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I'm worried about the real estate market right now

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EvanOkanagan

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I didn't read the entire thread, but here's my take on RE.

1. RE is overvalued in many different markets due to the ridiculously low interest rate ongoing since 2008. However, this is not enough to create a bubble. To have one, actual demand should be lower than estimated demand. The question we should be asking is therefore: will people need more space, or less in the future?

One way to look at this is to look at the demographic pyramid (and immigration number). As long as a country's population is growing, RE is a sure investment. If you have more and more people, you will need more and more homes.

Since the West is about to have much less people than it was used to, RE is doomed to lose value over the really long-term (50 years or so).

The second way to look at it is the Internet: if the online trend perseveres, it is obvious that there will be fewer need for commercial RE.

2. Not everything is overvalued because not everything has the same demand: it all depends on the location. There will be places that will always have demand (city centers of student cities), just like there will be places whose demand depends on trends, economic growth, etc.


3. I hardly see how RE can be a fastlane strategy. To me, it's similar to the stock market: you invest in it once you became rich, not to become rich, unless you decide to contract a mountain of debt. But even then, you'd better buy a small company and grow it instead of investing into RE. RE is slow to repay itself because let's be honest, it's pretty chilled. You don't do much besides owning the place.

When you rent out a house for 4, it will always be a house for 4. However you manage it, you can't scale the value of your asset.


4. RE is not efficient AT ALL.

In Belgium, you can buy RE in some places for a price approximately 40% lower than in Brussels, and subsequently rent it out to students at a price approximately 20% lower than you would in Brussels, so the ROI is much better than in Brussels. It's been like that for 6-7 years now.

In Bruges, prices per sq/m are 3x what they are in Brussels, and yet, the rent is..50% cheaper. Go figure this out.

I actually think RE is the least efficient of all markets. When I look at prices, it always seems undervalued, or overvalued.

Oil is efficient. So efficient that when there is too much of it, producers will pay you to get it.

I disagree somewhat on RE not being fastlane. If you make the right moves and utilize “intentional iteration” as MJ calls it in TMF, it can be.

In about 5 years, I was able to grow my net worth to over 1.5m while at the same time having a mostly passive positive cash flow (managed) over 5k/month by investing in rental properties (long term leases). Have been able to take one month trips while not working at all and come back home in a better financial position than I was in when I left. At the same time I’ve also “house hacked” where we’ve lived essentially paying almost nothing for housing or at one point getting a surplus positive cash flow on top of mtg, taxes, even utilities where we’ve lived (and in decent homes).

Definitley takes knowing what you’re doing but is possible.
 

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WJK

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I didn't read the entire thread, but here's my take on RE.

1. RE is overvalued in many different markets due to the ridiculously low interest rate ongoing since 2008. However, this is not enough to create a bubble. To have one, actual demand should be lower than estimated demand. The question we should be asking is therefore: will people need more space, or less in the future?

One way to look at this is to look at the demographic pyramid (and immigration number). As long as a country's population is growing, RE is a sure investment. If you have more and more people, you will need more and more homes.

Since the West is about to have much less people than it was used to, RE is doomed to lose value over the really long-term (50 years or so).

The second way to look at it is the Internet: if the online trend perseveres, it is obvious that there will be fewer need for commercial RE.

2. Not everything is overvalued because not everything has the same demand: it all depends on the location. There will be places that will always have demand (city centers of student cities), just like there will be places whose demand depends on trends, economic growth, etc.


3. I hardly see how RE can be a fastlane strategy. To me, it's similar to the stock market: you invest in it once you became rich, not to become rich, unless you decide to contract a mountain of debt. But even then, you'd better buy a small company and grow it instead of investing into RE. RE is slow to repay itself because let's be honest, it's pretty chilled. You don't do much besides owning the place.

When you rent out a house for 4, it will always be a house for 4. However you manage it, you can't scale the value of your asset.


4. RE is not efficient AT ALL.

In Belgium, you can buy RE in some places for a price approximately 40% lower than in Brussels, and subsequently rent it out to students at a price approximately 20% lower than you would in Brussels, so the ROI is much better than in Brussels. It's been like that for 6-7 years now.

In Bruges, prices per sq/m are 3x what they are in Brussels, and yet, the rent is..50% cheaper. Go figure this out.

I actually think RE is the least efficient of all markets. When I look at prices, it always seems undervalued, or overvalued.

Oil is efficient. So efficient that when there is too much of it, producers will pay you to get it.
It sounds like a housing bubble to me.
 

WJK

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The Residential market where I live is unreal right now (a few hours out of Vancouver, Canada).

I’m a realtor so I’ve always got my finger on the pulse. The prices have never been higher than they are now. 4-5 months ago, I was looking at listing my house, and figured I would list for $775k and likely get around 750k at the end of the day...

The market started getting hotter.. we love our house so weren’t eager to just let it go, but if we got the right price then yeah.

I tested it out on a realtor networking group a month ago at 800k... lots of interest. Then I put it up to 825k.. still decent interest.

We decided, what the hell, let’s throw it on for 850k and if it doesn’t sell, we still love living there.. and it’ll probably shake out around 825k.

Goes live on the MLS, and in two days we have 25 showings. 3 offers and the top offer is also unconditional (cash offer and no inspection needed.. on a 1970 house). We just sold for $865k. Over 100k more than I thought we could get around the summer time.

Could the market go up anymore? It’s still super hot where I live but I don’t see this growth as sustainable...
I've been through several of these "hot" markets -- only to have them crash at our feet. It's not "sustainable". The housing market depends on the job market and the income of the average buyer versus the cost to own (the payments, the upkeep, the taxes, etc...). Homeownership must also compete with the average rentals in the area.
The idea of living in a place that costs $850,000 is pretty scary to old tightwads like me. My first house was a 2 bedroom, one bath with a single car garage. It was known as a "GI special" tract house. We paid $27,500 for it. But, minimum wages at that time were $1.65 per hour. So, it was a day or two ago...
 

Connor

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I do believe there is a coming recession, and real estate will be included in it. However, there are a few things to note (in my opinion):
  1. Real estate tends to lag significantly behind the economy- 2008/9 was the bottom of the economy last time, but real estate prices didn't hit their low points until 2010/11.
  2. Given the government protections on evictions/PPP/stimulus and how much the banks don't want to end up with the assets like they did the last go around, the drop will be further postponed/stretched out. What the heck is a bank going to do with a vacant hotel or shopping center?
  3. Real estate performance will vary drastically by market and submarket. Remember 2008, when Texas pretty much didn't have a recession? We'll see similar things happen in areas where there is continued growth. While the tourism industry and business travel has hit the Carolinas (where I am), this area will fare far better than the Northeast or West Coast.
  4. It will heavily vary by asset class. Hospitality & retail of course are getting hit, but multifamily and industrial are holding up well. Here, we can't get enough warehouse space, with all of the reshoring and e-commerce booming.
So I am a firm believer that there are ways to smartly invest, and it depends what your time horizon is. In this marketplace, prices could go down in the next 2-3 years, but if you're looking at 5-10+, it's a completely different story.
 

socaldude

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I’m not a real estate investor and I’m really not that knowledgeable about it but I’m guessing it will take a hit as payments and interest can only be deferred for so long. So the debt aspect is probably the riskiest part of this sector.

But it’s also helpful to keep in mind that it’s a part of our financial system and the last thing to collapse will be our financial system as they have VIP access to unlimited liquidity. And the central bank corporate partnership loves anything “backed” by this asset or that asset and even better if it cash flows.

I personally would be more worried about what it does to Main Street as that is always what gets hit the hardest. And the social consequences of all this.

But if prices collapse it would be a good time to get some cheap properties paid in cash. As it would eventually pick up again thanks to infinite bailout money.
 

WJK

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I do believe there is a coming recession, and real estate will be included in it. However, there are a few things to note (in my opinion):
  1. Real estate tends to lag significantly behind the economy- 2008/9 was the bottom of the economy last time, but real estate prices didn't hit their low points until 2010/11.
  2. Given the government protections on evictions/PPP/stimulus and how much the banks don't want to end up with the assets like they did the last go around, the drop will be further postponed/stretched out. What the heck is a bank going to do with a vacant hotel or shopping center?
  3. Real estate performance will vary drastically by market and submarket. Remember 2008, when Texas pretty much didn't have a recession? We'll see similar things happen in areas where there is continued growth. While the tourism industry and business travel has hit the Carolinas (where I am), this area will fare far better than the Northeast or West Coast.
  4. It will heavily vary by asset class. Hospitality & retail of course are getting hit, but multifamily and industrial are holding up well. Here, we can't get enough warehouse space, with all of the reshoring and e-commerce booming.
So I am a firm believer that there are ways to smartly invest, and it depends what your time horizon is. In this marketplace, prices could go down in the next 2-3 years, but if you're looking at 5-10+, it's a completely different story.
The recession in the 1990s took down the entire Savings and Loan Associations and the Thrift industry. It took the whole decade to absorb the extra RE inventory and for the RE market to right itself again. the secondary market and Wall Street took over financing our RE deals. I hope this moment is nothing like that one. That one hurt us investors and RE professionals like hell.
 

biophase

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3. I hardly see how RE can be a fastlane strategy. To me, it's similar to the stock market: you invest in it once you became rich, not to become rich, unless you decide to contract a mountain of debt. But even then, you'd better buy a small company and grow it instead of investing into RE. RE is slow to repay itself because let's be honest, it's pretty chilled. You don't do much besides owning the place.

It certainly can if you do it properly. Back in 2011-2015 would have been the time to accumulate properties in AZ.

I’m looking at properties now that are $1m that were $500k in 2015. If you purchased 2 of them you’d be doing pretty well now.

Instead I bought an R8 and a $120k place all cash. The $120k place is worth $220k now. I could have bought 2 of the $500k homes and put down $100k on each one. Rented one out and lived in another and I’d be $1M richer now.

$200k a year is pretty fast lane.

This is just an example, obviously you don’t know if real estate will go up or down but it’s a risk just like with a business.
 

WJK

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It certainly can if you do it properly. Back in 2011-2015 would have been the time to accumulate properties in AZ.

I’m looking at properties now that are $1m that were $500k in 2015. If you purchased 2 of them you’d be doing pretty well now.

Instead I bought an R8 and a $120k place all cash. The $120k place is worth $220k now. I could have bought 2 of the $500k homes and put down $100k on each one. Rented one out and lived in another and I’d be $1M richer now.

$200k a year is pretty fast lane.

This is just an example, obviously you don’t know if real estate will go up or down but it’s a risk just like with a business.
Hindsight is always 20/20.
 

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Sendery

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Define soon. A downturn or collapse is always coming. It could be a few months or a few years or even a deceade away. no one can do anyhting but guess when it will come, but anyone can accurately say it is coming. If anyone would predict when with any accuracy, they would be Billionaires.
 

Lyinx

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Define soon. A downturn or collapse is always coming. It could be a few months or a few years or even a deceade away. no one can do anyhting but guess when it will come, but anyone can accurately say it is coming. If anyone would predict when with any accuracy, they would be Billionaires.
if you say that the downturn is coming often enough, you'll eventually be right :)
 

WJK

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Define soon. A downturn or collapse is always coming. It could be a few months or a few years or even a deceade away. no one can do anyhting but guess when it will come, but anyone can accurately say it is coming. If anyone would predict when with any accuracy, they would be Billionaires.
Actually, they are cycles that occur regularly. I've been through several over the years. They are trackable. I don't know the exact moment they will happen, but I know when things are getting overheated or going sideways. The wild card is an unforeseen event, like this virus shutdowns. But, the underlying issues were already festering in the commercial RE markets. Those wild cards are generally a tipping point, not a determinate.
 

Sauce

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Actually, they are cycles that occur regularly. I've been through several over the years. They are trackable. I don't know the exact moment they will happen, but I know when things are getting overheated or going sideways. The wild card is an unforeseen event, like this virus shutdowns. But, the underlying issues were already festering in the commercial RE markets. Those wild cards are generally a tipping point, not a determinate.
The current market makes me think of the warren buffett quote "be fearful when people are greedy and greedy when people are fearful". On one hand we are in the middle of a global "pandemic". States are being shutdown, unemployment is at a record high. On the other, the stock market is about to eclipse 30k and the real estate market is on fire. It doesn't make sense. I have pivoted out of residential real estate and I am waiting for things to make more sense.
 

Envision

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The Residential market where I live is unreal right now (a few hours out of Vancouver, Canada).

I’m a realtor so I’ve always got my finger on the pulse. The prices have never been higher than they are now. 4-5 months ago, I was looking at listing my house, and figured I would list for $775k and likely get around 750k at the end of the day...

The market started getting hotter.. we love our house so weren’t eager to just let it go, but if we got the right price then yeah.

I tested it out on a realtor networking group a month ago at 800k... lots of interest. Then I put it up to 825k.. still decent interest.

We decided, what the hell, let’s throw it on for 850k and if it doesn’t sell, we still love living there.. and it’ll probably shake out around 825k.

Goes live on the MLS, and in two days we have 25 showings. 3 offers and the top offer is also unconditional (cash offer and no inspection needed.. on a 1970 house). We just sold for $865k. Over 100k more than I thought we could get around the summer time.

Could the market go up anymore? It’s still super hot where I live but I don’t see this growth as sustainable...

Dude this just happened to me too.

My duplex I bought for 270 in 2017 I figured I would hold forever. Then the market went from 300 > 350> 400... and I started looking to refinance. Figuring Id atleast pull some money out. Start talking to realtor friends and we figure I could probably sell for 450. Market keeps going up, look at listing for 500... List it for 539 and get an offer at 560...

Absolutely insane. The argument that businesses can surpass current real estate appreciation is difficult to make today especially when looking at the work loan compared to the two. I bought a company last year and tripled it but my real estate still appreciated faster.

Im not saying its sustainable at all. I netted what I paid in 2017 and I dont believe that that can last at all. Sure supply is low but for many markets it is affected by rent and for alot of people where I live they cannot support increased rents. We just dont have the industry here. We're completely driven by a California invasion.

I think the music stops when the stimulus stops. We're already over the edge, I think its just freefall now.
 

Sauce

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Dude this just happened to me too.

My duplex I bought for 270 in 2017 I figured I would hold forever. Then the market went from 300 > 350> 400... and I started looking to refinance. Figuring Id atleast pull some money out. Start talking to realtor friends and we figure I could probably sell for 450. Market keeps going up, look at listing for 500... List it for 539 and get an offer at 560...

Absolutely insane. The argument that businesses can surpass current real estate appreciation is difficult to make today especially when looking at the work loan compared to the two. I bought a company last year and tripled it but my real estate still appreciated faster.

Im not saying its sustainable at all. I netted what I paid in 2017 and I dont believe that that can last at all. Sure supply is low but for many markets it is affected by rent and for alot of people where I live they cannot support increased rents. We just dont have the industry here. We're completely driven by a California invasion.

I think the music stops when the stimulus stops. We're already over the edge, I think its just freefall now.
That is really crazy.

I still don't get the market, but I am holding my 45+ rental units as a hedge on inflation.

They are cash flow positive right now, and if I sold, I wouldn't have a place to put my capital without a big tax hit.

Another concept I have been considering is that a house is really a basket of goods. Take a look at all of the components that go in to it - lumber (Lumber package for a 2300 SF home Jan 2020 $21K now $46K), concrete (2018 $95/yard now $130 per yard), then you factor in the labor which has gone up tremendously (Tile install 2015 1.50-2.00 PSF now $3-$4 PSF). So, is the RE market really overpriced or just finally catching up? Did the printing of trillions of stimulus induce a rapid inflation?

It should be interesting to see what the next year brings.

I wonder what @SteveO and @JScott opinions are on this.
 

Envision

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3. I hardly see how RE can be a fastlane strategy. To me, it's similar to the stock market: you invest in it once you became rich, not to become rich, unless you decide to contract a mountain of debt. But even then, you'd better buy a small company and grow it instead of investing into RE. RE is slow to repay itself because let's be honest, it's pretty chilled. You don't do much besides owning the place.

When you rent out a house for 4, it will always be a house for 4. However you manage it, you can't scale the value of your asset.

There a numerous benefits to real estate that make it fastlane that you're not considering.
1. Appreciation
2. Tax Breaks
3. Leverage
You've only considered Cash flow.

There is no business in the world where I can put down 8K and get 2.5% interest on a secured asset that will beat inflation and average 3-10% appreciation per year while lowering my tax burden and paying off my debt and I can compound my growth by leveraging that asset over and over again.

Leverage is what compounds wealth and makes real estate ultra fastlane. If you understand leverage and how to structure debt you can build wealth that lasts in a relatively short amount of time. Debt is what makes you rich, you just cant be the one paying it.

To your point:
I started my company 6 years ago with about $6k I saved, the same year I bought my first duplex and put down $10k I had saved

My company grew slowly, had insane amounts of risk, and for all intensive purposes should not have worked considering my circumstances and I probably cannot repeat what I did today. This is gross revenue
2014: -$5,000
2015: -$10,000
2016: $75,000
2017: $275,000
2018: $600,000
2019: $1,400,000
2020: $3,500,000
2021: $5-7M...

My real estate grew steadily and slowly at the start, was secured, always cash flowed, and appreciated. This is asset value with about 50% debt

2015: $155000 (one duplex)
2016: $155000
2017: $425000 (another duplex)
2018: $500000 (appreciation)
2019: $2000000 (2 houses and a triplex + appreciation)
2020: $7000000 (Storage + exchange + refinances + existing portfolio minus one duplex)
2021: 10M+

If I had to do it over again and only had one choice, Id pick the real estate every time because the probability of my success is higher in every circumstance. The real estate is also on par with the value of my company with considerably less work and much less risk - this might not last forever but it's something to consider.

Real estate is not a passive asset, it is a business. There are aspects that can be manipulated to increase your returns and processes that can be put in place to prove a consistent and targeted growth rate. You need to build a system that makes CENTS versus just view it as a stock you have minimal control over.

The key is to honestly do both. Because the net income off the business makes it so banks will continue to provide financing and work with you. I merge both and they keep giving me better loan products, deals, and support to keep growing. You merge high risk, high cash flow businesses with stable, secure long term assets with tax benefits.

Hope that helps.
 
Last edited:

JScott

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That is really crazy.

I still don't get the market, but I am holding my 45+ rental units as a hedge on inflation.

They are cash flow positive right now, and if I sold, I wouldn't have a place to put my capital without a big tax hit.

Another concept I have been considering is that a house is really a basket of goods. Take a look at all of the components that go in to it - lumber (Lumber package for a 2300 SF home Jan 2020 $21K now $46K), concrete (2018 $95/yard now $130 per yard), then you factor in the labor which has gone up tremendously (Tile install 2015 1.50-2.00 PSF now $3-$4 PSF). So, is the RE market really overpriced or just finally catching up? Did the printing of trillions of stimulus induce a rapid inflation?

It should be interesting to see what the next year brings.

I wonder what @SteveO and @JScott opinions are on this.

In my opinion, what we're seeing is simply market inefficiencies. Specifically, the supply side doesn't accurately represent the consumer intent and the demand side is skewed based on the migration trends related to Covid.

On the supply side, there are a lot of potential sellers who are choosing not to sell because they don't want people trouncing through their house during Covid, or who refuse to leave their house during showing because they don't want to be out in public. So, there is a lot of pent up supply that is driving prices upwards.

On the demand side, there are a lot of people who are reacting irrationally with respect to migration trends. They are desperate to get out of cities and into suburbs or they are being given a short-term opportunity to relocate without risk of losing their employment. So, we're seeing spikes in demand in suburbs and in areas with low cost of living, nice weather, low taxes, etc. Namely places like Florida, Texas, Arizona, etc.

So, in some areas, we're seeing both reduced supply and increased demand, and prices are soaring. In other places, we're seeing reduced supply and steady demand, and prices are increasing. And in other places, we're seeing increased supply and reduced demand, and prices are dropping.

It's all over the board, depending on your area. But, I don't believe what we're seeing is a representation of market efficiencies. Just the opposite. And things are likely to change drastically once Covid is under control and once the stimulus slows/stops.
 

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WJK

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The current market makes me think of the warren buffett quote "be fearful when people are greedy and greedy when people are fearful". On one hand we are in the middle of a global "pandemic". States are being shutdown, unemployment is at a record high. On the other, the stock market is about to eclipse 30k and the real estate market is on fire. It doesn't make sense. I have pivoted out of residential real estate and I am waiting for things to make more sense.
I too am sitting on the sidelines. Usually, I'd be doing my research to buy a trust deed or two after Christmas -- it's my favorite time of year for big purchases (TDs, heavy equipment, etc.) But, I'm on hold waiting to see which way the RE market in my area goes. I'm looking for trends of where the "herd" is going next. I too move against the market -- buy when most are selling -- sell when most are buying. In times like this, "Cash is King".
 

mon_fi

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It certainly can if you do it properly. Back in 2011-2015 would have been the time to accumulate properties in AZ.

I’m looking at properties now that are $1m that were $500k in 2015. If you purchased 2 of them you’d be doing pretty well now.

Instead I bought an R8 and a $120k place all cash. The $120k place is worth $220k now. I could have bought 2 of the $500k homes and put down $100k on each one. Rented one out and lived in another and I’d be $1M richer now.

$200k a year is pretty fast lane.

This is just an example, obviously you don’t know if real estate will go up or down but it’s a risk just like with a business

There a numerous benefits to real estate that make it fastlane that you're not considering.
1. Appreciation
2. Tax Breaks
3. Leverage
You've only considered Cash flow.

There is no business in the world where I can put down 8K and get 2.5% interest on a secured asset that will beat inflation and average 3-10% appreciation per year while lowering my tax burden and paying off my debt and I can compound my growth by leveraging that asset over and over again.

Leverage is what compounds wealth and makes real estate ultra fastlane. If you understand leverage and how to structure debt you can build wealth that lasts in a relatively short amount of time. Debt is what makes you rich, you just cant be the one paying it.

To your point:
I started my company 6 years ago with about $6k I saved, the same year I bought my first duplex and put down $10k I had saved

My company grew slowly, had insane amounts of risk, and for all intensive purposes should not have worked considering my circumstances and I probably cannot repeat what I did today. This is gross revenue
2014: -$5,000
2015: -$10,000
2016: $75,000
2017: $275,000
2018: $600,000
2019: $1,400,000
2020: $3,500,000
2021: $5-7M...

My real estate grew steadily and slowly at the start, was secured, always cash flowed, and appreciated. This is asset value with about 50% debt

2015: $155000 (one duplex)
2016: $155000
2017: $425000 (another duplex)
2018: $500000 (appreciation)
2019: $2000000 (2 houses and a triplex + appreciation)
2020: $7000000 (Storage + exchange + refinances + existing portfolio minus one duplex)
2021: 10M+

If I had to do it over again and only had one choice, Id pick the real estate every time because the probability of my success is higher in every circumstance. The real estate is also on par with the value of my company with considerably less work and much less risk - this might not last forever but it's something to consider.

Real estate is not a passive asset, it is a business. There are aspects that can be manipulated to increase your returns and processes that can be put in place to prove a consistent and targeted growth rate. You need to build a system that makes CENTS versus just view it as a stock you have minimal control over.

The key is to honestly do both. Because the net income off the business makes it so banks will continue to provide financing and work with you. I merge both and they keep giving me better loan products, deals, and support to keep growing. You merge high risk, high cash flow businesses with stable, secure long term assets with tax benefits.

Hope that helps.
Ok, I guess I had missed a bunch of stuff.

Thank you, I understand better.

What I meant was regarding asset value "explosion".

You can start a company with $1000 and grow it to one million.

You can't invest into real estate with $1000 and grow it to one million.

I guess what I am trying to say is that the value of a company can explode by 100000%.

This isn't the case with real estate (because you need to borrow).

It's correct, right? Or am I crazy?

2015: -$10,000
2016: $75,000


The embodiment of the desert of desertion
 
Last edited:

Sauce

Contributor
Jan 16, 2013
72
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119
Albuquerque, NM
Ok, I guess I had missed a bunch of stuff.

Thank you, I understand better.

What I meant was regarding asset value "explosion".

You can start a company with $1000 and grow it to one million.

You can't invest into real estate with $1000 and grow it to one million.

I guess what I am trying to say is that the value of a company can explode by 100000%.

This isn't the case with real estate (because you need to borrow).

It's correct, right? Or am I crazy?




The embodiment of the desert of desertion
You can absolutely grow $1k to one million in RE. Takes some time, and lots of trading up, but it can be done (I will take $30k to $1mm plus early next year in the span of <2 years).
 

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