thinking of real estate investing..

In reply to frenchyd :

ROI IS how much is in your pocket. There is no choice between $100k and $1k. They're similarly likely to both put the either $1k or $100k in your pocket (ROI) over a similar time frame. Your gross over simplification of the real estate investment is simply causing a $99k error in your ROI calculation, and over-simplification of the math is part of the actual returns for most real estate investors are not actually as good as they might believe...And if the returns you see are indeed better or worse than the other, it's largely because you chose to take an additional risk and make some type of speculative gamble, and either got lucky or unlucky in the process. But if you simply invest based on sound fundamental principles proven to minimize long-term risk, the "money in your pocket" will be similar between the two at the end of the day/week/month/year/decade/century.

In reply to Driven5 :

I’m a simple guy. I’ll admit, I’m pretty good at gross over simplification too. 

Mind trying to explain that better?  Honestly, I’m with Frenchy on this. But I’m willing to admit I’m kind of simple in this. 

If I have $10K to invest, and expect both RE and the market to increase by 10%, why is the return equal in the leveraged position?

The rate is 10%. 10% of $100K is more than 10% of $10K. 

Yes, I understand I am also magnifying the risk. But if the controlling factor is how much I have availble to invest, and I’m ok with the risk, how does the unleveraged position ever come close to the returns of the leveraged position? (in dollars) 

Because in general, RE makes money on rent (not appreciation of the asset), and stocks make money on appreciation of the asset. 

It's very unlikely that the value of a million dollar house appreciates at the rate of the stock market.

However, it's also very unlikely that the stock market will pay dividends monthly that approach the rent you can charge. So the two investments make money different ways. When all is said and done however, ROI on the initial investment is usually about the same.

Also (the large mistake) is usually you cannot buy a million dollar property with only 1% down. You're probably looking at more like 20-30% or 200-300k principal. So right there you're RE ROI falls to 100k on 300k, or 33%, not 100k on 10k (1000%).

Just so we're all clear here, you CAN leverage any stock market buys as well as RE buys. It's just not as common (nor required to make similar returns).

Also when you leverage something you need to pay the financing costs (mortgage payments). So make sure to include the interest you pay on the 700k during the year against your gain on the 300k.

I'm not willing to reveal further minutia of my personal experience in $ or % terms, but to me real estate investment complements, not replaces stock, bond or other types pf investments.  Also the ROI due of the increase in property value is of very much secondary importance to me.  I am looking at the monthly income from rent (minus expenses and maintaining a maintenance fund) as a chunk of my retirement income to complement my 401k, Social security etc.  Once the property is being managed for us it will be a semi passive income stream.  Ideally we will never sell the properties in our life time.  The LLC's that own them will be passed down via trust to our kids, one each.  Because of that you can see we care relatively little about the ROI based on property and or land value.  That could change if the market, economy, city etc. make a significant change in status, but even then we'd look at getting out of one property into another in a different location.  Nothing is set in stone, but that's how we view it.

Again, I have no interest in bashing, second guessing or criticizing other peoples views, opinions or experience, I'm just trying to help others with our example and thinking.  It may not work for others, but so far it's working well, and on track to continue doing so, for us.

In reply to SVreX :

I guess we're in agreement?   Granted over simplified but I'm not trying to be an accountant.  
 

Risk is what is always there.  If anything the market is more volital than realestate. Since values there change by the nano second in some cases. While housing is always going to be a need. 

In reply to Adrian_Thompson :

A well diversified portfolio is generally considered the soundest investment. Your real estate holdings as a supplement to other holdings should provide a secure retirement for you and future generations. 
Like any portion of your holdings constant attention is called for but likely not constant action. 

In reply to SVreX and frenchyd:

1) Long-term real estate appreciation does NOT even close to match the stock market rate of growth. The actual historical average is something in the neighborhood of 4%, BEFORE accounting for inflation, as opposed to the after inflation numbers previously provided for the stock market. Using the same rate of appreciation for both is heavily biasing your results in favor of real estate.

2) You have to pay interest and PMI on that $900k mortgage.That's probably something in the neighborhood of 4.5%-6% of loan value at today's (historically low) rates, plus another 0.5%-1% PMI since you're putting such a low percentage down.

3) You don't make any money on appreciation until you sell, and selling costs are significant. Expect 5%-6% of sale price for most transactions. 

So if it's only for 1 year, 10% appreciation will actually result in a significant NEGATIVE ROI if you factor in real world numbers and costs. Even if we bury our head in the sand and ignore #3, since it's a piper you won't have to pay until later or maybe you personally are Mr. FSBO, run the numbers again accounting just for #1 and #2. Notice that it absolutely kills your ROI. There are multiple reasons that investing for property value appreciation is considered speculative gambling in the real estate world. The fundamentally sound way to invest is to do so based on the rent performance, with any appreciation being icing on the cake.  If you do invest in a location that is appreciating at a significantly greater rate than the national average, you will also find that the rent performance for new acquisitions will typically not meet the standard performance measures (i.e. 1% rule) and will work to offset each other while adding investment risk.

Oh and the stock market assumption has to include that already contributing the $25k/year max into your tax advantaged accounts, and the $10k being invested in the stock market it in a standard taxable account. If you're contributing $10k or less to your tax advantaged accounts, an as such still have the ability to contribute it to them instead, the stock market numbers will improve significantly as well.

In reply to Driven5 :

I'm not arguing or disagreeing with anything you said, just a couple of comments.

1. We have never had PMI on either our personal or our rental properties.

2. Getting a loan for under 4% on an investment property right now is easy dead easy, even on a 30 year note (not that I'd do that long).  We're in the process of re-fing both properties right now so this is current info.

I know that many people do very well with real estate appreciation, but it seems like a total crap shoot to me. I'd only be comfortable considering it "gravy" on top of any RE investment, rather than a core component of it:

Who would have thought that the median home in the Dakotas or most of the deep south would have stronger appreciation after the housing bubble than the median home in CA, FL or the entire Northeast? Notice how Maryland has seen almost 10% decreases, Virginia has seen modest 4.3% growth while DC proper has seen nearly 35% increases right next door!

And it doesn't get any more consistent on the local level either:

In reply to Adrian_Thompson :

I'm also not arguing against real estate investing as part of a well balanced investment portfolio, nor specifically your personal seemingly well rationed approach. Thanks for the updated info on the ivestment loan rates, although that still basically just makes this overly generic example more of a break even at this particular moment in history. I would never consider putting little enough down on an investment property to require PMI either, but the example provided would necessarily required assuming one could even get financed for 1% down on an investment property.

Hi Driven5,

I bought a two-bedroom condo as an income property way back in 1982 when I was 18.

I did a lot of homework comparing real estate investing to stock market investing before pulling the trigger. I was very surprised to find that after taking tons of factors into consideration, the two investment categories produced extremely similar overall expected rates of return.

Then it dawned on me…most other investors had gone through a similar thought process as I did and whenever one investment category (say real estate for example) started to look more attractive, more money would flow in its direction. At that point, classic supply and demand would kick in and run up prices in that investment category until equilibrium was reestablished. Simply stated, whenever real estate (for example) is a better deal, investors compete with each other running up prices until its no longer a better deal.

FWIW, I did great on that condo…I held it for four years and after taking everything into consideration (purchase and sale costs, mortgage and tax payments, repairs, rent, etc.) I got a factor four ROI so I doubled my money each of the four years (not at a compounded rate, just linear though).

In reply to RX Reven' :

I noticed that when looking at some local commercial real estate for sale. When using the sellers' numbers for current income/expenses, and then 30% down and stardard interest rates, the ROI kept coming back at exactly 8%. I realized that sellers were using the 8% figure to set the asking price of their property!

Some folks are making this much too complicated. 

STM317 said:

I know that many people do very well with real estate appreciation, but it seems like a total crap shoot to me. I'd only be comfortable considering it "gravy" on top of any RE investment, rather than a core component of it:

 

Crap, I had a really long reply to this written out then the interntet/my computer/Chrome/the GRM site or a combination of all took a E36 M3 on me and I lost it.

To recap in far more brevity.  The 1.7% recovery for Michigan simply doesn't pass the sniff test.The rest of the country had the ‘great recession’ starting in 07.  Michigan was already in a depression by then.  Long before TARP and the auto bailouts Michigan was in a world of hurt and started shedding jobs early in the century.  The unemployment rate doubled in only three years from 3.7% in 2000 to 7.3% in 2003 then went on to pretty much double again hitting 13.7% in 2009 (source). 

I may not be able to speak for the whole State, but I’ve got a pretty good handle on the Detroit Metro real estate market, and as the Metro area accounts for 1/3 of the whole states population and is a pretty good bellwether for the rest of the State.  I also follow the Traverse City area and the Charlevoix, Petoskey, Harbor Springs areas pretty well in the NE lower peninsular.  Finally I have some good friends who've bought about 6 or 7 rental houses (I've lost count) in Grand Rapids, the next biggest housing area after the Detroit Metro.  The Travers City area was the only area not to loose population in the depression/recession but house prices certainly fell significantly.  Additionally the Charlevoix, Petoskey, Harbor Springs areas got hammered as enough properties up there were second homes that people walked away from that it destroyed the market there for a long time.  Don’t forget circa 2009 the National news was full of stories about houses selling for $1.  I have friends (the one I mentioned in Grand Rapids) who literally bought whole houses, outright, for cash using their credit cards in that time.  I wish I'd had the balls to do that too.  In that 07-17 time frame we bought our two rentals and we re-fi’ed our personal house I think three times.  The city of Detroit itself is approx 10% of the State population.  I know someone who bought a couple of apartments, a one bed and a three bed in Detroit.  Just a few years later they sold the one bed for enough to own the three bed free and clear.  I knew a couple of people at Ford who rented down in down town Detroit whos rent more than doubled from 2012 to 2015 meaning they had to leave the downtown area. 

I list all this to show I had a real time barometer of how prices were changing based not just on my own expereince but that of friends, family, colleges and the experience of buying and refinancing.  Allowing for the outliers my ‘gut’ feeling is that in the 07-17 time frame Detroit Metro houses recovered in the 40+% range.  Even if I'm a magnitude off on my thinking, 1.7% is simply pure farce in real world terms.

In reply to Adrian_Thompson :

07 was peak housing prices for many places before the bubble burst. Any cheap real estate after that fact, and the subsequent climb back, isn't what that map is showing. It's showing pre-bubble pricing, through the drop, and into recovery. So housing in 2017 was only 1.7% higher than it was 10 years prior, before all of the housing crisis in 2008-2009, not immediately after the housing crisis, which is likely what you're remembering.

Here's what Zillow shows for Michigan home values since 2010:

At its lowest, in 2012, the median home price was $95,900. By the end of 2017 it had climbed to $153,000, for an impressive 59% improvement. That sounds great right?

But that's not including the drop from 2007-2010, which was pretty significant:

If you've bought since 2010-ish, you've probably seen great appreciation. But If you bought in 2006, it probably hasn't been so hot. So, just like buying a single stock in the stock market, timing matters in real estate too. You want to buy low and sell high, but timing that is always a gamble. I do think it's probably easier for a person with local knowledge of a real estate market to successfully time a purchase or sale than it would be for them to time the stock market, and that's a huge advantage, but just like trying to time the stock market you can get burned too and getting burned with real estate can be more perilous and long lasting than stock.

In reply to STM317 :

I get what your saying, but notice I spend a lot of time talking about the state of the Michigan economy and housing pre the National crisis kicking off in 07.  Michigan house prices were already in freefall long before 07 hit, the freefall on housing probably started around 03-05.  While your chart only goes back to 2010, it looks like it starts with a median price around $100K, by 2017 it's pobably around $145K.  That would be in the region of 45%, which isn't far off my swag of 40%.  Admitidly prices fell from 07-10 (07 being the claim for the 1.7% and 10 being when the Zillow chart starts)  Let's say the median price in 07 was $105k, that then would be right on my 40% swag and magnitudes off the 1.7% stated earlier.  No matter what, the figures you are posting make my 40% swag a whjole lot more accurate looking than the 1.7% I was disputing.  I declare a win for me!!!!!!

In reply to Adrian_Thompson :

The drop in median home prices in MI started around 06 according to the charts above from the Michigan Association of Realtors, and the Federal Reserve. (If those aren't good enough sources, I'm not sure what to tell you. Maybe your gut is right, and they're wrong...)

Anyway, the median home price in 07 looks to be around $140k to me. If true, that's a $13k gain (1.09%) in 10 years. From 12/21/07 to 12/15/17 the S&P 500 gained 80%.

In reply to STM317 :

I don't think so, what I'm saying is the figures you are providing in your post at 1:37pm are much closer to my 40% (call it 25-55% if you like) belief than the 1.7% in the National chart you posted at 10:12am.  I think we're in violent agreement here!

Here's some for my and others experiences I learned over the years.

1. Don't overlook Singlewides as a potential flippers. I'm fixing up one right now as I'm living in it to be rent to own.

2. Mobile home parks are very good investments IF you don't own any Trailers, other than the singlewide you live in.

3. Noticed I didn't mention Doublewides. As much as they cost, better off buying a small house. Which leads into....

4. The smaller a single family home, the more potential of a long-time renter.

5. Duplexs and such are another rental properties I like. However, They usually don't go up in value per square footage like a single family home, only because they are design for quick income. Of course it's a generalization.

6. Stroage unit are great in or near an urban area.

7. If you don't want to fool with working in real estate while still wanting to profit from it, Check out REITs.

It's always funny to watch people saying stuff "can't be done" to the people that are doing it....

You can come up with all kinds of reasons why RE investing is bad and/or won't work, but there are a lot of people building wealth that way. 
 

How many people in this thread saying it is a dumb investment, are renters?

Steve_Jones said:

It's always funny to watch people saying stuff "can't be done" to the people that are doing it....

You can come up with all kinds of reasons why RE investing is bad and/or won't work, but there are a lot of people building wealth that way. 
 

How many people in this thread saying it is a dumb investment, are renters?

I’m not sure anyone is really saying it’s a dumb investment. At least I’m not. I’m just saying that at the levels of time commitment and [initial] capital investment that I and probably most individuals in this thread can lay down, it isn’t going to be as good as the stock market. 

If you have large amounts of capital, or you can time the real estate market right, or you make it a full time job, or you can leverage it in another way (i.e. rent a house instead of selling it when moving or renting 1/2 of a duplex and living in the other) it can be an excellent investment. But all signs right now for the country in general are pointing to it being a worse investment than the stock market for the average investor. 

In reply to FuzzWuzzy :

Have you look into REITs?

A lot of the discussion about general house price increases does not take into account what I said earlier: comparisons to owner occupied properties are invalid. Rentals sell as rentals to other investors, and the prices reflect that. You do not get the same annual growth in value from a rental that you do an owner occupied house.

In reply to Steve_Jones :

Nobody's said it can't be done. The most we've said is it doesn't make the enormous returns that people think. It's *shock* more in line with other investments.

Perhaps you missed the part where I'm a full time landlord. And I'm on the side of saying, oh, about 8% is realistic. If you're lucky. A lot of small time landlords make more like 3%.

I will say, at least it's something - even at 3% you're doing worlds better than the guys that buy high and sell low in the stock market or blow all their money on booze and expensive meals.

@Frenchy: Yes, stocks can go down and you can end up having to sell in a pinch. However, you have those same life emergencies as a landlord, only now instead of an asset you can click a single button on and sell with zero costs involved you have illiquid immobile assets with high transaction costs. Banks aren't going to loan you money on them when you're in a personal financial emergency. If the stock market is down then the economy is probably slowed as well so selling the house(s) will be difficult or impossible. The bills on the houses don't stop just because you're in a crunch. So instead of losing some money selling stocks you now might face bankruptcy and losing everything including the rental houses, your personal residence, etc. Leverage cuts deeply when you're on the wrong side of it.

In reply to Adrian_Thompson :

I also think that 1.7% is not believable. Housing prices around here are enormously up since 2007, there's no question. I am not going to bother doing any research and instead agree and say that 40% feels right. But still even at a 40% increase and adding in the income return it isn't going to match the corresponding 80% return from the stock market. 40% in 10 years is less than 4% per year, barely above inflation, which is what I've said real estate tends to appreciate at. Compound growth over decade plus time periods tends to yield high numbers, that's always the case.