Real estate in ERE

[Seppia]

Please don’t take my one single data point as actionable information.

[Ego]

Investing in real estate is weird.

Mortgages are amortized so that the interest is front loaded. In 2021 the average US homeowner sold their home after 6.3 years. Someone who bought a home with a 30 year, $100K mortgage still owed $91K after 6.3 years, yet they paid the realtor a commission (about 4.5-6%) on the sale, plus they get taxed on any gain if they do not reinvest in real estate again right away.

If they rented out the home to tenants they exposed themselves to unlimited (uninsurable) liability for certain risks (mold, lead paint, handicap accessibility) in a world where there are law firms that do nothing but troll for nuisance suits against small owners in each of those areas.

Many who own the home longer than 6.3 years refinance and restart the skewed amortization schedule. Every time I hear someone say that they refinanced their home to save $211 a month, my head explodes.

But I am talking my book, as they say.

Granted, EREers are different. Some here have had success buying modest homes with cash that they never intend to sell. That can work.

[Laura Ingalls]

@Ego
I hate to be the defending home ownership because I think it is greatly overrated. I have also had the life experience of owning a house for 11 years and selling it for less than I bought it for.

However, in the same six year timeframe you described the median home price went from ~$180k to ~$350k. Again using this mythology median homeowner he, she, they would have no capital gains taxes as they lived there 6 years. They would have~$209 to use for whatever purpose they wanted.

The crux of the issue is that ownership often requires more house than ERE minded person wants and historically just holding the American stock market has had better returns (although both have been a bumpy ride.)

[Seppia]

On the positive, as MI said, housing is a great defensive asset.
Small and paid in cash, my tiny Italian apartment is the perfect SHTF shelter

[bostonimproper]

The best things about real estate (in the US) are 1/ the many tax benefits (write off everything including depreciation, 1031 exchanges, step up basis when you die) which means the government effectively paying you thousands a year to own the property and 2/ an ability to get cheap, fixed interest leverage in large quantities at relatively high loan to value. This allows people to acquire a large amount of assets to put under their control and allow to appreciate without needing to accumulate and put it in much capital of their own. My two cents, anyone paying all cash for a rental— that’s not planning to refinance to pull out their capital— is doing it wrong (at least in the current low interest rate environment, modulo cases where getting a conventional loan is difficult/impossible).

Assuming you pick a not-dying metro region, have a 15-20+ year horizon, and find a cash flow positive property, consistent real estate investment historically been a pretty “easy” way to get to seven or eight figures (“easy” as in it doesn’t take any amount of cleverness and only an achievable amount of luck to make happen). Prolonged inflation is also a boon as it gives you tailwinds, both causing nominal values to rise and reducing the effective cost of your mortgage.

On the other hand, landlording comes with a lot of headaches. Finding reliable tradespeople is expensive and difficult, so you better enjoy fixing stuff yourself. Renters are also stereotypically harder on properties than owners, so more things break. Also a lot of cities are passing more renter friendly laws, including the eviction moratorium over the course of the pandemic, so there are some cases where you might be left with a non-paying tenant for months (or years).

Certainly a lot less passive than just throwing some money in your Vangurd account, where it flows to your default allocation, and calling it a day.

[chenda]

Please don’t take my one single data point as actionable information.

Yes I'll be doing plenty of research first. I'm not looking to spend lots anyway, just a field up north or something.

[chenda]

On the positive, as MI said, housing is a great defensive asset.
Small and paid in cash, my tiny Italian apartment is the perfect SHTF shelter

Yes outright ownership definitely gives a great deal of security.

[Sclass]

Rather than wonder which is better than the other I’ve thought about it a different way. I mentally tabulated my older wealthy friends and looked at how they made their money. Stocks or land? I tried to focus on track record rather than tabulating the benefits of each.

I look back at the wealthy people I know IRL and try to tabulate how many people made how much money in what. The overwhelming number of wealthy people in my family’s circle made their money in stocks. There may be a selection bias there.

A small handful had rental empires. Those people were highly skilled at collecting, managing and cycling property. When I look really hard at their holdings I believe they constantly churned their land or financing for tax purposes. They also followed markets around the country. For instance one started in LA in the 60s, then converted the empire into Riverside properties in the 80s, went to the Gold country in the 90s and finally finished out (deceased now) in Las Vegas the turn of the century. It was a machine. Not comparable to owning a few million in stocks.

There were a couple of others where commercial property and apartments helped seed the creation of other more lucrative businesses. They weren’t just property people at the end of the day. It was one of their big tools.

Besides those few most of my wealthy friends made their money in stocks. I’m not sure why but I’m leaning to it possibly being easier. I certainly wouldn’t dare build a property management machine the magnitude of my stock holdings.

[take2]

I think RE is generally overrated by the majority of people, mainly because they confused personal housing (which is a consumer good) with investments.

However, I think it’s generally underrated, or at least an overemphasis on the negative aspects of what can go wrong on the ERE forums.

Personally I see owning your own home as a defensive SHTF (per Seppia) rung in the overall FI ladder. It’s above the basics of eliminating debt and building multiple income streams, but below being truly FI where passive income exceeds expenses.

Beyond that it’s quite personal as to using investment properties as the primary means to build passive income (vs stocks or your own business). If you live in an area where the numbers work, and you enjoy the type of work then go for it. If not then it’s probably not going to work out well.

Above the FI rung of “passive income exceeding expenses” I think RE can play a new role in diversifying ones portfolio (and vice-versa for stocks if RE was primary wealth vehicle). And beyond that it can play a larger role if you’re aiming for generational wealth. Time is generally on RE’s side if you’re leveraging properties.

I think for most here once passive income exceeds their (low) expenses there isn’t much of a push or reason to expand financial capital further. Generally the view of this forum is to work on other things outside of financial capital.

For others that’s likely not the case - forums such as Bigger Pockets focus exclusively on building wealth via RE.

[Sclass]

I think RE is generally overrated by the majority of people, mainly because they confused personal housing (which is a consumer good) with investments.

This is a really important point. It’s touched upon in this thread. Owning a single family home and investing the majority of one’s capital in it while living in it is a completely different thing than building a rental property empire. It’s easy to get them confused.

[jacob]

Personally I see owning your own home as a defensive SHTF (per Seppia) rung in the overall FI ladder. It’s above the basics of eliminating debt and building multiple income streams, but below being truly FI where passive income exceeds expenses.

Like this, https://www.youtube.com/watch?v=y6yCmdIkw_E

[Ego]

Like this, https://www.youtube.com/watch?v=y6yCmdIkw_E

Can't argue with the value in that, but most people (even many here?) must invoke the Yuppie Nuremberg defense to get there. https://youtu.be/UrHA9wWuuMo

[7Wannabe5]

Even if you own your own home outright, you still can’t say fu to the enforcers of the ordinances related to weeds , DIY backyard saunas, and your decision to walk along the path through the weeds to your sauna in the buff.

[theanimal]

There are places where you can do as you please, no code and therefore no code enforcement. It may involve living in a place that most would deem undesirable though. I'm not sure if there are such places in the US outside Hawaii and Alaska.

[Laura Ingalls]

My current county has no building code if you are zoned agricultural. This requires one to have a 20 acre parcel. The exception is that your septic must be inspected before you backfill it with dirt.

While I wouldn’t consider the most awesome place ever this system doesn’t produce an excessive number of unsafe @$!&holes. We have decent services (schools, libraries, fire/EMS).

[prudentelo]

As others point out investing RE is much more like job like "fund manager but with own money" than stock investing which is "passive".

I think it is actually excellent job for ERE, combining many useful skills with high, uncapped, scalable (non-salary) earning potential, importantly with much more achievable barrier to entry (to actually have situational edge, not just credential gatekeeping) than stock fund world, and more return from "skill' than "sales".

But mostly people who discover ERE already salarymen. Do not want second job, want to maximize the passive returns on the salary income.

"Go into RE industry" is good advice for very young (college or pre-college) ERE enthusiast.

[7Wannabe5]

@the animal@Laura Ingalls:

Yeah, it has also been my experience that there are fewer regulations and less enforcement with lower population density. If/when I recover my health, I am going to relocate above the 45th parallel.

[chenda]

@the animal@Laura Ingalls:

Yeah, it has also been my experience that there are fewer regulations and less enforcement with lower population density. If/when I recover my health, I am going to relocate above the 45th parallel.

Have you decided where yet @7 ?

[MBBboy]

There are places where you can do as you please, no code and therefore no code enforcement. It may involve living in a place that most would deem undesirable though. I'm not sure if there are such places in the US outside Hawaii and Alaska.

Of course there are. Not having an HOA is all you need to avoid 90% of issues. The DIY sauna part is the only iffy one, but also easy to avoid by living in cities that don't micromanage their citizens

[theanimal]

Yes, though I'm talking about places with no code at all (or just septic inspection as Laura Ingalls) suggested. Places where you can build any kind of house (however big, tall or small you desire) out of any kind of materials you want, no questions asked, no permits necessary. My area is similar to Laura's, with less regulation and enforcement. There are some junk properties, where people have yards full of rusting and decrepit cars/trash/machinery, but on the whole, the houses are largely structurally sound.