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Poll: Do you invest in real estate?

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  • fatlittlepig
    replied
    CREGuy are you a doctor? I don’t know of any doctors who decide one day they want to spend their precious free time learning how to manage and invest in commercial real estate.

    Leave a comment:


  • CREGuy
    replied
    Originally posted by FIREshrink View Post
    Take your example of a WAG or MCD property. Again I ask, if it’s as simple and risk free as you say it is, wouldn’t the smart money already have moved into the market, bid up the prices of the properties, thereby diminishing the ROI? How can such an easy, low risk, high return investment persist in an efficient market, especially when the risk free rate is currently under 1% nominal (and negative in real terms)? Why haven’t private equity firms and hedge funds and endowments and foundations seized on the obvious easy money and moved en masse, closing off this lucrative opportunity for retail investors?


    Obviously if someone presented me with a low risk, low effort, high return investment I’d be all over it. So let’s partner up, we can lever up 2x rather than x and increase our ROI sixfold, rigth?
    The same reason that you could ask, if I can get 8% historical returns in the stock market, who is selling? These opportunities hit the market for a number of reasons. Sometimes it's a REIT that's trying to reposition a portfolio. It could be a private seller raising capital for another venture. It could be someone just inherited the property and wants to sell for the step up basis. Sometimes it's a sale leaseback, where a company is trying to unlock capital that's tied up in real estate producing nominal returns and put that capital to work in their operations where their ROC is 10 fold. It could just be that the seller simply wants to sit on a pile of cash. Also to your point, the hedge funds, family offices, endowments, foundations, and private equity do have MASSIVE allocations to real estate. Go look at Blackstone's balance sheet. The majority of their revenue comes from RE. It's a 60 Trillion dollar asset class, it's impossible to corner the market.

    In addition to the existing stock of these assets, you also have developers out building new assets every day. I am one of them. I sell the majority of my developments upon completion, simply because I have a pipeline of projects that requires additional capital, so I sell my projects after completion, take the proceeds and start on a new project.

    I would ask this question, what is it that you think the REITs are out there buying? They're buying Dollar Generals, Walgreens, CVS, Starbucks, Industrial Facilities, Data Centers, Storage Facilities, McDonalds, MOBs, etc. The difference between you doing it directly and simply buying a REIT is that they do all the work and allocation, add a monstrous layer of expenses via management, salaries, bonus, etc. and pay you what's left. Again it's not to say that makes it a bad investment, but I'm not sure why there are so many that are skeptical that skipping the middle men (REITs), wouldn't produce vastly larger returns. I do agree that it does take some work in educating yourself to make informed decisions and jump into those types of assets, and depending on how large your portfolio is, it can become a bit of a job. However, you can say the same thing about stocks. How much time have you spent educating yourself so you can understand how to allocate your portfolio, financial planning techniques, tax consequences, so on and so forth?

    Leave a comment:


  • EntrepreneurMD
    replied
    Yes FIREshrink so why are they naysayers in the first place when the most successful people in our society have more of their wealth in real estate/personal business (as you made the connection) than they do in the stock market? Thumb our nose at success or learn to mimic it? They engage in all 3 revenue generating ventures for true diversification - markets, RE, personal business. Many doctors don't get their "fair share on wall street" because they settle for average returns but also because more are becoming employees rather than employers, and don't understand the fundamental value in RE investment.

    The logic: "It takes work, so don't bother." Then why do you all...work? It's less work than work. I earn more in my real estate investment annually than many of my colleagues earn working, with the add benefits of RE "business" write offs that employees don't get. I have someone manage the property for me. When I retire from my career, it will continue to give me, dollar for dollar invested, better dividends than the stock market does. I will still contribute to society by supporting those tenants that don't have the resources for the RE investment. For legacy purposes, it can support my kids if they choose to become physicians and/or business owners. The RE can be passed on to them at the stepped up tax basis at the time of our death, in addition no need to worry about the loss of the stretch IRA, no taxes are not paid on RE appreciation until sold. It has a built in stretch tax advantage - indefinitely for my kids - that you don't have with tax advantaged stock portfolios.

    Lot's of considerations beyond "it takes work". Nothing in life is free my friend. With property management, as you requested it can be a great blend of "low risk, low effort, high return investment".

    Leave a comment:


  • FIREshrink
    replied
    I don’t think the naysayers are dismissing the returns of real estate investment. Rather they tend to argue that the returns are not a free lunch: managing real estate is much different than managing a stock/bond portfolio. It takes effort; work; to some extent it becomes a business itself, even a job. It’s not just a pure investment. You even conceded that a property is not like a stock investment, where you ‘buy it and hope for the best.’ No, ‘With direct RE investment, you have control. You can improve the property, you can redevelop a property, you can restructure a lease, etc.’ This takes work. This takes time. This takes effort, and knowledge. I can also invest those resources into another industry (hey... what about medicine?) and make more than stocks, but it’s not a pure investment: it’s a business.

    Take your example of a WAG or MCD property. Again I ask, if it’s as simple and risk free as you say it is, wouldn’t the smart money already have moved into the market, bid up the prices of the properties, thereby diminishing the ROI? How can such an easy, low risk, high return investment persist in an efficient market, especially when the risk free rate is currently under 1% nominal (and negative in real terms)? Why haven’t private equity firms and hedge funds and endowments and foundations seized on the obvious easy money and moved en masse, closing off this lucrative opportunity for retail investors?


    Obviously if someone presented me with a low risk, low effort, high return investment I’d be all over it. So let’s partner up, we can lever up 2x rather than x and increase our ROI sixfold, rigth?

    Leave a comment:


  • CREGuy
    replied
    The main difference with your analogy between direct RE investment and stock picking, is control. There is nothing you can do to influence the value of a stock. You buy it, and hope for the best, you hope that you identify an opportunity and eventually that thesis plays out in the market. With direct RE investment, you have control. You can improve the property, you can redevelop a property, you can restructure a lease, etc. Perhaps these aren't things that are achievable if you're a novice, and don't have the time or desire to commit to learning the industry. Again it's not for everyone, and for a lot of people, a REIT is good enough and frankly, their best option if they don't have the wherewithal or desire for direct RE investment.

    Your hotel project is probably not a great example. Hospitality assets aren't really an example of what I'm talking about. Hotels are as much of a business venture as a real estate investment. You have to build it, market it, operate it, your cash flow fluctuates based on occupancy and operations, you have a large staff, maintenance requirements etc. That's not the same thing as buying a Walgreen's or McDonalds with a 25 year absolute net lease in place where I can tell you exactly what your cash flow will be every year for the next 25 years (provided neither of them file bankruptcy in the next 25 years, which again can be fairly well underwritten), and you have zero responsibilities outside of walking to your mailbox to pick up your check every month.

    You are correct though in that the more knowledgeable one is in regards to a specific property or market, the more likely they are to see outsized returns. It's like any other venture, the better you are at something, the more money you will make. The more information you have, the easier it is to make a good decision. Again, it's not necessarily for everyone, but it's interesting how often the naysayers rarely ever seem to have any actual experience to draw their conclusion from.

    Leave a comment:


  • FIREshrink
    replied
    Originally posted by CREGuy View Post

    It's about the lease structures. You own a bunch of houses. Your leases are year to year at best most likely, and the underlying cash flow is backed by someone who likely doesn't make a lot of money, and their ability to pay is dictated by whether they have a job or not. There's nothing inherently wrong with that, but it makes for a wildly unpredictable cash flow and return. Add to that, that you're responsible for maintenance on the property, property taxes, insurance, etc. all of which fluctuate, making your cash flow even more unpredictable.

    In commercial real estate, there are plenty of opportunities to pick up triple net leased properties, or even absolute net properties where you have extremely long lease terms, the tenant is responsible for all of those variable expenses, and your cash flow is very predictable over a long time horizon. It could be an office building, retail, industrial. It could be single tenant or multi-tenant. There are still risks. In the event of a single tenant deal, obviously you need to underwrite the strength and health of the company guaranteeing the lease. In some cases this is pretty easy, when you have a publicly traded company who already has a debt rating from Moody's. In other cases, where you're dealing with a private company or franchisee, it may take a little more digging. In the event that you don't properly underwrite a deal and it goes bad, you can end up in a bad situation, especially on a single tenant deal. That obviously carries a bigger risk and re-letting the building will be more difficult and costly. The above risks can be further mitigated if you have a portfolio of various properties, where if one deal goes bad, your cash flow is diversified enough to keep you afloat until you can get things straightened out. That brings in the biggest problem though, that these types of deals require significant capital to acquire. That makes it difficult for smaller investors to A) get their foot in the door and B) get enough diversification to get comfortable. That's why you see syndications and now crowdfunding however, so you can pool a smaller amount of capital together with others.

    You can also go out and buy publicly traded REITs. There's nothing wrong with that, however, you're also adding layers and layers of fees, management, etc. between you and the end product. However, it's easier, more liquid, etc. But, You also have no control over what they're buying, how they're running it, and there is no opportunity to add any value. In my experience REITs and any form of direct RE ownership are really two different completely different asset classes. There are just too many inherently different characteristics to compare.

    Look, it's not for everyone, but if you go look at a list of billionaires, and see where they made their money, a large chunk of them did it through real estate, and none of those people did it through simply going in their brokerage account and buying a REIT. You'll also see the same significant allocations to direct CRE ownership in most portfolios of HNW individuals and family offices.
    The idea of a REIT index is that, just like stocks and bonds, the average investor does not create alpha and is better off buying an index. Direct property investment seems like individual stock ownership. Some will do well, but on average performance will be average.

    In the past, stock investing was expensive and passive investing was difficult. Now it's both cheap and easy to invest in index funds. Buffett made a huge fortune investing in stocks (businesses) moreso than in real estate, of course his conglomerates are complex and own both. Sure some make a fortune in real estate, but thank you for acknowledging that there are risks, and that some effort is required. In an efficient market the risk adjusted return should not be more or less than that for stocks. TINSTAAFL.

    Maybe the key is investing in small, somewhat niche markets where you have a competitive advantage through inside knowledge of the industry or local market conditions. I'll concede that real estate is hyperlocal and therefore much less efficient than, say, the US stock market. Thus like Entrepreneur MD, investing in your own medical offices is not exactly an efficient competitive market.

    I looked at investing in a hotel as part of a waterfront development in my town. In the end it seemed highly speculative. I had no inside knowledge of the industry and no specific connection to the developers. I was just cash. I can't imagine that has a better risk adjusted return than buying VTI or VNQ.

    Leave a comment:


  • CREGuy
    replied
    Originally posted by dennis View Post

    You give a 30 day notice that they have to vacate, but not because of lack of payment. When they don't move you can then evict because they are there without a valid lease. The moratorium is for lack of payment and other reasons for eviction are still allowed. If they are there without a lease they are squatters.
    Like I said, it depends on your jurisdiction I suppose, but while it sounds like a good work around, I'm not sure it will hold up in court. In addition, the moratorium goes through the end of the year. By the time you put a tenant in on a MTM, they don't pay rent, you give them notice, then go through the eviction process, I'm not sure you're really accomplishing a whole lot, other than opening yourself up to your tenant bailing on a MTM lease. Of course if they continue to extend the moratorium it may be worth it, again assuming it would hold up in court.

    Leave a comment:


  • CREGuy
    replied
    Originally posted by FIREshrink View Post

    I'm sympathetic to this viewpoint but something doesn't entirely make sense to me. In an efficient market it would not be possible to continue to make outsized returns in an asset class (real estate) without some higher risk. I have understood that risk to be concentration in a single property or small number of properties, and the risk of hassle. To reduce these risks, get more properties which then makes it worthwhile getting a manager. And at the extreme level of owning multiple commercial properties, you're just talking about a REIT. So explain this utopian world where you own enough real estate that the risks and hassles are very low, but the returns much higher than the stock market or the REIT market. And also explain why this outperformance persists seemingly in contravention to the EMH.

    i am part owner of 9 doors, residential. The returns are ok. I'm not getting rich off them. Even with property managers there are phone calls to take, emails to answer, decisions to be made that is not true of my Vanguard portfolio.
    It's about the lease structures. You own a bunch of houses. Your leases are year to year at best most likely, and the underlying cash flow is backed by someone who likely doesn't make a lot of money, and their ability to pay is dictated by whether they have a job or not. There's nothing inherently wrong with that, but it makes for a wildly unpredictable cash flow and return. Add to that, that you're responsible for maintenance on the property, property taxes, insurance, etc. all of which fluctuate, making your cash flow even more unpredictable.

    In commercial real estate, there are plenty of opportunities to pick up triple net leased properties, or even absolute net properties where you have extremely long lease terms, the tenant is responsible for all of those variable expenses, and your cash flow is very predictable over a long time horizon. It could be an office building, retail, industrial. It could be single tenant or multi-tenant. There are still risks. In the event of a single tenant deal, obviously you need to underwrite the strength and health of the company guaranteeing the lease. In some cases this is pretty easy, when you have a publicly traded company who already has a debt rating from Moody's. In other cases, where you're dealing with a private company or franchisee, it may take a little more digging. In the event that you don't properly underwrite a deal and it goes bad, you can end up in a bad situation, especially on a single tenant deal. That obviously carries a bigger risk and re-letting the building will be more difficult and costly. The above risks can be further mitigated if you have a portfolio of various properties, where if one deal goes bad, your cash flow is diversified enough to keep you afloat until you can get things straightened out. That brings in the biggest problem though, that these types of deals require significant capital to acquire. That makes it difficult for smaller investors to A) get their foot in the door and B) get enough diversification to get comfortable. That's why you see syndications and now crowdfunding however, so you can pool a smaller amount of capital together with others.

    You can also go out and buy publicly traded REITs. There's nothing wrong with that, however, you're also adding layers and layers of fees, management, etc. between you and the end product. However, it's easier, more liquid, etc. But, You also have no control over what they're buying, how they're running it, and there is no opportunity to add any value. In my experience REITs and any form of direct RE ownership are really two different completely different asset classes. There are just too many inherently different characteristics to compare.

    Look, it's not for everyone, but if you go look at a list of billionaires, and see where they made their money, a large chunk of them did it through real estate, and none of those people did it through simply going in their brokerage account and buying a REIT. You'll also see the same significant allocations to direct CRE ownership in most portfolios of HNW individuals and family offices.

    Leave a comment:


  • dennis
    replied
    Originally posted by CREGuy View Post

    I'm not sure where you live, but this isn't likely a work around. Just because a lease ends, doesn't mean you can just throw the tenant out. They can still continue to holdover, and then you need to go through the same process as an eviction, at least in most jurisdictions.
    You give a 30 day notice that they have to vacate, but not because of lack of payment. When they don't move you can then evict because they are there without a valid lease. The moratorium is for lack of payment and other reasons for eviction are still allowed. If they are there without a lease they are squatters.

    Leave a comment:


  • FIREshrink
    replied
    Originally posted by CREGuy View Post
    Part of the disconnect here is that there are many different avenues to allocate capital towards RE. Direct RE investment is about as broad of a category as you can get. All RE is not created equal. It's a completely different animal investing in a single family home vs a large multifamily project vs a retail center vs a medical office building, etc. etc. etc. Of course, any direct RE investment is going to require a good amount of knowledge and/or a group of advisors to assist you through the process. If you don't have any interest in learning about RE and the nuances and work that comes along with it, then it's probably best to stick with a REIT.

    I think most people responding to this thread, especially those with negative outlooks on direct RE investment, probably arrived with the concept that direct real estate investment is buying a house or duplex to rent out. It makes sense, as it's the lowest cost to entry, and everyone is inherently familiar with residential property and the leasing of residential property. It's pretty easy to understand if that is what you think of when you think direct RE investment, that you would be turned off by it. It's a lot of headache and work to grind out a couple hundred bucks a month in income, especially for the relatively affluent folks here. Who wants the headache and work of renting a single family home to make $2500/year when they can make that in a shift? There's nothing inherently wrong with that mindset, but there is a whole other world of opportunities out there, specifically in the commercial world, where you can realize much bigger returns with far less risk and operational involvement. Part of that is simply bigger numbers make for bigger returns, and part of that is the inherent lease structures and valuation models that exist in those opportunities. Like any opportunity, if you aren't interested or capable in learning the industry and/or assembling a group of advisors to help you through the process, your results may underperform others.
    I'm sympathetic to this viewpoint but something doesn't entirely make sense to me. In an efficient market it would not be possible to continue to make outsized returns in an asset class (real estate) without some higher risk. I have understood that risk to be concentration in a single property or small number of properties, and the risk of hassle. To reduce these risks, get more properties which then makes it worthwhile getting a manager. And at the extreme level of owning multiple commercial properties, you're just talking about a REIT. So explain this utopian world where you own enough real estate that the risks and hassles are very low, but the returns much higher than the stock market or the REIT market. And also explain why this outperformance persists seemingly in contravention to the EMH.

    i am part owner of 9 doors, residential. The returns are ok. I'm not getting rich off them. Even with property managers there are phone calls to take, emails to answer, decisions to be made that is not true of my Vanguard portfolio.

    Leave a comment:


  • CREGuy
    replied
    Originally posted by dennis View Post

    Moody Analytics says nationwide tenants are currently behind by $25bn and headed to $70bn.
    That sure sounds like a lot, until you realize that the value of real estate in the US is about 55-60 TRILLION. Now, not all of that is leased, but if you assume ~50% of it is, that's 30 Trillion or so, $25 billion is a drop in the bucket.

    Leave a comment:


  • CREGuy
    replied
    Originally posted by dennis View Post

    FYI: I belong to a real estate landlord association and we recommend you go to a month to month lease rather than yearly so that if you get a non payer you can just not renew the lease rather than evict for no payment. It's a work around of the eviction moratorium. If the tenant balks thinking you could raise the rent at will you could put in a clause that you won't raise the rent for a year.
    I'm not sure where you live, but this isn't likely a work around. Just because a lease ends, doesn't mean you can just throw the tenant out. They can still continue to holdover, and then you need to go through the same process as an eviction, at least in most jurisdictions.

    Leave a comment:


  • dennis
    replied
    Originally posted by EntrepreneurMD View Post
    Is anyone having any real problems with their real estate leases? One of my tenants is behind part of 1 month, amount representing 0.5% of my total annual lease collections. It has a late fee attached. I'm more concerned with the stock market.

    Fear is a major driver of paralysis, whether it's real estate, active investing, entrepreneurship, or skydiving. We all just find some other way of justifying why we don't. Sometimes we don't want to admit our shortcomings, but I think more often we don't even recognize them. Overcoming them requires honest introspection for self-awareness.
    Moody Analytics says nationwide tenants are currently behind by $25bn and headed to $70bn.

    Leave a comment:


  • dennis
    replied
    Originally posted by Larry Ragman View Post

    Is the landlord association local or national?
    Local. Very valuable to be involved. It is a combination of education and advocacy for landlords. We've testified at the city council and state level against bone headed legislation proposed by clueless state senators and city council members.

    Leave a comment:


  • EntrepreneurMD
    replied
    Is anyone having any real problems with their real estate leases? One of my tenants is behind part of 1 month, amount representing 0.5% of my total annual lease collections. It has a late fee attached. I'm more concerned with the stock market.

    Fear is a major driver of paralysis, whether it's real estate, active investing, entrepreneurship, or skydiving. We all just find some other way of justifying why we don't. Sometimes we don't want to admit our shortcomings, but I think more often we don't even recognize them. Overcoming them requires honest introspection for self-awareness.

    Leave a comment:

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