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Jason V.
  • Investor
  • Rochester, NY
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Is REI Just the "Least Worst" Choice?

Jason V.
  • Investor
  • Rochester, NY
Posted Feb 28 2017, 08:34

When it comes to obtaining "financial freedom" is investing in real estate just the least worst choice?

I tripped over this article the other night, which sums up a lot of what I've been thinking about REI lately: Investing in Real Estate Won't Build Massive Wealth

I think there are some pretty obvious omissions or flaws in it, most notably that the author is looking at ten years as an unbearable amount of time to build "massive" wealth, but that it also hits on some very important points. 

I'd guess the goal for most people on BP is to be able to quit their job, and live life on permanent vacation while having disposable income to travel, drive a Tesla, and otherwise generate social media posts to make people jealous. A number I see thrown around a lot is $10,000 per month, which is obviously $120,000 per year (I'm assuming that's before taxes.) But what does that look like?

At a 10% CoC return (which is probably fairly typical for a TK operation) you'll need $1.2 Million dollars of your own money invested.

At a 7% CoC return (what an Index Fund would have gotten you over the last 10 years, and probably close to what it'll get you for the next 10 years) you'll need $1.7 Million dollars of your own money invested.

At a 2% CoC return (what typical Hedge Funds would have gotten you over the last 10 years, after fees and splits) you'll need $6 Million dollars.

At a 15% CoC return (because you're a semi-active, successful RE investor) you'll need $800,000 of your own money invested (as pointed out by the article.)

At a 30% CoC return (because you're hitting non-stop home runs in RE, even in today's market) you'll still need $400,000 of your own money invested.

And in any of these situations, I would argue that you're not building 'massive' wealth (although if your goal is freedom month-to-month, your net worth is just a number.) 

Is this all possible, given decent income and enough time? Absolutely. Is it going to happen overnight, with no money down, or by investing passively? I'm sure there's a couple of people out there who have, but for the vast, vast majority of people, it's just not going to happen. 

If we start talking about IRR, instead of CoC (which is the logical and intelligent thing to do) those 10%, 15%, and 30% numbers become a lot easier to hit...except IRR involves exiting the property, meaning the money will need to be reinvested somewhere else to keep earning you a return. CoC during ownership is the only money you'll have to "live on." If you did it right, and refinanced out but still own the asset, that's the ideal situation, but finding opportunity to do that today is something "ordinary" investors are really struggling to do, if they're able to do it at all. Value-Add opportunities seem to be fewer and farther between all the time, and requires us to be more and more active to find them. (Or else drive levels of frustration to the "smash my head on the desk" point.)

So what's an aspiring yacht owner to do?

I think there is an important distinction to be made, that the people we know who were able to build wealth by investing in real estate likely did it slowly, over a long time - which doesn't let you quit your day job. Even more important is that unless you build a Real Estate Investment Business, you're going to struggle to build mansion in the hills, private plane wealth. I think this also ties in to Serge Shukhat's appearances on the podcast, where he talks about what it takes to be successful, and why he invests, as well as the one with Noah Kagan where Josh Dorkin talks about why he spends his time building BiggerPockets, and not building his real estate portfolio. 

Thoughts? Am I completely wrong? Did you achieve a $10 Million dollar net worth in 10 years by solely investing in real estate in a way that the average person could do in the next 10 years? If so, can I interest you in becoming a $50,000 per student guru? Are these returns all depressed because everyone and their cousin is a real estate investor now? Or has most of the value-add just been eaten up for a while? 

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