proposition. People have to shop, don't they? What could go wrong? Well, look at the anchor stores at malls across the country. Sears and Shopko are bankrupt. JC Penney is hanging by a thread. The properties they sit in are becoming about as valuable as racquetball courts.

If people want to minimize their psychological burden, the way to go is a well diversified portfolio of stock and bond index funds with a bit of REITS thrown in. Make the mix age appropriate. Stop looking at the market everyday. You aren't going to beat it.

 

[Mman]

#1 Bought 2 duplexes at 150K each. In 3 Yrs, the property is valued at about 215K.

If you can buy real estate that rises 40% in value in 3 years, well let's just say that's like printing money no matter how you do it. Unfortunately that is extremely rare to do. It's like saying if you just buy this stock that will double in 5 years you will make money.

 

[HalO'Thane]

If you can buy real estate that rises 40% in value in 3 years, well let's just say that's like printing money no matter how you do it. Unfortunately that is extremely rare to do. It's like saying if you just buy this stock that will double in 5 years you will make money.

Do you have any guarantee that property will continue to rise 40% each year into your planned retirement? What was the property valuation of that duplex leading up to and after the 2008 housing crash? I do feel that we are due for another correction in the real estate market. Also remember that with higher property values come higher property taxes so unless you plan to sell your property or unless you can convince your tenants of the need to charge higher rent then that valuation is only worth the piece of paper it is written on.

Don't get me wrong, I have invested in real estate as well. My goal is not to beat the market but instead to diversify my income and to have a passive income stream in retirement. Hopefully with a well designed trust I can also pass it on to my son with the mortgages paid off. I doubt that many investments would have been as profitable as investing in an Amazon or Google in 2002.

 

[pgg]

You have to look past just the ROI of an investment. Lets assume 8% return in the market historically. Assume you have 100K to invest in a stock with 8% and didn't touch it, you would double it in 9 Years and have 200K. You pay 20% long term on the gains and you are left with $180K in your pocket or 80K profit.

These are real world returns on my investments that are typical. All of my properties are low maintenance b/c I hire a property manager

#1 Bought 2 duplexes at 150K each. Put 50K down on each about 3 yrs ago. My Yearly NOI is about 2.5K per duplex. So I have pocketed 7.5K and have paid zero taxes b/c depreciation. In 3 Yrs, the property is valued at about 215K. If I sold today and after all expenses to sell (15K), I would have 200K-100K (mortgage balance) and have 100K per duplex in my Pocket. After long term cap gain of 20% on 57.5K (depreciation cost basis) =46K. 46K+42.7K (cost basis) + 7.5K (NOI) = 96.2K x 2 duplexes = 192.4K in my bank.

[...]

The stock market has moderate risks and significant psychological burdens. When the Nasdaq dropped 70+% in 2001, how many people could sit and watch the knife continue to fall? Many sold off and never caught the upwave. Imagine 1 mil in your retirement down to 250K. The psychological strain is signficant.

Leveraged real estate has higher risk but less psychological burdens. If you put in 200K to buy a 1 mil home and the market tanks, you are down only 200K vs 750K with the nasdaq.

I don't disagree with any of the numbers you've printed. And kudos for acknowledging the risk that leverage introduces; most real estate investor advocates pretend that doesn't exist.

Where I think your argument is weak however, is in some other details.
- The 13% annual appreciation you've enjoyed is not normal and should not be expected.
- No acknowledgement of the risk of vacancy.
- No acknowledgement of the risk of significant repairs (e.g. roofing, broken pipe, etc)

My parent bought two rental properties in the mid-1980s. When those properties spent the next 10-15 year valued below their purchase price, there was a "significant psychological burden" associated with them. As I mentioned above, the house I live in right now is currently valued at less than what we paid for it in 2006 - we live in it so but if it had been an investment property a 12 year return of -10% (not even counting repairs, taxes, vacancy, etc) is a lot less compelling.

Leveraged investments do great when the asset appreciates. Investing with borrowed money is awesome when everything goes up! I wish I had borrowed from bookies, stretched the limits of margin, and rented my children to local factories so I could put everything into stocks in 2009.

 

[emergentmd]

Guys,

I know all the risks and all of the problems with buying rental properties. I have 7 and been through it all even with a property manager doing the vast majority of the work. My properties have done well because I did homework, know my local market, and was ready to buy when a good deal came b/c the good ones do not last long. My returns are true and have had to replace roof, HVAC, renovate units, etc.... This is the importance of buying a solid property that will not lose money if repairs are needed. I buy only when I see a very good deal. Not just a good one but a very good one.

My point is not to say that investment property is better than any form of investments. All forms has its pluses and minuses, otherwise everyone would just invest in the unicorn that is high return/low risks.

There are alot of issues with rental properties. Some people do not make money, many lose money.

The key is to do research, know your market, account for the unknown in your business plan. Also be able to live with the potential loss of investment. Don't invest if you can not afford to lose the money. Just as you should not go to vegas if you can't afford to lose the money.

That is why I am all about diversification. I am invested in stocks, rental properties, apartment syndication, my medical business facility, and still work to get a paycheck.

 

[emergentmd]

I don't disagree with any of the numbers you've printed. And kudos for acknowledging the risk that leverage introduces; most real estate investor advocates pretend that doesn't exist.

Where I think your argument is weak however, is in some other details.
- The 13% annual appreciation you've enjoyed is not normal and should not be expected.
- No acknowledgement of the risk of vacancy.
- No acknowledgement of the risk of significant repairs (e.g. roofing, broken pipe, etc)

My parent bought two rental properties in the mid-1980s. When those properties spent the next 10-15 year valued below their purchase price, there was a "significant psychological burden" associated with them. As I mentioned above, the house I live in right now is currently valued at less than what we paid for it in 2006 - we live in it so but if it had been an investment property a 12 year return of -10% (not even counting repairs, taxes, vacancy, etc) is a lot less compelling.

Leveraged investments do great when the asset appreciates. Investing with borrowed money is awesome when everything goes up! I wish I had borrowed from bookies, stretched the limits of margin, and rented my children to local factories so I could put everything into stocks in 2009.

Buying a house to live in is a money pit. Homesteads are money pits. We live in homes with nice fixtures, nice areas, with high property tax.

You buy investment properties in areas where rent/purchase price fits your business plans. You don't get that with homes you physicians typically will live in.

 

[pgg]

Buying a house to live in is a money pit. Homesteads are money pits. We live in homes with nice fixtures, nice areas, with high property tax.

You buy investment properties in areas where rent/purchase price fits your business plans. You don't get that with homes you live in.

Fair enough.

Still. Your example included 13% annual appreciation. 13%! You can't possibly think that's a number you can use to project future gains?

Vacancy risk. Local economic woes can make a property unrentable for an extended period, simultaneously destroying its sale value. Particularly for commercial property.

Repairs.

The risk of borrowing to buy an asset which can easily depreciate or stagnate in value for an extended period of time. (I know I know, "do your homework" and buy the right property ... same advice devoted stock pickers give.)

Transaction costs.

Renters in the not-nice areas don't care for your property the way you care for your property. One bad tenant can cause 10s of thousands of dollars in damages, pronto.

My parents had great tenants in one of their houses for something like 10 years. They eventually left and it turned out most of the HVAC ducting had to be replaced because it was impossible to get the cigarette stench out of the place.

 

[emergentmd]

My investment properties definitely has a high appreciation and high rent/value in my market. It was lucky to find them, but I was prepared and knew what were good values.

 

[Mman]

My investment properties definitely has a high appreciation and high rent/value in my market. It was lucky to find them, but I was prepared and knew what were good values.

But using that as an example is irrelevant for anybody making future decisions because it is not likely applicable to the math they will see.

 

[urge]

My investment properties definitely has a high appreciation and high rent/value in my market. It was lucky to find them, but I was prepared and knew what were good values.

You might be able to control the NOI, but the appreciation is just a gamble, which is where you have made the bulk of your gains.

Lucky indeed.

 

[emergentmd]

But using that as an example is irrelevant for anybody making future decisions because it is not likely applicable to the math they will see.

Like any investment, you have to put the time and gain knowledge. I would recommend only buying in the market you live. I would not buy anything until you just look for a year at what is available, you will figure out what is a good deal.

But research and knowledge is always required if you want to do any type of investment. If you don't have the time or want to get knowledgeable, then you are best to do index fund and be completely passive.

I know my investment will not go up at such a high rate but i am still sure it will go up b/c my place is still the low relative to the area and the City I live/buy in is one of the fastest growing cities in the country. No matter what happens, people will still have to rent and even if the housing market bottoms out, people still need a place to live and I will be able to weather the storm.

I think we have gone in an unintended tangent and that was not the purpose of my post. The purpose is diversify, many tax advantages with real estate investing, and leverage.

 

[dhb]

You might be able to control the NOI, but the appreciation is just a gamble, which is where you have made the bulk of your gains.

Lucky indeed.

No because you only put 20% down, the tenants are financing the other 80%. Even if the house loses 50% of it's value you're still not losing money (just making less if you sell).

 

[urge]

No because you only put 20% down, the tenants are financing the other 80%. Even if the house loses 50% of it's value you're still not losing money (just making less if you sell).

What?

You make no sense.

 

[pgg]

Should be required reading:

https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

 

[pgg]

No because you only put 20% down, the tenants are financing the other 80%. Even if the house loses 50% of it's value you're still not losing money (just making less if you sell).

What?!?

$100K house, you put down $20K, borrow $80K. Then if the house loses 50% it's worth $50K, and you still owe $80K on it.

Of course, if the local market has tanked so much that the house is now worth $50K, you won't be able to rent it for the expected amount, so in order to avoid outright vacancy, you'll have to lower the rent. So now you've got negative cash flow on an investment you've sunk $20K into, and are $30K underwater on the mortgage.

Not even counting the additional losses that would be realized if sold because of transactions costs.

I swear, real estate investing is surrounded by some kind of number distortion field.

 

[Mman]

I think we have gone in an unintended tangent and that was not the purpose of my post. The purpose is diversify, many tax advantages with real estate investing, and leverage.

As you say, we should get back to the topic. Real estate investing is unlikely to provide great returns long term, especially compared to stocks, but it can help diversify your investments depending on how much work you want to put into it.

 

[sbhfl]

I'm not in real estate-- mostly because the price hasn't been right on any of the properties I've seen. Looking to start, though! Perhaps there will be some opportunities in the future.

 

[emergentmd]

As you say, we should get back to the topic. Real estate investing is unlikely to provide great returns long term, especially compared to stocks, but it can help diversify your investments depending on how much work you want to put into it.

We will have to disagree. It is somewhat more complicated but since 1971 to 2017
S&P - 25x return
FTSE NAREIT Composite Index (Across all real estate REIT) - 68x return


If you just compare S&P vs housing market, S&P wins hands down but this does not account for rental income, tax advantages/deductions, ability to avoid taxes on sale, etc.....

I will look for some recent charts I read for the past 15 yrs but it compared the total US market vs Apartment vs mobile home parks vs storage facilities. US market was the worse performer with the highest volatility.

I am not a person who thinks real estate is the way to go, or stocks are the way to go.... There is no such thing. But if you discount real estate, then you are short sighted.

Let me give you a real example why I think real estate is good. I currently net about 300K/yr from my work.

I currently Hold 2.5 million in rental property. I owe about 1 million. My gross yearly rent for 2018 was 170K. Once I pay off all of my loan, my NOI will be about 100K which will be mostly Tax Free because of depreciation and Carrying costs. This is assuming rent will not go up in 5-10 yrs when I should have everything paid off. I will essentially have covered 1/3 of my income.
I currently hold 250K in apartment syndication with 8% preferred return. Assuming I do not get anything from supplemental loan/distribution or Sale, this is 20K yearly untaxed. If everything goes as planned, I hope this 250K will be 1 million in apartments in 10 years assuming I reinvest all distributions/sale of property. That will be close to 100K in income from preferred return in 10 years. This will be another 1/3 of my income untaxed.

So if I do not buy anymore properties, my rent doesn't go up, nothing appreciates then I will still have 2/3 of my current income covered. This is when I will retire.

 

[dhb]

What?

You make no sense.

Ok let's put it this way: if your house's value goes down to 0 you lose 20% if your stock goes to 0 you lose 100%.

 

[sbhfl]

We will have to disagree. It is somewhat more complicated but since 1971 to 2017
S&P - 25x return
FTSE NAREIT Composite Index (Across all real estate REIT) - 68x return

Not even close. 1971 to 2017 S&P 500 with reinvested dividends-- 98x - 110x return.
CAGR of the Stock Market: Annualized Returns of the S&P 500
S&P 500 Return Calculator, with Dividend Reinvestment - DQYDJ

 

[flightnurse2MD]

I’m a resident and bought a 3-bedroom house as soon as I found out where I matched. Closed in May and have been renting out my 2 other rooms to 3rd year medical students. It’s almost February and I still haven’t made a mortgage payment with my own money yet, but I do put an additional $250/month towards the principle. Other than the occasional dirty dishes left overnight in the sink- it hasn’t been half-bad dealing with these millennials. 🙂

 

[Mman]

We will have to disagree. It is somewhat more complicated but since 1971 to 2017
S&P - 25x return
FTSE NAREIT Composite Index (Across all real estate REIT) - 68x return


If you just compare S&P vs housing market, S&P wins hands down but this does not account for rental income, tax advantages/deductions, ability to avoid taxes on sale, etc.....

I will look for some recent charts I read for the past 15 yrs but it compared the total US market vs Apartment vs mobile home parks vs storage facilities. US market was the worse performer with the highest volatility.

I am not a person who thinks real estate is the way to go, or stocks are the way to go.... There is no such thing. But if you discount real estate, then you are short sighted.

Let me give you a real example why I think real estate is good. I currently net about 300K/yr from my work.

I currently Hold 2.5 million in rental property. I owe about 1 million. My gross yearly rent for 2018 was 170K. Once I pay off all of my loan, my NOI will be about 100K which will be mostly Tax Free because of depreciation and Carrying costs. This is assuming rent will not go up in 5-10 yrs when I should have everything paid off. I will essentially have covered 1/3 of my income.
I currently hold 250K in apartment syndication with 8% preferred return. Assuming I do not get anything from supplemental loan/distribution or Sale, this is 20K yearly untaxed. If everything goes as planned, I hope this 250K will be 1 million in apartments in 10 years assuming I reinvest all distributions/sale of property. That will be close to 100K in income from preferred return in 10 years. This will be another 1/3 of my income untaxed.

So if I do not buy anymore properties, my rent doesn't go up, nothing appreciates then I will still have 2/3 of my current income covered. This is when I will retire.

I would hope your stock portfolio is at least 4-5M if you have that much in property. If not you are probably doing yourself a disservice long term by giving up bigger returns.

As noted by someone else, your stock returns are WAY off. $1 in 1971 in the S&P became $114 by the end of 2018.

I'm not down on real estate. Like I said I think it can be a nice diversification. Just pointing out that over the long term there is essentially no way for it to beat equities for return. But diversification is good. I'm not anti-real estate.

 

[pgg]

Ok let's put it this way: if your house's value goes down to 0 you lose 20% if your stock goes to 0 you lose 100%.

No, if the house goes from $100K to $0, you lose 100% of the $20K down payment and you still owe the $80K you borrowed.

Same way you'd lose 100% of a $20K stock purchase if it went to zero.

If you're lucky the house stays rented, but it'll be at a lower than planned rate (the housing market collapsed, remember?). Now your monthly cash flow is negative and you lose more money. If you're unlucky the house is vacant and you lose much more money.

Note that the risks of vacancy and value loss are highly correlated. As housing prices drop, rents will drop too, but with a lag, making buying more attractive than renting, harming the rental market. At exactly the time you desperately need a tenant, there are fewer to be had.

Of course investments purchased with debt are great when the assets appreciate! But they're a disaster when they don't, and the common thread to every bright-eyed real estate investor is the assumption of appreciation. There is no way to massage the numbers or pretend these risks are offloaded to tenants, to change this immutable fact.

 

[dhb]

No, if the house goes from $100K to $0, you lose 100% of the $20K down payment and you still owe the $80K you borrowed.

Same way you'd lose 100% of a $20K stock purchase if it went to zero.

If you're lucky the house stays rented, but it'll be at a lower than planned rate (the housing market collapsed, remember?). Now your monthly cash flow is negative and you lose more money. If you're unlucky the house is vacant and you lose much more money.

Note that the risks of vacancy and value loss are highly correlated. As housing prices drop, rents will drop too, but with a lag, making buying more attractive than renting, harming the rental market. At exactly the time you desperately need a tenant, there are fewer to be had.

Of course investments purchased with debt are great when the assets appreciate! But they're a disaster when they don't, and the common thread to every bright-eyed real estate investor is the assumption of appreciation. There is no way to massage the numbers or pretend these risks are offloaded to tenants, to change this immutable fact.

You said the price of the house you live in is flat or slightly down over a 10y period but what about the rent it would generate?

 

[urge]

We will have to disagree. It is somewhat more complicated but since 1971 to 2017
S&P - 25x return
FTSE NAREIT Composite Index (Across all real estate REIT) - 68x return


If you just compare S&P vs housing market, S&P wins hands down but this does not account for rental income, tax advantages/deductions, ability to avoid taxes on sale, etc.....

I will look for some recent charts I read for the past 15 yrs but it compared the total US market vs Apartment vs mobile home parks vs storage facilities. US market was the worse performer with the highest volatility.

I am not a person who thinks real estate is the way to go, or stocks are the way to go.... There is no such thing. But if you discount real estate, then you are short sighted.

Let me give you a real example why I think real estate is good. I currently net about 300K/yr from my work.

I currently Hold 2.5 million in rental property. I owe about 1 million. My gross yearly rent for 2018 was 170K. Once I pay off all of my loan, my NOI will be about 100K which will be mostly Tax Free because of depreciation and Carrying costs. This is assuming rent will not go up in 5-10 yrs when I should have everything paid off. I will essentially have covered 1/3 of my income.
I currently hold 250K in apartment syndication with 8% preferred return. Assuming I do not get anything from supplemental loan/distribution or Sale, this is 20K yearly untaxed. If everything goes as planned, I hope this 250K will be 1 million in apartments in 10 years assuming I reinvest all distributions/sale of property. That will be close to 100K in income from preferred return in 10 years. This will be another 1/3 of my income untaxed.

So if I do not buy anymore properties, my rent doesn't go up, nothing appreciates then I will still have 2/3 of my current income covered. This is when I will retire.

You seem to be doing pretty well for yourself with RE.

I think if you want to help newbies maybe you can share your rules of thumb for selecting a good deal and how to secure an investment loan.

Edit:
I doubt you can overcome 100k NOI with depreciation, even for a 2.5M portfolio. I guesstimate you will have to pay taxes on at least half of it. Maybe even more if you bought cheap and have had a good amount of appreciation.

 

[urge]

I would hope your stock portfolio is at least 4-5M if you have that much in property. If not you are probably doing yourself a disservice long term by giving up bigger returns.

As noted by someone else, your stock returns are WAY off. $1 in 1971 in the S&P became $114 by the end of 2018.

I'm not down on real estate. Like I said I think it can be a nice diversification. Just pointing out that over the long term there is essentially no way for it to beat equities for return. But diversification is good. I'm not anti-real estate.

To each their own.

I know a successful bond investor who won't touch stocks. Can't tolerate the volatility. He likes real estate.

 

[Mman]

To each their own.

I know a successful bond investor who won't touch stocks. Can't tolerate the volatility. He likes real estate.

volatility is why stocks return so much over time

 

[emergentmd]

I invest in both the real estate and equity market. Diversification is always important. I am not an advocate of either but I understand the pros and cons of both. I am just pointing out where real estate trumps the equity market.

Most people can't handle the volatility, can't stomach when the Nasdaq dropped 80%. When you have $$ in stocks, and you can instantly look up the value, seeing it dropped large amounts is too volatile for many.
Buying/renting a piece of property doesn't have the same psychological effect. Even if real estate prices dropped 20%, someone is still renting your place.

Leverage at historically low mortgage rates is one of the biggest draws to real estate. It is essentially free money that someone is letting you use when accounting for inflation with all of the mortgage deductions.
You can leverage equity too on margin but at a much higher rate. Also if the equity drops, you have to either sell at a loss to cover or inject money. If your rental property drops, nothing materially changes and you can ride the downturn much easier than stocks.

You can look at history and say the S&P has outperformed the housing market by alot and no one will argue. But you are comparing apples to oranges.

Most of these homes, people live in. It is not an investment.

When you can put down 20K for a 100K home, and in 5yrs sell it for 110k (accounting for closing costs), you essentially have a 50% return not to mention the rental income/deductions. That 50% return in 5 yrs is about what the average market does.

Again, I am not here to argue which is better. When I first started investing, I thought real estate was a waste of time and time consuming for lower returns. The more I get educated, I feel real estate is a better long term investment especially for what my retirement goal is..... which is for rent to cover 2/3 of my current income.

If I had 5 million in equity with a high dividend structure at 5%, I would bring home 250K/yr or 200K after taxes.
If I had 5 million in real estate, I would conservatively bring home 250K/yr with likely more in my pockets after taxes.

The big difference is a market crash like 2001 or 2009 would make me go back to work after seeing that my retirement has 1-2.5 million left.

 

[Mman]

If I had 5 million in equity with a high dividend structure at 5%, I would bring home 250K/yr or 200K after taxes.
If I had 5 million in real estate, I would conservatively bring home 250K/yr with likely more in my pockets after taxes.

The big difference is a market crash like 2001 or 2009 would make me go back to work after seeing that my retirement has 1-2.5 million left.

If you had 5M in equity compared to real estate, the equity would be gaining much more in value per year than the real estate ( like double) and then 10 or 20 years later you'd have a much bigger value.

I'm not arguing you should only want to live off dividends.

And also, red hot real estate markets can occasionally cool off and drastically tank the worth and occupancy rates/rental income all at once. I know some folks in Vegas that went through a blood bath in 2008 in rentals. It's nice to be living off that rent until it's almost all gone at once and you have almost nothing else and 10 years later you still have less income than you had in 2007.

The point of diversification, especially as you get nearer/into retirement is that a market crash doesn't hurt you. You can live off the balances in things like bonds and cash until the equity portion recovers. Real estate can be part of that diversification. It just can't take the place of equities.

 

[nimbus]

Ok let's put it this way: if your house's value goes down to 0 you lose 20% if your stock goes to 0 you lose 100%.

No. Unless you declare bankruptcy, you still owe the bank the remaining 80% on the house. Leverage adds risk.

If you put down 200k to purchase a 1mil property and the property for some reason becomes a total loss, you still owe 800k to the bank. You’ve not only lost your initial 200k but you owe much more than your initial investment.

If you put 200k into a stock and it goes to zero, you’ve lost your initial investment but that’s it.

 

[acidbase1]

No. Unless you declare bankruptcy, you still owe the bank the remaining 80% on the house. Leverage adds risk.

If you put down 200k to purchase a 1mil property and the property for some reason becomes a total loss, you still owe 800k to the bank. You’ve not only lost your initial 200k but you owe much more than your initial investment.

If you put 200k into a stock and it goes to zero, you’ve lost your initial investment but that’s it.

But the scenario you’re illustrating is very rare. RE never goes to zero