Quote:
Originally Posted by Maximus122
The problem with property as an investment is properties only have a useful life off about 70 years. If you take an extreme example, any property you own will be rubble 500 years from now.
The real estate agents and the builders make the money on property. If the properties were excellent investments the banks and the builders would just keep them and rent them out themselves.
Stocks are better investments, as depreciation is already subtracted, from the net profit line.
500 years from now Coca Cola will still be here, paying dividends, their factories will be in tip top shape and it will be far more profitable. You're property will be bulldozed to the ground.
Thank you Maximus for the comment/thesis. One of the key reasons that I post here is to allow anyone and everyone to comment and tell me where I am wrong in my thinking and make me defend my thinking and actions OR have to reconsider my thinking. I hope you come back with a much more solid argument why RE is a bad investment in comparison to Equities and Smash on the idea with a much bigger hammer.
Let me help you out by trying to smash on my plans by Taking your position.
I will break my reply into 3 sections. 1)
Why RE is a bad investment, (this post) 2) Why Equities are good investments, 3) why RE is a good investment (for some)
----------------
‘stocks are better investments’ Definitely true for most investors, but not for all and not for the reason(s) you state.
Here are a few Negatives for Real Estate Investments in no particular order:
1) High barrier (down payment) to entry. I have several small properties (under 100k) that generate 7-800/per month and have owned them for over 10 years. One or two of the tenants are older (mid went from mid 40’s to 50’s and working) If they could see that they were staying, they could have saved up for 2 years and had a down payment and made a mortgage payment instead of a rent payment for the last 8 years and be close to owning the properties outright today. Their problem is that they cannot see past their next paycheque.
2) Risk of ruin. On an Investment property, If you need to collect rent to pay your mortgage, one bad tenant or professional squatter can stop you from collecting rent for a year And cause you to have to pay 5k for legal and Bailiff fees. IF (mortgage is underwater) and you are forced to sell at a bad time in the real estate cycle your entire investment can go to 0. You can get downgraded to a bad credit rating if it was a bank foreclosure and/or property tax was still owing. This compounds the problem as lower credit rating individuals pay higher interest rates on the same loan amount because the bank considers them a higher risk of non-payment.
3) Maintenance and repairs are required annually on the property. You should have CapX funds to deal with this, but most first time investors think that the tenants will love and take care of your property for you…. Sorry NO! Hot water tanks, dishwashers, fridges do wear out and fail over time.
4) Requires a minimum level of disagreeableness. If you are starting out and have the personality type that would dread firing a co-worker, you would also likely dread evicting a tenant. You can have professionals do it, but it costs way more. Sometimes you have to fight with a tenant when they complain the toilet is not working and you send a plumber. The plumber’s report comes back and says a hair clip was jammed in the drain line. A hair clip is not wear and tear. The plumber’s fee is the tenant’s responsibility.
5) Illiquid nature of Real estate. Need cash for an emergency? Selling a property may take 3-6 months. Even at the best of times, you cannot get that number under 2 months unless you are buying with cash and no subjects. (subject to inspection/financing etc.) Banks/Lawyers/building inspectors/Title companies need time to process. Banks also need extra time to assess you as a risk and the value of the property.
6) Transaction costs rules out quick gains. Your comment on real estate agents making money on deals is legitimate. If you are planning to hold the building for less than say 10 years, profit on a normal property can be eaten by the bank/legal/assessor/inspector/realtor/transfer tax fees on both buying AND selling the property. You have 0% chance of gaining 20% on your investment in under a year. (as opposed to an individual stock.)
7) Requires lots of self study and advanced planning. You need to think about your personal and investment needs. This statement can mean a lot of things. Personally because of the illiquid nature of RE, if you can foresee that you will need large amounts of money in the future, say to pay for a car/wedding/kid’s university, you may need alternate sources of funds.
Locationally, you also want to have a good Idea (need to study and plan) that you are investing in a place that is growing and will have a reasonable chance of capital appreciation. Ie. Invest in a location where jobs are moving like Texas and not California. On a more local note, if your city is planning a transit stop or new bridge to improve traffic in that area or a new ‘development zone/revitalization zone’ that gives the investor certain privileges or tax exemptions. I am a big believer in ‘free infrastructure’ plays. Ie. The city has a better idea of where transit demand is high and will forecast for you where the growth in the city is going to be.
8) It takes patience even when things are good. When the city starts building a new transit stop at location X and you decide to buy a condo in the tower right at that location, you will have to suffer during the construction and 100% guaranteed protests and delays that come with such infrastructure development before you see that large lift in property prices when new retail restaurants and services move in to take advantage of the new transit. 400yards/meters is a good gauge of where to buy and what gets a lift. That is roughly a 3-5 minute walk to transit.
9) Capital gains are taxed all in one year. Generally this leads to a maximum tax in the year that you sell a property.
10) Can be hit by natural disasters and uninsurable events. Terrorism or vandalism by vexatious tenants are not insurable and will be money right out of your pocket. In some places where you can buy insurance vs. large natural disasters, your premium could jump as much as 100% after such an event. Think of Florida hurricanes and the threat of insurance companies to pull out entirely from the state if they are not allowed (by law) to raise insurance premiums by market rates.
11) You can do everything right and still have your property value decrease. Having the wrong neighbors is a good example. (don’t cut their grass/rake leaves/park wrecked vehicles on their lot/neighbor house becomes a drug house or is occupied by gang members)