@Citylights18 wrote:The problem with the stocks and say crypto is that most buyers don't take a look at the macroeconomic cycle and just go all in thinking the more money they put in the more money they'll eventually make on it. I have a friend that went all in on Etherum when it was 3,500 in April and now its trading for half. He could have used that money to pay down a real estate loan and saved himself interest. Anytime you make an extra payment against a loan you are getting a return on that money equal to the interest saved.
Property number 1 for example costs you 200k but the DP was 5% first time homebuyer program (10,000) which has to be repaid in full to be able to sell. The buyer then spends two years paying off the homebuyer grant. The property has appreciated to 220,000 and they have 10,000 more in equity (owe 180k on a 220k) property. Then they could take a HELOC on the first property for 25,000 and use it as a DP for a 300,000 dollar property while renting out the first home.
After five years the first property has appreciated to 245,000 and the mortgage is down to 165,000. Then at their second property its appreciated to 325,000 and they owe 250,000 with the HELOC on property 1 paid. Before age 30 a buyer could have over 150,000 in equity just with picking up a couple of lower priced properties.
Real estate if anything becomes a time in market thing. If you get started early it will help you later in life.
It looks like you're doing a bit of cherry picking mixed with examples of people not diversifying. You can also find people who went all-in on real estate and got burned as housing also has cycles. Your nest eggs should never all go into a single basket. When you pull back and look at your investments over a time scale in the decades (as you should), the adage that the more you put in increases what you get back does hold true.
Here's one of the oldest positions in my portfolio:
Since 1982, there was the 1987 crash, the dotcom bubble burst, the recession in 08-11, and it's now down over 20% from its high last year, and despite all of that it's still up over 86,000% over 40 years. Had that been $9k instead of $9 invested, that position alone would be worth almost $8 million even in the current craptastic market. Stocks win when left to grow for long periods of time. Crypto's a different animal, but I've made my thoughts on it clear enough in other threads.
Again, I'm not saying you can't make money in RE (people do it every day), but I think you're looking at it from one angle and stocks from another, giving both a bit of an unfair assessment. Using your example above, things to consider:
- On the first property, you're in $10k (down payment) + $190k (mortgage at let's say 4%, so also $15k in interest over two years) + let's say $3k in property tax over those first two years you repay. Assuming $0 in maintenance (and this is being very generous as you will almost certainly have to do some before renting it out, even if it's just paint or new carpet), you're in ~$210k ($28k plus still owe ~$182k on the mortgage) on the $220k home, even though your equity on paper is $30k.
- You then borrow $25k against that $30k to roll into a $300k property so now you're talking another $275k mortgage at 4% plus property taxes. You're the proud owner of $520k in real estate, of which only just a little under $10k isn't owed to someone else. That's about 2% of wiggle room, and if housing goes flat or even down in an overheated market, or you have extra unplanned maintenance to deal with, that $10k can be wiped out fast. There's also the risk that you're leveraged up to your eyeballs, and any difficultly to retaining occupancy can wipe out your cash flow (which you are relying on to make those debt payments).
That last sentence is important and worth emphasizing in a comparison between RE and equity investing. Assuming you stay out of margin investing and stick to traditional long-position style investing (ie, don't play with options and shorting stocks), you could put $10k in and see it drop to $5k when you need to pull it out for whatever reason, and you're out $5k and that's the end of it. If your tenants fall through in the leveraged RE game, you now have no cash coming in from rentals plus 3 loans (2 mortgages and a HELOC) coming knocking on your door for their money that you aren't generating. Foreclosures and auctions ensue, and what isn't recouped is going to be chased until you drop dead or ditch it in a bankrupcty.
It's great to think about the best-case outcomes to strive for, but also be aware of the worst-case depths you could also experience if things don't go right.
