When I look around the internet, it seems everyone loves real estate. I can hardly peruse a personal finance blog feed without tripping over someone extolling the virtues of investing in rentals.
Why is it, then, that the PiN household isn’t doing the same?
Family Experience
My side of the family does not have a winning track record with real estate. Stocks have done much better for us. Therefore, my dad spent much more time encouraging me to invest in the latter.
How bad is our family history? Read on.
New world, new problems
According to family history–as told to me by my grandfather many years ago–my paternal great-grandparents were not penniless immigrants who came to this country at the turn of the 20th century. No, my great-grandfather actually owned a business, which he sold when he realized it was time to leave town and bring his family to America.
Unfortunately, he invested in real estate in his new hometown, and by the time his youngest (my grandfather) was a boy, the family had lost all that money. Poppy was –strongly–encouraged to become a physician, which he did.
Continued losses through real estate
The top tax brackets in the 1970s were high. Very high.
A surgeon, even one married with 3 little tax deductions, could be looking at a marginal tax rate of over 50%.
Luckily for my dad (or not), there were numerous tax shelters involving real estate. As he pointed out later, anything that lets you save money on taxes by losing money means–you’re losing money.
He found a few ways to lose money on real estate, and watched some of his colleagues lose even more.
After being burnt a few times, he decided to stick with stocks, which have treated him well.
The next generation woes
One of my cousins was a business major, and I think is a pretty smart cookie. He has bought and sold a number of homes over the years, and sometimes does very well. But I just can’t forget his experience with his first condo, many moons ago.
He bought a small one bedroom condo in a convenient part of town. A great starter home for a twenty-something year old.
Unfortunately, before he could sell it and move to a better place, the local real estate market crashed. He was stuck in this condo for quite a few years, and I think it felt pretty cramped once he was living with a partner.
In-law FOMO
Mr. PiN’s parents led a somewhat peripatetic life for the first 10 years of marriage. By my count, they lived in at least 6 cities during that time.
As it turns out, they also bought several houses, at least 2 of which were kept as rentals until very recently.
Luckily for them, those 2 rental houses were in a city that has become much more popular in the 21st century, and they were sold for a large sum, after providing 3 or 4 decades of rental income.
They got monthly checks for probably 30 to 40 years, and at least one house sold for 40 times the original purchase price. That sounds really nice to me.
For a while, Mr. PiN and I were inspired by his parents’ success, and thought more seriously about real estate investing.
Landlord woes
On closer evaluation, real estate was not without issues: Mr. PiN’s parents relied for years on their property manager, who retired a few years before the houses were sold.
Money did have to be put into the house over the years, for maintenance and repairs. I am not privy as to whether there were issues with vacancies until the last 6-7 years of rental house ownership, but I assume there must have been a few months here and there over the years.
Once the original property manager retired, the replacement(s) did not do well for my in-laws: they had vacancies, delinquent tenants, and poor upkeep on the homes. In fact, as far as Mr. PiN can tell, those homes were bought for the location, and demolished soon after closing to build something new.
Great returns?
One of the allures of investing in real estate is the prospect of reliable monthly income. My in-laws never really had to deal with the “2 in the morning toilet call,” as they lived over a thousand miles from their old home(s). They really just had mailbox money (go to the mailbox and collect the check), and maybe some calls with the property manager periodically.
In addition, getting back 40 times your original money sounds great. (They paid cash for their homes originally, so no leverage to make the returns sound even greater. For those who feel sad about missing out on the leverage, this did mean that their checks in the mail were larger than they would have been if they had a mortgage.)
Then I went to this handy-dandy calculator. It estimates the value of your money if invested in the S&P 500. (To be fair, it assumes that you reinvest your divedends, so a real comparison with owning a rental would mean that you never spend that mailbox money but invest it somewhere.)
Had my in-laws invested the purchase price ($10,000) of their home in 1963, by the time 2016 came around, they would have had a good deal more than $400,000.
How much more? Try $1.3 million more.
That seems pretty hard to beat.
Real Estate is not required
I know that I can overcome my lack of real estate investing knowledge; there is a plethora of books and on-line courses to learn from.
I know that I can use leverage to increase my potential earnings (though I believe that leverage is what caught my relatives by surprise over the past 3 generations).
I know that I can be as hands on or not as I wish (no 2 am calls for me, thank you) with my real estate.
I also feel very comfortable that I can invest my money with good returns without ever venturing into real estate, if I wish.
No need to worry about vacancies, tax assessments, changes in local laws, or agent honesty. No responsibilities for tenant safety, no guilt about evicting people who need a roof over their head but aren’t paying for it.
The biggest reason we don’t invest in real estate is because we can do very well without it. Decent returns and less work, sounds great.
Do you feel pressure to invest in real estate? If you have invested, are you happy that you did so?