Poll: Do you invest in real estate?

[CREGuy]

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.

[FIREshrink]

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?

[EntrepreneurMD]

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".

[CREGuy]

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?

[fatlittlepig]

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.

[CREGuy]

Obviously not a doctor. My wife is an OB/GYN. There seem to be a lot of doctors here that want to spend their precious free time learning how to manage and invest in stocks, bonds, businesses, etc., and it sure appears that there are at least a handful that are interested in doing the same with commercial real estate. If you're not one of them, that's fine, but your particular circumstance certainly doesn't represent the entire board.

[dennis]

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.

I am a doctor, retired 3 yrs now. I did wake up and decide to invest in real estate after the stock market meltdown of 2000-02. My portfolio dropped in half and I saw a number of docs have to keep working because they were dependent on the stock market for their retirement. I decided that wouldn't be me so I educated myself for several yrs and then pulled the trigger on my first apartment buy in 2005. It is work but I find it fun and interesting and it keeps me active in retirement as well as a source of wealth that I feel I wouldn't have had I just stayed in the market.

[fatlittlepig]

I am a doctor, retired 3 yrs now. I did wake up and decide to invest in real estate after the stock market meltdown of 2000-02. My portfolio dropped in half and I saw a number of docs have to keep working because they were dependent on the stock market for their retirement. I decided that wouldn't be me so I educated myself for several yrs and then pulled the trigger on my first apartment buy in 2005. It is work but I find it fun and interesting and it keeps me active in retirement as well as a source of wealth that I feel I wouldn't have had I just stayed in the market.

Well the stock market is like 3x what it was in 2002, or something like that

[dennis]

Well the stock market is like 3x what it was in 2002, or something like that

Yes and my wealth is 5X what it was in 2002.

[fatlittlepig]

Yes and my wealth is 5X what it was in 2002.

That’s it? Should have stuck with equities.

[EntrepreneurMD]

To all those employed docs with no interest in real estate:

You are currently paying rent for someone else to profit off of CRE. Part of your overhead that you pay to your employer out of what you generate thru the daily grind goes to paying the facility rent/mortgage (plus utilities, property taxes, property insurance, property maintenance, repairs and improvements, property manager, etc. AKA NNN). It's just that you're giving up your precious time every month, and someone else makes the money...and gaining that precious free time you gave up. You don't get an invoice or the opportunity to negotiate those rates. You don't have a say in the matter. You will likely to just pay it every month until retirement, in both money and free time - your loss is their gain. Your labor (paying them) means you spin your wheels while they are the ones getting somewhere. They can replicate their system, you can only work so many hours a day.

You just don't know it yet, you really want to be the other guy, executive investor and not day laborer. My physician tenants work hard every month then send me a fat little check - and like you they have to work a little harder to cover their rent. I deposit the funds, enjoy the real estate appreciation and tax depreciation, and therefore can (and do) work less than them. Replicate. My employed providers, like you, are paying their share of the rent to my business which then pays it to my real estate holding company. More precious time for me, yeah!

That's why I spend my precious free time learning how to manage and invest in commercial real estate. It gives me more precious free time and contributes to wealth accumulation. That's how you stop spinning your wheels and actually get somewhere - your fair share of Wall Street.

[dennis]

That’s it? Should have stuck with equities.

The point is I am only 20% stock market and 80% RE and my retirement income is from the RE. The stock market could cease and I would be unaffected. I don't have to sell assets to have income like many docs do in retirement. I don't understand why someone builds wealth then has to cannibalize it to live.

[Anne]

That’s it? Should have stuck with equities.

My NW is over 1000x what it was in 2002. But I was a med student with a small Roth IRA from prior jobs and a tiny e-fund for ramen. 5x for someone who was a midcareer doc in 2002 is not bad at all. If many of the regulars here have 2-4 million midcareer right now they are not going to be sad about having 10-20 million in 2038. I won’t be sad about it at least.

[fatlittlepig]

The point is I am only 20% stock market and 80% RE and my retirement income is from the RE. The stock market could cease and I would be unaffected. I don't have to sell assets to have income like many docs do in retirement. I don't understand why someone builds wealth then has to cannibalize it to live.

I’ll reiterate my initial point. Majority of physicians aren’t looking for a second job managing commercial real estate so whatever the returns may or may not be is a moot point.

[EntrepreneurMD]

If the majority of the aliens on planet Zondir are green they should not simply alienate (ha!) the desires of the few that are orange.

Likewise we know the 99% are the 99%, we're sometimes speaking to the minority that have the desire and grit to climb into the 1%. Inclusion>exclusion. Let those that successfully diversify into real estate discuss their story and strategies. Jim, Dennis, CREGuy, WBD, others and I are fans, you, Johanna, burritos and others are not. We're not a homogeneous group nor should anyone insist we be.

The majority of us don't like investing in individual stocks. How's that recent XOM investment doing for you?