Hey everyone, it’s Finance Fridays again. Today I’m just going to talk about “What’s the Deal with Real Estate?”

What’s the Deal with Real Estate?

Whenever people talk about “where to put their money” the usual echo’d answer is “Just buy real estate”. They may even throw in this quote:

“Buy land, they’re not making it anymore.” – Mark Twain

They will extol the virtues of passive income and downplay any issues they may have come across. That sweet, sweet rental check they receive every month is worth all the aggravation they may deal with.

Usually this is also followed by other people who talk about the dangers of real estate, like those who lost a lot of money in the housing crash of 2018. Or that one person who bought a duplex that ended up costing more in repairs than they could ever hope to make from rent. Etc. etc.

Everyone has a story.

Here’s my take on it:

Real estate is fine.

Not great, not bad – just fine.

I say it that way because it takes all the emotion out of it. Investing should be emotionless… and real estate is an investment. However, whether real estate is good for you is not a one size fits all endeavor.

I have a mortgage, student loans, and two kids. I would love to be able to buy another place, fix it up, and rent it out. However, my current liabilities and responsibilities don’t make that a good idea. Perhaps you may think that I’m just a scaredy cat and “you’ll be fine”. That just proves my point though. Like any investment, you need to weigh what your risk tolerance is.

I have colleagues who are young single guys. No student loans. No wife, no kids — and no plans for either. If I was in their shoes, I could honestly take whatever chances I wanted. I would probably have 2 or 3 properties right now — because even if I ran into problems I only have myself to take care of. I don’t need much and I could live anywhere or crash with friends for a few months of a year if I really had to.

However, I’m not any of those things.

My risk tolerance is significantly lower because my responsibilities and liabilities are significantly higher.

I have a family that depends on me. With this mortgage and student loans weighing on me, there is no way I could, in good faith, go out and try to buy another place right now.

Actually, let me rephrase that. I could go out and secure another loan to buy a place — since my bank loves to lend me money. However, in my current situation it would be irresponsible to do so at this point in time.

Could I be ok? Sure. However, I’m all about worst case scenarios. Could I weather two mortgages if for some reason I couldn’t rent the place — or repairs went on for too long or some other reason? The answer is maybe… maybe for 3 months, maybe even up to 6 — if I exhausted all other options. However, anything more than that and I could potentially lose that 2nd property, as well as put my primary residence at risk.

Just for full disclosure — I have seriously looked into buying a rental property, but the math just doesn’t work out… The risk is simply too great for the potential reward.

Why are you so scared?

I’m not.

I’m a realist… not an optimist, not a pessimist — but a realist.

My parents had multiple properties when I was growing up. My dad spent a lot of nights and weekends heading out to Long Beach and Pomona, or even just down the street from me to take care of problems. Taking care of all these properties and working full time really wore him down. Not only that, it placed a lot of financial stress on my parents. There were times we couldn’t rent for a few months at a time or a tenant damaged the house and we needed to fix it. Having those properties really stretched us thin.

I think my dad was the happiest I’d ever seen him when were down to only one property, our house in Cypress. They sold off the other properties one by one in order prior to buying that new house. Of course, my mom was happy as well to have the house of her dreams… the American Dream if you will.

My parents tried their best to hide financial issues from my siblings and I… but like I keep saying, kids are smarter than you think. They can put two and two together and know when the family is struggling.

Wait a second… didn’t they do ok?

I think they did gain some equity and appreciation in those other properties over the years… However, if you were to ask my dad and mom if it was worth all the headache — they would probably say no. That said, it did enable them to buy the house they always wanted, which may not have been possible without it — so I guess there is that. I guess in the end, it worked out ok, but there were times that mom and dad were just a few weeks (or maybe even days?) from losing it all.

However, their best investment was still that last house they bought in 1995. 24 years of appreciation will do that. My parents buying that house really helped me when I was searching for mine — prioritizing a good public school as close to my house as possible. I felt, and still feel, that the single most important factor in home appreciation is close location and cachement to a good public school. Being a reasonable distance from any good private schools is also a plus.

So why are you against real estate?

Oh no. You’ve got me all wrong.

I’m all for real estate — at the right time and for the right place. My concern is that people just jump into it without checking to see how deep the bottom of the pool is. Don’t just invest in real estate because you have the extra money or because you heard it’s “now or never” or whatever.

Make sure you have enough leeway to weather a storm or two. I think a good benchmark is being able to afford two mortgages for at least 6 months, if not a year. You should have that ability — even if you must include unfavorable options like cashing out your CDs or taking on a 401k loan or even another loan from the bank. Additionally, your current debt should be manageable, and for me, mine aren’t because of student loans. That’s what I mean by the “right time”.

By for the right place, I mean you should have done your own research on what you want. Do you want a place to rent short term or long term? How does your state handle rent? What are the property taxes? Are there maintenance fees? What is the estimated amount of money you need to allocate to fix things? What are the rents for comparable places? Will this property by cash flow positive from the outset? If not, how many years would it take for it to become cash flow positive? How much do you expect (and want) the property to appreciate in the next 5-10 years? How long would you need to own it in order for the closing costs to be nullified? The list goes on and on, but these are questions that need to be answered.

Hmm…

There is also something that keeps me from buying another property here on Oahu. It’s simply too expensive to buy another property. As of October 2019, the median house price on Oahu is $789,000 and the median condo price is $442,500. (Source: Pacific Business News)

Obviously, the more you have to invest into a property in the beginning the more front loaded risk you are taking on. I can’t just a buy a duplex for $400,000 or something more reasonable which may be possible in other places.

I know what you’re thinking…

Why don’t you just buy that duplex somewhere for $400k then? Well, first I would need to know the area really well. But then what, be an absentee landlord and just let a property manager handle it? Doing something like might be ok for some people but it would worry me… especially because I’m likely far, far away from anywhere with a duplex for that price.

Like I said, perhaps if I was single with no wife, no kids, no loans, and no real responsibilities, I could probably take that risk. However, the me right now is happily married with two beautiful kids… just starting to aggressively pay down my our student loans and build 529s.

So what’s the take home message?

I think everyone needs to understand the real estate is just an investment like any other. Just like the index funds in your 401k, dividend stocks, or even crypto (gambling). You have to decide where you are on the risk tolerance curve and also, where you are in terms of your own level of liabilities. Can you weather a market downturn and/or afford two mortgages for up to a year?

Obviously, the amounts of the two mortgages you have really changes this scenario. Having two mortgages in Hawaii ($635,00) is very different than having two in somewhere like West Virginia ($166,488). (Source: Business Insider 2018)

Like many things in life, the answer to whether real estate is good for you or not is very person dependent… and time dependent. If I was still in Rhode Island right now (my 1st job) instead of Hawaii, things may have been different. Our first house probably wouldn’t have cost as much and perhaps our student loans would already be gone. This post may have been very different — instead of explaining why I’m not buying a rental property, I may be explaining why I already did or am planning to.

That said, maybe when these student loans are gone I’ll look into buying another property again… but as above, it has to be the right place (for me).

TL;DR

I try to provide a balanced look at real estate.

Real estate is not one size fits all — it’s just another investment option. Take your emotions out of it.

It really depends on your risk tolerance, current liabilities, and just where you are in life in general.

As it stands now, I probably shouldn’t even consider buying another property (although I have looked).

If I was in Rhode Island, this post might look a lot different.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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