I have a friend who's a realtor who thinks real estate is a better investment than stocks/funds, etc because you can improve upon real estate, i.e., rehab it while you can't do that with stocks unless of course you're Warren Buffett and can buy a company in its entirety and "rehab" or restructure it. So my friend calls real estate an "active" investment and stocks etc. "passive," because you can't improve stocks which is funny to me as I have a completely different view of those terms in the fund world. I also see flaws in his argument because of the liquidity issue with real estate.
It's interesting to note that both real estate and stocks have speculator fans as there are TV shows/channels devoted to both--flip this house, CNBC/HGTV, etc. What I'm wondering is what board members' experiences have been. Have any of you had experiences rehabbing a house or property where it really turned out to be a great investment? I also suppose that for someone who is a realtor with an inside track on the hot upcoming neighborhoods and connections with the right contractors, the rehab experience would be completely different from what it might be for the average person. To me it seems like a high risk activity but potentially a highly rewarding one if you know what you're doing.
Comments
I've had the thought but haven't pursued.
nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html
Additionally, recession tend to increase rental rates and make buying property more affordable, while growing economies tend to push up the sales and prices of property.
Like the equity market, the real estate market has it's cycle.
Nick de Peyster
Undervalued Stocks
We recently considered doing a 15-year refi for remodeling purposes under the supposition we could do better leaving our money invested. But ran the other way.
First, (mid February) we were quoted a 3.5% fixed rate (no points) which would have been nearly a half-point higher than the existing mortgage. They submitted an app to their central office (and dinged our credit report) based on a cursory talk with local agent (nothing signed). I attempted to cancel by phone and email the same afternoon.
About a week later they mailed a 20-30 page packet of Disclosure Documents. They had lowered their previously estimated closing costs, so I contacted them again. Than - they informed me that the 3.5% rate quoted in the disclosure papers was not firm, but would "float" for 5-6 weeks while the home appraisal was done and the loan finalized. There would be no firm rate until right before closing. I could still back out prior to closing - but the bank would not refund the appraisal fee if I did.
In a few years we'll perhaps long for the good old days when you could still get a 15-year fixed for 3.5 - 4%. Don't know. But where I am mystified is why they refused to lock-in the rate they quoted at the time the loan was applied for and which they put into their disclosure documents? When I asked, they said it had to do with "new federal regulations."
(Actually, having one's home ripped apart during a 2-3 month remodel is no fun anyway. Still may fund the project from investments, but not sure.
@Lewis - I've always thought real estate a good investment - provided one has a long enough time horizon. Of course, the best time to buy might have been in 2008-09. That said, I've known a few people who planned their retirement by doing something like what you propose. (Instead of flipping they rented.) All seemed happy - but the amount of work involved (as others note) is heavy. One alluded to having a good knowledge of plumbing and often having to fix things himself. Own a few vacant lots purchased in the 70s and kick myself often that I wasn't smart enough to buy-up more of them at the time.
Your closing comment precisely put the hammer on the nail: " ...., the rehab experience would be completely different from what it might be for the average person. To me it seems like a high risk activity but potentially a highly rewarding one if you know what you're doing."
My wife and I shared two house investment experiences in the 1970s that reflected the wisdom of your statement; we didn't know what we were doing. We paid a price for that ignorance. During our short holding periods (like 2 years), we rented the two properties. The rental fees mostly covered our expenses and we sold at a modest increase.
Like the market gurus say, property values increase at about the inflation rate except under very special circumstances. That was our limited and dated experience. We surely would have done better if we had invested in equities.
Also, maintaining and managing the properties proved to be a time sink. We made the mistake of buying in another town, so just visiting the houses cost transit time. We tried to minimize costs by doing our own repairs and painting. Again a huge time sink. The financing and tax situation was complex enough that we hired a professional accountant. That too reduced any potential profits.
Overall, we were playing a Loser's game so we stopped playing. All that was a long time ago and we were very young and naive owners. Perhaps times have changed to make small housing investments more attractive, but I doubt it. There are easier investment opportunities that are far less worrisome and less sweat demanding.
For diversification purposes we do include a small fraction of REITs in our family portfolio. The benefits don't seem all that great given the modest correlation coefficient of 0.7 to 0.8 between REITs and equities, and the high volatility of REITs. It seems like most Lazy Portfolio constructions include REITs, but only at a relatively low, single digit level. That's us too.
Thanks for your comments in this arena.
Best Wishes
http://michaelbluejay.com/house/appreciation.html , if the links and data are right.
Every so often you hear this sort of wack thing, like the uncle who tells you, or told you long ago, to buy land 'because they're not making any more of it'. Etc.
Although I know others, who had one bad tenant that did them in or ended up with a lemon of a house that was in constant need of repair. So I'd agree that it takes more maintenance than owning stocks, but it can work out well. Owning stocks is active in the sense that the company is investing in itself and growing to increase earnings. I don't like the way that your friend has framed it, but I can see that you have more decision rights in real estate than being a shareholder in a corporation.
can you elaborate pls?
Q&A with Phil McAndrews, CIO, TIAA-CREF’s Global Real Estate
Regards,
Ted
https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=TIAA-CREF:+Real+Estate+Is+the+First+Alternative&*
http://www.mutualfundobserver.com/discuss/discussion/31829/whitepaper-re-listed-vs-direct-real-estate-of-interest-to-folks-investing-in-tiaa-r-e-account
https://www.wsj.com/articles/new-real-estate-funds-try-to-make-concrete-liquid-for-investors-1489777175