Posted by: patrick | March 23, 2007

why I’m not in real estate

If you’ve been following the economic news recently (which my AP Econ kids haven’t, shame on them), you’ve probably read about the decline of the housing market, particularly the collapse of the subprime mortgage market. It got me thinking, “Why don’t I like real estate?” After seeing the dot-com crash in 2001 and the jump in housing prices over the past few years (especially in the San Francisco Bay Area), it was definitely hard to see friends flipping properties and making money off houses while I was kicking it as a cashier at Borders.

But now, I really don’t have a need or desire to buy or invest in real estate, either by managing rental properties or speculating on price increases. I’m more of an index mutual fund / Modern Portfolio Theory kind of guy. I haven’t created a coherent theory about why I’m not into real estate, until now.

  1. It’s work. Looking up house listings, checking out properties, making sure that said property doesn’t have leaks or an Indian burial ground underneath…that’s work! Okay, doing research on mutual fund fees or standard deviations is work too. But do you want to do it? I enjoy looking up rates of return and other minutiae related to paper investments. But real property? Ugh. Much respect for those of you who do enjoy it. I’ll go to you when I want to buy my first house.
  2. It’s not diversified. Buying a single house in a single housing market in the whole of the United States strikes me as the antithesis of diversification, the key tool in investing. You’re betting on that one property going up in value enough to recoup your costs and commissions. I guess if everything went up in value, you’re sure to make a profit. This assumes you have willing buyers, however, and from what I’ve read, it’s a buyers’ market now. Sucks to be the one who bought at the peak, hoping that home prices just keep on rising! They said that about the stock market in the late 1990s–and look what happened there.
  3. It’s not liquid. Maybe I’m just worried about having cash on hand (or easily on hand in a few days) for some major purchase or emergency. I save plenty in my retirement accounts, which could be liquidated at a moments notice (albeit with tax penalties), but I feel that real property “locks up” the value you put into it. Factor in the additional fees to buy or sell property, and the possible chance you don’t find willing buyers or sellers–the cash value is definitely not as accessible as the investments I currently own.

Does this mean you shouldn’t get involved in real estate? No. I’m only stating why I’m not. If you know what you’re doing, you treat it as a business, you assume the risks of losing money as well as gaining it, and you take responsibility for your actions, then go do it! When people think they can make money quickly, and without risk, just beware of the consequences.

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Responses

  1. Real estate is not for everyone. The topic gets debated all the time and rarely will the views be consistent.

    Warren Buffett talks about investing in the public markets. He makes the statement that diversification if a marketing technique used by Wall Street to sell product. His view is to concentrate on a few companies and to avoid diversification. To diversify is to aim for the average return. He prefers using time and skill. If you want average he says to buy an index.

    I started as a software engineer in Silicon Valley in the 1980’s. I also started investing in real estate at that time. As a part time activity it is hard to beat the performance. Much higher than the stock market but that is because real estate has two unfair advantages. Leverage (debt) to boost return on equity and tax advantages unique to the sector (1031 tax code).

    You have to pick what you enjoy and then focus. At the same time you need to recognize that what works for you might not be the best choice by some other measure.

    John Corey- Real estate investor, 20+ years – multiple states and countries.
    Check my blog – http://johncorey.wordpress.com/ – advice for real estate investors.

  2. John: Thanks for your perspective. To each their own, right? Maybe I’m just getting hung up by the work involved with real estate…it’s not as interesting to me in general. But as you mentioned, there are definitely some advantages in real estate that don’t exist with more liquid assets.

  3. I’m in real estate, but I should have been in it as a hobby and gotten into something else – anything – that is not so cyclical. The people I know who make their living in this industry have all been broke a few times and bankrupt at least twice in the last 25 years. They have had the IRS and every property tax authority after them at least once. So I started a message board for environmental freaks called http://www.envirofreak.com – it’s out of the RE industry, and it is a subject that transverses a wide segment of the population.

    The trick to being a real estate invester is to have “staying power.” Buy something you can afford and plan to just hold it for the next 50 years, because you may have to. If it appreciates in some wild hyper-inflating market then go and sell it, but if it does not the renter will pay it off for you and make it a source of income for life. If you approach it that way you will never lose.

  4. I would like to see a continuation of the topic


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