4 – REAL ESTATE – But is it an investment?

Real Estate is a little harder to  explain since most people definitely think it is an investment. But is it? There is value in it, and it is typically safer than stocks and bonds. Let us start by clearing up what real estate is. There are basically two types of investment that most of us will be involved in; residential and commercial real estate.

Your home is considered by most people their greatest investment, unfortunately most people don’t act that way. They buy a house they like and then realize they overpaid and that the house is more costly than they thought to maintain. Truly a home costs you more than it produces, this is not an investment, it is a place to live. If you do the numbers then you realize that the cost of maintaining a home can be surprisingly high.

Property taxes, insurance, maintenance including that of a new roof every twenty years can eat up, you appreciation. Sure you are saving $1000 or $2000 a month into it, but most of it does not go to reducing the mortgage or increasing its value. Of course you need a place to live anyway, so it may be better to pay a mortgage than rent. There are tax advantage to paying interests, no advantage to renting, but if your not paying taxes anyway what is the advantage

The rich have homes, big homes. But the truly rich actually have more money than house, the poor have more house than money. The typical rich person may have a net-worth of 5 million dollars and may be one million house. They owe half the value of the house. Their house is only one tenth of their value. The poor person has a $150,000 and a net worth of $10,000 dollars if that. The house represents a mortgage payment at 30% of their income and 100% of their worth. They work to pay their home. The rich have their money working somewhere else.

I am not saying not to buy a house to live in, I am saying it is a cost item and not as much of a benefit as you might think. Some people would tell about the tax advantages of owning one. Realize that it saves you on taxes but it doesn’t put that money on your table, your are just spending it in a different place.

So what is the best deal. Easy, if your wife, husband or other significant person will allow it, buy yourself a duplex or apartment building, get the tax break, turn it into a business, deduct your cost of living from your other income. You have a true tax advantages and positive cash flow, and your property will go up according to inflation. Have I done it, no, my wife or girlfriends never allowed it. Perhaps now that I am closer to retirement time, and prices are at a reduce level it might be a good idea again. Note rental real estate didn’t suffer the big drop in prices, that the regular homes did, and there are not that many on the market since there positive cash-flow has kept them in demand.

What about Commercial real estate? Commercial properties can make you lots of money or make you loss it very fast. The cycles are much faster and deeper, it is only for people with very deep pockets. In the last real estate cycle, I made a lot of money in residential real estate over 10 years period. Bought a big home on Miami Beach with part of money and became a partner on a building. We bought the land very cheap under$50,000, built the building with a $800,000 loan, and we had over $800,000 in equity. Unfortunately  a commercial real estate crash was just around the corner, we lost our tenant, and could not get it rented for a period of over a year. The monthly carrying cost was over $30,000 a month. The economy in general was doing badly, and after a year of carrying it, we decide to give back to the bank in lieu of foreclosure. Our savings were exhausted and we didn’t see anything happening quickly enough to turn the value of it around. The bank wasn’t that happy either, they figure the building was worth about we owed. It took them 5 years to sell the building, after maintaining it for 2 years without a tenant. I lost about $200,000 but could sleep at night.

Conversely, I made far more from my waterfront home on Miami Beach than the building. Ultimately sold that one because the Taxes and Insurance were becoming eyesores. I mention all this to restate the obvious buy Location, Location, Location in Real Estate. By the house that you will enjoy, stay away from elephants, but be careful calling them investments.

Real estate has carrying cost, maintenance, taxes, insurance, cleaning and more depending on property. Consider buying land, it had a lower carrying cost and you can make more long term than if you have some on it. Do your research, become the expert, don’t let anyone sell you something. You make your money when you buy, not when you sell. You always sell at market, the trick is to buy below market.

You make your money when you buy. If you buy a house worth $150,000 for $75,000 then spend $25,000 fixing it, you made $50,000 if you sell it. Buy a $150,000 for $150,000 and it sits there year after year costing you money and when you sell it maybe you made money or not. SO REMEMBER You make your money when you buy.

Leave a comment

Your email address will not be published.