Category Archives: real estate

Investing is a business …

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There was a craze that hit Australia in the 90’s and America in the 2000’s … we know the result, but what was the cause?

It was the ‘negative gearing’ craze …

… people were promoting real-estate purchases on the basis that you take a loss now and make a (hopefully, huge) capital gain in the future.

The benefits that used to be promoted by the real-estate gurus are stated very nicely in this comment on Andee Sellman’s blog:

You have forgotten tax benefits which can be substantial. Also, the actual equity needed to purchase his investment could have been minimal compared to the purchase price. Most importantly, over time the tenant and the tax man pay for the majority of his investment.

Now, I would understand this comment if it were from 2005 or even 2006, but it is from only a couple of months ago …

… if we don’t learn from our mistakes, we are doomed to repeat them!

When real-estate is going up in price, it is easy to get caught in the trap of buying on the basis of future capital appreciation, and use tax deductions on the mortgage and depreciation benefits on the building and improvements to help ‘soften the blow’ as running costs were typically higher than the income (in some places, severely so … yet we still bought!).

Given the current market we all KNOW the problems this causes, but real-estate – and sentiments – cycle every 7 to 10 years, so WHEN you forget what happened in 2007 and 2008 during the next boom, pull up this blog and remember:

Treat your real-estate investment as a BUSINESS.

A real business is bought (or started) because it does (or soon will) produce profits and free cash-flow year in and year out, and then MAY be sold at a future date for a speculative gain. At least, that’s what happened to me …

… I can’t understand why we shouldn’t look at any other investment, including property, exactly the same way?

Can you?!

Anatomy of a Commercial RE Investment – Part 3

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Hopefully, my last post gave you the numbers, and today’s will explain the ‘deal’:

Summary

So, here is the crux of the deal:

1. I have a property with one good tenant (they are cashed up … because I just gave them the cash!) and an easily rentable smaller area for a second tenant.

2. If I borrow 75% at 6.5% fixed for 7 years, I get $63,000 cash (i.e. TOTAL INCOME – TOTAL EXPENSES) in Year 1 to spend (well, keep some in reserve against future repairs, vacancies, etc.).

3. My deposit is $700,000 so that $63,000 is a 9% return on my own money (subject to those unforeseen costs that I mentioned in 2.) … not a bad return on cash AND I get all the upside on the property.

4. If the second tenancy is vacant for any reason, I still almost break-even.

5. If the second tenancy rents at only $6 / sq. foot I still net $43k per year; if I get $10 / sq. foot I net $83k.

6. Properties in this area sold for $80k – $120k per sq. foot; even though the market has softened somewhat (commercial generally works on a slower up/down cycle than residential) I am buying it for $60 / sq. foot … clearly, if a condo. developer knocks on my door in 7 years and offers me $120 / sq. foot, I’ve doubled the whole $2.6 Mill. (not incl. Realtor’s commissions) purchase price!

Note: Think about that – when people say that RE only increases with inflation, therefore stocks are a better option: I make $63k a year less costs (est. 25% as a contingency), say, 6.75% net. The property then increases to $3.4 Mill. over the next 7 years (that’s only inflation):

I earn: $362k in rents (after the 25% contingency against, repairs, and with a 3% rent increase each year)

plus: I net $700k on the sale of the property (I’m expecting to make close to double that, but let’s just accept inflation for now).

I return: That’s a total of $1.362 against the $700,000 that I put in (the bank put up the rest, and they’ve already been paid interest and their money back in these numbers) or 11.5% on my money

I expect: But, that’s only if the building appreciates by inflation; I expect to net at least $1.5 Mill. on the sale of the property (if not $2.5 Mill.!) which brings the return up to 20% … secured by real-estate, no less!

7. If no purchaser does come along, I am earning a neat 9%+ on my $700k until somebody does buy it!

So, by all measures, this is a great deal … some common sense and some simple number-crunching tells me that, no ‘cap rates’, ‘proforma’s, or any other complex financial manipulations necessary.

BTW: I did a quick ‘drive by’ but haven’t even been inside, yet. It doesn’t matter … I won’t be ‘living there’ 🙂

Next step: tell the broker to make the offer!

Anatomy of a Commercial RE Investment – Part 2

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OK – close your eyes (actually, keep them open so you can keep reading!) and imagine the complexity of analyzing cashflows and proformas for a real-estate deal north of $2.5 million …

Daunting, huh?

Well, that may be how OTHERS analyze a deal, but not me … all of my deals are done on the backs of envelopes … well one clean sheet of paper. I have this one right in front of me, in my own scrawly handwriting.

On the strength of it, I have authorized my Realtor to make a written offer, with a $200k ‘earnest money’ deposit on the $2.7 Mill. office/warehouse. Sure, the proformas will come later, but I’ll get him to prepare those for the bank … while I’m at the beach or off skiing someplace!

Here’s what the piece of paper says:

Purchase Costs

$2.7 Million (incl. $100k broker commission)

$5k Building / Environmental inspections

$15k Closing Costs (legals, bank fees, appraisals, etc.)

Of these, the $5k for the inspections is my only financial risk, as I need to undertake these during ‘due diligence’ (we’ll talk about this in a future post if the deal gets that far).

Finance

$2.7 Million Purchase Price (incl. broker’s commission)

$ 2 Million to be financed

Note: this is approx. 75% of purchase price to be financed; this is high for commercial which can be as low as 60% being the maximum that the bank will fund.

$700k – so this leaves me 25% of the purchase price, or $700k, to find as a deposit.

Note: I’m sure that the owner’s won’t ‘carry back’ a note on this one, as the whole purpose of the sale is to raise cash to keep their business afloat or growing.

So, that’s the purchase / financing side of the equation, now let’s see if it can make me any money …

Income

$175k – Rent for Tenant 1 @ $8 / sq. foot

Note: the current owners will lease 2/3 of the property for the above fee (probably 5 years, with a 3% yearly increase)

$80k – Rent for Tenant 2 @ $8 / sq. foot (we need to find this smaller tenant)

Note: the property is street front with car park, so we feel is should be easy to find a second tenant in the $6 – $10 / sq. foot price range

$255k TOTAL INCOME

Expenses

Note: the GREAT thing about commercial properties is that most expenses (and in a ‘triple net property, all expenses – unfortunately, this is NOT one of those) are handled by the tenant, leaving me just …

$45k Taxes

$7k Building Insurance

$10k Management Fees

Note: Rental management fees can vary from 4% – 6% of the rent if you don’t want to deal with the tenants yourself; keep in mind that commercial property is very different to residential and you won’t have as many issues dealing directly with commercial tenants – they are responsible for all repairs & maintenance … but, if the roof springs a leak, you’ll be expected to act quick! I will use an agent ( my friend).

$130k – Bank Interest @ 6.5%

Note: this is the ‘biggie’ and I haven’t spoken to any banks, yet; obviously, that’s my next port of call but my Realtor friend tells me that I shouldn’t have any problem getting funding fixed for 7 years (or a 25 year P&I loan with a 7 year balloon) around these rates. Variable can be as low as 4%, but I prefer to ‘fix my costs’.

$192k TOTAL EXPENSES

In the final part [AJC: when I return from my ‘winter break’ on Jan 5], I’ll summarize this all for you and explain why I like the deal so much …

Anatomy of a Commercial RE Investment – Part 1

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I just answered a question on commercial real-estate investing and thought that there’s no better way to explain the process than by showing …

… coincidentally, I have been working on a commercial RE deal in the $2.5 mill. price range, so I thought that I should simply share.

Warning: like most deals, this deal could simply fall through at the first hurdle. Let me explain by sharing the story so far:

All good real-estate transactions, in my opinion, start with finding a good broker who is working for you.

As it happens, I have a close friend who is a commercial real-estate broker who meets the ‘trifecta’ that I mentioned in that last post: (a) I like/trust him, (b) he works with commercial RE in the area/s that I am interested in, and (c) he invests heavily in commercial RE himself (buy/hold).

I have been pestering him for the last 4 years to find me a deal … interestingly, and this is something that you should take mental note of, he says that he is asked by most people he meets to ‘find them a deal’ but almost none ‘pull the trigger’ …

… so, forgive your broker if they don’t fall all over themselves with excitement until you actually close on your first deal with them 😉

Anyhow, finally a deal came up that seemed to fit my criteria. I didn’t even request financials at that stage or see the property: on the strength of my friend’s recommendation (it was a deal he wanted, but the $700k deposit was a bit too steep for him) I authorized him to put in a written offer.

I don’t recommend that you do this, you will pick up where this post leaves off …

Anyhow, the current owners occupy the premises (they were planning a sale/leaseback i.e. they sell the property to me, then lease 2/3 of it from me on a 5 year lease) and decided to first see if they could simply refinance their loan and take some cash out.

Naturally, in the current market this has proved difficult, so they have put the property back on the market … my friend is the listing broker, so I have first ‘dibs’ on the deal.

So, I am now at Stage 1: I have a deal in front of me; presumably, motivated sellers (we’ll find out, if they accept the new offer); and, I need to decide whether and how to proceed.

In Part 2 I’ll step you through exactly how I decided this was the ‘deal for me’ …

A journey with George …

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Perhaps I just like this video because the ‘talking head’ is a fellow Aussie – although, I don’t know who he is or what his credentials are (I do know that if you watch all three of the videos listed on his blog you’ll end up with an ad for a new ‘personal finance’ educational board-game) …

… but, I do like his neat little whiteboard summary of the problem of ‘investing’ to chase capital appreciation. This was the sort of ‘wrong thinking’ that fueled the property market booms, both here and in Australia.

And, after every boom comes the bust 🙂

Commercial RE … first steps!

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strip-mall-gilmer-rd

I am working on my first US commercial real-estate deal right now and by coincidence received the following question from MoneyMonk:

I plan to buy commercial Real Estate (strip mall) in the near future within the next 4 yrs. I want your advice on some things.

I want a property between 350-400k, I plan to put down $80K <- which will take me 4 yrs to save/invest

I want a commercial re agent to search for me, Im think Im looking at 8-10% commission to give the broker;
I want to form an LLC for my company, apply for a federal id, get a good CPA, a lawyer to form the LLC, umbrella insurance for about 1 million (u never know, The U.S. like to sue).

For as cap rate I want something above 7%. Am I’m missing something???

I also want to visit a banker and ask about financing. Is commercial re different from personal RE? for as terms?
I know any decent bank want you to show a good income, credit and some cash in the bank. What are good questions to ask a banker?

First I would like to congratulate MoneyMonk on being so forward thinking; it doesn’t hurt to talk to a Banker upfront, but my suggestion as to the very first place to start is with the following four steps:

1. Identify the type / location / price ranges of properties that you want to buy – MoneyMonk is targeting “strip malls … between 350-400k”.

2. Start researching the types of properties in the areas that you are interested – with 4 years to go before MoneyMonk has saved sufficient deposit, nothing else matters right now other than the research: LoopNet and RealtyTrac are great places to do this research.

That’s it for now; when the deposit has been saved:

3. Find a real-estate broker – you’re looking for the trifecta: (a) a broker that you like/trust, (b) one who works with commercial RE in the area/s that you are interested in, and (c) somebody who invests in commercial RE herself.

Keep in mind that the best deals are NOT usually on Loopnet /Realtytrac – they are what the brokers haven’t been able to offload, so are probably NOT the best deals around – the best deals are still probably with the brokers. It’s still an “old boy’s club”, so don’t expect your broker to bring you these deals first time around … your first acquisition is unlikely to be your best!

4. Find a property that you like / can afford / that meets your criteria and put a refundable deposit down (subject to: finance, partner’s approval even if you don’t have a partner, and due diligence).

… then approach the banks for funding.

The reports of real-estate's 'death' are greatly exaggerated …

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The reports of my death are greatly exaggerated

The text of a cable sent by Mark Twain from London to the press in the United States after his obituary had been mistakenly published.

Just like Mark Twain, I think that real-estate has been prematurely ‘written off’. Do you need proof?

Just check this often-cited graph (I think that it’s from Irrational Exuberance by Robert Shiller) floating around the internet:

It purports to cover a period from 1900 to 2005 in a linear fashion … a clear bubble-spike, right?

What could one reasonably conclude from this?

A long downward trend and/or an even longer flattening until house prices catch up with, say, 3% – 4% inflation?

Now, take the period covered by the red line beginning roughly in line with where the ’10’ starts in the phrase on the graph that says “Yields on 10-Year …” – got it?

That’s roughly 1987 until today …

Now, let’s look at an a national index of housing prices covering that same period from a source that I trust – Standard & Poors (the same rating agency that produces the S&P500 stock price index):

This picture tells a slightly different story, doesn’t it?

One reason is that this one, I don’t think, is inflation-adjusted whereas I believe the Schiller one is (or at least ‘adjusted’ for something … any of our readers know what that might be?). In either case, a definite ‘bubble’ can be clearly seen in both charts from, say, 1999 to 2007.

But, have a look what happens when you break this second chart into three sections:

1. We see the tail end of a rise from (we don’t know when, because S&P apparently only started collating this data in 1987) to the end on 1989 … the extent of this rise is pretty important, because we then see …

2. … a ‘flat’ line (or worse) from the end of 1989 to roughly the end of 1998, then …

3. … all hell breaks loose from the beginning of 1999 to somewhere towards the end of 2006 when a clear crash occurs.

So, was the flattening in 2. a correction for 1. OR was the growth in 3. an over-correction of 2.?

I can’t say for sure, but I can say this:

If you draw a compound growth curve between two points: a 20 year period when the market moved from an index of 75 (roughly at the end on 1987) to an index value of 200 (roughly at the end of 2007), we can see that that represents an average compound growth rate of just on 5%

Given that real-estate compounds at 3% to 6.5% annually, depending upon which source you believe (I’m firmly in the 6%+ camp), here’s what all of us as investors have to decide …

Buy now (or soon) while the going is cheap (particularly, if you think that interest rates will also start to go up soon), or wait because you believe that real-estate is still overpriced.

Be warned: if you wait too long (is that 6 months or 6 years?), the ‘real estate discount party’ might be over!

How do you manage real estate risks?

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My most recent post – of a long series – on 401k’s v real-estate (which is a dumb comparison: like comparing the container with the drink that you might put into it … when, what we are really trying to compare is Mutual Funds v Real-Estate) sparked a long series of detailed comments about the risks and rewards of real-estate …

… I encourage you to read that post and the associated comments here. The discussion culminated in a great series of comments/questions by Jeff who also asked:

I agree, the “technical risks” need be manageable. But, how much does the management of these risks (infusion of cash when necessary) reduce your return?
For instance, do you keep a safety net for possible negative cash flows (high-yield savings account, CD)? Do you then bundle the two investments (investment property return plus safety net return) to determine the actual return of the investment property?
Do you pull cash out-of-pocket to cover short falls? Since you don’t receive any additional growth from this new cash and the new cash is added to your capital investment amount, it drastically reduces your present and future return from the investment.
Do you borrow more money to cover the cash flows? Since this borrowed money provides no additional return it puts you in severe negative leverage situation. Further, that loan has to be paid back with future cash flows from the investment property that you were expecting to give you the return your initially expected–for lack of a better term–compounding the damage of the negative cash flow.
Do you use a cash flows from another property to cover the short falls? This seems to be the best solution for the property receiving the infusion of cash, but to what extent doe sit reduce the return of the other investment property–by reinvesting its cash flows in an investment that provides no additional return? Put differently, it is a loss of opportunity to invest those cash flows in something that will bring additional return–rather than saving your RE investment from foreclosure.

When you experience short falls in RE investing, which one of these options is best? What did you do when you experienced cash short falls, and why? …and what effect did/does it have on your annualized return?

As I said, great questions, but the first comment that I would make (actually, did make) is:

I would caution you to remember the phrase: “paralysis by analysis” … in a practical sense, once I satisfy myself that (a) a certain type of investment is within my skill/interest level, AND (b) is LIKELY to meet my investment targets, AND (c) I can cover the risks – usually through a ‘reserve’ which may or may not be sitting in a shoebox with the word ‘RESERVE’ etched in the side, then … shoot … I’ll close my eyes and just go for it!

In other words, if you are going to be a success in real-estate investing – indeed, any endeavor where you expect to achieve more than the average person expects/can achieve – then you need to have a bias for action.

Often, we have to proceed in a world of imperfect information …

… magically, once we jump in a lot of these types of questions just seem to fall away!

But, to try and answer Jeff’s question:

Technically, YES the ‘reserve’ is part of the investment and lowers the returns e.g. if you are earning 20% on the investment and only 4% on the CD’s sitting in ‘reserve’ then obviously the actual return lies somewhere between the two.

BUT pulling ‘free cashflow’ out of one property to help service another, doesn’t actually reduce the return of the first … but, the amount of cash that you put IN to the second property affects ITS return.

But, at the end of the day, it’s the COMBINATION of all of these returns that counts: will you, or will you not make your Number, or whatever target you set?

The only real benefit of analyzing the return on each individual investment once you have made it is if you then intend to do something about it e.g. trade it for something better …

The Sensible Flipper …

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No, we are not talking about sweet, intelligent, trained TV dolphins – for those of you old enough to remember the show …

… we are talking about people who buy a piece of real-estate, merely to (perhaps clean it up a little or even do a ‘gut rehab’ then) resell it at a (hopefully) decent profit.

On a larger scale, ‘flippers’ are called ‘developers’ or ‘property speculators’.

In all cases, we are not talking about a Making Money 101 – or even a Making Money 301 – INVESTMENT strategy, we are talking about a Making Money 201 INCOME strategy a.k.a. a true BUSINESS.

Dustbusterz says:

i was just watching your video on what it takes to earn 1 million in 20 years and how time can be the determining factor. in that video, you mentioned flipping real estate. you said you could build up to where your flipping more and more properties(using this as a business). your warning said watch out because the market could crash leaving you high and dry. but i believe( and correct me if i am wrong here) those who are smart( read educated) in real estate should never have to worry about such things as crashing real estate, because they would know exactly where to buy and when to buy and how to buy to avoid this situation. you see, even when the market is crashing ( such as is happening now) you can still find deals areas that are appreciating not crashing.that might take you out of one stater or even out of the country. but you can always find property that is going up in value. that will make you money.

It’s funny, if we had read my previous article – or even this one – a year or two ago, we would be in one of two camps:

1. I like the idea of flipping: in which case, we would be nodding “yeah, yeah … be careful … yadayadayada” all the while looking for our first/next flipping deal, or

2. I don’t like the idea of flipping: we would be reading with the idea of confirming our already ‘set in concrete’ idea that flipping is bad.

But, sitting in the current market, we’re all nodding and saying “how could those idiots not see the crash … they deserve what they got …”

The reality is that those who DO flip put themselves at risk of loss …

… but, so do those who DON’T: they run the risk of loss of missed opportunity.

My point being that there is nothing inherently wrong with developing, or even flipping; they both serve a purpose, they both generate chunks of cash where none existed before; they are both legitimate businesses for those who are so inclined.

That just doesn’t happen to be me …

Just to remind you, the problem with developing/flipping is not one of lack of market knowledge – although, you HAVE to understand exactly what you are getting into to have any chance of success – it’s getting caught out by sudden market changes.

In essence, you are timing the market – hoping that the market stays on a flat-to-upwards trajectory for the whole time that it takes to:

– Close your acquisition

– Make whatever developments or improvements you deem necessary

– Re-market the property / properties

– Close your sales

This takes weeks to months to years depending upon the scale of the project … which leads to another point; the larger the project, the more risk because time is elongated. Markets can change dramatically in just months and certainly years (weeks is another matter, entirely).

The motivator for any flipper/developer is profit – in many cases, this is their INCOME, remember? And, they usually roll one closed deal into the next bigger open deal in a rising market …

… but, we know what eventually happens to rising markets.

However, eventually even the down cycles run their cathartic course … including the current real-estate crash.

Sooner or later, the time will be ripe in most US markets – and, is certainly ripe already in some – for the flippers/developers to come back out of hibernation … or bankruptcy.

Here’s how to do better next time:

1. If you are working on single deals – this one is easy: make sure that you can rent out the property and HOLD for as long as it takes, in case you aren’t able to flip it quickly. Your only risk then is lost opportunity: while you are holding this deal, you may not be able to get onto the next one.

2. If you are working on larger/multi-property deals – develop/rehab with the idea of retaining a proportion of the units for yourself (as long term, buy/hold rentals). Obviously, you are ‘buying’ these from yourself at ‘cost’, so a profit margin should be built in.

If you plan your largest deals correctly, you shouldn’t need to worry about the market ‘going south’ on your most recent deal … you should be protected (e.g. put each ‘deal’ in a separate LLC and offer no personal guarantees, if at all possible) … this may be possible or may not.

Assuming that you can protect yourself from catastrophic loss on your latest deal, then retaining some equity for yourself (i.e. by buying a few properties out of this deal and all previous deals) ensures your long-term wealth, so that you aren’t simply rolling up all of your profits each time …

… it’s like taking some money OFF the craps table each time, because you know you won’t be able to roll the same number over and over before a 7 or 11 eventually hits, wiping you out completely.

I like to think about it this way:

– Imagine that you start with $150

– Through your first deal, you double that to $300

– Instead of buying two new $150 deals and trying to score big again i.e. to make $600 ($300 x 2),

– You split your $300 into three piles: invest one pile outside of your next deal, and buy two new $100 deals

– You split the $400 profit from these two new deals into three piles … and, so on

The next time you try anything that is speculative, try the Double-Then-Divide-Into-Three Rule … let me know how it works for you!

Horses are not for courses …

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You can find this post in this weeks Carnival of Personal Finance ….

As I mentioned yesterday, I drafted yesterday’s and today’s series of two posts before the latest round of stock market crashes … it seems that with all the money LEAVING the market at exactly the wrong time – i.e. the market bottom (or, close to!) – everybody is suddenly ‘anti-stocks’ … of course, as soon as we get towards the top of the next bull market all the pro stock / anti-real-estate people will come out of the woodwork again … and, the cycle repeats 😉

There is a great argument for investing in stocks and businesses: Warren Buffett has done it successfully for 40+ years turning himself into either the #1, #2, or #3 richest man in the world (depending upon what’s happening with Bill Gates and Carlos Slim on any given day).

Warren has shepherded his company, Berkshire Hathaway to compounded returns averaging 21% for the past 20+ years doing the one thing that us ‘mere mortals’ have difficulty doing: picking ONE horse and riding it all the way home.

What we seem to prefer to do is invest in Mutual Funds, the stock market equivalent to following all the advice of a ‘top tipster’ in the Saturday Racing Guide for either the horses or the dogs (how many of these newspaper ‘tipsters’ are rich, anyway? If not, how good are their tips, really?) …

… or, we plonk our money into Index Funds, which is the stock market equivalent to betting on every horse in the damn race!

By betting on every horse or – in this case – stock, we are aiming exactly for the average result … for the time frame that we manage to stick it out.

But, wouldn’t we get better results if we simply bought all the stocks in the Index Fund that are above average and ignored all the others? 😉

Simple and powerful strategy, no?

No!

We know that the logic is there: by simply NOT buying the dogs, and concentrating on the (even slight) favorites, we push the odds markedly in our favor.

But, when it comes to stocks – or horses and dogs for that matter – the form guide, tips, and other sources of ‘best buy’ information have proven to be highly unreliable.

The past is simply NO guide to the future, so we are left with either relying on others to pick some winners for us (they will lose us money, relatively speaking, because of the fees they charge, but at least we’ll feel good about having an ‘expert’ doing our guessing for us) or ‘playing the whole card’ i.e. buying the Index Funds …

… the net result is that we tend towards the average (returns) or worse … never better.

So, quite rightly, we talk about the stock market in terms of aiming towards (but, never quite getting there) long-term average returns.

Yet, the total opposite applies to real-estate:

The pro-stock / anti-real-estate movement [AJC: I am neither; I am simply pro-profit 😉 ] points to the average return from real-estate and compares it to the average return from stocks and says “aha … stocks are better!”

Putting aside the leverage, tax, income and other benefits of real-estate, the problem is that nobody buys the whole card when it comes to real-estate …

… there is no Index Fund for real-estate!

[AJC: well, there might be an artificial ‘index tracking’ ETF that does this … but do you know ANYBODY who’s ever bought it? 🙂 ]

You either buy a Mutual Fund (technically, called a REIT) that buys a selection of real-estate for you, based upon what some inside ‘expert’ predicts will do well (after fees, fees, fees) …

… or, you buy one or more properties yourself.

You see, unlike stocks, you NEVER buy the market, so comparing average returns is just plain dumb.

There is also one other key difference:

You DO know how to pick real-estate … you have at least some experience: you bought your own house, didn’t you?

You chose a ‘nice area’, close to schools, transport, in a nice neighborhood, didn’t you? And, if you still live with Mommy and Daddy, well, they bought a nice house, etc., etc. … right?

Gotcha!

Right there, you bought in the top half of the market in terms of growth … you just beat the (real-estate) market average!

When it comes to stocks, not one of us is Warren Buffett, so we ‘gamble’ on the performance of some market index that we don’t really understand …

… but, when it comes to real-estate, we are all like Warren Buffett – we all have the capability to pick the horse … oops, house … that will perform better than average.

And, even if we only get ‘the average’ return on our real-estate investment … we are going to do two things that we are never going to do with stocks:

1. We are going to leverage our investment – we will almost always take a mortgage on real-estate, but we will hardly ever borrow to buy an Index Fund

2. We are going to invest for the long-term – we will most likely stay in the real-estate investment for at least 7+ years, but we will most likely try and time the market (i.e. get scared and sell at the first sniff of a ‘down market’) if we buy stocks or Mutual Funds, thus absolutely killing our potential returns.

Still don’t believe me?

Then why is that conservative old banker prepared to back your real-estate acquisition with a couple of hundred grand?!

[AJC: at least until a couple of months ago … and, again in a couple of months time]

See if he’ll do the same when you want to go and visit your bookie … or stock broker 🙂