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It Feels Like Gambling With Options

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It Feels Like Gambling

 

I had a raw conversation with a client this week. He expressed a deep concern with investing in Real Estate… passionately he expressed how “it was gambling”.  It’s been a crazy year.. hasn’t it? With the stock market up as much a it is, bitcoin up and down and the real estate market on fire, you have to question.. when will this end?  And will it hurt when it does?

I felt his pain and understand the hesitation and even fear.  This market “feels” like a bubble.  And when I hear that “experts” think the stock market will drop 10% this year, I have to double click on that.  As American’s we are blessed with an abundant amount of choices of what we can spend our money on in hopes of living a full life both now and in our future.  Many of us have no formal training or education in investing so rely on others for information.. which can lead us to being taken advantage of. Because, of course any investment can have losses.. or experience gain.

I thought I had a good amount of money in the stock market when the Dot.com bubble burst in 2000.  I had $60,000 and it dropped to $25,000 almost overnight.  It’s recovered since but it’s been a long road.. because to be honest.. my stock chooser is broken.  Ultimately, my 401K and IRAs will provide some income for my retirement, but I will have to be careful, because if I take too much out, I will run out.  Or if the markets drops right before I retire, I’m out of options.  It’s really a one trick pony.

Which is why I feel real estate, although a gamble, offers more in the way of options.  And ultimately it’s not about the amount of money you have but the options that money gives you.  Let’s go through some of those options…

Leverage – This is something we talk about often; but I wanted to share why I think it’s so cool.  When  my stocks drop from $60,000 to $25,000 in 2000.. that was it.  I now had $25,000 to reinvest or pull out and hold in cash.  Alternatively, if I had put $60,000 as 10% down on a $600,000 Denver home which then dropped 11% in the housing bubble of 2008; I would have lost $66,000 in value… everything I put in.. but …I still had an asset worth $534,000 working for me.

Appreciation – This is the same gain you hope to get in all investments.. it’s the increase in value.  I included the stock market 100 year historical value chart above to show how volatile it can be.  Ultimately long term, it goes up.. but it takes a lot of dips to get there, and unless your chooser is better than mine, buying on the dips is a fools game.  Real estate on the other hand, outside of the housing bubble has had a slower more consistent growth pattern.  In recent years, continued price increases are also magnified by the size and quality of today’s homes.  Also to note.. home values usually do well in recessions (down markets) due to dropping interest rates.

 

Cash Flow – A home offers you safety and security, and hopefully appreciation. A real estate investment also offers cash flow.  Some investors want to invest in immediate cash flow, I invest for long term cash flow.. in fact, I invest in markets where I feel confident in long term appreciation and cash flow, like Denver (see DMARs median price growth below).  Of course, I know there is risk to losing cash flow.. it’s called vacancy and is the most expensive cost to an investor.  This is why I love multi-unit homes with back yards.  Because Coloradoans love their dogs and in times of economic distress, I can drop rents and steal tenants away from apartments.. ensuring my units are occupied.  Also with multi-units you have multiple units/families/opportunities to pay the mortgage.  In fact, the quads I buy can pay the mortgage with 2.5 units occupied.. that offsets risk!  And not just quads, tri’s and duplexes.. but also single family homes with a mother in law suite downstairs, garage apartment or auxiliary dwelling unit.  These are great too. Then there’s house hacking and room rents.. don’t get me started!
Exit Strategies – People talk a lot about the tax strategies for real estate, but when I think about them, I think in terms of exit strategy options.  I mean .. yes.. the Schedule E on your tax return is a gold mine, but long term, I also want to be able to optimize my returns by flipping investments to better investments using a 1031 exchange or leave real estate to the kiddos with no taxable burden with step up in value.  Also if cash is needed in a hurry as I get older, I can do a cash out refinance to pull out the equity with no taxable hit and then continue to have tenants paying down that debt to again.. leave for the kiddos.  Truly this conversation is a BIG one and I am only scratching the surface.  But suffice it to say.. there are many tax advantages and exit strategies real estate has that no other investment does.

The Bottom Line:

I could talk for hours and hours about why real estate offsets the risk of gambling.  Can I lose in real estate.. yes.  Which is why I also talk a ton about how you chose the right location, product, and purpose when buying real estate.  This is the opportunity for 80% of Americans that have 62% of their wealth in a (singular) home.  This is the conversation we need to be having every day.. especially now, with rents up 18% and stocks primed to take another one of it’s many dips.  This is the conversation for not just your clients.. but YOU.  2022 is your year to expand your portfolio and your wealth.  and I am always here to be your biggest fan!


[author] [author_image timthumb=’on’]https://www.theruethteam.com/wp-content/uploads/2020/11/testimonial_image.jpg[/author_image] [author_info]Nicole Rueth has been passionately advising clients on their wealth building and home financing strategies for over 17 years. Her path has been non-conventional and it is a benefit to her clients.  www.TheRuethTeam.Com.[/author_info] [/author]

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