I was reading yet another book about real estate investing and landlording, before yet again wussing out of the whole idea. Here’s the opening anecdote, labeled “Upside”:
Twenty-five years ago, my neighbor’s dad took a real estate seminar, and got into real estate buying. On the weekend he would buy properties, while keeping his full-time job. Instead of working only 40 hours a week, he began working 70 hours. Meanwhile, ever day at the dinner table his wife would say, “Get rid of those properties! They are driving you crazy and stressing you out. I just don’t know why you do it! Last month you made no money…”
Over a period of 20 years, this man bought houses, duplexes, and a small apartment building that had 80 units — all the while, he endured his wife’s criticism. He has since passed away and his widow now lives in a $2 million beach house in Florida in the winter and in her other property up north in the summer. Her net worth is about $8 million, all because of what she called her husband’s “headachy” rental property. Ironically, from his regular job, he received a pension worth only $400,000.
1) If this anecdote is actually true, his wife is clearly a total bitch.
2) This man gave up 20 years of the prime of his life working 30 hours a week on real estate, besides a full-time day job. He may not have known his children’s names. It quite possibly drove him to an early grave. So maybe his wife isn’t a total bitch, maybe she had a good point. He could have passed up some of those houses and duplexes and spent some time with his family.
3) How much was that labor worth? We don’t know how much his regular job paid, but according to this, the average US income is about $50,000. He worked an extra 30 hours, so that’s $37,500 worth of labor he put into this. If you invested $37,500 a year for 20 years with (for example) a 9% return, how much would you end up with? Over $2 million. Hm. Actually, that’s pretty convincing! That’s only a quarter of what he got through the real estate!
4) But of course we don’t know if it was unusually good market timing. Or much of anything to figure out if this is representative. I’ve read hundreds of stories about these great successes, but never any about the poor schmucks who blew their life savings in real estate.
5) And we don’t know how much of that $8 million was due to these properties. Probably most of it, but hopefully he was contributing to a 401(k), his residence was appreciating, his wife may have worked, etc.
6) (To be fair, I used 2005 income, 9% may be optimistic, I ignored inflation and taxes, so there’s some counter-arguments also.)
7) Why didn’t this guy quit his job after 10 years? By then, he must have been generating enough income from these properties.
The next section is titled “The Downside”. Here’s the only downside he can think of. “But like any other business in any part of the world, landlording has its rewards and it takes work.”
The tax benefits are real. I know someone with 18 properties who says the same thing, and showed the details of it.
A fair point, but honestly I don’t follow it well enough to blog about it.
I think you ignore the biggest thing in real estate investing: tax benefits. The guy I work with here pays himself a 300k+ salary and invests heavily in commercial real estate. Due to accelerated depreciation on the real estate, he creates enough of an accounting loss that he’s significantly decreased his income tax burden such that he’s basically paid no tax 6 out of the last 7 years (or so he says). I suppose he could be BS-ing me some, but he’s adamant that the tax benefits are what makes real estate such a good deal.
Good example. Revenue, schmevenue, how much profit? I can make $500,000 in revenue next month, all I have to do is promise to pay it back at 12% interest. Let’s see them make an informercial outta that.
It’s great to see someone other than me likes to dissect these types of scenarios. It’s like those commercials that advertise that anyone can make a living selling stuff over the web – real easy! Then the testimonials start — “I brought in $10K revenue in my first 3 months!” Sounds good, but how much did it cost to bring in the $10K — between acquisition of goods, packaging, mailing, other overhead, etc. Hardly worth quitting your day job.