Benefits of Real Estate Investing?

[Millions]

Hey everyone,

Just curious. I bought a couple houses in the last couple years and not trying to be negative, and after learning more and more, astleast for me, they are the worst thing I have done.

It probably doesnt help with the market ofcourse but even still, from what I read now in Investment books, etc, is that Real Estate is not as "great" an investment as what it was made out to be.

As an example in the USA, according to a study I read,in the last 100 years, house prices have not gone up at all (when you factor in inflation )

So If not for appreciation, what are the major benefits from RE. I know there are some but I think I have missed or not heard of some concepts yet.

Obviously..

Cashflow (if you out enough down payment)
Appreciation (If lucky but not a priority for investors)
Leverage - As far as I know, this is leverage on borrowing more money with less but can go both ways if market goes down
Tax - If you make enough for write offs etc.

I`m just wanting to learn the other benefits so I can maximize my investments.

I currently have a condo but it is negative cash flow.

And a House ( which is about $700 in cashflow a month at 2.25% prime) so Not for long!

I have heard some stories of having your equity always available and liquid but I dont think its possible with my mortgage.

Any more Advice, or is it just hold on, try for cash flow, and hope the market goes up so you can sell and profit?

Thanks all!!

 

[Dnaiture]

You`re forgetting mortgage paydown as well. My first property is essentially cashflow neutral, however, in addition to any possible appreciation, my tenants are paying down the principal on my mortgage by over 700$ per month.

 

[Millions]

QUOTE (Dnaiture @ Mar 9 2010, 08:12 PM)
You're forgetting mortgage paydown as well. My first property is essentially cashflow neutral, however, in addition to any possible appreciation, my tenants are paying down the principal on my mortgage by over 700$ per month.






Yes True, Im getting about 700-800 paydown a month but only while rates are this low.



Again, just for the readers, Im not trying to be negative or blast RE, Im literally just curious that there must be much more to it, much more complex, but maybe thats only when you get into big buildings and not just duplexes, etc.



MAtt

 

[newfiebullet]

you are forgetting the that even at normal inflation rates you would still profit because your mortgage does not inflate, so you are making on the inflation of the property that is mostly owned by the bank.

 

[JimWhitelaw]

See this excellent article by Thomas Beyer on how you make money in real estate besides equity appreciation:

http://80lessonslearned.blogspot.com/2009/...ay-to-make.html

 

[Rickson9]

`Investments` regardless of what they are, are only good when purchased at a good price. All investments are bad when purchased at a bad price.

 

[gwasser]

QUOTE (Millions @ Mar 9 2010, 07:52 PM) Hey everyone,

Just curious. I bought a couple houses in the last couple years and not trying to be negative, and after learning more and more, astleast for me, they are the worst thing I have done.


Any more Advice, or is it just hold on, try for cash flow, and hope the market goes up so you can sell and profit?

Thanks all!!

Hi Millions,

Just keeping up with inflation - i.e. retaining your purchasing power is already a benefit of investing.
In real estate, you can benefit even more when you are leveraged. But these benefits come only out when you hold a property long term.

If you keep up with inflation, your property value appreciates typically 3 to 4%; real estate in many of parts of Canada appreciates on average 6% per annum or so. Hence if you have a property with only 20% of your own money down, your ROI is nearly 30%. However, 20% may not represent a big amount of money. e.g. if you have $20K down you`re making $6K profits. You would need a lot of investments of this type to make $1million profit (close to 166 doors).

The beauty of real estate is that you can determine how much your net cashflow is and how much your appreciation of your investment money is going to be. The higher the leverage, the less cashflow and the more appreciation.

What many REIN members forget are two key ingredients in the investment puzzle. First Real Estate Investing ala REIN is not strict investing. It is more like running a business. Yes you get a return on investment but rather than a typical investment, you can not hold up your hand and money comes flowing in. You need to work for it as well , i.e. run your business. As a minimum you have to manage your team, in particular your rental manager. If you do the rental management work yourself, you owe yourself a salary and that is not profit, that is as it says salary: compensation for your work. If you don`t do the work all by your self, you have to pay a rental manager and... you will still have to spend time on inspections and so on to stay current with your properties as well as spending time to find new deals.

Overall, it is true that real estate is a handson and very time consuming form of investment. But, when using leverage, your salary and the profits can be good as well. In Calgary, even now at depressed prices, it is tough to find properties with cap rates over 3%. Especially when you are after a single townhouse or apartment units. You`re competing with numerous home buyers who are willing to overpay - at least from a REIN investor`s perspective. That is the reason that you may have to look at numerous properties and deals before you find the right one and that takes again a lot of time and labour. So, in fact still more business than investment.

Only when you arecbuying wholesale, say 6 doors or more at once, is the chance that you find investor priced properties with higher cap rates. But many of us don`t have pockets deep enough or sufficient work experience with real estate to dare to take this jump into multifamily housing (myself included).

So, especially as a small investor, you should diversify into paper securities as well. At least that is my opinion. However, investing in stocks and bonds, although closer to true investing without labour (and holding up your hand to receive your income while sitting in a chair watching BNN or a entertaining sitcom), is not without its risks and disadvantages either.

Hope this helps. In the end, only the sun goes up for free (within limits).

 

[EdRenkema]

QUOTE (gwasser @ Mar 9 2010, 11:19 PM)
So, especially as a small investor, you should diversify into paper securities as well.




Paper assets are momentum driven and hence can only be less risky once an investor understands options trading - I don't.

RE is simple and I'm a simple guy so I get it (speaking basics here) its not easy, once again I get it, I'm not a quitter.

Paper securities are not diversification they are a different variable altogether and a much steeper and more severe learning curve not to mention not nearly as leverageable as RE.

I had a realtor who advised me to 'diversify' (aka deworsify) into paper assets and this was 3 years ago... guess what happened to most paper assets since then...



Mathew, learn a system and always, always, always invest for cashflow, real cashflow no matter what the appreciation might be.

 

[Thomas Beyer]

QUOTE (Rickson9 @ Mar 9 2010, 10:05 PM)
'Investments' regardless of what they are, are only good when purchased at a good price. All investments are bad when purchased at a bad price.


not necessarily .. depends on the time frame ..



if you had bought a house in Calgary in the 60's for $40,000 .. but really it was worth $30,000 at the time i.e. you overpaid by 1/3 .. and today it is worth $400,000 .. is that a bad investment ?



The money in real estate, certainly in single family homes or townhouses or condos is not primarily in cash-flow but in equity build-up through value appreciation and mortgage paydown. Even in a flat market with no cash-flow you can make a substantial amount of money by paying down the mortgage .. on a 25 year term mortgage you pay it down about 10% in 5 years .. and 22% in 10 years .. so assuming 20% down: that is a 100% ROI in a completely flat market with 0 cash-flow !!! Most markets are not flat for 10 years .. in fact the Canadian average is value doubling in less than 20 years ..



Of course you need to get there .. so if you have positive or at least non-negative (on average) cash-flow you can get there !



Thus, if you overlever, i.e. have too high a mortgage, then you may or likely will, loose ..



20% down is usually too tight .. but doable sometimes .. better is 25 to 35% down !



Why are values in 10+ years generally not flat: because we live in a democracy with public obligations to the constituents aka voters .. thus a propensity of elected governments to overspend. Thus: deficits. What makes deficits smaller through time ? Inflation aka printing press.



Thus: democracy = inflation = real estate upside if you hold long enough .. thus: buy as many properties as you can comfortably hold for 5 or 10 or 20+ years .. and you too will look like a genius in 10 years even if you overpaid slightly in the beginning.



Think of it as a three course meal:



appetizer = cash-flow

main course = mortgage paydown

dessert = value upside



I rest my case for real estate.

 

[Thomas Beyer]

QUOTE (EdRenkema @ Mar 10 2010, 07:48 PM)
..



Mathew, learn a system and always, always, always invest for cashflow, real cashflow no matter what the appreciation might be.


true .. but the real money is not in the (usually tiny) cash-flow .. it is in the equity creation through mortgage paydown and value upside !

 

[larysa002]

And I recently found The Spectactor newspaper from Feb 1950 while renovating. Hamilton Mountan bungalo's are advertised at around $6,000. They are from 210k now.




QUOTE (ThomasBeyer @ Mar 10 2010, 08:21 PM)
if you had bought a house in Calgary in the 60's for $40,000 .. but really it was worth $30,000 at the time i.e. you overpaid by 1/3 .. and today it is worth $400,000 .. is that a bad investment ?

 

[Thomas Beyer]

QUOTE (larysa002 @ Mar 10 2010, 09:41 PM) And I recently found The Spectactor newspaper from Feb 1950 while renovating. Hamilton Mountan bungalo`s are advertised at around $6,000. They are from 210k now.
indeed .. imagine you had overpaid .. and paid $10,000 ...

 

[LeighF]

I have 4 condos right now, (planning on more) that I am holding long term. This is going to be our retirement nest egg. I cannot (and do not want to) rely on stocks and mutual funds to supplement our retirement. I could care less if I ever invested in another mutual fund in my life! I would rather buy real estate.

My goal: cash flow properties and to have my tenants pay off my mortgage
When we are ready to retire, I know I still have my four properties that I could sell if cash is required. (If I don`t want to sell, I know that I still have money coming in every month from my tenants)

 

[aiden1983]

QUOTE (LeighF @ Mar 11 2010, 06:44 AM) I have 4 condos right now, (planning on more) that I am holding long term. This is going to be our retirement nest egg. I cannot (and do not want to) rely on stocks and mutual funds to supplement our retirement. I could care less if I ever invested in another mutual fund in my life! I would rather buy real estate.

My goal: cash flow properties and to have my tenants pay off my mortgage
When we are ready to retire, I know I still have my four properties that I could sell if cash is required. (If I don`t want to sell, I know that I still have money coming in every month from my tenants)

This is very similar to my goals also.

 

[housingrental]

I think both Thomas and Godfried`s post are great

What isn`t being acknowledged from following Godfried`s perspective is the opportunities this might allow for in real estate. Markets don`t always move in tandem. Down turn`s in real estate are the often the best time to take positions for your long term purchase.... Along with the additional level of safety this provides if things go wrong in your real estate business having a significant component of your portfolio in other area`s allows you to re-balance to overweight in real estate from time to time when opportunities present themselves.

 

[DaveRhydderch]

Good responses here. I think Millions your problem may have been poor real estate investments. However, you`ve learned and won`t make the same mistakes twice. That is worth money.

I started investing in June of 2006, right in the heart of the boom. I was going over my mortgage statements the other night (tax time) and was surprised to find that even during this time, my original cash investment had more than doubled.

I checked my other investments. Needless to say, the same wasn`t true for them.....

 

[LillianHo]

QUOTE (ThomasBeyer @ Mar 10 2010, 06:21 PM) Think of it as a three course meal:

appetizer = cash-flow
main course = mortgage paydown
dessert = value upside

Well said, I like that!

 

[gwasser]

QUOTE (ThomasBeyer @ Mar 10 2010, 07:21 PM) not necessarily .. depends on the time frame ..

if you had bought a house in Calgary in the 60`s for $40,000 .. but really it was worth $30,000 at the time i.e. you overpaid by 1/3 .. and today it is worth $400,000 .. is that a bad investment ?

The money in real estate, certainly in single family homes or townhouses or condos is not primarily in cash-flow but in equity build-up through value appreciation and mortgage paydown. Even in a flat market with no cash-flow you can make a substantial amount of money by paying down the mortgage .. on a 25 year term mortgage you pay it down about 10% in 5 years .. and 22% in 10 years .. so assuming 20% down: that is a 100% ROI in a completely flat market with 0 cash-flow !!! Most markets are not flat for 10 years .. in fact the Canadian average is value doubling in less than 20 years ..

......

Thus: democracy = inflation = real estate upside if you hold long enough .. thus: buy as many properties as you can comfortably hold for 5 or 10 or 20+ years .. and you too will look like a genius in 10 years even if you overpaid slightly in the beginning.

Think of it as a three course meal:

appetizer = cash-flow
main course = mortgage paydown
dessert = value upside

I rest my case for real estate.

Ed and Thomas

If you had invested Thomas` 30,000 in the Templeton Growth Fund in 1955 (inception) it would have been worth: 3x$6,728,650.00 provided you reinvested the dividends or $20,185,950.00. Ed, I am so sorry that you have such a hard time understanding investments other than real estate. BTW, this includes all those bad stockmarket crashes and the poor performance of the last 10 years or so. (http://www.templeton.com/retail/jsp_app/pr...?fundNumber=101)

As they say... longterm investing does work. And a diversified portfolio including stocks and bonds does work.

Oops, Adam. Sorry I missed your post initially but yes. You seem to get the point I am trying to make.

If I did not like real estate, I would not be a member of REIN. But... Each asset class of investing has plusses and minusses. Ups and downs. You should have muliple investment classes. If you owned 200 properties of $200,000 with LTV of 80% in 2006 or 2007 in the U.S. What would have your net worth been now? What if you had been diversified and instead of $800,000 invested in real estate, you had invested in 2007 $400,000 in real estate, $200,000 in the stock market and $200,000 in cash. Would you not have been better off being diversified?

In the first case you would have been broke. In the second case you would still have $300,000 to $350K to fight another day.

 

[EdRenkema]

QUOTE (gwasser @ Mar 11 2010, 05:47 PM) Ed, I am so sorry that you have such a hard time understanding investments other than real estate.
Real Estate - I have control over the asset once I own it, I choose when and where to invest based on market fundamentals and simple mathematical calculations.

Paper assets - no control period!

Whats not to understand?

Think thats the way to go? then give er.

Between 2000 and 2005 I was cranking almost $5K every two or three months into mutual funds thinking I was being conservative and relying on a financial `advisor` and not staying much ahead of my principal invested.
Between 2005 and 2009 I tripled my net worth using real estate and learning a system - nobrainer!

 

[EdRenkema]

QUOTE (ThomasBeyer @ Mar 10 2010, 07:25 PM) true .. but the real money is not in the (usually tiny) cash-flow .. it is in the equity creation through mortgage paydown and value upside !
Tiny?
I beg to differ, 2 humble condos I bought in Hamilton in 2008 spin off $4 to 500 a month in positive cashflow. But I guess its just me thats good grocery money for me. These deals are now few and far between.

In any event the cashflow is what will carry through the times of downturn, but no downturn in Hamilton the past 2 years!