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Man, there is a lot to respond to in this thread, but here are the main comments I have that jump out at me perusing the thread...
1. There is a clear disconnect that you see with the two camps of RE investment. The truth is superior returns can be attained through real estate investment, however, to realize those returns, one must spend time and effort in both learning the nuances and developing the skills required to execute what's learned. So the disconnect is that for those who have a desire to put in the time (and quite frankly many people who are active in this arena have a passion for it, even if it's not their main source of income), RE is an area where an enormous amount of wealth creation can be had. However, for those who don't wish to dedicate the time or effort and are seeking something completely passive, have no desire to learn about the nuances, etc. - those folks will do one of two things - either delegate to a third party (syndicator, crowdfunding, etc.), which eats into the returns as those people have to be compensated for filling that role that's been vacated, OR they will simply jump into an investment without the proper knowledge, background, insight, and skills, and typically those deals are a coin flip on how they ultimately turn out. In short, direct RE investment is a hybrid of a business and an investment. If you are unable or unwilling to do or learn the business side of it, then other assets are probably better suited for your capital.
2. Vacant land speculation is the worst way to invest in RE. Buying vacant land that produces zero income, while at the same time bleeding you annually for property taxes (and worse interest if you've financed it) is a recipe for disaster. Unless you have a clear, concise purpose in mind for the property (i.e. you're going to develop it in the near future), you're simply banking on someone, someday, coming along to pay you significantly more than what you paid for it originally. You've done nothing with the property, and therefore have created no value. Can you get lucky and have the area around it explode with new development that drives the value of your parcel up significantly? Sure, but you're relying on outside forces that you have no control over, that may or may not happen. Honestly most land speculation deals aren't even great investments if they do appreciate in value. Your property taxes are going to eat up 5% a year or more in most places, so you need 5% in appreciation just to break even. The real killer is that all that capital you have sitting around in the dirt, producing zero income for a long period of time (I think the poster who mentioned this had a 20 year timeline!). That's just crazy. Your true break even on a 20 year timeline on a vacant parcel is going to be somewhere around a 250% gain, based on 5% property tax, and a modest 4% cost of capital, and that's before you take into account the time value of those property tax payments. That's not to say nobody makes money on vacant land. Everyone has heard a story of someone who bought a chunk of land for next to nothing and someone comes along with a big project and pays them top dollar for it, but those stories are the needle in the haystack of land speculators that would have been far better off shoving the money under their mattress.
3. One thing that's often never mentioned in the RE discussion is control. If you own a piece of property, you can do whatever you want with it (within the bounds of zoning, lease constraints, etc.). See a property that's being underutilized? Buy it, unlock it's potential and reap the rewards. See a stock that's undervalued, perhaps because their execution on the operations side is lackluster? You can buy it, but unless you're a majority shareholder, you're just along for the ride. Your hope is that they correct those inefficiencies and it's ultimately reflected in the share price, but you have zero control or say in those actions.
4. The biggest wild card in the discussion of RE however, is the tax advantages. Anyone who fails to take these into account when analyzing RE shouldn't be taken seriously. Can anyone else please point me to the investment that allows you to write off significant non-cash expenses against income? More importantly, can anyone point me to the other investments that allow you to defer any tax liabilities on the sale of the investment if the proceeds are transferred into a similar vehicle? Depreciation and the 1031 exchange are the tools that really drive significant returns to direct RE investment. The depreciation allows you to shelter large portions of your income from the property annually. There's no depreciation fairy that you're writing a check to. In most cases the property is actually appreciating. Now on it's own, depreciation is simply a slight deferment of tax liability, as eventually if you sell the property, you have to recapture all that depreciation and pay Uncle Sam his share. However, then we get into the 1031 exchange. Sell that property that you've depreciated for a huge gain? Go ahead and roll it over into another property (bigger? better? different location? more secure? more passive?) and there goes that tax liability on the capital gains, the depreciation recapture. You don't owe one cent to Uncle Sam, and you get to keep that money working for you and in your "pocket". Then it gets even better. Just keep doing that until the day you die and you can pass it on to your heirs, they get a step up in basis, and you NEVER pay Uncle Sam his cut. Again, if anyone can point me in the direction of other investments that can claim these same tax advantages and provide the same returns available in RE, I'm all ears... These advantages don't mean that direct RE is the end all be all for everyone. Obviously if you're the latter person in section 1, the tax advantages may not be enough to overcome the added work, poor returns due to lack of experience/knowledge, etc. Even with the tax advantages, most of the time those folks are going to be better off putting their money elsewhere.
At the end of the day, like everything, it all comes down to personal circumstances. There is no one size fits all when it comes to allocating capital. For one person, index ETFs make the most sense and will provide them with the best returns. For another perhaps a heavier allocation to direct RE makes more sense. In the end, we must all decide what makes the most sense for our own personal circumstances. Everyone should keep this in mind when having discussions such as this one. Speaking in absolutes for either side can be misleading.
1. There is a clear disconnect that you see with the two camps of RE investment. The truth is superior returns can be attained through real estate investment, however, to realize those returns, one must spend time and effort in both learning the nuances and developing the skills required to execute what's learned. So the disconnect is that for those who have a desire to put in the time (and quite frankly many people who are active in this arena have a passion for it, even if it's not their main source of income), RE is an area where an enormous amount of wealth creation can be had. However, for those who don't wish to dedicate the time or effort and are seeking something completely passive, have no desire to learn about the nuances, etc. - those folks will do one of two things - either delegate to a third party (syndicator, crowdfunding, etc.), which eats into the returns as those people have to be compensated for filling that role that's been vacated, OR they will simply jump into an investment without the proper knowledge, background, insight, and skills, and typically those deals are a coin flip on how they ultimately turn out. In short, direct RE investment is a hybrid of a business and an investment. If you are unable or unwilling to do or learn the business side of it, then other assets are probably better suited for your capital.
2. Vacant land speculation is the worst way to invest in RE. Buying vacant land that produces zero income, while at the same time bleeding you annually for property taxes (and worse interest if you've financed it) is a recipe for disaster. Unless you have a clear, concise purpose in mind for the property (i.e. you're going to develop it in the near future), you're simply banking on someone, someday, coming along to pay you significantly more than what you paid for it originally. You've done nothing with the property, and therefore have created no value. Can you get lucky and have the area around it explode with new development that drives the value of your parcel up significantly? Sure, but you're relying on outside forces that you have no control over, that may or may not happen. Honestly most land speculation deals aren't even great investments if they do appreciate in value. Your property taxes are going to eat up 5% a year or more in most places, so you need 5% in appreciation just to break even. The real killer is that all that capital you have sitting around in the dirt, producing zero income for a long period of time (I think the poster who mentioned this had a 20 year timeline!). That's just crazy. Your true break even on a 20 year timeline on a vacant parcel is going to be somewhere around a 250% gain, based on 5% property tax, and a modest 4% cost of capital, and that's before you take into account the time value of those property tax payments. That's not to say nobody makes money on vacant land. Everyone has heard a story of someone who bought a chunk of land for next to nothing and someone comes along with a big project and pays them top dollar for it, but those stories are the needle in the haystack of land speculators that would have been far better off shoving the money under their mattress.
3. One thing that's often never mentioned in the RE discussion is control. If you own a piece of property, you can do whatever you want with it (within the bounds of zoning, lease constraints, etc.). See a property that's being underutilized? Buy it, unlock it's potential and reap the rewards. See a stock that's undervalued, perhaps because their execution on the operations side is lackluster? You can buy it, but unless you're a majority shareholder, you're just along for the ride. Your hope is that they correct those inefficiencies and it's ultimately reflected in the share price, but you have zero control or say in those actions.
4. The biggest wild card in the discussion of RE however, is the tax advantages. Anyone who fails to take these into account when analyzing RE shouldn't be taken seriously. Can anyone else please point me to the investment that allows you to write off significant non-cash expenses against income? More importantly, can anyone point me to the other investments that allow you to defer any tax liabilities on the sale of the investment if the proceeds are transferred into a similar vehicle? Depreciation and the 1031 exchange are the tools that really drive significant returns to direct RE investment. The depreciation allows you to shelter large portions of your income from the property annually. There's no depreciation fairy that you're writing a check to. In most cases the property is actually appreciating. Now on it's own, depreciation is simply a slight deferment of tax liability, as eventually if you sell the property, you have to recapture all that depreciation and pay Uncle Sam his share. However, then we get into the 1031 exchange. Sell that property that you've depreciated for a huge gain? Go ahead and roll it over into another property (bigger? better? different location? more secure? more passive?) and there goes that tax liability on the capital gains, the depreciation recapture. You don't owe one cent to Uncle Sam, and you get to keep that money working for you and in your "pocket". Then it gets even better. Just keep doing that until the day you die and you can pass it on to your heirs, they get a step up in basis, and you NEVER pay Uncle Sam his cut. Again, if anyone can point me in the direction of other investments that can claim these same tax advantages and provide the same returns available in RE, I'm all ears... These advantages don't mean that direct RE is the end all be all for everyone. Obviously if you're the latter person in section 1, the tax advantages may not be enough to overcome the added work, poor returns due to lack of experience/knowledge, etc. Even with the tax advantages, most of the time those folks are going to be better off putting their money elsewhere.
At the end of the day, like everything, it all comes down to personal circumstances. There is no one size fits all when it comes to allocating capital. For one person, index ETFs make the most sense and will provide them with the best returns. For another perhaps a heavier allocation to direct RE makes more sense. In the end, we must all decide what makes the most sense for our own personal circumstances. Everyone should keep this in mind when having discussions such as this one. Speaking in absolutes for either side can be misleading.
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