Added Real Estate Investment Risk?

Someone posted a curious question about real estate investments in an online forum this week.

They wondered if anyone had ever reached a financially comfortable early retirement “without investing in real estate”? They held the hypothesis that real estate is one of the primary routes to FIRE (financial independence & retired early).

I thought the question was a bit odd. While I always surmised that it is likely a good financial lever, I answered that beyond our personal home, we never really diversified beyond stock & bond index funds. I’ve read a lot of articles on real estate (residential & commercials), but never had the energy to put in the time needed to find the right rental properties at the right price.

If anything, I have become a bit leary of investing in real estate given the government’s restrictions on landlords during the pandemic. The CDC – who I would never have guessed had the authority – has put in place a moratorium on evicting people who don’t pay their rent. It started under Trump (last July) and has been extended under Biden (thru June 2021 at least). That’s 12 months renters can skip out on paying rent with no immediate consequences.

If residents were in active quarantine due to CV19, I could understand why the CDC would limit people from moving, but not a blanket restriction whether or not people are actively infected.

A friend who works in real estate said she sees many young people are skipping rent and taking the money (along with their stimulus checks) and bidding on houses to buy. The housing market has become red-hot. People are so flush with cash, she says she is seeing 25-30 offers on starter homes.

I have written before that it seems the stock market may be a bit ‘derisked’ by the willingness of government to flood Wall Street with stimulus. At the same time, it seems that real estate has become much more risky with federal intervention. I’m happy I don’t have to deal with it right now.

Anyone caught first hand in a real estate investment conundrum right now?

Image Credit: Pixabay

12 thoughts on “Added Real Estate Investment Risk?

  1. Yeah, I am with you. Although I believe in real estate as an investment vehicle that will have solid returns over time, I have looked at RE as an active investment. No matter what you do, you have to take time to look at real estate, crunch numbers, hire a property manager, etc. etc.

    OR I could simply go to Vanguard, send some money and sit back and let the markets do the work.

    I have consistently chosen the latter. Even after heavily looking at commercial property and residential earlier in my early retirement, I just came to decide that even a vacation property would be more of a drain on my time/energy than it would give back as an investment.

    Liked by 2 people

    1. Well stated! Even if you have a property management company you trust, there is still a LOT of brainpower & time to manage an investment in RE.

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  2. I think much of the FIRE discussion concerning setting up a passive income stream through rental real estate is put forth by dreamers. I was a landlord for two years back in the 90’s and my brother was a landlord when we rented my parents house when they moved to assisted living up until their estate was settled. We rented to a family friend going through divorce and the agreement allowed us access to the house so we didn’t have to clear out 55 years of stuff. That experience cured my brother for wanting to be a landlord. Dreamers see those who have huge real estate portfolios and think that the owner sits back and cashes rent checks. They might, but few understand the strife the landlord went through decades earlier when they were highly leveraged and tenants were not paying rent

    Liked by 1 person

    1. Agree, Dave – one of my neighbors has 5-7 townhouses and even though he says they largely run themselves, I’m not convinced!

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  3. Decades ago, a colleague with lucrative real estate holdings in Texas told me that one needs five things to succeed: Gobs of capital; Extensive personal knowledge of locale; An excellent accountant; A connected lawyer; And last, but not least by a long shot, a hard-nosed agent on-or-near premises to prevent dead-beats from dead-beating-you.

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    1. That’s a great checklist. I’m guessing people get themselves in trouble when they have a little of the first (some $$$), but none of the other 4 needed to be successful!

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  4. So I’m one of those early retirees because of real estate investments. We initially invested in real estate as a divesture from our stock market investments. We ended up owning 54 units less than seven years later, and were so successful, that we were able to retire at least ten years earlier than we would have with our traditional stock market investments. Last year was concerning with the federal moratoriums enacted due to the pandemic. It gave us some pause, and yet we ended the year in a very similar place from an ROI standpoint to 2019 (still achieving double digit returns). IMO the biggest advantages of real estate are the ability to leverage (if done safely) and to shield income allowing you to build wealth so much more quickly. You simply can’t consistently get +20% returns year-over-year for extended periods through traditional stock/bond investments. Ok sure, you can get 30% for a year or two in the stock market (without diversification), but then you’re just as likely to follow with a -5% year. But with a conservative and successful leverage plan, real estate investments can readily achieve +20% levels of ROI for very long periods of time consistently. I have NEVER had a negative year in real estate. And for any retirement police screaming about it being another full-time job or plunging toilets at 2am, if you are doing those things then you’re doing it seriously wrong! I worked full time and traveled extensively during those initial seven years in a MegaCorp corner office role, while building our real estate portfolio. I still spend less than 2 hours per month on my real estate portfolio even in early retirement. I guarantee that many non-real estate investors spend a similar (or more) amount of time watching their stock market investments any given month. Don’t get me wrong, I love the stock market too, but real estate has been around a lot longer than the NY stock market, and it will likely outlast it for a few more thousand years. Cheers!

    Liked by 1 person

    1. Wow – 54 units is truly impressive! Appreciate your perspective as someone who has obviously been very successful at real estate. I’m surprised that you were able to minimize your time investment to that degree. As a neophyte in this area, I have to ask – did you simply learn by trial & error? Have professional experience in this area? Or, grow up in a family that had rental properties? I for one, would not even have an idea where to start!

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      1. It’s a slightly longer answer, but I’ll try to provide a short synopsis of our portfolio’s evolution. I had no family or insights into real estate investing. My MegaCorp career was largely involved with M&A (mergers and acquisitions) of other large businesses. I built business plans that underwrote many facets of those M&A activities from an operational (manufacturing/supply chain) standpoint. During that period, I simply realized I was making our shareholders very wealthy, and decided I could scale down my M&A decision processes to real estate. I wrote a very specific business plan, that I still utilize to this day. I spent just over a year developing and verifying my BP and underwriting matrix. I also read every book and blog I could find on real estate during this period. Once satisfied that my plan would be successful, my first acquisition was a small apartment complex with two – eight unit buildings (16 total units). Within a year I had purchased another small building. The following year, we acquired two more buildings. We continued to grow rapidly from there. It’s been very successful based on a very specific model. Not really trial and error, but a model developed around required underwriting decisions, that lead to excellent ROI’s. I know it sounds like a late night real estate ad, (Lol!) but it’s far from it! It’s definitely more like M&A underwriting matrix. From that first purchase, I was able to walk away from MegaCorp in just six years. Now fully retired another four years later, and my traditional investments are still growing untouched. Real estate can absolutely shorten the FIRE process, without question, when done properly.

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      2. Wow – that’s terrific. Self-taught, principled, and successful! I was VP/Corp Officer for Corporate Strategy at MegaCorp and also involved in a fair amount of M&A. I get the financial models, but never would have thought about applying it to real estate. Good for you – buying 2 eight-unit buildings was really jumping in with both feet, but at least spread the risk among a number of leases. Nice!

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  5. Real estate has always been an underweighted (compared to maaaany folks in our situation, anyway) investment category within our overall asset sheet. We’ve had our 1 cheap little house for 28 years (paid off in 8) and that’s it. No land, no cabin(s), no vacation palace(s), no rental property(ies), no Bailey Office Tower(s). Such a deal is (admittedly very arguably) part of a core FIRE strategy. We HAVE diversified into real estate through REIT investments, and I’ve been OK with that.

    Liked by 2 people

    1. There’s no ‘Bailey Building & Loan’ behind your Bedford Falls empire? 😉 We’ve been in our house for 11 years. We had just paid off our previous house and took a ‘transitional mortgage’ to slide into this one. I puzzled our mortgage officer by taking a high interest rate, letting them cover all the closing costs, and then payed if off a few months later!

      Liked by 1 person

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