I think Ryan's missing my point. When I talk about income %, I'm talking about across an entire portfolio (that real estate should certainly be a part of).
So you're putting 25% of your cash down on a $5m property for $110k per year. Nice! How many such properties do you think the banks are going to let you buy? With the future values of these properties a bit murky, I imagine that someone with 4-5m in the bank ISN'T going to get the green light to buy $21m in properties (4 difference loans to service).
People keep bringing up INDIVIDUAL investments that can net a great return (in this case, 9%). That's missing the point. With big piles of money, you have diversified holdings. You're not going to drop 90% of your cash in real estate down payments. Nor are you going to drop it all in stocks. You're going to (generally) do a reasonable asset allocation to minimize the risk. While I did mention the S&P500's performance for comparative purposes, I wasn't advocating for a pure stock portfolio (any more than you're advocating for a pure real estate portfolio).
As he says, real estate has plenty of risk. You're betting on a local economy, construction pace, population growth, etc. But anyone with millions ought to be playing in real estate.
I really enjoyed your article, so I apologize if you felt like I was attacking you. That said, I think I disagree on a few points:
1) Commercial real estate underwriting much more heavily weighs the fundamentals of the property as opposed to the borrower. As a result, it's possible that you could have a lender who would be comfortable with you carrying several times your net worth in loans, provided the underlying collateral fundamentals are strong.
2) I'm skeptical that a long-term diversified portfolio will only return 5%, before inflation is taken into account. This would correspond to a real return of 2%, which seems overly-conservative. Don't wealth managers advise safely withdrawing 4% per year to protect your principal and keep pace with inflation? I may be mistaken here.
3) I'm not as gung-ho about diversification as you are. I think it can make sense, but as Buffett has said, it's a hedge against ignorance. If you sell a startup for $20m, you were highly under-diversified before the sale, but that doesn't make it a bad idea. Nor would it be a terrible idea to roll a significant portion of that capital back into a business that you knew well enough that the risk profile was low for you. This probably requires more work and self-assessment than most people are capable of or willing to engage in.
Anyway, thanks for your original post and your comment here. Food for thought, as always :)
Fair points. Regarding the 5%, that's my conservative # based on my personal feelings about the economy. The math holds up just fine if you nudge that up to 7%. You still go broke (unless you cut your spending, which I certainly would-- I've no need to live rich). 7% is pretty solid for a balanced portfolio.
I personally opt for a riskier portfolio than most (I have a few rental properties and assorted mutual funds), but I don't think you or I can pick 'em like Buffet! :-) It IS a hedge against ignorance, which I happily admit that I am (compared to buffet).
Interesting stuff, regardless-- I've actually never crunched the #s on big apartments. Thanks for doing it!
You're definitely not managing the property in this scenario; part of the operating expense is hiring professional managers. REITs and other institutional investors own and operate properties like this from a distance all the time.
EDIT: I should mention that I own several smaller properties in another state that are managed and I spend maybe an hour a month on them. I'd spend more on larger properties like this, but it's hardly a full-time job.
Would you consider expanding on some of the nuts and bolts of hiring and managing those professional managers? I can't name anyone who's had a good experience with a management company on either side of the transaction but of course that's likely confirmation bias.
A 'day in the life' of what kind of issues you run into with those properties would be fascinating (to me anyway).
I joined a firm that owned and operated a portfolio of around 1,400 mixed-use units after college. The firm was small and so I was able to get involved in almost every aspect of the business. In addition, I'm currently getting a M.S. in Real Estate. I suspect our firm had better success because we had skin in the game. Personally, I would have difficulty handing over those responsibilities to someone without a long term financial stake.
Conversations about real estate investment are so localized and situation specific, it's difficult to make generalizations, but I'll try making a few anyway:
1) Motives - consider carefully when drawing up a contract what financial incentives are being created for your manager. Our top priority was always filling vacancies, but as an owner, your sign-off should be always be required before a new tenant is approved[1].
2) Kickbacks - if you expect your manager to handle hiring of contractors, he will be offered money to award the contract. You will also need contractors more often than you think. When a tenant moves out, you'll either renovate or at the very least, re-paint their apartment... depending on the local rental market, this can be the difference between a one month and a six month vacancy. The smaller the property, the more important it is to get apartments rented quickly.
3) Repairs - if something can go wrong, it usually will go wrong. Appliances, doors and other fixtures will break, capital improvements will get pushed ahead in your schedule and tenants will misbehave, sometimes even breaking the law and requiring the police to get involved. When you see a property with a high cap rate, expect more of these issues[2].
4) Emergencies - if you don't live very close by, you should have someone on staff that does or, even better, have someone on payroll that lives on-site.
This is only the tip of the iceberg, feel free to get ask any questions.
[1] Personally, I would also want to deposit all rent checks myself and sign off before any invoices were paid.
[2] Another "high cap rate" problem you'll be faced with is landlord-tenant court. These properties tend to just have more 'problem' tenants.
P.S. Some last thoughts for investors:
a) *You make your money when you buy.*
Putting all your eggs in the appreciation basket is risky;
if the cashflows are there, many of the above issues won't
be keeping you up at night.
b) *If your strategy is to hold for less than five years,
your management time just increased 10x.*
Commercial real estate loans generally have a balloon
payment after 5, 7 or 10 years. You'll need to roll your
loan over at this point and any equity built up above the
lenders required loan to value (c. 65% these days) can be
extracted. Don't put yourself or your investors in a
position where you are forced to sell at a loss.
Credibility in this field is hard to gain, but easy to lose.
> part of the operating expense is hiring professional managers.
I don't think smackfu meant to imply you'd be replacing lightbulbs yourself. But if you have employees who provide a service, and if they screw up it can affect your future income (and you therefore need to do some degree of management, minimal though it may be), well, that sounds a lot more like a job than retirement to me. It might not be 40+ hours a week in an office, you might not be writing code, but that doesn't make it retirement.
Most property management companies are actually just managing the contractors who fix the sprinklers... those people aren't on your payroll. Usually property managers just take a fixed % of all the rental revenue.
When I was 24, one of my best friends who was two years younger starting researching the issue of how to invest for the long term and he also came up with the rental property plan. We both bought condos that we lived in ourselves for a few years and we have both had about 30 years of rental income from. He bought another couple small units, and he quit working as a programmer when he was 40, he and his family live very frugally, and he has done nothing but property management since then.
My problem with the article: taking on a lot of debt. Bad idea, in my opinion. It is best to own much less property and have no debt on it. Of course, who wants to completely retire? I think that the trick is to make small income property investments, try to pay them off within a decade, and always work on what gives you pleasure, and don't concentrate on money.
The point of debt is that when the real estate market drops, you declare bankrupcy and let the lender eat most of the loss. Donald Trump has done this like 5 times.
If you own outright, you eat the entire loss yourself.
Basically -- debt increases upside and reduces downside risk. And inflation helps you pay it off. No wonder we're addicted?
"Debt is bad idea" - it is not as long as your income is sufficient to cover payments and pay yourself. It's always better to have only 20% of the skin in the game rather than 100%.
My dad spent 30 years in private banking for a big swiss bank, investing money long term for rich people. His advice to me when he retired: The only way to invest money long term and relatively risk free is through property - everything else is just bullshit.
This is assuming stable economic and population growth. There are lots of rural and inner-city property owners who could provide a cautionary tale to this theory.
In principle I agree. On the other hand, if he has a positive cashflow from the property it doesn't really matter what its price on the open market is.
One big concern with real estate is that properties are extremely undiversified investments that have high transaction costs, high holding costs (taxes and maintenance), and low liquidity.
The example of Amsterdam's housing prices comes to mind as an example of the risks of undiversification. Various accounts say that here has been no appreciation in house prices since 1736[1] or that it has only doubled in 350 years [2,3].
I really believe this is true, from what I've seen around me.
That said, bankers and advisors know that this is somehow assumed to be common sense, and quite often use that as an argument to get you onboard investments that are not interesting at all in most cases (apart for them :-).
Anyone got any knowledge of Australian real estate? Which on the surface appears to be a lot less likely to go through the same downturn American real estate faced due to population growth outpacing new housing, especially in terms of housing a short distance from decent city infrastructure.
The major difference financially between the stock market and real estate seems to stem from the fact that real estate is costly to manage, and doesn't scale, and thus investment banks and major market players are unable to participate in a big way.
My knowledge of the stock market, even if I get a fancy MBA and specialize in finance, still won't be able to compete profitably with institutional investors that have massive pools of capital, inside knowledge, aggregated expertise, and highly optimized trading algorithms. As an individual investor I have no competitive advantage, even if I'm savvier than 99% of other individuals, because all the spread will be grabbed en masse by the big players.
By contrast, the number of non-experts buying and selling real estate, along with its relatively high transaction costs and necessarily local nature, means that even if I were only smarter than, say, 90% of people, I'd be able to do quite well because the spread wouldn't be gobbled up by the 99.999999th percentile financier.
As soon as electronically-managed liquidity is thrown in, and transaction costs become substantially lower for an elite subset, then it becomes much less "worth it" to participate. Thus, even REITs, by their very nature, are going to yield a lower return (pre-fees) than clever, well-managed individual real estate investments.
I didn't see Tony Wright's article the other day, but I've just read it and the article linked here. I have a few comments.
First, for the rest of this comment I'll define income as 'what you've got coming in' and wealth as 'what you keep or what you grow'.
Most people fail to make this distinction (If you ask somebody if they are wealthy they will start talking about how much they get paid), but it's important, especially when thinking about how to optimize your tax situation.
Tony's article makes several assumptions:
(1) That you want to live a high consumption lifestyle. The $200k p/a first class lifestyle he quotes isn't necessarily what everybody wants. Even people with some wealth have to live within their means or they'll (as he correctly pointed out) lose it eventually.
I'd actually take a guess that a typical family wouldn't be able to spend $200k in a year if they did not make purchases whose primary purpose was to display status.
(2) That you would invest your $4m in a low-return investment.
(3) That you would invest the money in such a way that 100% of your income is realisable (subject to income tax).
The best strategy, imo, for somebody with a freshly minted $4m to play with is to put as much as possible into an investment where growth in their wealth is not realisable (which usually means buying property because appreciation is not taxed whilst it's happening [1]).
They have a balancing act to play because they want to invest as much in this way as possible whilst leaving enough in an investment that will provide them with an income substantial enough to live on.
As for Ryan W's article, I'd basically agree with what he said other than the part about buying a property with a mortgage. It would be better to buy a smaller property you could afford outright or partner with some other investors to buy the apartment complex (which has it's own set of problems).
[1] I might actually be wrong about this. I know I've read somewhere that there have been attempts to tax wealth directly in some US states. I've no idea how the govt would be able to do this in a workable way though - how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it?
how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it?
I think property taxes are fairly widespread in the US, actually. Your county has a group of assessors, who pick a SWAG based on comparable recent sales and -- ahem -- their desire to have the county generate tax revenue this year, and then you get to pay .8% or whatever of the assessed value in property taxes.
My father has drolly noted more than a few times that he wishes this assessment came with a shotgun clause (i.e. if the assessors tell you your house is worth $X, you could say "Sweet! I'll have the lawyer draw up the sale documents. You can have the keys tomorrow.")
I've heard proposed property tax systems that work that way: you pick a property value on which you'll pay taxes, but you give the government the right to buy your property at that value.
Is there a name for this kind of game? I think the most common example I've heard is "you cut the pie, I pick who gets which slice (assuming everyone wants the largest one)".
As patio11 mentioned, it is called a "shotgun clause". We share a ski condo with another family and we debated using a shotgun clause to help figure out the sale price when we decide to sell.
Thanks for the clarification (you too gyardley!). I'm in the UK and we don't do that here. We pay 'stamp duty' when buying a house and capital gains tax when selling (or not as there are exemptions) but nothing on an ongoing basis for the appreciation in value.
You have a point. I guess you can make a case that CT is an indirect wealth tax though it certaintly isn't intended to be. And of course the property value isn't re-evaluated on an ongoing basis so appreciation isn't reflected in the tax you pay during any given years liability.
In my original comment what I was really trying to get at is that, as an investment strategy, you would want to maximise your wealth by minimising your realisable income and that the typical way to do that over time has been to accumulate wealth in property. I guess I was wrong about this in the US but it's still a valid strategy in the UK.
No no, it's the same in the US and Canada. Wikipedia tells me it's around 1% for a £100,000 asset (in the UK). In Vancouver (Canada), I pay roughly 0.3%, so if anything the argument is stronger in Canada.
While you were _technically_ wrong that no one taxes on the entire value of the property, I think your point still stands, because the property tax rates are so low.
I believe that, in Canada, my trade-off looks like this:
On real estate, I'd pay a very low property tax (under half a percent?) on the principle, plus capital gains on the appreciation when I sell, plus income tax on revenue from the property.
On stocks, I'd pay some combination of capital gains on sale, and whatever the tax is on dividends. So the percentage on my income is higher, but it's only on the income.
The thing is, if you're gonna pay capital gains on the "wealth" (your definition) when you cash it out, the only reason it matters you're not getting taxed on the growth is that it compounds faster. So you get to ask yourself, which compounds faster, the non-realisable asset without tax, or the realisable one with tax.
Council Tax in the UK isn't a percentage of the value of the property. It's an annual charge which varies according to the bank your property falls in.
A local council sets the charge for 'band C' (I think) and the rest are calculated from that. (This then pays for rubbish collection, libraries, all that sort of stuff.)
If you're buying a property as an investment, council tax isn't hugely relevant. If the property is occupied, the occupant pays it. (Unless they're exempt, like students are.) If the property is empty you don't need to pay it for up to six months.
So the tax does scale according to the value of your property (ie, your wealth) and is an attempt at progressive taxation, but it's not a direct tax on that wealth.
If you're buying investment property in the UK, your tax liability is going to be income tax on the income and capital gains tax if the market value of the property has risen. In addition you'll have to pay Council Tax based on the property you're living in, regardless of if you own or rent it.
Ah, thank you for the clarification, and my apologies for only reading every other word in the WP article before posting. ;) I didn't realize it was on occupied property, my bad.
Based still on wikipedia, I would describe this as a regressive tax. The amount to pay increases sub-linearly with increase in the value of the thing taxed.
In Canada, property tax is paid by the owner, not the occupant, and it pays for the same things (garbage collection, libraries, schools, etc).
In California, Proposition 13 limits (among other things) reassessments to when the property changes hands or when there is new construction. Opinions vary on whether it's a good seal for the state. It's a great deal for me, though.
Doesn't it make it difficult to sell homes in high cost-of-living areas? Seems like you'd be taking a hit in the sale price to reflect the increased property tax burden on the new owner. I don't know whether you come out ahead, but it's probably more likely the longer you live there.
What it does do is create incentives for people to remodel extensively--keeping just a fraction of the house intact so it's legally not new construction--rather than move.
A balanced portfolio is a very inefficient portfolio.
Many people would be willing to take risks, or don't want/need to hedge against everything. His real estate example is a good one - you are at the mercy of housing/renting markets. But over the long term these have been quite steady and wouldn't be outside most peoples' risk thresholds.
No, a balanced portfolio aims to balance risk and return. If you put all of your cash into one (or many) high-risk-high-return securities, you run a meaningful risk of losing a big pile of your cash.
There's a pretty well-understood playbook for wealth management. You SHOULD be willing to take risks (with a very specific % of your portfolio)... But at any given time some of these risks will have gone south, some will have gone north, etc. Feel free to find me a wealth manager who offers big double digit returns over multiple decades.
The Warren Buffet school of thought on the issue is put your money into a few things you understand really well, and he is one of the better managers of our time.
I understand the 'balanced' wealth management approach - I am just not sure it is the ideal way to go. Is pg better off dumping money in mutual funds, real estate, commodity index funds and bonds - or driving the majority of his wealth into YC? He lives and breathes startups - so even trusting the best managers I would say he would be foolish not to invest a lot into YC himself.
I also would like to see the results of how bubbles, world wars, massive inflation, depressions and other difficult to hedge against events impact balanced portfolios vs someone dumping all their money into a single apartment building. My instinct is both would be equally screwed. And an event like that is almost certainly going to happen during the next 50 years.
I don't disagree with you at all - there are just several angles.
When I read your comment I realised that I had made a rather foolish assumption myself - that most people would want to take risk. In practise most people do the opposite and seek to minimise their risk.
Then again, your article was talking about startup founders, who (in general) presumably are quite willing to take risk!
I've no idea how the govt would be able to do this in a workable way though - how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it?
A bureaucrat called a 'tax assessor' makes an assessment - which may or may not be fair - of your property's current value. You're then charged a percentage of this assessed value in taxes. That's how property tax works across America today.
>I'd actually take a guess that a typical family wouldn't be able to spend $200k in a year if they did not make purchases whose primary purpose was to display status.
Mortgage + 3 cars + 2 kids in college + 1 in a private high school + 1 family vacation = ???
I don't think any of that stuff is a status symbol, or excessive. And it seems like that would easily exceed 200k a year, and that's excluding utilities, food, etc.
> it seems like that would easily exceed 200k a year
it seems to me like that wouldn't exceed 100k a year, and "2 kids in college, 1 in private high school" is probably your highest consumption year. Seems like we have vastly different expectations as to what's reasonable to spend on those things. See also my comment [0] and kscaldef's [1] on the previous thread.
I'd also assume you don't have mortgage/car payments with a $4.3m buyout, but instead pay those things in full but amortize the costs in your budget spreadsheet.
Well, were talking about somebody with $4m to play with.
Unless they expect to get a better return from investing the money than the rate they are paying for their mortgage it makes sense that they would have bought the house.
You don't think three cars is excessive? We'll have to differ in opinion there.
A lot of your costs depend on location obviously but, yes, I stand by my hunch.
Not so fast on those tax benefits. Yes, you can depreciate your real estate and not pay taxes on them that year. However, if you later go on to sell that property for a gain, there is something called recaptured depreciation [1]. In essence, you will pay taxes on those gains at the orginary income tax rate until all the depreciation you reported is covered. Only the remaining gains can be taxed at the much lower capital gains rate.
Yeah, I decided to avoid getting into that because the article was already long, but it's a good point. However, to be fair, you should also point out 1031 exchanges, which allow you to defer those capital gains taxes even further down the line:
I'd like to hear what people think about REIT ETFs to invest in real-estate more indirectly. Do they bring most of the same potential returns as owning a building yourself, with the added benefit of diversification, or are they a completely separate thing?
What if that million was invested in a low cost REIT index?
They've unsurprisingly been hammered over the last year or so. In the long run investing in focused REITs (like apartment rental, etc.) will give you similar exposure to investing in their target market yourself.
Of course, you pay the standard laziness premium. The REIT takes a fee, and sometimes their incentives are not aligned with yours. Perhaps they have $x they are incentivized to invest, forcing them to buy and run properties without top-tier ROIs and you, with a tiny fraction of $x, could do better. Perhaps you could just flat out do better than them by knowing your market and running your properties better.
But REITs are probably not a great way to go as a solo investment. Most that I've found have underperformed the S&P 500 over the last decade. I'd use them more to hedge though as we've seen recently, it's entirely possible for both the stock market and the real estate one to nosedive together.
They are indexes (REIT) and funds (ETF) so you get diversification at the loss of control. Kind of like buying an S&P Index or investing in a mutual fund as opposed to investing in specific company stocks.
An REIT is a Real Estate Investment Trust. Not an index.
I have a small investment in an REIT and while the trust owns multiple properties, it is far from an index. An REIT is more like buying an individual stock, you are investing in a company that will use your money to purchase, improve, and maintain real estate in exchange for a share of the company. (That may not be technically accurate, but it is essentially what is going on)
That's hardly retirement. You should re-title this to "How to invest $1 Million in multifamily real estate at 2010 prices". Doesn't quite have the same ring to it, but it's a lot closer to the truth.
It's a shame that even intelligent and knowledgeable people like Ryan and Tony choose to write articles with linkbait titles. There is clearly some interesting and valuable stuff in these articles, but they would be better if written more honestly without a pre-determined conclusion.
This seems to be a somewhat common practice. A pro football player (A.J. Hawk) just bought the apartment complex next door (bank shortsale). I was told he has bought several properties, fixes them up and rents them out to pay for his retirement.
You forgot to factor in capital gain taxes on the original sales price.
Depending on where you live that could put a substantial dent in your 'take home'.
And leveraging (to use a popular word) that money to obtain a much larger property by financing is actually a fairly risky strategy, especially if you are going to put the rest of your money in to different investments.
You forgot to factor in capital gain taxes on the original sales price.
I believe Tony already took that into account in his article?
Leverage increases the risk, yes, but that doesn't make it "risky". It's very much the norm in the real estate world, which has a pretty stellar track record for creating wealth, once you get out of the levels where soccer moms are flipping houses. Buying commercial multifamily real estate isn't about the value of the property; it's about the value of the cashflow stream that you're buying. For certain markets and with long-term demographic trends and forecasts being what they are, I'm very comfortable with that level of risk.
If it makes you feel better, run the numbers where you put $2mm or $3mm down, which reduces your return, but also decreases your risk.
It makes it risky in the sense that if you only buy what you can pay right off the bat that you will reduce your income, but if the market tanks and you have to sell for whatever reason that you won't suddenly be working for a bank.
Tying yourself up like that might come back to bite you and if something unforeseen happens you're back where you started or worse.
You do raise a good point, in that you're in some sense risking your other assets as well. You can secure nonrecourse debt for real estate like this, though this is harder to do than it was a few years ago.
But the other way to look at this is that you're going to risk the money one way or the other: either you risk it as indirect collateral by guaranteeing a loan at 80% LTV or you risk it directly by buying the property outright. The advantage in the first scenario is that you get a higher return. YMMV, but again, I'm comfortable with this level of risk.
I think that's why any investment advise or plan should always start with an analysis of the risk profile of the person doing the investing. And some of the risks are not always evident.
The point is that it's disingenuous to say you're only using ~25% of your money to buy the property, when in reality all of your money is at risk, because you're leveraging. If you invest 25% in the stock market, you won't lose more than 25%. The returns on the real estate is higher, because you are leveraging. Just because 20% down payment real estate loans are common doesn't change that fact.
I agree with the idea that real estate can be a good investment, but this article has very little to do specifically with investing after a startup exit. The article should be called "Why to invest in real estate."
> this article has very little to do specifically with investing after a startup exit. The article should be called "Why to invest in real estate."
Or, perhaps it should be called "A plan for generating retirement-suitable income using approximately $1mm of capital".
Oh, hey, that's what it _is_ called (modulo some aggressive rounding).
I agree with the first paragraph, though, that if it does turn out that you have $5mm, and if it does turn out that you can't secure nonrecourse debt, then it is true that you're also taking on extra risk.
There are going to be distinct advantages and disadvantages with any investment philosophy you wish to make your own. The real question is what are your long term goals?
This is how I see real estate investment.
PROS
- After paying off the mortgage you can still sell the house for its current value. If you select wisely, this is an additional investment.
- Monthly income that is generated as safely as possible. Since you can select a good market to invest in, and even select who is moving in. You have as much security as in a monthly payout as you are ever going to get.
- Can be used to leverage other investments. Equity can be an incredible tool.
- Makes your credit score and personal financial statement look amazing. If profitable, of course.
- You can invest money to make continued improvements on the property. And potentially increase it's value.
- Can live there is your significant other kicks you out (haha)
CONS
- Limited mobility. If you invest in real estate with are with it for a while.
- High initial cost. Unlike investing in stocks, it is difficult just to buy 10 shares google. You have invest quite a bit of personal capital.
- Ties your investment to the community. Which may be a positive if you don't like the swings of the investment market.
To say that an investment can be unsafe, or it is changing from a way you know how to make money to a way you don't, is an invalid reason not to do it.
Any investment can be unsafe. Business lose value all the time. General Motors has lost value consistently, buying there stock doesn't mean that Google Stock isn't going to be a great idea.
As for a learning curve, there was plenty to learn about stocks while learning to invest in those. There was plenty to learn about your startup before you could make it profitable. There will be plenty to learn about real estate as well.
Ultimately, what are your investment goals? How much money do you need, and how are you comfortable spending? Do you need money for huge investments, or are you content to have a steady safe income?
I love the idea of real estate investing just because it seems like it could replace the income from my job. Therefore, I would not have to work. Also, it gives you a base of credit to allow massive loans for massive expansions in business.
Also, if you don't screw it up, it can be multi-generational income. Which is something you can not say for capital style investment.
I think a good read of "Rich dad, poor dad" would do many good on the philosophy end of things.
His point is to define "rich" as having your assets (which he defines as investments that produce income) produce enough income to cover your expenses.
As soon as you reach that point, you can quit your day job and focus on managing your assets.
The point about redefining the meaning of asset is a good one - real-estate is his thing too - but he points out that the cycle joe average has been playing (at least, pre-crash) where he gets a mortgage, waits for the market to go up, then sells, then just goes out and mortgages a bigger/better place and keeps doing that...... he chooses not to define this as an Asset in this context because it's not generating income for you - it's a constant liability and bill you have to pay.
Kiyosaki might have some good nuggets of general wisdom in his book, but he is one of those whose actual success is based on book sales, not other business(real estate, investing, etc.).
sell one business, which you know really well (if you got offer - i think you are successful and know business well), and replace it with another business (real estate), which you do not know yet and probably loose money during initial period... doesn't make sense for me.
That's a fair point, but unless you're going to roll it all back into the same type of business that you just sold, you're going to have to learn something new, either the stock market or real estate or something.
Ah. Then it's good when you want to learn new skill. I actually want to do this, but I believe retirement is something different. =)
Probably, we need to define what is retirement. =)) If it's doing nothing (business wise) - probably it's too boring anyway and learning new skills is good idea.
I would never want to retire. This whole series of articles is silly. Let alone that if you're the kind of person that wants to do nothing for the rest of your life there is an even smaller chance of making it in building a startup.
Why can't someone interested in a future in philanthropy, volunteerism, family building, etc., succeed at building a startup?
None of them are likely to be income-generating ventures, meaning for all intents and purposes, it's a life of retirement. Retirement does not imply doing "nothing" for the rest of one's life.
Ryan, would you need to "love" real estate for this to work? Going back to the initial article, don't do it if you don't love it because you may end up spending a lot of time on it and doing something you hate is a pretty crappy retirement.
It sounds like you have a passion for real estate now, but maybe not when you started. The same is true for me and retail (I have a couple of franchises).
I'll have to reflect on this. It's true that I do love real estate, but I'm not sure you'd have to. My sense is that you'd have to enjoy it to some degree, perhaps more than the stock market, but less than a job. Acquiring properties is time-consuming, but holding them long-term just really isn't, both from my experience and from what I've seen from larger investors.
I guess that is a key difference in real-estate and retail. The margins in retail aren't high enough to hire a management company to handle all of the details. Sure, there are store managers, but they have to report to someone. And there is turnover.
I am going to keep the multi-family unit idea in mind for the future.
Seriously? You want to get into real estate in the middle of the biggest depression we have ever seen? When property values are still way over-inflated?
This is only the start of the article's problems. The next thing he advocates is putting 20% down on a $6.5 million apartment complex, effectively leveraging 5 to 1.
Leverage has no place in any retirement account, period!
"Be fearful when others are greedy and greedy when others are fearful." ~Warren Buffett
Do you have any personal experience with multifamily real estate? It's valued based on the income stream, so unless the income stream is inflated, it's not really overvalued. And increasing population + more single-member households + fewer people buying houses now = more renters. Where the hell do you think all the people losing their homes right now are going to live?
Avoidance of the kind of knee-jerk reaction that you're espousing is what makes good real estate investors incredibly wealthy.
The leverage thing I'm more willing to concede, but the numbers aren't terribly different if you just buy the property outright. And let's be honest: this isn't a true "retirement account".
Do you have a source for this? I think the number of single-member households is actually declining in most parts of the US. People move in together to reduce costs during a recession. College grads moving back in with their parents, 2 imigrant families share a 2BR apt, etc.
Yeah, I know Buffett said that but there's a reason why nobody is buying homes right now- they are still way overpriced historically compared to incomes. Anyone that tells you property never loses value is probably an RE shill or makes money somehow off the industry.
>Seriously? You want to get into real estate in the middle of the biggest depression we have ever seen? When property values are still way over-inflated?
Depends. In general when everyone is panic selling you want to be buying. Obviously you never want to be buying crap (bad stocks, bad property, bad anything), but the panic times open up great opportunities for those with cooler heads.
Looking specifically at property many people still need places to live, but again it comes down to good versus bad. Should I invest in an apartment complex out in the middle of the desert, probably not. If I find a good deal on a complex in a city near a college, now we're talking. Rates are currently low and a lot of people are being forced into selling which makes many prices low. You can also look at the financials of a rental property and value it much easier than say a residential house. Examining a rental property is much closer to examining a business than pricing residential.
Now, the above ignores the work that goes into owning rental properties. Depending on the income level your property targets you may end up spending a full day in court every month throwing people out. Does the owner of the property have the stones to throw out a mother and her kids because they don't pay? Then you have repairs and other complaints. You can get a company to handle most of this, but that does cut into your profit.
Right now is actually a very good time to go into real estate investment. The price has dropped. The market is in fear. Interest rate is unbelievably low. The economy has somewhat bottomed out.
Currencies, on the other hand, have not. If you shift your $1 million USD across to Canadian dollars, and the Canadian/US exchange rate returns to its historical norm, then you can (effectively) lose 30% of your money quite rapidly, assuming USD is what you typically spend.
"Greene began investing in real estate while in business school, and continued to build a successful real estate business. Greene went from being a bus boy at the Breakers Hotel in Palm Beach to being one of the most successful businessmen in the world. [8]
In mid-2006, Greene, worried about the possible collapse of the real estate market, spoke with John Paulson, a fellow investor who discussed with Greene his investing strategy. They agreed that the real estate market was unstable and a bubble might be forming in housing. After the meeting, Greene engaged in a similar investing strategy to that of Paulson, which involved a series of unconventional investments trading credit default swaps. The return on Greene’s investments ultimately saved his business, and even put him on the Forbes 400 list."
A better way to invest your money in real estate is to purchase a primary residence and (with some cosmetic improvements) sell the house (after 2 years) for a tax-free gain.
You get the obvious mortgage deduction, while living there as well.
I am on my 2nd house (I bought #1 in Metro Detroit in '08) with no experience fixing up houses, so it can be done.
Have to be willing to be patient and study the market. Generally, you make your money on the "buy"
If you are in the right place at the right time, and willing to live there, that can work.....
Not everyone can handle that, though - people are unlikely in general to be able to treat their home impassionately as an investment.
The key is knowing that you've already won before you sign the papers.... as you said, doing the research, etc. Good investors always make their money on the "buy" - you buy something you KNOW is already undervalued - you never buy and then just hope.
This can be a better way to start in real estate, but it's also highly dependent on the specific market, timing, and your skills. It also doesn't scale very well.
You can make the market timing argument for any property. Like I said, I bought in Detroit area in Jan '08. Look at the numbers, the timing was awful. The purchase itself, was not.
Then try, as hard as you can, to realize that if you've been paying attention to house prices over the last decade you've been training yourself to think that this epic once-in-a-lifetime bubble is "normal" behavior for real estate prices. It isn't.
This only scales if the value of the property appreciates and allows you to refi and purchase another property with the equity. If the value goes down, the cash flow will as well.
Actually, for income real estate, it works the other way around: value is determined almost entirely on the cashflow of the property. As a result, you can control the appreciation of the property by improving the income of the property.
On that "mortgage interest deduction" thing; are you saying that the US doesn't let you deduct from your taxes the interest you pay on an investment property?
this is not retirement, this is good and old fashined work: investigating investment options. i.e. you network, look for best deals, best people, less risk, better roi, etc. etc.
There are no sure things in investing. If you have some specific quibble with my scenario that you can back up with data or experience, please post it.
The basic problem I see with this scenario is the tail risk.
You're probably going to be just fine. However there is a non-zero (and impossible to calculate) risk that you're going to lose the entire income stream.
Equities / ETFs allow much greater diversification.
The bit which bugs me though is why are you spending 200k a year. Countless studies show that greater income is not linked to happiness above a fairly low level. I refuse to believe the USA is so expensive that this level is $200k per annum. Reductions in living expenses are far easier to guarantee than increased returns.
Where's the risk of losing the entire income stream? Sure, it can burn down, but that's what insurance is for.
Or are we talking about the possibility that your occupancy may fall or rents may fall or maintenance costs may rise to the point where it's no longer profitable? That makes sense.
> The basic problem I see with this scenario is the tail risk.
you don't think that there's a similar risk in the market? sure, you pick how much risk you take when you invest, but i'd say that you're doing the same when investing in this type of real estate -- making a choice to exchange some safety for higher returns.
> The bit which bugs me though is why are you spending 200k a year.
There are good and bad investments of everything. What matters is results. If the housing is a good deal and won't fail, then logically it is a smart move.
I don't think you can decide on a hypothetical without investigating. At the very least, this article has given you another point of view of a problem most of us try to solve every single day.
Buy a land somewhere in a developing world (a sharing with a native) and build an apartments for rent (hotels, flats, depending of location). In some areas of China or Brasil it is too late (too expensive), but the developing world is really big. Several projects, $100k+ each.
World's population is growing exponentially. Tourism (flights) becoming cheaper, etc.
In each small town in Himalayas I visited there were a lot of opportunities.
all [he] ever did was smash up things and creatures and then retreat back into their money or their vast carelessness.
—Fitzgerald, The Great Gatsby
I think I recently drove by a sign on the road that said this too. It was right next to another sign that read "Make Money Fast", and another sign that said "Get Rich Working from Home." However, a much wiser man than I once said: TANSTAAFL.
Now I know this is gonna get nuked, but I don't care because I can prove my point if you can understand me. Money is all you guys ever talk about here. Can we get more up votes on articles about oh say, extravagant assembly code or hardware hacks, instead of the daily echo chamber of TC driven $pablum?
IMHO everyone here, or at least the most vocal minority, is far, far too obsessed with making money. And the kind of money amount always being talked about is literally winning the lottery. Fools! You want to know why the American Empire has hollwed out and is about to fall? Everybody is a fucking true-blue believer that they deserve to be rich,at the expense of everything and everyone else! Why can't people just be happy with enough to get by? Spend time with your friends and family, stop chasing the bullshit ideology of conspicuous consumption which much richer and much more powerful individuals want you to believe in order to trap you into their completely distorted mentality, a simulacrum of un-reality! And those biggest fish only benefit themselves by getting everyone else to chase their white rabbit btw.
Here's my one "TED" wish: instead of the pursuit of money and winning the lottery, I want more of you super-smart, elite, "WEIRD", technophiles to spend the same amount of time & effort doing something intrinsically meaningful, creative, in the pursuit of knowledge for yourself or others, or sacrificing & helping those people in your communities who are disadvantaged, oppressed and less fortunate, or the noble purpose of doing something(anything!) because it is Right and nobody else seems to be doing that thing.
What kind of ignorant fuck truly wants to live the hollow lifestyle of a wealthy young aristocrat? You might think you're making sacrifices now for freedom from money later, but I, and every single philosopher going all the way back to Thales would warn the pursuit of wealth, for it's own sake, or for the sole sake of being "freed" from money, ends up becoming a tragic, inescapable anchor you will be permanently chained to in your life, and it will fully consume and ruin whatever goodness and potential you might have started with.
There is another way. Take only what you need, don't need much, give generously without regard, and redirect all your newly found free time & energy into efforts that truly matter.
Ouch. Strawman attack. I want to get rich for several reasons.
* I don't want to think about money
* I want to be able to chose stuff to work on
* I want some expensive things, like learning to fly and moving out of my country
To get rich, I'm trying to create value by writing useful/entertaining software.
Is there something wrong with me? It's not that HN is full of lazy wishful thinkers who just want to get rich so that they can go insane with a new Maserati every week. We just want to get some more freedom and a safety net, and are willing to work hard and create value.
This particular article is more of a thought experiment than a pratical investment advice. Very few if any startup-culture people will spend their money this way. Most will spend it to pay off debts, start new companies, maybe invest in others' startups, buy a new car.
I don't want a new car. It's 25 years old, and I wouldn't mind replacing the ratty, decaying upholstery. My house is great, but could use some repairs.
I've got a wife and four kids, and if I didn't have to work I wouldn't have this ten hour hole in my day where I can't spend time with them. And, you know, time for learning a new language. Or, maybe, a hobby. I could play catch with my kids instead of fixing the washing machine.
I'll add that for each rich person there must be an army of people working to feed this rich, clean his toilets, repair his cars, tend his gardens, so there is a definitive limit to the number of rich lazy bastards the society can support.
Then you may realize that you don't really want to be even more exploitative towards other people by being living a more wasteful way-of-life than you already do.
I've read that at the height of the French monarchy right before the revolution, a disproportionate number of labor was being employed in textiles to create the extravagant, lavish and enormously expensive dresses for the royal court. We're talking like 25+% of what we would call their GDP. (If you really want to understand capital, wealth & labor in terms of the bigger picture, I highly recommend skipping the baseless, mostly fictional "modern" econ textbooks, and go read some political economy history books. The more thing changes, etc, etc)
Your point hits right to the heart of the matter. And it's why I utterly despise the rich so much. When I look out on the world, I don't see what is actual, rather I see all the lost potential(opportunity cost). It's heartbreaking. And it's not just how much wealth they take—it's also how much resources they divert from the natural ebb & flow of capital to support their meaningless, empty, wasteful lifestyles. And all for no practical reason other than keeping up with the Joneses. Meanwhile people are starving and killing each other in ghettos not 10 miles away.
It's funny how such a stat like the French textiles leaps right out in historical hindsight, yet every era of human history has it's own economic sinkhole into which the rich and the powerful throw societies collective wealth. I suppose for the present day US, instead of lavish dresses for the royals, it's lavish military spending for the gravy-train DoD fucktards. (We'll hit a $1 trillion defense budget in less than 5 years! If that doesn't make you want to take to the streets with a molotov, then nothing will). They don't realize it yet, because they are all narrow minded pigs blinded towards their own trough, but their economic parasitism will inevitable trigger another revolution in America. Malcom X's proverbial chickens will indeed come home to roost, and it's going to be simple, unsustainable economics that triggers it. Archaeologists will dig us up in 1,000 years and wonder why we couldn't see the pattern.
Wealth = Exploitation.
QED, bitches. If this belief makes me a radical socialist, so fucking be it! I know I'm right from a high level perspective.
So you're putting 25% of your cash down on a $5m property for $110k per year. Nice! How many such properties do you think the banks are going to let you buy? With the future values of these properties a bit murky, I imagine that someone with 4-5m in the bank ISN'T going to get the green light to buy $21m in properties (4 difference loans to service).
People keep bringing up INDIVIDUAL investments that can net a great return (in this case, 9%). That's missing the point. With big piles of money, you have diversified holdings. You're not going to drop 90% of your cash in real estate down payments. Nor are you going to drop it all in stocks. You're going to (generally) do a reasonable asset allocation to minimize the risk. While I did mention the S&P500's performance for comparative purposes, I wasn't advocating for a pure stock portfolio (any more than you're advocating for a pure real estate portfolio).
As he says, real estate has plenty of risk. You're betting on a local economy, construction pace, population growth, etc. But anyone with millions ought to be playing in real estate.