I am sure you have seen the promotions of seminars of how to get rich in real estate. While it is true that people can amass a fortune, real estate is a very tough business. Unfortunately, the barrier to entry is usually rather low as compared to some other things. This tends to attract a lot of people who have no idea what they are doing. They enter thinking they are going to mint a fortune only to realize they end up having it all foreclosed upon.
The allure of real estate is powerful. Sadly, the promise of riches, for most, are nothing more than a myth. It is a rough game and one has to be very mindful of what he or she is doing. One misstep can lead to ruin.
If one questions this idea, simply look at the situation with Evergrande. This is the real estate "miracle" on steroids. Certainly fortunes were made, right before they started to be lost. Here we see one of the largest companies in China, at least from the development standpoint, facing extinction over the next couple years.
As with anything, it is best to assess downside risk.
Source
Buying A Home
Many start their real estate career with the basic idea of buying a home for oneself. Here is where we see things getting squirrely right from the beginning.
To emphasize my point, I will share a story of a buddy of mine. He (and his wife) returned to the town they grew up in at the end of the 1990s. They purchased a home using cash for $225K. There was a mortgage taken out when the son went to school for $40K but for the sake of our discussion, we will set that aside since it was paid back quickly as it was "backup" money.
They sold the house in 2016 as they were empty nesters. They downsized moving into a place with less square footage (and no yardwork). The sales price was right around $325K. Here we see a profit of $100K.
Of course, that is not the true numbers. We have to factor commission and other costs. There was also $10K in appliances they bought to help sell the house. Finally a new roof had to be put on since it would not have passed inspection (if you are in a place close to 20 years, you will likely have to pay for a new roof). The total of all that was close to $50K.
That still puts them ahead of the game by $50K, something that is never a bad deal.
It must be stated that neither the purchase, nor the sale, was at the peak or bottom of the market. They rode the early 2000s bubble up, and right back down. Naturally, since this was their residence, they were not flipping or looking at things from the investment perspective.
In other words, this was done about as well as you can do. Yet the profit of $50K is also an illusion.
The property taxes and insurance were roughly $2000 per year. There were also maintenance bills over the decades which added up to thousands of dollars. Anyone who had to replace a hot water heater, sprinkler system, or broken pipe knows how this all can add up.
So it is likely they just about broke even on the deal.
Here is where it gets interesting. Many will say that they saved on paying rent all those years. That is true. Breaking even on a house puts one way ahead as compared to paying rent for almost two decades.
There is a challenge here. One is the fact that the home was purchased with cash. This means there were no financing expenses. Run the numbers on this deal with an 80% mortgage and you see how things change.
Also, there is an opportunity cost. My friend simply did not want payment. Yet, if he dumped that money in the stock market (he pays his bills by investing), he is sure he could have averaged at least 5% yearly. Here is another pieces of the equation that turns the situation south.
Of course, that is not to say that people should not buy a home. This brings up one of the few points that I agree with Robert Kiyosaki about: a home is not an asset, it is a liability. Rental properties are investments, your home is a cost.
Investing
There are a lot of nuances to real estate. Watching the home flipping shows on television make it look so easy. What they do not show you are the properties that are rehabbed and sit, for a year or two. There was one who does a show out of Chicago. She was complaining she had to get the property on the market or she would be stuck carrying it all Winter. The deal was tight to begin with.
We looked it up online. It sold 18 months later; seems she held it two Winters.
A situation like that could bankrupt many wannabe real estate investors.
The myth about real estate is that people make money. Sure, some get very wealthy off it. However, they spend years learning what they are doing. It is not an easy trick. Also, simply buying a home does not qualify one to be an investor. They are two totally different things.
One of the biggest keys is to have your own team. The nuances I just mentioned most often require professionals. This can range from tradespeople to agents. Having people who are willing to do things in the manner needed on an acceptable time frame is crucial. Anyone who tried to get a reliable contractor in the last 18 months knows how tough that can be. It seems they are Johnny on the Spot during slow times yet won't return calls during the bull runs.
Having people who will show up no matter how busy things are (or are not) is crucial.
Another fatality is to look at price. Sales price is not the most important aspect to real estate investing. Instead, it is all about cash flow. Of course, price plays a part in this, especially if financing the deal. However, if the rents will not sustain the price, it matters none how "good a deal" it is. The cash flow will be negative and that does not lead to success in any type of investing.
In the US, we had three straight Presidents that talked about home ownership, the American Dream, and giving people access. The reality is many of those people ended up being foreclosed on due to the fact they had no idea what they were doing. Of course, the blame is always predatory lending and other headlines to cover for the fact these people should not have been buying a home. The reality is a certain percentage of the population does not have the financial acumen to be involved. If one is not willing to do the research, he or she should avoid it.
Yet people buy a house like they are buying a shirt. It is insanity.
For many the promise of real estate turns into a nightmare. For those who took the time to learn what is going on, it is a great way to build wealth. However, there is a reason why there are very few millionaire real estate investors running around. It is not an easy game.
In fact, for the majority of the public, it is nothing more than a myth.
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I made my "Fortune" haha as a Realtor. I worked in all aspects and did all sorts of creative deals.
It's strange and counter intuitive, but I made a bulk of my money during the housing crash and Short Sales.
A lot of what I did was make a cash offer on a Short Sale or Pre Foreclosure Properties. Once accepted, we immediately got to work negotiating the final sales price with the Bank. In the meantime the property was remarketed at a higher price and once we had a new buyer, our current contract was assigned to the new buyers with non-refundable earnest money to be released to us immediately.
Avg $$$ amount per contract assignment was as little as $10,000 - approx $30k. We had a few go through with $50k+ profit just for assigning a contract.
I'll make a post about some of these deals.
But as you mention, the closing and holding costs made most investors lose money.
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You are a case in point. The knowledge to do what you did is not held by most. Instead, they go the traditional route.
Knowledge knows how to make money regardless of which way the markets are going. The vast majority cannot do that.
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One principle I learn in life is never to invest in things you don't know about because no matter how others are making it from the investment you might not make it because you are clueless of how it works. Real estate is a 50-50 business.
Those who understand it, can do very well. Those who do not, get slaughtered.
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Most people are priced out of the market. I have heard about a project that offers fractional revenue property with Ethereum. You need white-listed KYC. They use Ethereum, but really there is no reason to use a blockchain like this. They could do the same thing by publishing holdings according to randomized account numbers. If you get the minimal fraction, the Ethereum fees would exceed the rent you would get. I've reached out to the author of the project but I guess he has a lot of stuff on his plate as he also runs a podcast.
I figure you will see that offered on other chains at some point. With real estate, the government can always have their hands in it, at least until we make them mostly obsolete.
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Real estate can be indeed tricky and, like all sectors, prone to Black Swan events. Good example is Croatian capital city of Zagreb, where home prices were going insane. Like in most European cities, the most attractive locations were those in the city centre, partly because of vicinity to government institutions, partly because historic monuments and cool looking 19th Century architecture which made renting those properties to tourists quite lucrative.
So, the most expensive and most sought of locations in Zagreb were those in city centre. At least until March 22nd 2020 when the city was hit by an earthquake that happens once in 140 years. It turned out that all those 19th Century buildings were liabilities rather than assets; they were old and poorly maintained and, consequently, suffered a lot of damage in that earthquake and aftershocks that followed. Many are still in danger of collapsing and it isn't uncommon for debris still to fall down on street. Needless to say, some of those buildings will have to be demolished (although much more slowly than expected, due to COVID and latest developments in Ukraine) and even those that haven't damaged much would need extra costs for renovation. I'm certain that people who bought homes there in hopes of flipping them are now wish they hadn't.
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Wow that is an amazing story. I presume there is insurance on the properties so at least they are covered for that?
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It's hard to tell. Most property owners rely on government reconstruction funds, which, in most cases , failed to materialise in last two years. Most of reconstruction that was done was from private funds, by property owners themselves.
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The real estate market is very good, but since almost everything we do in our lives carries its risks, that is why we must inform ourselves well before entering the business and know all the options and always be prepared with plans for any eventuality.
Despite the magnitude and complexity of the real estate market, many people tend to think the industry consists merely of brokers and salespeople. However, millions of people in fact earn a living through real estate, not only in sales but also in appraisals, property management, financing, construction, development, counseling, education, and several other fields.
The tentacles of real estate are long and widespread. Few consider that. Think of the flooring company in town, they are mostly dependent upon real estate for their success.
It is why a real estate pullback is so detrimental economically.
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Spot on sir!
The business of real estate is very profitable but one needs to learn the basic principles indepthly. I know of people that has made fortunes from the real estate sector.
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For example, if you want to buy a typical house in this building in İstanbul/Turkey, you have to pay min. 1 million Turkish liras (Apr. 70.000$). And do not forget, your salary is only 3.402 $ yearly. That's crazy. You have to work 20 years to buy a house :)
That is the case in many areas. Affordability is an issue. This is one of the problems in China with their major cities.
We will see if (when) the market corrects and how it does.
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Not really my thing so I never tried to invest in it. I know a couple of people who tried to flip properties thinking it was an easy thing to do and they jumped in without any knowledge or any help from an expert. Needless to say, they got burned.
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A common story we see all too often.
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I think the people making some of the most reliable money these days are the agents. Sales are happening very quickly and with little effort in a lot of markets. The agents usually have several of these deals going simultaneously, so the earnings can add up very quickly. As prices climb, so do their commissions.
Some get wiped out by investing their earnings poorly though. I know of several agents that this happened with in San Diego in the mid '00s. One woman bought a one bed condo by the beach for $700k. Place was tiny. The whole floor plan was the size of my current living room. Housing prices crashed and the next year she was foreclosed on and the bank sold it for $230k to a friend of mine. She got wiped out by that deal.
Housing crash happened right after I moved out there and I remember falling asleep with the TV on a few months before I moved. I had this dream that I was buying and selling houses and making millions. I woke up to find out that my dream was just an infomercial on the TV about some service to get you into the real estate game. It was so disappointing to wake up to that realization because the dream was so pleasant and exciting. 😂 But that was the mania of that time. You know when they have infomercials, all the good has been wrung out of that pyramid scheme and they're just looking for suckers to unload their bags on.
That is commonplace. Many agents fall prey to the frenzy. They get in the game making commissions yet the percentage is not enough for them, they want more. So they leverage and get burned.
NAR is notorious for providing false propaganda that many realtors subscribe to. After all, they are salespeople for the most part.
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As for Italy, I can say that the real estate sector was precious from the 1960s to 2007 ... In the last 15 years this sector has been a disaster. I also noticed that many try to jump into this sector with very low professional skills, and this only worsens the situation.
Italy has a demographic issue that has to be crushing much of the country. I would think some of the major cities are okay but a lot of rural areas have to be suffering.
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It's why I haven't even tried looking into real estate for my investments. While it doesn't sound like a bad idea, all that extra stuff for inspections, fixes, and then the time to sell the house just seems like way too much of a hassle. Of course, you might be able to rent it out but then you are also dealing with tenants and all the other issues.
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It is not an easy game. Anyone who dealt with tenants knows they are a nightmare.
Again, some can make a fortune at it but you best know what you are doing.
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Real estate keeps requiring property tax payments, and periodic renovations and improvements, therefore perennially requiring cash infusions. Not counting mortgages. IF they provide income they can be quite lucrative but I find many people insist on 1 family homes which means they will never be able to retire in that house, they will end up in a 50+ in Florida most likely.
Stocks/crypto on the other hand once you own them, they require no additional cash infusions. And often can provide income, that's why I prefer stocks/crypto/bonds to real estate.