Re: Why real estate?
Real estate is not for the timid.
I work with a ton of real estate developers and small investors, including some where we set it up for them to use their 401k and IRA money to invest with. They are very confident in their abilities and all have made profits, but even they will warn against it for most.
First off, you CAN lose money in real estate, just like any other investment. Even though you have a physical property, I've seen people lose tens of thousands of dollars on their investments. For example, a friend of mine purchased a new condo in an upscale neighborhood full of corporate executivies. His plan was to rent it out to these executives, and maybe make a deal with the local corporations for them to rent it out. It was a good plan. But it backfired when he didn't get the rent amount he needed to break even on the loan, considering property taxes, homeowner's dues, and other fees. He still isn't, and he's losing money even though the loan is being paid down. This is money every month that is coming out of his current investments. Even his long-term return is at risk, given historical appreciation rates in that area.
Second, most people underestimate housing cycles and the right time to buy/sell, so you have to be committed to holding a property for a longer time period than you expect. This could create some considerable financial risks.
Third, secured debts provide no safe haven in bankruptcy, so if you lose your job, or a renter, and blow through your life savings, you have fewer options than if you simply bought a REIT mutual fund or something.
Lastly, real estate is naturally going to appreciate with inflation, but people vastly underestimate their "true costs". For example, if you pay $2500 per year in property taxes, that is a cost item. And there is also a lost-opportunity cost of that $2500, because it's money you could've invested and earned a rate of return on, for many years. But all too often investors look at what they paid for a property and then what they sold it for and calculate their rate of return. They simply do not consider ALL costs involved, which makes real estate an even more risky investment than people believe.
On the flipside, I believe that people can be very successful with long-term real estate investing, and recommend it as part of your portfolio. The key there is long-term, not buy-sell flips. But for the timid, mutual funds can provide that part of their portfolio at a lower cost and reduced risk.
Every real estate investor my CPA knows that flips properties has lost money over the long-run, just like the majority of daytraders lose money over the long haul. The most successful ones I know are those who see things 20 years ahead and buy property then, letting it appreciate it, and then selling it to developers.
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05-16-2007, 05:05 PM
