Real Estate is an Add On
Real Estate is an Add On
I own four properties. I have built up this portfolio over years. My goal was never to be a real estate mogul. In fact, I think that lifestyle would be relatively painful. By far, one of the greatest mistakes in the financial independence community regarding property ownership is that we shoot too high. We imagine building a perpetual money machine based slowly on rental income. While this model works for some, the majority of us should buy investment properties as a mode of diversification. Your returns will be good and uncorrelated with the market, but most likely it won’t make you rich. Real estate is an add on.
It will definitely help you build riches. But it’s most powerful role, in my humble opinion, is not as a primary income generator.
Four legs
I have made the point in the past that all good financial plans have at least four legs. The first leg, key to building wealth, is a good W2 or 1099 wage. Nothing will propel you forward faster. Unlike capital used for investments, there is no capital consumed when you provide a good or service for money.
Only a fool would avoid investing in the stock market. There is no more passive means of making money than to buy and hold index funds. It takes almost no thought nor energy to make money this way. Invest it and forget it. Years later you will be wealthy.
I have a ridiculous love affair with side hustles. Although time intensive (and possibly capital-intensive), I cannot imagine any go getter avoiding this “asset class”. it is one of the most exciting ways to build wealth and the upside can be enormous.
And real estate is an add on. It is a great way to make money, but it has several draw backs. It consumes a lot of capital (capital-intensive). It can be incredibly time consuming, and anything but mindless. It is not nearly as fun as a new side hustle.
It’s an add on.
Diversification
In the great war off investments, diversification is the secret weapon. Tumultuous times and markets can be remedied by only one means. Your investments have to be somewhat uncorrelated. In simpler terms, when one asset class is in the toilet, another has to be racing through the clouds.
Believe it or not, uncorrelating your portfolio is easier said than done. The first step is to build up the W2, 1099, or business asset class to provide a steady stream of income. The next step is to build a healthy investment portfolio that is well indexed to the stock market as a whole.
Real estate is an add on. Unlike your job or the stock market, rental properties often buck the trend of most economic downturns. As long as you are not looking to sell any time soon, a smart, reasonably leveraged landlord will survive most ups and downs.
Efficiency of Scale
While many dream of being landlord barons, the efficiencies of scale are only so great. Owning more than a few properties can become a full-time job. While there are several notable investors in our community who do this flawlessly, generally investing in a handful of properties is much easier.
You don’t have to be a magnate to take advantage of this asset class. For most of us financially independent people, real estate is an add on. Not the primary gig we used to build wealth.
Final Thoughts
Real estate on a large-scale can be the main generator of wealth that leads to financial independence. But it is not necessarily the simplest path. For most of us, real estate is an add on. It is a great mode of diversifying a portfolio and uncorrelating risk.
Do I want to own more than four properties? Maybe if the market tumbles again I will consider it.
But I have a number of other eggs in my basket.
You can definitely be successful without real estate in your portfolio as Jim says, there are many roads to Dublin. I like to take advantage of the tax benefits of real estate so I do choose to add it to my portfolio (mainly through passive investments (syndicated deals) which as you know I write about in my blog.
As long as you are comfortable with whatever asset class you add to your portfolio it should just make you better prepared to weather any storm that may come
Yep. It is a key to go asset diversification. I like it as an add on.
Bonds also provide non correlated diversity as does some gold. The thing I like best about real estate is it is a rational use of debt in a portfolio which is an often ignored asset class. Debt properly risked is an asset multiplier and quite powerful in building wealth. It doesn’t have to be real estate, it can be mutual funds you buy with your debt it just has to be cash flow positive. There is a whole kind of investing called life cycle investing that uses debt to buy assets early and then pays of the loan over time as compounding works its magic. The model is very similar to a real estate purchase, but in a Dave Ramsey society people would treat this wealth elixir as poison. It’s also why I don’t understand people hell bent on paying off a time limited student loan as opposed to acquiring property in the form of stocks which you can own forever. That’s another use of debt as a kind of diversity.
I don’t own any real estate. My one big deal was such a friggin headache, but I kind of envy people that have that temperament
Should you use debt if your financially independent? Leverage loses its glory if it starts feeling like an unnecessary risk.
Depends on your definition of financial independence. When I retired I had a chance to lever some money but decided against it because I was headed into the great unknown. It’a one thing to calculate that you have enough and another to spend the money W2 free actually live it and see what that feels like as well as what it feels like to the family. Also SORR freaks me out. Now that I know my plan works and is SORR resistant I would be more likely to take some risk. If I won a couple million in the lotto I would definitely risk it or maybe half of it. I concur completely with your sentiment that leverage is best spent when you have a tankful of human capital to actualize and a W2 to shield you. I do own some shares in a lending syndicate which is accessing leverage once removed, kind of like owning real estate private equity.