Downsides of real estate

[GoodSteward]

I guess my point is people better look before they leap...in anything they do. Also...its not so bad being a boglehead...especially the majority of them with multi million dollar portfolios

Using real estate as income is just like starting a business. Some make it, but most don't. Just depends on all the factors.

[corn18]

I guess my point is people better look before they leap...in anything they do. Also...its not so bad being a boglehead...especially the majority of them with multi million dollar portfolios

I agree. Maybe I'll just buy some REITs. But the DW is interested and if she gets into it, I might be willing to take some risk.

[StormRichards]

I'm liking the new TexasHusker. He stopped bashing savings and is focused on what he has done and seen personally to be successful in real estate. Maybe I don't agree with everything he says about it, but he makes me think outside my boglehead box.

If there were only the honest and sincere posts being considered, I would agree with you 100%.

Sadly the majority of his posts are for "entertainment" and I can't post what I think about those posts without getting scolded.

[TexasHusker]

If there were only the honest and sincere posts being considered, I would agree with you 100%.

Sadly the majority of his posts are for "entertainment" and I can't post what I think about those posts without getting scolded.

Oh you poor thing

[Fishindude77]

as soon as you borrow just one dollar against a house you no longer own it outright. If you default on that one dollar you have to answer to a bank. For just one dollar, they can own it. After borrowing it you have to pay it back to maintain all of the investment.

Who says you need to borrow to get into investment real estate?
We don't borrow to make our stock market investments.

[97guns]

I love the idea of real estate for investments due to the potential of passive income and would like to get into it one day if possible. However, I just can't group tapping real estate anywhere near tapping cash investment accounts. I don't even group borrowing against 401ks or other accounts as similar. The main reason is as soon as you borrow just one dollar against a house you no longer own it outright. If you default on that one dollar you have to answer to a bank. For just one dollar, they can own it. After borrowing it you have to pay it back to maintain all of the investment.

On the contrary, you when you borrow from a retirement account you are borrowing from yourself, and pay yourself the interest in the case of a 401k loan. Also, if you lose your job and can't pay it back you are simply out of that money and charged taxes on it as it becomes counted as income (if it was traditional). I just don't see these two as comparable at all, outside of the fact that you can technically use the equity on a home for cash. With a home, though, it's always going to be in the form a loan with collateral, and that collateral is potentially all your equity in that home.

As far as I'm concerned my RE investment is the same as a dividend paying, income generating stock investment, If you need funds you liquidate stock. Now tapping equity on your personal residence is a different matter imo

[TexasHusker]

as soon as you borrow just one dollar against a house you no longer own it outright. If you default on that one dollar you have to answer to a bank. For just one dollar, they can own it. After borrowing it you have to pay it back to maintain all of the investment.

Who says you need to borrow to get into investment real estate?
We don't borrow to make our stock market investments.

Leveraging is how you make a lot of money in real estate. If you took away the borrowing aspect, it would just be ho-hum.

Example:

Friend of mine (we will call him "Stupid" for this thread) funds the construction of 3/4 bedroom single family homes here. He does the funding, the builder does the building, and they split the profit. They generally are doing 3-4 at a time.

Stupid goes to the bank and puts down $30K to start construction, borrowing the other $120K to finish out the house. He pays interim finance interest of maybe $3K for 120 days until the home is completed.

The house is then completed, and they sell it for $180K. The profit is $27K and they split that amount. $13,500 for Stupid. Multiply that X three houses at a time, and Stupid is making about $40K every 120 days. As is the builder.

And Stupid just keeps putting down the same $30K per house each time and keeps going.

His $30K turns into $43,500 every 120 days. That's about a 45% return for Stupid.

Of course, sometimes they lose a little, sometimes they only make a little, sometimes they make a lot, and most of the time they just make average.

But you can't do any of that without using leverage. People like Stupid who are investing in real estate are using leverage.

Donald Trump might be the most famous real estate mogul of all time. Then again, you might think he's Stupid.

[97guns]

Leveraging is how you make a lot of money in real estate. If you took away the borrowing aspect, it would just be ho-hum.

Example:

Friend of mine (we will call him "Stupid" for this thread) funds the construction of 3/4 bedroom single family homes here. He does the funding, the builder does the building, and they split the profit. They generally are doing 3-4 at a time.

Stupid goes to the bank and puts down $30K to start construction, borrowing the other $120K to finish out the house. He pays interim finance interest of maybe $3K for 120 days until the home is completed.

The house is then completed, and they sell it for $180K. The profit is $27K and they split that amount. $13,500 for Stupid. Multiply that X three houses at a time, and Stupid is making about $40K every 120 days. As is the builder.

And he just keeps putting down the same $30K per house each time and keeps going.

His $30K turns into $43,500 every 120 days. That's about a 45% return.

Of course, sometimes they lose a little, sometimes they only make a little, sometimes they make a lot, and most of the time they just make average.

But you can't do any of that without using leverage. Folks that are investing in real estate are using leverage.

Yes, I have a couple properties with loans and my ROI is better with them than properties that are free and clear.

[Fishindude77]

Folks that are investing in real estate are using leverage.

Some are.

Some are using their own money instead of the banks money, paying zero in interest. If Stupid used his own $150,000 to fund these houses he would add another $9000 per year to his take home that he is currently giving to bank.

[TexasHusker]

Folks that are investing in real estate are using leverage.

Some are.

Some are using their own money instead of the banks money, paying zero in interest. If Stupid used his own $150,000 to fund these houses he would add another $9000 per year to his take home that he is currently giving to bank.

Stupid would think that's stupid, because that lowers his return to less than 10%. In that instance, he would only be able to build one house at a time, and would only be making around $13,500 every 120 days.

Instead, he will use his $150K to build 5 houses simultaneously, thereby multiplying his income by almost 5.

Would you rather make $54,000 a year by using all of your cash, or $200K a year using someone else's?

I would have exactly zero interest in investing in real estate if I couldn't leverage.

[corn18]

Stupid would think that's stupid, because that lowers his return to less than 10%. In that instance, he would only be able to build one house at a time, and would only be making around $13,500 every 120 days.

Instead, he will use his $150K to build 5 houses simultaneously, thereby multiplying his income by almost 5.

Would you rather make $54,000 a year by using all of your cash, or $200K a year using someone else's?

I would have exactly zero interest in investing in real estate if I couldn't leverage.

Sounds like trading on margin. At least with RE, you have something to back up the leverage. Margin trading scares the crap out of me.

[Fishindude77]

Would you rather make $54,000 a year by using all of your cash, or $200K a year using someone else's?

We can go round and round on this all night.
Use your own money and you make whatever profit you make on each project, plus save whatever you would have paid in interest to the bank. Banks are in business because lending money is profitable. Cut them out of the picture and be your own bank, make more money.

[TexasHusker]

Sounds like trading on margin. At least with RE, you have something to back up the leverage. Margin trading scares the crap out of me.

It's the same as margin, but with stocks there is no hard asset, just a piece of paper. It can be dicey.

Leverage in real estate is the norm.

[TexasHusker]

Would you rather make $54,000 a year by using all of your cash, or $200K a year using someone else's?

We can go round and round on this all night.
Use your own money and you make whatever profit you make on each project, plus save whatever you would have paid in interest to the bank. Banks are in business because lending money is profitable. Cut them out of the picture and be your own bank, make more money.

If you want to leave most of your return on the table, by all means.

You think Donald Trump and Warren Buffett are using their own money for their holdings? No way. Trump probably doesn't personally own 20% of his holdings.

[Nutria]

I turned over a new 🍃

You don't want to know what that little oblong thing attached to a long squiggly tail really looks like...