Real Estate vs. CD Market investments

New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes

I am brand new to real estate investing, but I’ve been listening to BiggerPockets podcasts for the past 3 months and I read 2 of Robert Kiyosaki’s books. But when I told one of my family members about my interest in real estate, he was very skeptical. What can I explain to him are all the advantages of real estate over other forms of investment, like the CD market which guarantees a 5% return annually?

Here is what he said about why I’d be better off putting my money in an index fund or a CD. Italicized sentences are my sentences. Italicized sentences are my words:

The mortgage interest rate is much higher than we’ve had over the past 20 years, so the returns would likely be much less for me if I bought something this year.
Appreciation cannot be assumed with interest rates as high as they are. Is this true? For example, he said his brother has looked at homes in the Dallas area that have depreciated in the past 12 months.
I will likely have some vacancies, and maybe evictions.
I will need to spend money on repairs and maintenance.
Other expenses: property tax, HOA (hopefully not), insurance, legal costs, and closing/selling.
He told me most landlords he has talked to had to mortgage their properties and that most are actually losing money in years 2023 and 2024.
Distressed sellers lack the capital for property maintenance. You can expect a lot of repairs to get the place up to par. Leaks, mold, and lots of hidden problems. He said this because I told him I was going to search for off-market deals.

How much are average closing/selling costs?

Here is what I told him were the advantages:

The landlords he knows who have been losing money are probably only describing their cash flow (rent payments). But I could also profit off depreciation of the property annually, appreciation (especially if I make improvements), and tax deductions.
Since I plan to buy a multi-family property and live in one of the units, this should give me a steadier cash flow even with vacancies.
Assuming that I 1031 this property or hold on to it, I would never pay sales taxes on it.

Are there any other advantages? Is anything above incorrect?

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Bruce Lynn

Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes

Don't take financial advice from broke cousins.

Don't let them kill your dreams, because they don't have any.

I would go to far as to say, don't ever talk finances with that cousin again. Don't tell him of your plans, don't tell him about your investments, don't ask him about his. Not the right person to support you.

Disadvantages1-2-3-4-5-6-7 all true and possible, this smells like opportunity, probably more risks than that....and property is more work than T-bills.

Advantages....1 is possible....not sure I understand 2....no cash flow from your side if you have vacancy. 1031 defers taxes not eliminate it, but there are ways perhaps, for example if you get big enough and 1031 into QOZ you have the poential to eliminate 100% of the capitol gains taxes.

#4 you forgot about leverage....for the most part you can't leverage T-bills, maybe 50% on ETFs. ETFs can fall to zero...or even lose 20-30% in a day. People can and do lose money in ETFs, go back and find the paragraph about the average investor loss in Fidelity Magellen fund back during Peter Lynch tenure. I forgot the numbers, but fund went up like crazy, but avg investor tried to time the market and lost money. Buying at the highs, selling at the lows.

Ask relators and investors in the Abilene area if prices have gone up or down in 2023-2024 or if they wish they had more money to buy more homes in the 1970s, 1980s, 1990s, 2000s, or whatever decade. I've never met a long term real estate investor who wished they had bought less property.

If you invest $100,000 in T-bills this year at 5% in a year your return is 5000.

If you invest $20,000 to buy $100,000 of real estate and it goes up 5% your return on the $20,000 is 25%, not including the rent, the depreciation, the tax advantage, the ability to defer taxes, and your tenant paid down $1000-$1500 of your mortgage....these are the bare basics.

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Craig Janet
Member since 2019 · 223 posts · 261 votes
2y
Your cousin is being kind of a negative Nancy but they are all valid points that many investors overlook. The reality is that the market has drastically changed over the last 3-5 years. Home prices are still high, construction labor and materials, insurance is averaging 20% a year increases, interest rates, etc.
In my area the rent increases have not come close to covering the increased expenses. Run the numbers carefully and compare it to a 5% CD and I bet they are not far off.
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Brian Kloft
Investor · Arizona & Oregon Coast · Member since 2023 · 128 posts · 113 votes
2y
@Ryan Daulton Basically everything he told you is correct. However just about everything he told you he is either double dipping on or is irrelevant.
1. Interest rate higher. When you buy, get a fixed rate locked in for long term. When you are calculating your rate of return it doesn't matter if interest rates are 3% or 10%, if your rate of return is 7% with whatever the interest rate is you are still making that 7%. Getting a 7% rate of return after paying a 10% interest rate is no different than making 7% after paying a 3% interest rate; and can be great because if rates go down you can refi and increase your rate of return.
2. Appreciation can not be assumed. Technically true and if you are looking short term then you can not bank on it. However if you buy and force appreciation you are good. Also if you are holding for 10 years you can just about be assured of some appreciation.
3. Vacancies and evictions. These should already be calculated into your rate of return so irrelevant or double dipping.
4.repairs and maintenance. These should already be calculated into your rate of return so irrelevant or double dipping.
5.Other expenses. These should already be calculated into your rate of return so irrelevant or double dipping.
6. Other landlord losing money in 23/24. Sounds like they took out loans with interest rates that can change. If you get long term fixed rate debt then this would not happen.
7. distressed seller. Personally these are the types of properties I look for. Some people want turn key properties that are already fixed up and they won't buy these. If you are fine fixing up a distressed property then after fixed up you should be getting a much higher rate of return. Personal example, when I fix up the units in my places (2-5 unit properties) I tend to go from a 5 to a 10 rate of return. Plus the value of the property is significantly higher. So once again this is an opportunity if you know what you are doing.
ADVANTAGES
1. I never calculate in the depreciation and tax advantages when looking at a property and what kind of rate of return I am getting. I like to keep it simple and depreciation/tax advantages are just a bonus. You are right on the appreciation that you will be getting on top of your rate of return. This is where it blows other investments out of the water.
2.This is a great way to go. It is what I would do if I was younger and it is what I am telling my daughter to do instead of her just buying her first house to live in.
3.You are correct but this is not a calculation to do in the beginning. You may at some point choose to cash out a property and pay the taxes. I just did that on one of my properties for a strategic reason. Plus you never know what the government could do in potentially changing the rules.
OTHER ADVANTAGES
It sounds like you are looking at distressed multi fam properties. If you can find a property that is ugly and has low rents. You buy it based on its current cash flow. Then when a tenant moves out you invest money into that unit and fix it up nice (don't keep it looking like the ugly apartments like all of the competition does. I have sold my old fridges and stoves to other landlords who were putting them in their units while I was putting stainless steel appliances in mine.). You then get top market rent for the space. If there is a down turn and vacancies increase you will still be able to get yours rented out as yours will look nicer than the competition. I have taken plenty of units that were ugly and getting around $700-$900 in rent and after fix up anywhere between $1,100 and $1,600 in rent. You get that done across all the units and your rate of return now looks much better than that CD and you also increased the value of the property by forcing appreciation.
DOWNSIDES
-Real Estate is filled with risk that you don't get with CDs. You could buy a property and a major defect is not seen during the inspection and it will cost you a lot and kill your numbers and really hurt you.
-Lawsuits
-Another covid happens and you are in an area where they make rules preventing you from kicking someone out that doesn't pay their rent for a long time. (CA did this and some people were not able to get rent for 2 years)
-If you don't have an adequate reserve then big expenses like HVAC, roofs, etc can really hurt.
FINAL THOUGHTS
-Make sure not to overleverage
-Keep a large enough cash reserve so that when things happen that require money that you don't make bad decisions because you are desperate.
-Fix it up right and make it nice.
-Treat your tenants right, like humans and not just a cash account.
-There are plenty of people out there that either have baggage when it comes to real estate or are scared of the uncertainty of it. If you want to be in RE then do not talk to them about it or listen to their advise, other than to make sure that your a doing things to protect yourself from all of their worries. Also don't just listen to those that have only been in it for just a few years. They don't have enough experience yet. I have many family members (most of them) that did not think it was a good idea for us to start our business. They also are not ones for investing in real estate. I just did not talk to them about it or at most I told them a little about what we were doing. (I do talk to them more about it now, but after 20+ years they have seen what we have achieved and don't try to tell me anything anymore.) Some people are made to be business owners or real estate investors and others are not.
Just my two cents.

1 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
2y
Quote from @Ryan Daulton:

....when I told one of my family members about my interest in real estate, he was very skeptical. What can I explain to him are all the advantages of real estate over other forms of investment, like the CD market which guarantees a 5% return annually?

Ryan I have to first correct a major fundamental flaw in your analysis, and conversation of things.
This person speaking with your promoting CD's, is speaking of and focusing on JUST investments and investing.
What you are doing Ryan, is speaking of and promoting a BUSINESS, but calling it an investment.
This will always result in conflict and uncertainty, because were measuring apples too hand-grenades.

One of the greatest failures in the entire Investment Real Estate community is our propensity to refer to any/all of it as "investing". Rarely, RARELY is it "investing", like less than 5% exceptionally rarely.

When you are a Landlord Ryan, you are operating a Residency Business. When doing STR, a hospitality business. When doing flips, a Home Redevelopment Business.
The fundamental is that the asset (real estate) does literally NOTHING without active operational inputs on a consistent, regularized basis.

When you buy a CD, what inputs is there? Nothing, right. That is a true "investment" as in buy it, do nothing, just ownership is the requirement for future return potential.

As a landlord, STR hosting, flipper, we "invest" in the asset of Real Estate, TO MONITIZE that asset through our various active actions of operation.

This may seem like it's splitting hairs but I assure it is not, it's CORRECTLY setting the stage of comprehension, as what comes next will give this clarity.

If discussing a different business operation, say buying a restaurant, immediately people won't think the value is just the market value of the location, the tables, the broiler, dishwasher, plates, pots and pans, right. No, everyone asks how you will MAKE money with it. What will you DO with it. How you will MONITIZE those assets.

And at same time, it's understood that depending on what you do to convert those assets who do nothing alone, into something that generates $$$$, that the overall value/worth of that enterprise will be based upon how efficiently it generates revenue and converts gross revenue to net profit.

A Real Estate BUSINESS is exactly the same.
A property does NOTHING alone.
It's ability to produce revenue is a direct result of how one utilizes that asset. How they run it.
And it's worth, it's value, will be a result of all that.

Take a 4br home.
One person uses it for long term rentals, no pet's, requires super high credit, 3 months deposit etc etc.. Well, so they have a lot longer vacancy, less revenues etc..
Another runs it different, does better getting tenants, get's 20% better rents, less vacancy.
And yet another does a STR with it and grosses triple what standard tenant rents would be and doubles net.
Same asset, same real estate, operated differently.

So, first you must correct the conversation that your looking at owning a BUSINESS vs stocks, bonds, CD's.

Now the rewards for such should be a ready obvious to most.
If you run your business well, you will ALWAYS "beat the market" on what an "investment" alone will bring in.
Because a true "investment" such as a CD, what is it? It's a nothing. It's just the underlying item that a business, somewhere, uses to actively generate there revenue. It will ALWAYS be the lessor return, because it is the lessor input.

1. When mortgage rates press UP, less can buy. When less can buy MORE rent. When more RENT, rents-go-up. Cause-effect. It's truly that simple. ALSO, more buy on terms, more buy via unique constructive means such a C4D or LO, all additional mechanisms a business entity is doing for-profit.
2.1 Appreciation is GUARENTEED by the higher rates. Rates are a DIRECT reflection of appreciation, DIRECT. The inflation rate. Inflation IS appreciation when one holds an asset such as real estate.
2.2 he is incorrectly using the word depreciation. He is looking at 1 specific market and 1 specific segment of asset in that market.
3. I GUARENTEE you will have vacancy in this business, and if done long enough you WILL have an eviction. It's like saying if you open a taco stand you WILL have someone who doesn't like your taco eventually. Yes, you will, that is reality, you will not please 100% of people 100% of the time.
4. Most likely YES, the real question is WHEN, HOW MUCH, WHAT FOR, WHY and WHO's PAYING. Done correctly, you will NEVER spend $ without a direct ROI connected to/from it. Damages are tenant funded repairs. Again, done correctly. Again, this is a BUSINESS not an "Investment".
5. Again, it's an obvious yes that you will have costs of operation. If had that taco truck, you would have food costs, fuel to cook it, staff etc., does that means it's "bad"????
6. He is a LIAR! Sorry to be so blunt about it but there is no way around it. '23'/'24' are CASH-COW years for hundreds of thousands of landlords. Proof: Go find a landlord who bought in '18' and prior and ask them how there doing. Now on mortgages, OF COURSE we use O.P.M. to SCALE. If he thinks the only way to landlord is via paid-off properties; HE's NUTS. O.P.M. is how one scales, and it's rocket-fuel to profitability. Would you like to be earning appreciation on 1 or 47 properties? Which do you think is more profitable? Would you like tenants paying down 1 or 47 mortgages for you? Does one have to manage there margin, HECK-YEAH, but to randomly decide any with a mortgage are failing in some manner is BONKERS.
7. Really.... is this person the ghost of Stephen Hawking? I ask as he seems to think he is the smartest man alive containing all knowledge there is.
So how about an estate where person passed? Where "distressed" sellers are the heirs who live 4 states away and are too busy with their life to spend the weeks clearing out all the items of the PERFECTLY MAINTAINED home there parent left them, and they simply want the $, and things to be done simply.
Or the divorcing couple.
Or the person who just got relocated with days/weeks to get everything sorted and done.
Or, or, or......
This is just a person flat-out making things up and pretending to be the vessel of all knowing and that everything conforms with there FEELINGS of how things are.

So with all this here is the think Ryan, FIRST you have to decide FOR YOURSELF what you want YOUR life to be, look like, have.
Than, SEEK THE TEACHER....
If you want to have a body like Schwarzenegger, does it make sense to go ask the people with bodies like Pee-Wee how to do it????

If your happy with CD's then do CD's, but don't lie to yourself that you'll get wealthy doing it. Look around and ask how many millionaires CD's made, that is, other than CD brokers.

Real Estate has made MORE millionaires from average John/Jane Does than EVERY other "investment" alternative there is, COMBINED.
Think on that a bit.

3 Reply
Ryan Daulton
OP
New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes
2y
@James Hamling wow this was quite the response! I love it! That's a great point about the difference between business and investment. I already decided what I went for myself and I agree that real estate is way superior to CD market. But I didn't know how to explain it to my peers. And also you and others identified benefits I am not realized before now.
0 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
2y
Quote from @Ryan Daulton:

@James Hamling wow this was quite the response! I love it! That's a great point about the difference between business and investment. I already decided what I went for myself and I agree that real estate is way superior to CD market. But I didn't know how to explain it to my peers. And also you and others identified benefits I am not realized before now.

I'd say to first and foremost make that clear distinction that it's NOT an "investment" that it's you, or anyone, starting a Business.
Yes, the Business "invests" in it's assets that it will need and use to create the revenue. Just like a contractor with his tools, truck, scaffolding etc.. And if anyone says a GC doesn't have nearly as much $ tied up into assets, lol, tell em they couldn't be more wrong, I had way more in tools and equipment then any 2 properties cost whole $ but when factor against just the capital outlay.... my shop and all equipment was roughly 12 if not 15,20 properties worth of "stuff".
One simply can not compare a Real Estate Business like Landlording for standard rentals too "investing" such as CD's, stocks, bonds etc., there just totally different things as comparable as a CD vs a Taco Truck.
Down the rabbit hole a bit more....
Let's say you DO try to do Real Estate as a "pure investment". You setup a trust, who sets up an LLC. With that LLC it buys real estate and conveys it to you, the person, on a Triple-net lease basis for your personal actions of letting for profit.
Now comparing the biz to a CD.... Let's say it's $50k to play with, over 5yrs.
CD earns say 5%. That's it, done deal, 5%, nothing else. - $12,500 "profit".
With Real Estate, say we get $200k property, and now were $50k out of pocket "invested".
Real Estate appreciates just 4% annually - $43,330.58 "profit"
Let's say rents 1st yr are, say $1,700 and so it's a net 0 1st yr. But rents appreciate just 4% per yr. - By end, rents are touching on $2k per month. $7,200+ profits from rent over the time.
Mortgage paydown via tenant payments. Now let's say that accounts for JUST $50mnth 1st yr and only grows at $50mnth each yr, because of the amortization curve (no, I don't feel like pulling out the chart and doing this full-out for real'sies)- That's $9k "profits".
We will skip tax advantages, as this case by case and too much math to make argument here.
So what have we go? We have CD at $12,500 vs Real Estate at $59,530.58
Real Estate could perform HALF of what I laid out here, which is rather conservative really, and it would still be WAY more than double the profitable return CD is.......
It's not a competition between the two anymore than a foot race between a snail and a cheetah.
2 Reply
Ryan Daulton
OP
New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes
2y
Wow brilliant deductions!
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @James Hamling:

Real Estate appreciates just 4% annually - $43,330.58 "profit"

That's the key emphasis there "appreciates".

As long as the appreciation is faster than CD rate then that asset is good.

But some office building like in 455 Market St San Francisco lost value 80% within 10 years lol. Luckily it's only wned by "Canadian" pension fund and not me.
The trick is that if we can keep find asset "that always appreciate" faster than CD then we are good.
2 Reply
Robert C.
Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
2y
Quote from @James Hamling:

Quote from @Ryan Daulton:

....when I told one of my family members about my interest in real estate, he was very skeptical. What can I explain to him are all the advantages of real estate over other forms of investment, like the CD market which guarantees a 5% return annually?

Ryan I have to first correct a major fundamental flaw in your analysis, and conversation of things.
This person speaking with your promoting CD's, is speaking of and focusing on JUST investments and investing.
What you are doing Ryan, is speaking of and promoting a BUSINESS, but calling it an investment.
This will always result in conflict and uncertainty, because were measuring apples too hand-grenades.

One of the greatest failures in the entire Investment Real Estate community is our propensity to refer to any/all of it as "investing". Rarely, RARELY is it "investing", like less than 5% exceptionally rarely.

When you are a Landlord Ryan, you are operating a Residency Business. When doing STR, a hospitality business. When doing flips, a Home Redevelopment Business.
The fundamental is that the asset (real estate) does literally NOTHING without active operational inputs on a consistent, regularized basis.

When you buy a CD, what inputs is there? Nothing, right. That is a true "investment" as in buy it, do nothing, just ownership is the requirement for future return potential.

As a landlord, STR hosting, flipper, we "invest" in the asset of Real Estate, TO MONITIZE that asset through our various active actions of operation.

This may seem like it's splitting hairs but I assure it is not, it's CORRECTLY setting the stage of comprehension, as what comes next will give this clarity.

If discussing a different business operation, say buying a restaurant, immediately people won't think the value is just the market value of the location, the tables, the broiler, dishwasher, plates, pots and pans, right. No, everyone asks how you will MAKE money with it. What will you DO with it. How you will MONITIZE those assets.

And at same time, it's understood that depending on what you do to convert those assets who do nothing alone, into something that generates $$$$, that the overall value/worth of that enterprise will be based upon how efficiently it generates revenue and converts gross revenue to net profit.

A Real Estate BUSINESS is exactly the same.
A property does NOTHING alone.
It's ability to produce revenue is a direct result of how one utilizes that asset. How they run it.
And it's worth, it's value, will be a result of all that.

Take a 4br home.
One person uses it for long term rentals, no pet's, requires super high credit, 3 months deposit etc etc.. Well, so they have a lot longer vacancy, less revenues etc..
Another runs it different, does better getting tenants, get's 20% better rents, less vacancy.
And yet another does a STR with it and grosses triple what standard tenant rents would be and doubles net.
Same asset, same real estate, operated differently.

So, first you must correct the conversation that your looking at owning a BUSINESS vs stocks, bonds, CD's.

Now the rewards for such should be a ready obvious to most.
If you run your business well, you will ALWAYS "beat the market" on what an "investment" alone will bring in.
Because a true "investment" such as a CD, what is it? It's a nothing. It's just the underlying item that a business, somewhere, uses to actively generate there revenue. It will ALWAYS be the lessor return, because it is the lessor input.

1. When mortgage rates press UP, less can buy. When less can buy MORE rent. When more RENT, rents-go-up. Cause-effect. It's truly that simple. ALSO, more buy on terms, more buy via unique constructive means such a C4D or LO, all additional mechanisms a business entity is doing for-profit.
2.1 Appreciation is GUARENTEED by the higher rates. Rates are a DIRECT reflection of appreciation, DIRECT. The inflation rate. Inflation IS appreciation when one holds an asset such as real estate.
2.2 he is incorrectly using the word depreciation. He is looking at 1 specific market and 1 specific segment of asset in that market.
3. I GUARENTEE you will have vacancy in this business, and if done long enough you WILL have an eviction. It's like saying if you open a taco stand you WILL have someone who doesn't like your taco eventually. Yes, you will, that is reality, you will not please 100% of people 100% of the time.
4. Most likely YES, the real question is WHEN, HOW MUCH, WHAT FOR, WHY and WHO's PAYING. Done correctly, you will NEVER spend $ without a direct ROI connected to/from it. Damages are tenant funded repairs. Again, done correctly. Again, this is a BUSINESS not an "Investment".
5. Again, it's an obvious yes that you will have costs of operation. If had that taco truck, you would have food costs, fuel to cook it, staff etc., does that means it's "bad"????
6. He is a LIAR! Sorry to be so blunt about it but there is no way around it. '23'/'24' are CASH-COW years for hundreds of thousands of landlords. Proof: Go find a landlord who bought in '18' and prior and ask them how there doing. Now on mortgages, OF COURSE we use O.P.M. to SCALE. If he thinks the only way to landlord is via paid-off properties; HE's NUTS. O.P.M. is how one scales, and it's rocket-fuel to profitability. Would you like to be earning appreciation on 1 or 47 properties? Which do you think is more profitable? Would you like tenants paying down 1 or 47 mortgages for you? Does one have to manage there margin, HECK-YEAH, but to randomly decide any with a mortgage are failing in some manner is BONKERS.
7. Really.... is this person the ghost of Stephen Hawking? I ask as he seems to think he is the smartest man alive containing all knowledge there is.
So how about an estate where person passed? Where "distressed" sellers are the heirs who live 4 states away and are too busy with their life to spend the weeks clearing out all the items of the PERFECTLY MAINTAINED home there parent left them, and they simply want the $, and things to be done simply.
Or the divorcing couple.
Or the person who just got relocated with days/weeks to get everything sorted and done.
Or, or, or......
This is just a person flat-out making things up and pretending to be the vessel of all knowing and that everything conforms with there FEELINGS of how things are.

So with all this here is the think Ryan, FIRST you have to decide FOR YOURSELF what you want YOUR life to be, look like, have.
Than, SEEK THE TEACHER....
If you want to have a body like Schwarzenegger, does it make sense to go ask the people with bodies like Pee-Wee how to do it????

If your happy with CD's then do CD's, but don't lie to yourself that you'll get wealthy doing it. Look around and ask how many millionaires CD's made, that is, other than CD brokers.

Real Estate has made MORE millionaires from average John/Jane Does than EVERY other "investment" alternative there is, COMBINED.
Think on that a bit.

James, great post, and that distinction between people viewing real estate as a business versus an investment has been on my mind a lot lately. I've been thinking it's one of the reasons real estate "investors" often find themselves over-leveraged, because they aren't thinking of the business fundamentals. Instead they've somehow been brainwashed into rinse-dry-repeat formulas that lack foresight.
@Ryan Daulton, one thing I've noticed is that whenever I've asked others for investment advice, they mostly speak to the thing that worked for them to the exclusion of all else. For example, when I first started out, I sat down with a luxury real estate developer and told him I was thinking about buying apartments. He told me luxury real estate is the best because rich people are always buying or building or remodeling in good times and bad (this was around 2010 in Palo Alto, CA). He also said there's no money to be made in apartments. I'm pretty sure he forgot he said that, because he looked me up 8 years later to ask about apartments so he could get into it.
Anyways, I don't hold it against people, but I understand that's how it is and I just make my own decisions in the end. But it also speaks to the fact that people make money in those fields where they have the most expertise.
My other thought is that it's actually really hard to compound your net worth, because you have to put it all (or most of it) at risk to achieve worthwhile returns. Real estate naturally lends itself to putting more money on the line because of entry prices, and that not only potentially benefits your compounding, but strategies like the 1031 and basic leverage help you maximize with pre-tax dollars. Some of this is a psychological argument, too - I'm not someone that can put a bunch of money in an index fund or stocks that are fully liquid and keep myself from messing around with it when I shouldn't. CD's are nice risk-free vehicles to get a return on my cash reserves, but I'm also nagged by the thought that if banks are willing to offer 5% on my money, then what are they doing with that money that is earning more?? Put another way, when 5% is the easy money, then I tend to think there are reasonable opportunities to make more than that.

1 Reply
Ryan Daulton
OP
New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes
2y
0 Reply
Ryan Daulton
OP
New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes
2y
Quote from @James Hamling:

Quote from @Ryan Daulton:

@James Hamling wow this was quite the response! I love it! That's a great point about the difference between business and investment. I already decided what I went for myself and I agree that real estate is way superior to CD market. But I didn't know how to explain it to my peers. And also you and others identified benefits I am not realized before now.

I'd say to first and foremost make that clear distinction that it's NOT an "investment" that it's you, or anyone, starting a Business.
Yes, the Business "invests" in it's assets that it will need and use to create the revenue. Just like a contractor with his tools, truck, scaffolding etc.. And if anyone says a GC doesn't have nearly as much $ tied up into assets, lol, tell em they couldn't be more wrong, I had way more in tools and equipment then any 2 properties cost whole $ but when factor against just the capital outlay.... my shop and all equipment was roughly 12 if not 15,20 properties worth of "stuff".
One simply can not compare a Real Estate Business like Landlording for standard rentals too "investing" such as CD's, stocks, bonds etc., there just totally different things as comparable as a CD vs a Taco Truck.
Down the rabbit hole a bit more....
Let's say you DO try to do Real Estate as a "pure investment". You setup a trust, who sets up an LLC. With that LLC it buys real estate and conveys it to you, the person, on a Triple-net lease basis for your personal actions of letting for profit.
Now comparing the biz to a CD.... Let's say it's $50k to play with, over 5yrs.
CD earns say 5%. That's it, done deal, 5%, nothing else. - $12,500 "profit".
With Real Estate, say we get $200k property, and now were $50k out of pocket "invested".
Real Estate appreciates just 4% annually - $43,330.58 "profit"
Let's say rents 1st yr are, say $1,700 and so it's a net 0 1st yr. But rents appreciate just 4% per yr. - By end, rents are touching on $2k per month. $7,200+ profits from rent over the time.
Mortgage paydown via tenant payments. Now let's say that accounts for JUST $50mnth 1st yr and only grows at $50mnth each yr, because of the amortization curve (no, I don't feel like pulling out the chart and doing this full-out for real'sies)- That's $9k "profits".
We will skip tax advantages, as this case by case and too much math to make argument here.
So what have we go? We have CD at $12,500 vs Real Estate at $59,530.58
Real Estate could perform HALF of what I laid out here, which is rather conservative really, and it would still be WAY more than double the profitable return CD is.......
It's not a competition between the two anymore than a foot race between a snail and a cheetah.

Since you gave such a brilliant answer, just one more question for you. Is it true that some states like New York are trying to dramatically increase the property tax for out-of-state investors in order to squeeze them out of the market? And if this becomes commonplace what defensive measure could we the investors make?

0 Reply
Bobby Larsen
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
2y
This is a long thread so this may have been said but from what I’ve read, everyone is focusing on appreciation which the often counter argument would be “what if it does appreciate?”.
Price appreciation is not certain which makes it a poor argument. What is more certain is rent growth and taxes.
1) You can buy a CD at 5% or a property at a 5.5% to 6% yield. Day 1 a better yield but not as big of a spread as some might prefer. However, that CD will stay at 5% while the yield on your property will grow. By year 3, most investments we look at have a cap rate (yield) of 7.5% with modest rent growth or 6.5% without rent growth. Much more attractive than a 5% CD.
“What about inflation?” They may ask. Well focus on market will low expense ratios so that rent (the largest component of inflation) is certain to grow faster than expenses. ALSO, very important here, if the fear is inflation, the last asset you want to be invested in during an inflationary environment is fixed income. Fixed income is the worst performing asset class during high inflation.
2) CDs are taxed at ordinary income so take that 5% and subtract your state and federal taxes from it to determine the actual yield. Would be anywhere from 25% to 50% so a 2.5% to 3.75% after tax yield from CDs. Cashflow from rents will be tax deferred and if you’re pursuing this as a business, it can be deferred indefinitely.
1 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Bobby Larsen:

This is a long thread so this may have been said but from what I’ve read, everyone is focusing on appreciation which the often counter argument would be “what if it does appreciate?”.
Price appreciation is not certain which makes it a poor argument. What is more certain is rent growth and taxes.
1) You can buy a CD at 5% or a property at a 5.5% to 6% yield. Day 1 a better yield but not as big of a spread as some might prefer. However, that CD will stay at 5% while the yield on your property will grow. By year 3, most investments we look at have a cap rate (yield) of 7.5% with modest rent growth or 6.5% without rent growth. Much more attractive than a 5% CD.
Rent growth is actually more dynamics and more volatile than residential real estate appreciation.
Nationwide we're in several quarter now where we see zero growth while residential RE appreciation keps agoing up.
Residential real estate in theory and practice is always better than investing at asset that's valued using cap rate because that's derivative product of (a) supply-demand local apartment (b) the asset is valued only following rent income.
About to say.......... in US it's way way way more "profitable" to invest at residential that appreciates , rather than a CRE where valuation is much more volatile and dynamics.
I would lose money now if I buy CRE few years ago, luckily I made the right decision by investing residential where I can control and the appreciation curves is exactly like what I've forecasted.
1 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Robert C.:

Quote from @James Hamling:

The bank is just a "spread" trader actually.
During cheap money era they borrow money from the Fed with 0.5% rate for example, and then they give us mortgage rate of 3% rate and 7% HELOC. The spread between 3 and 7 percent is their profit.
During expensive money era like today the Fed note is 4% and the bank give us 7% mortgage and 12-14% HELOC rate. The spread is the same concept but "widen".
The banks and Warren Buffet is actually more like "spread trader". They re-invested cheaper money to a productive economic that generates higher income.
Now from Buffet and any other big time investors prefer to invest at cash position (CD).
1 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @James Hamling:

So what have we go? We have CD at $12,500 vs Real Estate at $59,530.58
Real Estate could perform HALF of what I laid out here, which is rather conservative really, and it would still be WAY more than double the profitable return CD is.......

I used to do forecasting like this, in my realized investment after 10 years during cheap money where CD=0% ; mortgage rate=3% ; appreciation curve is 6% yoy.
The result of net investment (after fee and commision) is similar to CD with 13-14% rates.
Now that money is expensive, my modelling says it would be around 7-9% ; almost similar like the return of conservative debt/HML fund. Corporate bond return is at 6-7% as well.
0 Reply
Robert C.
Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
2y
Quote from @Carlos Ptriawan:

Quote from @Robert C.:

Quote from @James Hamling:

The bank is just a "spread" trader actually.
During cheap money era they borrow money from the Fed with 0.5% rate for example, and then they give us mortgage rate of 3% rate and 7% HELOC. The spread between 3 and 7 percent is their profit.
During expensive money era like today the Fed note is 4% and the bank give us 7% mortgage and 12-14% HELOC rate. The spread is the same concept but "widen".
The banks and Warren Buffet is actually more like "spread trader". They re-invested cheaper money to a productive economic that generates higher income.
Now from Buffet and any other big time investors prefer to invest at cash position (CD).

The way I look at things is that all capital allocators are spread traders underneath it all, maybe real estate more so because of our common sources of funds.

I watched the recent Berkshire annual meeting, and my personal takeaway isn’t to invest in CD’s, although parking cash is another matter. Berkshire operates at a scale where Buffet points out that it’s really hard to make any investments that move the needle, so that results in hoarding cash for now, or reinvesting in already successful businesses in the portfolio.
One of the questions to Warren Buffet was what he would do if he was starting over today with $1m and he talked about finding where he can make 50% return on his money and doing that. Now we’re not all Warren Buffets, but I also take him at his word that he and Charlie Munger are not actual geniuses either - it’s mostly knowledge, discipline, and patience. In my opinion, it doesn’t mean all us “non-Warrens” should be settling for risk free returns. I suspect he would continue to recommend passive players buy indexes or just Berkshire stock!

1 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Robert C.:

Quote from @Carlos Ptriawan:

Quote from @Robert C.:

Quote from @James Hamling:

The bank is just a "spread" trader actually.
During cheap money era they borrow money from the Fed with 0.5% rate for example, and then they give us mortgage rate of 3% rate and 7% HELOC. The spread between 3 and 7 percent is their profit.
During expensive money era like today the Fed note is 4% and the bank give us 7% mortgage and 12-14% HELOC rate. The spread is the same concept but "widen".
The banks and Warren Buffet is actually more like "spread trader". They re-invested cheaper money to a productive economic that generates higher income.
Now from Buffet and any other big time investors prefer to invest at cash position (CD).

The way I look at things is that all capital allocators are spread traders underneath it all, maybe real estate more so because of our common sources of funds.

I watched the recent Berkshire annual meeting, and my personal takeaway isn’t to invest in CD’s, although parking cash is another matter. Berkshire operates at a scale where Buffet points out that it’s really hard to make any investments that move the needle, so that results in hoarding cash for now, or reinvesting in already successful businesses in the portfolio.
One of the questions to Warren Buffet was what he would do if he was starting over today with $1m and he talked about finding where he can make 50% return on his money and doing that. Now we’re not all Warren Buffets, but I also take him at his word that he and Charlie Munger are not actual geniuses either - it’s mostly knowledge, discipline, and patience. In my opinion, it doesn’t mean all us “non-Warrens” should be settling for risk free returns. I suspect he would continue to recommend passive players buy indexes or just Berkshire stock!

totally agree with all the points....
0 Reply
Bobby Larsen
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
2y
@Carlos Ptriawan
Please provide support to your claim that rent is more volatile than values. Using two specific points in time is not support, it’s selection bias.
As for if you bought real estate a few years ago, you would have lost money. That is true but you are further using selection bias. You are choosing the exact peak in values and assuming you sold today. A more supportive argument would be to show a rolling 5-year or 10-year average index that tracks values. You could have purchased real estate in 2022 with a 10 year fixed rate loan at 3% and your investment would likely still be distributing 4% to 6% right now and while the value of that investment is down if sold today, you don’t have to. History has shown that residential and multifamily real estate has always appreciated over a 10 year time horizon.
0 Reply
Bobby Larsen
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
2y
Quote from @Carlos Ptriawan:

It's also easy to look at historical performance and say that something has performed exactly as predicted. What does your appreciation curve for multifamily and residential values show the next 12 months?
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Bobby Larsen:

@Carlos Ptriawan you don’t have to. History has shown that residential and multifamily real estate has always appreciated over a 10 year time horizon.

This statement is not true. You cant compare between the two.

The truth is residential is good location and has more demand than supply always appreciate over ten years.
While multifamily is appreciating over last ten year between 2012-2022, that is true because you have cap rate compression from cap rate 7-8 market to cap rate 3 market.
In residential, our valuation with sky as limit as homeownership is chasing that asset and rent valuation is not significant parameter on residential valuation.
now MF/CRE regressed to cap rate 5-6 from cap rate 3-4 generally in most market. So lets say the Fed doesn't change interest rate, then most likely most MF would regress to cap rate 6-8. So lets say we're good at market cap rate 6-8, then for the next 10 years you would ride til cap rate 4-5 again , but then during this point of market cycle 3 or 4 cap rate, then cap rate would regress to cap rate 6 again (aka losing valuation every 8-12 years).
This cyclical thing in MF, we don't have that problem in residential.
In today's 5% CD rate, I am feeling very safe if I have to buy primary with 5-6% ; or invest at CD ; but with multifamily volatility and rent dropping, it's not good investment outthere. CD is much more safer in this environment.
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Bobby Larsen:

Quote from @Carlos Ptriawan:

It's also easy to look at historical performance and say that something has performed exactly as predicted. What does your appreciation curve for multifamily and residential values show the next 12 months?

Oh very easy, for Multifamily it depends on Fed decision. Fed depends on CPI. We know inflation is sticky at 3% hence this year ratereduction would be less likely.

Rent Growth is 0% in the last quarter.
Bid buy-sell spread is around 100-150 bps.

With supply coming until 2025, my estimate is at least zero growth to 5%-8% decline for multifamily.

For Residential, you could check Lance research, it's pretty amazing research, the appreciation curve really depend on location and in particular , supply/demand/DOM factor.

New Jersey, Bay Area is top performing, we are appreciating at least 4-5% annually.

1 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
2y
Quote from @Carlos Ptriawan:

Quote from @James Hamling:

So what have we go? We have CD at $12,500 vs Real Estate at $59,530.58
Real Estate could perform HALF of what I laid out here, which is rather conservative really, and it would still be WAY more than double the profitable return CD is.......

I used to do forecasting like this, in my realized investment after 10 years during cheap money where CD=0% ; mortgage rate=3% ; appreciation curve is 6% yoy.
The result of net investment (after fee and commision) is similar to CD with 13-14% rates.
Now that money is expensive, my modelling says it would be around 7-9% ; almost similar like the return of conservative debt/HML fund. Corporate bond return is at 6-7% as well.

Carlos, buddy, pal, your breaking my heart here, I would have thought of all people you'd be Mr math on all this.
I get it, rates are highER than they have been but we gotta be the defenders of CONTEXT, right. And truth is NO rates are NOT "high", there actually "NORMAL" now. It's just that we enjoyed a decade of ridiculous fire-sale on money, right.
So now, like spoiled children, when things return to "a life more normal" were all wailing how "HIGH" the cost of $ is. And it's not, all the data is clear on this.
As for the rest of this, I don't follow. I have not seen anything close to 13-14% rates, not even 10%. Highest I have seen is in 8's.
Now you know the risks of doing various syndication investing, bonds etc., they are NOT risk free, just ask anyone getting capital calls, right.
Going a step further, what happens as rates stay highER? It lends foundation of highER rents, right. And it presses rents highER still.
Inflation = inflation. Sooooo many miss this simple SIMPLE fact. If a person is doing an analysis and using todays rent, for an eternity rent, and not factoring in rent appreciation, well that's just as flawed as not considering cap-x or maintenance right.
As I have said many MANY times before; most often the "Secret Recipe" to getting a "Cash Cow" of a rental is buying a Net-0 rental today, and TIME.
As your price is fixed, but rents appreciate, margin grows as long as you did things right and make sure expenses don't consume your margin growth.
This is a primary driver why so many are dumbfounded how persons like me and my clients are making $ hand over fist in New Con, where they "think" it should do poorly. Maximum margin growth, minimal expense growth. And TIME.
My current "Crown Jewel" of a standard rental was considered by most a "bad buy" when closed in '21'. Today, it's a cash-cow and with a truck-load in equitable profits. It started life as net-0 cash-flow.
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

So what have we go? We have CD at $12,500 vs Real Estate at $59,530.58
Real Estate could perform HALF of what I laid out here, which is rather conservative really, and it would still be WAY more than double the profitable return CD is.......

I used to do forecasting like this, in my realized investment after 10 years during cheap money where CD=0% ; mortgage rate=3% ; appreciation curve is 6% yoy.
The result of net investment (after fee and commision) is similar to CD with 13-14% rates.
Now that money is expensive, my modelling says it would be around 7-9% ; almost similar like the return of conservative debt/HML fund. Corporate bond return is at 6-7% as well.

Carlos, buddy, pal, your breaking my heart here, I would have thought of all people you'd be Mr math on all this.
I get it, rates are highER than they have been but we gotta be the defenders of CONTEXT, right. And truth is NO rates are NOT "high", there actually "NORMAL" now. It's just that we enjoyed a decade of ridiculous fire-sale on money, right.
So now, like spoiled children, when things return to "a life more normal" were all wailing how "HIGH" the cost of $ is. And it's not, all the data is clear on this.
As for the rest of this, I don't follow. I have not seen anything close to 13-14% rates, not even 10%. Highest I have seen is in 8's.
Now you know the risks of doing various syndication investing, bonds etc., they are NOT risk free, just ask anyone getting capital calls, right.
Going a step further, what happens as rates stay highER? It lends foundation of highER rents, right. And it presses rents highER still.
Inflation = inflation. Sooooo many miss this simple SIMPLE fact. If a person is doing an analysis and using todays rent, for an eternity rent, and not factoring in rent appreciation, well that's just as flawed as not considering cap-x or maintenance right.
As I have said many MANY times before; most often the "Secret Recipe" to getting a "Cash Cow" of a rental is buying a Net-0 rental today, and TIME.
As your price is fixed, but rents appreciate, margin grows as long as you did things right and make sure expenses don't consume your margin growth.
This is a primary driver why so many are dumbfounded how persons like me and my clients are making $ hand over fist in New Con, where they "think" it should do poorly. Maximum margin growth, minimal expense growth. And TIME.
My current "Crown Jewel" of a standard rental was considered by most a "bad buy" when closed in '21'. Today, it's a cash-cow and with a truck-load in equitable profits. It started life as net-0 cash-flow.

You are talking single family rental cash flow, right ?
I am talking about single family appreciation.
0 Reply
John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 805 votes
2y
Here are the advantages of Real Estate:
Tax deductions on Interest and expenses!
Income!
cost segregation!
control over an asset!
appreciation
Long term capital gains tax!
Leverage...Using other people's money
Step up in basis for your kids!
Depreciation!
It's relatively passive
Freedom to do what you want!
1 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
2y
Quote from @Ryan Daulton:

Quote from @James Hamling:

Quote from @Ryan Daulton:

@James Hamling wow this was quite the response! I love it! That's a great point about the difference between business and investment. I already decided what I went for myself and I agree that real estate is way superior to CD market. But I didn't know how to explain it to my peers. And also you and others identified benefits I am not realized before now.

I'd say to first and foremost make that clear distinction that it's NOT an "investment" that it's you, or anyone, starting a Business.
Yes, the Business "invests" in it's assets that it will need and use to create the revenue. Just like a contractor with his tools, truck, scaffolding etc.. And if anyone says a GC doesn't have nearly as much $ tied up into assets, lol, tell em they couldn't be more wrong, I had way more in tools and equipment then any 2 properties cost whole $ but when factor against just the capital outlay.... my shop and all equipment was roughly 12 if not 15,20 properties worth of "stuff".
One simply can not compare a Real Estate Business like Landlording for standard rentals too "investing" such as CD's, stocks, bonds etc., there just totally different things as comparable as a CD vs a Taco Truck.
Down the rabbit hole a bit more....
Let's say you DO try to do Real Estate as a "pure investment". You setup a trust, who sets up an LLC. With that LLC it buys real estate and conveys it to you, the person, on a Triple-net lease basis for your personal actions of letting for profit.
Now comparing the biz to a CD.... Let's say it's $50k to play with, over 5yrs.
CD earns say 5%. That's it, done deal, 5%, nothing else. - $12,500 "profit".
With Real Estate, say we get $200k property, and now were $50k out of pocket "invested".
Real Estate appreciates just 4% annually - $43,330.58 "profit"
Let's say rents 1st yr are, say $1,700 and so it's a net 0 1st yr. But rents appreciate just 4% per yr. - By end, rents are touching on $2k per month. $7,200+ profits from rent over the time.
Mortgage paydown via tenant payments. Now let's say that accounts for JUST $50mnth 1st yr and only grows at $50mnth each yr, because of the amortization curve (no, I don't feel like pulling out the chart and doing this full-out for real'sies)- That's $9k "profits".
We will skip tax advantages, as this case by case and too much math to make argument here.
So what have we go? We have CD at $12,500 vs Real Estate at $59,530.58
Real Estate could perform HALF of what I laid out here, which is rather conservative really, and it would still be WAY more than double the profitable return CD is.......
It's not a competition between the two anymore than a foot race between a snail and a cheetah.

Since you gave such a brilliant answer, just one more question for you. Is it true that some states like New York are trying to dramatically increase the property tax for out-of-state investors in order to squeeze them out of the market? And if this becomes commonplace what defensive measure could we the investors make?

Is Government making a "dash for the cash"..... Well yeah, just look around. We are living the reality that a lot of our politicians are firmly in an elitist mindset, and there cronies who serve them in Government. It's no longer conspiracy theory to state such, it's observation. And this problem is so pervasive that this elitist political class is now blatant in there stance and actions, doing it arrogantly, ramming it down everyone's throat and saying how grateful we should all be for it and demanding we all accept it as requisite responsibility for such.
Funny thing is, as these forces speak of how we all should "pay our fair share", notice how they NEVER speak of what THERE "fair share" is, do they.... Nor do they ever speak of financial ACCOUNTABILITY. They say how they "need" more $ to operate. Why? How'd they do it with less last year? Or the year before? What EXACTLY is the "more $" for?
No, zero accountability.
And how do we combat it? Well, first and foremost, WE MUST STOP FACILITATING IT! yeah, it's HEAVILY our fault. These clowns work for us, yet somehow we all say "well what can you do" and just, let it be. If an employee was stealing from the till would one say "what can you do" and just ignore it???? They are OUR employees! ACCOUNTABILITY!
We the employers MUST start DEMANDING accountability. DEMAND they work FOR us. DEMAND they get in there CORRECT place. Speak UP, be INVOLVED.
The silent majority.... THAT is the root cause of the problems, being a silent majority.
To say nothing is to suffer anything and everything.
If want CHANGE one must be a part of that change. People say don't talk politics, WHY?! Politics literally controls every facet of our lives because we employ politicians to run everything. No, we must change that narrative TO talk politics, as often and frequently as possible.
Attend our Local Government meetings, regional, national. Contact our political employees, air our grievances, DEMAND our actions we desire because again, they are OUR employees. If you go and order a meal don't you expect and demand them to deliver what was ordered not cow manure on a plate? Well.....
Or.... run away. Complain and run away to somewhere else until that place goes to cr#p and than run away again and again and again....
And to be clear, this is NOT a R of a D issue, it is NOT. It's a THEM vs US issue. It's elitist vs WE THE PEOPLE....
Somewhere along the way of prosperity we all got too drunk on success and just lay about in our stupor as these "children" run amok of everything. Now in our hang over we want to wag a finger and blame blame blame. Well, when you let an 8yr old take the keys to the car, who's the idiot when they smash it up.
We forgot, we are AMERICANS! It was WE THE PEOPLE who literally changed the world. We changed everything, defied all odd's, shook the world itself.
There is a story of history that a great Japanese military leader, when received the news of the great success of the attack on Peral Harbor, stood somber, silent, surprising all around him. When asked, because it was confusing, why not in joy and celebration he said "I fear we have awoken a slumbering GIANT".
We MUST pull ourselves from this coma again! WE.... That is how and when EVERYTHING will change. Again.
We have been sleeping our way into servitude and self-destruction....
1 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
2y
Quote from @Robert C.:

Quote from @James Hamling:

Quote from @Ryan Daulton:

....when I told one of my family members about my interest in real estate, he was very skeptical. What can I explain to him are all the advantages of real estate over other forms of investment, like the CD market which guarantees a 5% return annually?

Ryan I have to first correct a major fundamental flaw in your analysis, and conversation of things.
This person speaking with your promoting CD's, is speaking of and focusing on JUST investments and investing.
What you are doing Ryan, is speaking of and promoting a BUSINESS, but calling it an investment.
This will always result in conflict and uncertainty, because were measuring apples too hand-grenades.

One of the greatest failures in the entire Investment Real Estate community is our propensity to refer to any/all of it as "investing". Rarely, RARELY is it "investing", like less than 5% exceptionally rarely.

When you are a Landlord Ryan, you are operating a Residency Business. When doing STR, a hospitality business. When doing flips, a Home Redevelopment Business.
The fundamental is that the asset (real estate) does literally NOTHING without active operational inputs on a consistent, regularized basis.

When you buy a CD, what inputs is there? Nothing, right. That is a true "investment" as in buy it, do nothing, just ownership is the requirement for future return potential.

As a landlord, STR hosting, flipper, we "invest" in the asset of Real Estate, TO MONITIZE that asset through our various active actions of operation.

This may seem like it's splitting hairs but I assure it is not, it's CORRECTLY setting the stage of comprehension, as what comes next will give this clarity.

If discussing a different business operation, say buying a restaurant, immediately people won't think the value is just the market value of the location, the tables, the broiler, dishwasher, plates, pots and pans, right. No, everyone asks how you will MAKE money with it. What will you DO with it. How you will MONITIZE those assets.

And at same time, it's understood that depending on what you do to convert those assets who do nothing alone, into something that generates $$$$, that the overall value/worth of that enterprise will be based upon how efficiently it generates revenue and converts gross revenue to net profit.

A Real Estate BUSINESS is exactly the same.
A property does NOTHING alone.
It's ability to produce revenue is a direct result of how one utilizes that asset. How they run it.
And it's worth, it's value, will be a result of all that.

Take a 4br home.
One person uses it for long term rentals, no pet's, requires super high credit, 3 months deposit etc etc.. Well, so they have a lot longer vacancy, less revenues etc..
Another runs it different, does better getting tenants, get's 20% better rents, less vacancy.
And yet another does a STR with it and grosses triple what standard tenant rents would be and doubles net.
Same asset, same real estate, operated differently.

So, first you must correct the conversation that your looking at owning a BUSINESS vs stocks, bonds, CD's.

Now the rewards for such should be a ready obvious to most.
If you run your business well, you will ALWAYS "beat the market" on what an "investment" alone will bring in.
Because a true "investment" such as a CD, what is it? It's a nothing. It's just the underlying item that a business, somewhere, uses to actively generate there revenue. It will ALWAYS be the lessor return, because it is the lessor input.

1. When mortgage rates press UP, less can buy. When less can buy MORE rent. When more RENT, rents-go-up. Cause-effect. It's truly that simple. ALSO, more buy on terms, more buy via unique constructive means such a C4D or LO, all additional mechanisms a business entity is doing for-profit.
2.1 Appreciation is GUARENTEED by the higher rates. Rates are a DIRECT reflection of appreciation, DIRECT. The inflation rate. Inflation IS appreciation when one holds an asset such as real estate.
2.2 he is incorrectly using the word depreciation. He is looking at 1 specific market and 1 specific segment of asset in that market.
3. I GUARENTEE you will have vacancy in this business, and if done long enough you WILL have an eviction. It's like saying if you open a taco stand you WILL have someone who doesn't like your taco eventually. Yes, you will, that is reality, you will not please 100% of people 100% of the time.
4. Most likely YES, the real question is WHEN, HOW MUCH, WHAT FOR, WHY and WHO's PAYING. Done correctly, you will NEVER spend $ without a direct ROI connected to/from it. Damages are tenant funded repairs. Again, done correctly. Again, this is a BUSINESS not an "Investment".
5. Again, it's an obvious yes that you will have costs of operation. If had that taco truck, you would have food costs, fuel to cook it, staff etc., does that means it's "bad"????
6. He is a LIAR! Sorry to be so blunt about it but there is no way around it. '23'/'24' are CASH-COW years for hundreds of thousands of landlords. Proof: Go find a landlord who bought in '18' and prior and ask them how there doing. Now on mortgages, OF COURSE we use O.P.M. to SCALE. If he thinks the only way to landlord is via paid-off properties; HE's NUTS. O.P.M. is how one scales, and it's rocket-fuel to profitability. Would you like to be earning appreciation on 1 or 47 properties? Which do you think is more profitable? Would you like tenants paying down 1 or 47 mortgages for you? Does one have to manage there margin, HECK-YEAH, but to randomly decide any with a mortgage are failing in some manner is BONKERS.
7. Really.... is this person the ghost of Stephen Hawking? I ask as he seems to think he is the smartest man alive containing all knowledge there is.
So how about an estate where person passed? Where "distressed" sellers are the heirs who live 4 states away and are too busy with their life to spend the weeks clearing out all the items of the PERFECTLY MAINTAINED home there parent left them, and they simply want the $, and things to be done simply.
Or the divorcing couple.
Or the person who just got relocated with days/weeks to get everything sorted and done.
Or, or, or......
This is just a person flat-out making things up and pretending to be the vessel of all knowing and that everything conforms with there FEELINGS of how things are.

So with all this here is the think Ryan, FIRST you have to decide FOR YOURSELF what you want YOUR life to be, look like, have.
Than, SEEK THE TEACHER....
If you want to have a body like Schwarzenegger, does it make sense to go ask the people with bodies like Pee-Wee how to do it????

If your happy with CD's then do CD's, but don't lie to yourself that you'll get wealthy doing it. Look around and ask how many millionaires CD's made, that is, other than CD brokers.

Real Estate has made MORE millionaires from average John/Jane Does than EVERY other "investment" alternative there is, COMBINED.
Think on that a bit.

James, great post, and that distinction between people viewing real estate as a business versus an investment has been on my mind a lot lately. I've been thinking it's one of the reasons real estate "investors" often find themselves over-leveraged, because they aren't thinking of the business fundamentals. Instead they've somehow been brainwashed into rinse-dry-repeat formulas that lack foresight.
@Ryan Daulton, one thing I've noticed is that whenever I've asked others for investment advice, they mostly speak to the thing that worked for them to the exclusion of all else. For example, when I first started out, I sat down with a luxury real estate developer and told him I was thinking about buying apartments. He told me luxury real estate is the best because rich people are always buying or building or remodeling in good times and bad (this was around 2010 in Palo Alto, CA). He also said there's no money to be made in apartments. I'm pretty sure he forgot he said that, because he looked me up 8 years later to ask about apartments so he could get into it.
Anyways, I don't hold it against people, but I understand that's how it is and I just make my own decisions in the end. But it also speaks to the fact that people make money in those fields where they have the most expertise.
My other thought is that it's actually really hard to compound your net worth, because you have to put it all (or most of it) at risk to achieve worthwhile returns. Real estate naturally lends itself to putting more money on the line because of entry prices, and that not only potentially benefits your compounding, but strategies like the 1031 and basic leverage help you maximize with pre-tax dollars. Some of this is a psychological argument, too - I'm not someone that can put a bunch of money in an index fund or stocks that are fully liquid and keep myself from messing around with it when I shouldn't. CD's are nice risk-free vehicles to get a return on my cash reserves, but I'm also nagged by the thought that if banks are willing to offer 5% on my money, then what are they doing with that money that is earning more?? Put another way, when 5% is the easy money, then I tend to think there are reasonable opportunities to make more than that.

The meek will live a life....
The BOLD will EXPERIENCE life....
Ain't nobody getting out of this thing alive, so, what would you rather have at end? "I wish I had" or....
That's honestly what it all boils down to. A choice to live OUT LOUD, or tip-toe to an end.
Sure, money can be lost as equally as gained. But what you learn can NEVER be lost. Failing-UP is the GREATEST catalyst to fantastic success. Does anyone care how many failures of light bulbs it took before the 1 that worked....
The BOLD fail, fail, fail to then SUCCEED! The fear of failure is a fear of evolving.
Be BOLD, fail-UP, take your shot, live free of regrets and rich of learning!
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