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- #31
And in my opinion, you shouldn't. If you look at most markets around the country, over the past 100 years or so, appreciation of residential real estate has pretty much tracked inflation. You can always cherry-pick time frames and say that appreciation is averaging 5%, 10% or more -- but over the long-term, investing in residential real estate for appreciation turns out to just be a hedge.
Using "Real Deal Denver's" own market, take a look at inflation-adjusted Denver prices over the past 15 years -- in many locations, prices are still down in that 15 year period. Here's an article to illustrate the point:
Your House May Actually Be Worth Less Than It Cost 15 Years Ago
But, even if home values beat inflation, that doesn't mean that debt arbitrage is without the effort/risk. There are several reasons why -- especially those who aren't savvy investors -- should steer clear of debt arbitrage:
- Effort. Unless you're putting the money in the stock market, there will be effort associated with the arbitrage. Let's say you're borrowing at today's rates (about 4.5%) and you find a decent residential rental that's generating 8% cash-on-cash returns -- that's a 3.5% arbitrage gain. But, that requires you to find the deal, potentially get it renovated, put property management into place, manage your property managers, etc. For a non-investor, that's a decent amount of work for 3.5% arbitrage gain.
- Risk. No investment is risk free. Let's say you get that 8% cash-on-cash rental above. What happens if market rents decrease or if you have some really bad tenants that trash the place and you have to evict? When you own a lot of units, these things average out, and your variance around that 8% is small. But, across just one or a couple units, there's risk. And for non-savvy investors, that risk is higher than for savvy investors. Decide to put your money in the stock market instead? Pretty sure there is risk there as well.
I'm not saying that you can't make money off this arbitrage, but you have to ask yourself if the time, effort and risk you put in is worth the pay off. I do this for a living (I own 50+ units and have done 400+ flips) and I choose to pay for my house in cash, because I like the idea of being debt-free on my non-cash-flowing assets (like my house).
Not saying that Real Deal Denver is wrong -- purely from a math perspective he is right -- but, there are other factors in the real world besides math, and you should take them all into consideration.
MOST IMPORTANT POINT: If you're going to go after debt arbitrage, do NOT focus on appreciation. Focus on cash flow, and make sure that -- even if there is zero appreciation -- the arbitrage opportunity makes sense.
This makes a lot of sense to me. I appreciate your feedback brother! I LOVE the idea of being debt free on my “non-cash-flow” assets too! Actually, I’d prefer to be debt free on on both but I guess if I had to choose, it would probably be on my rental. The reason being is it would reduce the risk a bit. I know I’ll always pay my mortgage but I’m not sure my tenant always will.
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