Is Real Estate Investing Our Best Shot at Wealth? 13 comments
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By Eric Ames
Real estate has been a tremendous wealth builder over the years, but now that we are seeing record price falls is it still the best path to wealth? 91 percent of homeowners surveyed by real-estate-services firm Realogy Corp. thought that owning a home was the best long-term investment they could make, according to the Wall Street Journal. Looking at those numbers, it seems as though people still think that real estate investment is a good road to wealth, but what about the experts?
According to this article, most experts expect housing prices to level out over the next few years, and then regain a more historically balanced appreciation rate of between 2-4 percent per year. The tone of the article—which you should read if you haven’t already—seems to imply that real estate is not such a great investment, and certainly not the best path to wealth for Americans. After reading the article I agree with many points that were made, but I also think that they left out some huge pieces to the equation.
In the article Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley, advises that people should think of their own homes mainly as places to live, not as investments. This is wonderful advice: The house you live in is not an investment nearly as much as it is just a roof over your head.
Throughout the article the author evaluates the merit of real estate investment assuming solely that the “investment” is a person’s primary residence. Yet, when he interviews investors that talk fondly of real estate, they talk not about their primary residences but about rental homes they own. This is a huge difference, and I feel one that the author did a very poor job of differentiating. I agree that primary residences are a poor investment, but that is not their purpose. Rental housing on the other hand can be an incredible investment if managed properly.
I agree with the article’s point on real estate appreciation not being a reliable wealth builder. No one can predict which way prices will go next, and people should not rely on appreciation estimates when evaluating the worth of an investment opportunity. Investors should look instead at the cash flow numbers. Cash flow is something tangible, and it doesn’t require a call into the psychic hotline to predict.
In addition, properties that command better cash flow typically do not drop in price as much during market fluctuations. Dramatic price drops happen when people sell in desperation. They have to get out from under the house, so they drop the price until it sells. What motivation does an investor have to drop the price on their rental house if it is bringing in money every month? The answer is that they have very little motivation to do so, and so they probably won’t.
So while I agree that property appreciation shouldn’t be counted on anymore, that doesn’t make real estate a bad investment. Primary residences and rental properties are two entirely different animals and should be looked at independently when evaluating the merit of real estate as an investment. Investors can still make great money in the real estate market if they focus on the right things.
Is it the best path to wealth for Americans? I think the answer to that question is yes and no. I think it can be for the right person, who is willing to put in the time and energy. For the person who tries to cut corners, real estate investing is likely to be a painful and costly experience.
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You all have great points to debate. As a financial advisor specializing in evaluations and feasibility studies for real estate, we advise a well diversified portfolio, but a good portion can be in real estate (20-25 percent). Although real estate is technically an alternative investment in many books, I think it is fair to recognize real estate as a core asset class. Remove the home idea, it is not an investment. But let’s break down the economy and the total capital invested into real estate, it is a great deal of our GDP and the global economy, and a large portion of balance sheets. The trick is, to rely on professionals. I am not trying to tell others how to hedge their bets with commodities, evaluating companies, or timing the market, but when it comes to real estate: we know the details, every detail.
HISTORICAL DATA -- if used when making the real estate investment, historical data can be very helpful and insightful. In every market, there are ways to make money; in every market, you can exploit market inefficiencies. Through market intelligence (just like you would have in your due diligence) we make decisions. We are planning for mid-late 2009, it will present a wonderful time to get into the market at 10-30 cents on "today's dollar" in certain market locations.
GREED -- One of the biggest reasons we are all in this mess is due to the greed on Wall Street, many lobbyist and payoffs are/were going on to slick the wheels. The consumers were exploited, institutions did better. How did this happen? From builders creating a hyper-supply through building blindly – not knowing where the buyers would come from -- to severe market manipulation and misinformation: these corporations were not reporting correctly! These same national builders creating their own development, went vertical on construction, created their own mortgages, and then securitizing the instruments; they made significant profit all along the food chain. They knew exactly what they were doing, and took advantage of main street as long as they could, all while Wall Street profited. You will see more and more indictments coming down the pike within the next 3 years, just in time for these executives to be nailed before the 5 year statute of limitation.
IF’S -- The weakness of real estate is liquidity, so it is hard to track returns. However, “if” you can buy right (just like any investment), and “if” you can diversify product and geographical location, you are on the right track. By following leading and trailing markets you can chart the course. Then, if you can align yourselves with groups that have purchasing power and can buy with steep discounts, you are doing even better. “If” we can remember that commodities are the best bet for hedging against inflation, let’s not forget that real estate matches that inflation hedge -- in addition to the benefits from appreciation, tax benefits, capital expenditure/depreciati... coupled with income and capital gains potential, there are more ways to make money in real estate than to passively watch a stock. Real estate is a core asset. The Key if: find the right manager or operator, don’t waste your time with amateurs.
VALUE INVESTING -- There were many economists that predicted this mess in 2005, we sold assets at its peak and seemed to do fine. We are back at the value investing cycle as the Oracle of Omaha has demonstrated, specializing our core-competency in real estate. Again, our play like it was during 1991, 2000, is again to buy distressed and hold.
FOOD FOR THOUGHT: All the economists have said it’s all about dirt, not derivatives. Like anything else, get out when the market is hot. Pig’s get fat, hogs get slaughtered. Let’s all be a little more open, less critical, more understanding. When you associate with professionals in any market sector you can do well. Just find the best players for your team. Don’t throw the baby out with the bathwater. Know your variables, know the details. It is all about cash flow.
Like the author said, investors can still make great money in the real estate market “if” they focus on the right things. When you cut corners in anything, it will be a painful and costly experience.
Investment real estate is a good diversification option and it is favored by the US tax system (up to AGI $ 150,000 which is not bad).
Investment real estate is a good diversification option and it is favored by the US tax system (up to AGI $ 150,000 which is not bad).
I only got started about a year ago after stumbling onto deangraziosi.com, and the entire community was geared towards helping new real estate investors. Fortunately I have the liquidity to purchase real estate more than most new RE investors, and I approached the situation just like investing in equities.
I determined the technical indicators show this is a time to buy in certain cities/towns, I researched the fundamentals (jobs, growth, crime, schools, etc) and then started playing the numbers game getting properties at 30% off the current comps (yes, current, within a month or two max).
Not only do I have instant equity on these, they cash flow even while paying down the mortgage.
When it comes down to it, real estate doesn't evaporate like common stock does... and apples to apples... had you invested in real estate at the top you still wouldn't have lost as much compared to the Dow percent wise.
As a equities investor and casual trader I can say real estate can be sound. A lot of people and websites make it more complicated than it needs to be or really is. I was lucky to find some people online willing to do some hand holding when I started, but it seems hard to not be able to make a killing right now in real estate.
Again.. I'm not saying current list prices naturally mean it's a no brainer... I'm saying you can play the numbers game since there are some many REOs and find ridiculous low balled deals to the already slashed prices of homes.