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  • #31




    There is a mythology around real estate investing for two reasons.  One, it’s something people can understand. You buy a building, and get rent.  They played Monopoly, so they understand the concept.  The other reason is that hucksters and con-men tout their books and courses on TV and radio  ( Trump University, anyone? ).  Those books make money for the authors, no one else.  In contrast, index funds require a certain amount of education, and involve the stock market, which many don’t understand, or else have been burned by different stock market hucksters on TV.

    But real estate deals either have middle men, taking up too much profit, and also suffer from a lack of diversification, or can be outright scams.  There’s no free lunch.  Buying real estate is like buying an individual stock.  Someone’s 12% return is balanced out by someone else’s 6% return, or 10% loss.  Unless you really know what you’re doing, you’re setting yourself up for failure.

    Sometimes you hear of good deals.  Now, I know that sometimes that $20 bill on the floor is really a $20 bill, but if it’s a real $20 bill, why is someone telling me about it?  Why don’t they just pick it up themselves?  There’s usually a reason why the broker isn’t just buying this great property and a low price themselves.  I’m not getting the full story.

    I have some real estate experience with a small commercial property that my parents own.  It’s been theirs for over 60 years, owned free and clear, with a long-term tenant now and a triple-net lease, cap rate around 7%, I think.  But the rent is sometimes late, and we have to make sure that the insurance and taxes get paid, and personally, I would rather have more index funds.  It earns more long-term.   If the economy drops so will the rent payments.  It hasn’t been without problems.  About 30 years ago there was a fire and it was vacant for a couple of years.  Despite that, my mother loves the rental property.  She gets a check every month, and she spends it.  Even though her 401k and taxable account continue to grow, she doesn’t  understand them and she doesn’t fully trust them   But even when it’s late, she understands the rent check.

    I have been offered a few properties to develop ( single family homes: tear downs to rebuild ).  You can make money on these, but you can also lose.  For example, I live in a crazy expensive Bay Area neighborhood.  A house was bought two blocks from me at the absolute peak of the real estate boom 10 years ago.  It was a small odd shaped lot on a busy corner.  I argued with a contractor friend, saying that I wouldn’t take if for free, as I would not be able to build and make money.  It sold, was torn down, then they ran out of money and were foreclosed on.  Then another buyer was foreclosed on.  It took 9 years before a new buyer finally finished it.  They just had an open house, trying to sell the finished house.  It’s been 2 weeks and it hasn’t sold.  Houses here usually sell in 2 days.   The agent told me what they paid for the house and what it cost to build.  If they get the asking price soon, they will make a small profit.  If it doesn’t sell soon, they will lose money, not even counting sweat equity costs.  My point:  You can lose money on real estate, even if you think you know what you’re doing and don’t get cheated.  No thanks.
    Click to expand...


    You can definitely lose in property investment. But I think direct property buy and hold is considerably better odds than direct individual stocks. I've bought about 10 properties and sold 7 and none of them at a loss. I've bought a lot of stocks and sold at a loss and even one or 2 that went to zero.

    The problem (or advantage depending how you look at it) with property is that it often is quite concentrated and undiversified.

    Comment


    • #32




      That’s a great question. I paid about $4.5/sq ft for the raw land. That was somewhere around $265,000. It was at the edge of the medical center and just one address away from a main road on the city. There were vacant lots all around. In the 13 or so years since I bought, there has been a lot of medical development in the area and only a few lots are left. The lots currently in the area are selling between $10-15 sq/ft so I’m guessing it would now go for$500k to $800k.
      Click to expand...


      This is something I like a lot about property. You can buy something with a long term view and it often pans out. I've found this often doesn't happen in individual stocks because of management surprises.

      Sounds like you've made a good return on capital invested. I've never got into building. My father liked to build houses and warehouses. What I noticed is that most of his long term returns came from land appreciation and he could have saved himself the hassle of building. So I mainly buy vacant land and just sit on it. Which he says is speculation.

      So I basically did what you did but instead of buying 1.5 acres and building, I bought 7.5 acres for around 1m in 2007 and just left it. I had an offer for it for 5m recently. At some stage I will have to sell and incur a capital gains tax but I think it evens out. CGT gets taxed at half (rental) income.

      What I found is that the developers won't move in until the political risk is put to bed or the area is very close to rezoned. There are multiple opportunities. I like the front end before the developers move in. You can buy from a developer who has subdivided and improve it further. Or you can buy the tennanted building I guess.

      Something I find interesting currently is the beaten down mining towns. There was a property I just missed last month. The developer had acquired and cleared it and wasn't able to complete. Sold in 2013 for 600k and it was listed for 85k. Right next to the only hospital in town and zoned medium density.

      I was looking for something to buy for my son (who is 7) that might appreciate in the next 20 years. I looked for cheap land parcels (50-100k) in a city with greater than 100k population. I think land in the US is still well priced compared to other countries from what I can find.

       

      Comment


      • #33


        But I think direct property buy and hold is considerably better odds than direct individual stocks.
        Click to expand...


        I agree.  The odds of knowing more than the stock market about an individual stock is much lower than the odds of knowing more about a particular property.

        The average return for real estate is around the same as the average return for stocks.  The difference is that real estate is local.  You can know more about a particular area or a particular property than anyone else, giving you an advantage.  The problem is that for everyone who earns above average returns, someone is getting below average returns. And if you don't know who the sucker is...  Plus, if you're buying individual properties, you're not diversified within the investment class.  You might own many properties, but generally all within a single geographic area or a single type of property.  Plus real estate requires a lot of time and effort, unless you give up direct management, which in turn cuts into your profit.

        That said, IF you understand real estate, AND you know the area, AND you manage it directly, AND the local economy cooperates, THEN you can do better than you can with index funds. Owning your own office building is therefore ideal.  You pay yourself rent your entire career, then sell the building and live off the proceeds, or live off the rent.  This is what my father did.  BUT, he also bought another property, and ended up losing that entire investment.

        Also, some of the benefits of real estate come from the inherent leverage.  That leverage is a double-edged sword. In 2007, the value of index funds and real estate both plummeted.  If you didn't sell your index funds, you are now far ahead.  If you owned real estate, you might have gone bankrupt.

        So, as always, there's no free lunch.

        In my case, I was employed, so I didn't buy a building.  I have been very satisfied with the returns I have gotten from index funds.  I have not invested in any real estate opportunities and I have no regrets.  In every case, while money could have been made, there was risk.  I can't afford to lose a million dollars on a deal when it takes an extra year or two to finish the construction and I get killed on carrying costs and overruns.

        Comment


        • #34
          I quickly skimmed the thread but here is my experience as a 34 yo (age doesn't really matter imho) after three years of getting hands dirty

          1. You can make good money in RE but docs usually want easy investments and don't want "hassle" or want to invest time in it. Just put money and it should make money. So...

          2. They go syndicated deals. Which is fine but you have no control. Your returns are as good as your trust. Personally I trust me for growing my money, no one else - there is always conflict of interest . Ymmv.

          3. This is a skill that can be learnt. It's not rocket science. The hassle factor is overblown. To a lay person being a doctor is a hassle...is it to you? To the most cynical its manageable. RE is manageable. But yea I guess effort spent is your no free lunch.

          4. Think of what you want in life - of you are comfortable with your income and investments and 4% whatever rule then you don't need to stress. If you love earning more, learning more , endorse Ciriux views (?) then either: be a business owner in medicine (best way tbh, can include office building the whole shebang..) or create another business. You need interest ofcourse. Most docs I know make no effort to learn additional skills. They much rather rely on others (sometimes to their detriment, specially in investment). Thus, easier to set it and forget it in index.

          5. Not certain that RE returns are same as stocks. I doubt that is true. Yes leverage is big part but I leveraged to become a doc ...seems to have played off fine. Same leverage for carribean grads ? Not so good. Depends on your skills.

          In all of this people discount the amazing personal growth you get. The people skills you acquire etc. Its been tremendous. I am glad I do RE and other things outside of medicine.

          I wish I did it earlier.



          Comment


          • #35
            I agree with everything you posted above.  A few comments:


            . Not certain that RE returns are same as stocks.
            Click to expand...


            I'm not sure either.  The typical numbers that I see cited are 2% appreciation and rent of 7% cap rate, not including leverage effects. This corresponds to index funds with 2% dividends and  7-8% appreciation.  Are the numbers accurate for real estate? I don't know, but that's what I have seen and that's what people in real estate tell me.

            The way to beat those numbers is by getting a good deal, hence the adage "you make money in real estate the day you buy it.".  I don't know how true that is, but it seems to fit.


            This is a skill that can be learnt. It’s not rocket science. The hassle factor is overblown. To a lay person being a doctor is a hassle…is it to you? To the most cynical its manageable. RE is manageable. But yea I guess effort spent is your no free lunch.
            Click to expand...


            This seems reasonable.  Of course, it involves more work, more learning, and more time.  Maybe my reluctance is no different than that of doctors who use financial advisers and who find investing in index funds too difficult and scary. I don't doubt that unreasonable fear and laziness account for much of my reluctance.

            Nonetheless, lots of people have gone broke investing in real estate, including many well known investors over the years.  Not just Trump, but real smart investors with large, diversified Manhattan real estate.  No one who buys and holds index funds has lost money yet if they hold on.  If the time comes when we do, real estate will also be in trouble.


            4. Think of what you want in life – of you are comfortable with your income and investments and 4% whatever rule then you don’t need to stress.
            Click to expand...


            This works fine for me.  Guilty as charged.


            Thus, easier to set it and forget it in index.
            Click to expand...


            Yes, it is.   I don't consider this to be a negative.  I already have a job.


            If you....... endorse Ciriux views
            Click to expand...


            Here's where you lose me!!    

             

            I hope you continue to be successful.

            Comment


            • #36




              I agree with everything you posted above.  A few comments:


              . Not certain that RE returns are same as stocks. 
              Click to expand…


              I’m not sure either.  The typical numbers that I see cited are 2% appreciation and rent of 7% cap rate, not including leverage effects. This corresponds to index funds with 2% dividends and  7-8% appreciation.  Are the numbers accurate for real estate? I don’t know, but that’s what I have seen and that’s what people in real estate tell me.

              The way to beat those numbers is by getting a good deal, hence the adage “you make money in real estate the day you buy it.”.  I don’t know how true that is, but it seems to fit.


              This is a skill that can be learnt. It’s not rocket science. The hassle factor is overblown. To a lay person being a doctor is a hassle…is it to you? To the most cynical its manageable. RE is manageable. But yea I guess effort spent is your no free lunch. 
              Click to expand…


              This seems reasonable.  Of course, it involves more work, more learning, and more time.  Maybe my reluctance is no different than that of doctors who use financial advisers and who find investing in index funds too difficult and scary. I don’t doubt that unreasonable fear and laziness account for much of my reluctance.

              Nonetheless, lots of people have gone broke investing in real estate, including many well known investors over the years.  Not just Trump, but real smart investors with large, diversified Manhattan real estate.  No one who buys and holds index funds has lost money yet if they hold on.  If the time comes when we do, real estate will also be in trouble.


              4. Think of what you want in life – of you are comfortable with your income and investments and 4% whatever rule then you don’t need to stress. 
              Click to expand…


              This works fine for me.  Guilty as charged.


              Thus, easier to set it and forget it in index. 
              Click to expand…


              Yes, it is.   I don’t consider this to be a negative.  I already have a job.


              If you……. endorse Ciriux views 
              Click to expand…


              Here’s where you lose me!!    ?

               

              I hope you continue to be successful.
              Click to expand...


              In agreement.

              Like any investment, its a risk. RE is easier to assess than a security in the stock market imho. I have lost money in RE - not going to lie, but profits have totally out weighed that loss. As you said, easier way more laissez faire way is index invest but you don't have the upside of RE (unless those numbers you quote are true, but I use leverage so I've had much higher returns - I'll look definitive quantitative study). You are right, though that there is another "sucker" out there who you will eventually flip your property to for alot of eventual overall IRR. Am I looking for a sucker? not really, I am looking to sell when the price is right, otherwise, let it collect rent.

              None of this is necessary, but the benefits of doing it - for me - has been more than just financial (for example, I don't even think about the 4% rule etc, because I think about my 401K other then I get random email from the brokerage..its an after thought and thus I am not tempted by drops or anything; I bet a lot of docs worry about it).

              If you have entrepreneurial bend, try RE.

              Comment


              • #37


                Like any investment, its a risk. RE is easier to assess than a security in the stock market imho.
                Click to expand...


                I must disagree in re: the real estate projects that are the topic of this thread. otoh, RE investments that are small and in which you have direct ownership of the hard assets to the extent that you have a say in the agreements with tenants, then, yes, I agree. However, you are dealing with an illiquid, highly concentrated position, which must be taken into consideration.
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #38


                  What I noticed is that most of his long term returns came from land appreciation and he could have saved himself the hassle of building. So I mainly buy vacant land and just sit on it. Which he says is speculation. So I basically did what you did but instead of buying 1.5 acres and building, I bought 7.5 acres for around 1m in 2007 and just left it. I had an offer for it for 5m recently. At some stage I will have to sell and incur a capital gains tax but I think it evens out. CGT gets taxed at half (rental) income.
                  Click to expand...


                  I take the opposite approach. Except for land being bought to build a future home I have never gotten raw land to sit on. I can never be sure if the property will appreciate and when. Even if it looks dead certain at the beginning.

                  A lot of people locally got land adjoining a 8 acre parcel because they found that Bass Pro was going to build one of their mega stores here and had purchased land for it. These people felt that adjoining land could be used for restaurants and hotels and other businesses once people come to BassPro shop in droves.

                  What happened a couple of years later was that Bass Pro bought out Cabelas in a $4B deal and there was already a Cabela in town. So they scrapped the project and let go of the option to purchase the land ( they had not purchased the land as many thought). Now that land and adjoining lands lie vacant and the speculators are still paying property taxes and interest on the loan they have taken.

                  The person with whom I invest some money just purchases the absolutely minimal land we need to build a business and only when we get the zoning, bank loan approval and the franchise agreement to build the property. Otherwise we will be sitting on a 800K-1.5M land for years and that money could be used efficiently somewhere else. Buy the land, build it, make money, refinance the business and take out the gains and buy land and build at another site and make money. Rinse and repeat. Yes some places will be underperformers but by diversifying one can have decent returns.

                   

                  Comment


                  • #39





                    Like any investment, its a risk. RE is easier to assess than a security in the stock market imho. 
                    Click to expand…


                    I must disagree in re: the real estate projects that are the topic of this thread. otoh, RE investments that are small and in which you have direct ownership of the hard assets to the extent that you have a say in the agreements with tenants, then, yes, I agree. However, you are dealing with an illiquid, highly concentrated position, which must be taken into consideration.
                    Click to expand...


                    Complicated syndications I agree with. I go with direct ownership and it has worked fine. Concentrated position...for people who don't get risk management it is a big deal, otherwise significant wealth is generated not from diversification but from concentrated positions. Small is relative, Kamban does hotel investing that costs around 10-20 million via trusted group.

                    Illiquid? Aren't you advocating holding position till retirement and set a portfolio and not meddle with it? Sounds like self imposed illiquidity so I don't know what the practical difference is.

                    Comment


                    • #40


                      Illiquid? Aren’t you advocating holding position till retirement and set a portfolio and not meddle with it? Sounds like self imposed illiquidity so I don’t know what the practical difference is.
                      Click to expand...


                      That's like saying a savings account is illiquid just because you don't plan to take anything out of it. That doesn't make it illiquid - it's a choice. You can still liquidate at any time. Not so with real estate.
                      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                      Comment


                      • #41





                        Illiquid? Aren’t you advocating holding position till retirement and set a portfolio and not meddle with it? Sounds like self imposed illiquidity so I don’t know what the practical difference is. 
                        Click to expand…


                        That’s like saying a savings account is illiquid just because you don’t plan to take anything out of it. That doesn’t make it illiquid – it’s a choice. You can still liquidate at any time. Not so with real estate.
                        Click to expand...


                        What good is choice if not exersized? In retirement accounts you advocate no selling or moving till retirment. Practically illiquid.

                        Saving account is for emergency usage or can be. Made to be used as such.

                        Look, I am asset agnostic. My practical experience is that I have made good money in RE. I am making money like everyone else in the market. Just saying RE has returned more and the "risk" is totally worth it.

                        It would help if Kamban or whitebeard can chime in and give their thoughts who have made good money doing this. People lose money in market as well who aren't disciplined. Same principles here as well.

                        Comment


                        • #42








                          Illiquid? Aren’t you advocating holding position till retirement and set a portfolio and not meddle with it? Sounds like self imposed illiquidity so I don’t know what the practical difference is. 
                          Click to expand…


                          That’s like saying a savings account is illiquid just because you don’t plan to take anything out of it. That doesn’t make it illiquid – it’s a choice. You can still liquidate at any time. Not so with real estate.
                          Click to expand…


                          What good is choice if not exersized? In retirement accounts you advocate no selling or moving till retirment. Practically illiquid.

                          Saving account is for emergency usage or can be. Made to be used as such.

                          Look, I am asset agnostic. My practical experience is that I have made good money in RE. I am making money like everyone else in the market. Just saying RE has returned more and the “risk” is totally worth it.

                          It would help if Kamban or whitebeard can chime in and give their thoughts who have made good money doing this. People lose money in market as well who aren’t disciplined. Same principles here as well.
                          Click to expand...


                          Your confusing "risk" and "liquidity", apples and oranges. I may choose not to sell an asset, but that doesn't change my ability to liquidate, should I so decide. You can sell a mutual fund much more easily than a house or apartment complex. Besides, we rebalance every year - we can do that because a basket of mutual funds and ETFs is fairly liquid.

                          Liquidity is what it is, no matter what discipline I or anybody else recommends. That's just the definition. I am having trouble understanding why you want to debate this point.

                           
                          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                          Comment


                          • #43







                            What I noticed is that most of his long term returns came from land appreciation and he could have saved himself the hassle of building. So I mainly buy vacant land and just sit on it. Which he says is speculation. So I basically did what you did but instead of buying 1.5 acres and building, I bought 7.5 acres for around 1m in 2007 and just left it. I had an offer for it for 5m recently. At some stage I will have to sell and incur a capital gains tax but I think it evens out. CGT gets taxed at half (rental) income.
                            Click to expand…


                            I take the opposite approach. Except for land being bought to build a future home I have never gotten raw land to sit on. I can never be sure if the property will appreciate and when. Even if it looks dead certain at the beginning.

                            A lot of people locally got land adjoining a 8 acre parcel because they found that Bass Pro was going to build one of their mega stores here and had purchased land for it. These people felt that adjoining land could be used for restaurants and hotels and other businesses once people come to BassPro shop in droves.

                            What happened a couple of years later was that Bass Pro bought out Cabelas in a $4B deal and there was already a Cabela in town. So they scrapped the project and let go of the option to purchase the land ( they had not purchased the land as many thought). Now that land and adjoining lands lie vacant and the speculators are still paying property taxes and interest on the loan they have taken.

                            The person with whom I invest some money just purchases the absolutely minimal land we need to build a business and only when we get the zoning, bank loan approval and the franchise agreement to build the property. Otherwise we will be sitting on a 800K-1.5M land for years and that money could be used efficiently somewhere else. Buy the land, build it, make money, refinance the business and take out the gains and buy land and build at another site and make money. Rinse and repeat. Yes some places will be underperformers but by diversifying one can have decent returns.

                             
                            Click to expand...


                            It depends on individual preferences for risk options. In terms of the opportunity, I would look for something which has got very good upside and low downside. The Bas Pro play I would not hang my shingle on any one player possibility.

                            Situations that I would look for would have a compelling development impetus, for instance:

                            - Hospital being built- land has been acquired by the government but development timeline has not been announced. They have to build another hospital in the area due to demographic need but keep putting it off. Developers will not fully move in until first work on the project is announced and a clear timeline. But you assess there is a 90% likelihood this will occur in the next 10 years

                            - motorways or train lines proposed but project has not been funded and no clear timeline. But demographically they are required. Recurrent political putting off starting the project. You assess there is a 90% chance it will occur in the next 10 years and estimate where the business hubs will be.

                            Here you are buying into the area getting not just rezoned but a network effect from businesses moving into the area. The return is exponential if it does occur. There is always a chance it won't. In which case you aim to buy for as little premium as possible. Then if nothing happens you can sell at a small loss or it may still appreciate to a level where you break even.

                            If I had 1m, I think buying a vacant property and holding that would be less risk than buying it and putting another 2M in to build a building. To me the less risky thing is to sell the land to a guy who wants to build a hotel than to buy the land and build a hotel. The holding period for buy and hold land is longer but the ROI is higher, without the risk of much debt.

                            You have to be able to identify real opportunity though and if you buy something on a single rationale like the example you citied, it might well be wrong.

                            if it doesn't work out you can always use it for storage or a cucumber farm or just sell it. I haven't had a dud yet that I had to sell at a loss. It could be that I've just been lucky.

                             

                            Comment


                            • #44











                              Illiquid? Aren’t you advocating holding position till retirement and set a portfolio and not meddle with it? Sounds like self imposed illiquidity so I don’t know what the practical difference is. 
                              Click to expand…


                              That’s like saying a savings account is illiquid just because you don’t plan to take anything out of it. That doesn’t make it illiquid – it’s a choice. You can still liquidate at any time. Not so with real estate.
                              Click to expand…


                              What good is choice if not exersized? In retirement accounts you advocate no selling or moving till retirment. Practically illiquid.

                              Saving account is for emergency usage or can be. Made to be used as such.

                              Look, I am asset agnostic. My practical experience is that I have made good money in RE. I am making money like everyone else in the market. Just saying RE has returned more and the “risk” is totally worth it.

                              It would help if Kamban or whitebeard can chime in and give their thoughts who have made good money doing this. People lose money in market as well who aren’t disciplined. Same principles here as well.
                              Click to expand…


                              Your confusing “risk” and “liquidity“, apples and oranges. I may choose not to sell an asset, but that doesn’t change my ability to liquidate, should I so decide. You can sell a mutual fund much more easily than a house or apartment complex. Besides, we rebalance every year – we can do that because a basket of mutual funds and ETFs is fairly liquid.

                              Liquidity is what it is, no matter what discipline I or anybody else recommends. That’s just the definition. I am having trouble understanding why you want to debate this point.

                               
                              Click to expand...


                              What good is definition is what I'm saying. You are correct, but practically its little difference for a disciplined investor.

                              Lets do an experiment: Behind a black box is an asset class that goes up by 8% (lets go with AlexxTT return numbers) - what is it? RE or Mutual funds?

                               

                               

                               

                              Answer: Either.

                              Comment


                              • #45


                                What good is definition is what I’m saying. You are correct, but practically its little difference for a disciplined investor. Lets do an experiment: Behind a black box is an asset class that goes up by 8% (lets go with AlexxTT return numbers) – what is it? RE or Mutual funds?       Answer: Either.
                                Click to expand...


                                What does that have to do with liquidity? Liquidity happens to matter, at least to most people, and should be a consideration when investing.
                                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                                Comment

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