# Real estate: the ultimate in value investing (in my city)



## TomB19 (Sep 24, 2015)

Here is a decidedly pro real estate point of view that might counter balance a tiny bit of the opposing point of view which is so prevalent here.


*I will assert two premises*

1) The cost of housing, more than anything else, defines inflation. The government tries to minimize real estate in their calculations, so they can come up with a number in the low 2% range, no matter what real inflation is. Still, everyone requires a place to live and it is the single largest non-discretionary expense.

2) A rental house can pay itself off in 11 years. Before you say, "No it can't", I will counter with "Yes it can.... in my city"

When I buy a house, I look for numbers like this: monthly rent - (insurance + tax) = 20~21 years amortization

Every year or two, when rents go up, I adjust the payment such that cash flow is 0. Insurance and taxes go up also but the mortgage is seeing the vast majority of the increase so it's an accelerated mortgage. By year 10, the payment will have roughly doubled.


*Retirement Ideas*

Can you live on $50K of tax free (or almost tax free), inflation adjusted, annual income? The correct answer is yes. If the answer is no, it's time to buy out the lease on your ferrari and get your cocaine habit in check. You have a leak that needs plugging. You're in no position to invest in anything other than straightening out your life.

If you had $250K, you could fund 5 years of retirement at $4K per month.

If you can save $1000/mo, you will have the 20% ($20K) down payment for a $250K house in 50 months (4 years and 2 months). That house should then pay itself off in roughly 11 years. You can then sell the house and have $250K of house value, as adjusted to the time of purchase in four years time.

Once the first house is carrying itself, you can start saving for the second house. By year 9, you could have two rental houses. By year 14, you should have no problems owning three rental houses, all carrying themselves.... more or less.


*If you've gotten this far...*

You now have $750K (in today's money) worth of real estate that is carrying itself but it's better than that. The first house you bought has now almost paid itself off. You can either use that house to fund house four, giving yourself a saving holiday, or you can continue to fund house four out of savings with help from house one, so the fourth house will be purchased by year 16, or so. The point is, things are starting to accelerate. You can either encourage that, or you can stop adding fuel and let it carry you.


*There will be problems*

Being a landlord sucks. The best case is having a tenant who is great. These tenants are a slight negative factor in the life of a landlord. The worst case is undoubtedly substantially worse than non-landlords can imagine.

There will be vacancies. There will be problems. You won't make as much as it appears based on broad generalizations, such as this, and it will be a fair bit of work, but the value will still be extreme.

It's also worth pointing out that you have to be able to self manage and self repair most things. If you delegate everything, tradesmen will have a huge portion of the value you create. In fact, you might even lose money.


*The value.*

Let's say you can repair most things yourself and you self manage.

You've just saved $1000 per month for 14 years and funded 15 years of retirement at $4K per month with inflation adjusted money. That's way better than 25 cents on the dollar, because of the inflation adjustment. You would have to be an amazing investor to make that kind of money in the markets.


*The bottom is about to fall out of real estate*

The bottom has been about to fall out of real estate since I was old enough to read the newspaper. A lot of decades have gone by since then. I'm not a young man, to say the least.

One day, the bottom really could well fall out of real estate. A bubble could burst. Values could go down substantially. Sure, it would be unthinkable for them to go down as much as a stock market crash but they could go down quite a bit.

Fine. That will be a period of deflation. You will still have very roughly $4K per month of inflation adjusted money to spend.


*r > g*

Surely, returns cannot remain greater than growth indefinitely? The bubble has to burst sometime?

Thomas Piketty's book "r > g" basically describes how a market can go up beyond the rate of growth indefinitely. As I understand it, this situation is the classic class stratification we see everywhere. When the wealth gap expands, people living on returns are gaining income faster than people living on the growth of production. It's the concentration of wealth. The point being, it's not inconceivable that R-E could go up a wee bit faster than wages indefinitely. At least, indefinitely in terms of a human lifetime. Eventually, there will be a revolution.


Let the death threats begin! :biggrin:


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## Just a Guy (Mar 27, 2012)

I don't think anyone here really believes real estate is a poor investment, however not all real estate is a good investment.

Many people post thinks like I've got a 500k house which will rent for $2000. That's not a good investment. It's like people who buy apple today, how much higher can it really go, it's already one of the most valuable companies in the world...does it make sense that it could double in value?

Now, that being said, people who bought apple years ago don't have to panic and sell, people buying today should probably look harder for a different company...very similar to real estate.

The nice thing about real estate is there is no such hing as "market price". You never know what you're going to run into, sometimes you find a really good deal despite a hot market. 

In today's market you need to work to find a property, this isn't a climate like it was 10-20 years ago where prices went up, up, up...I personally love real estate, however that doesn't stop me from advising caution when it comes to buying it.


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## kcowan (Jul 1, 2010)

A BS Detector for RE Deals
This is a very thorough trestice on how to avoid RE get-rich schemes. Many of the bullets also apply to other BS investment schemes.


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