You often hear about people who have made a killing by investing in real estate. There is no doubt that some people have become very rich by investing in this asset class – but as we’ve seen in the recent financial crisis, most people have not been as fortunate. To be fair, I’ve only dabbled a bit in real estate, so I’m by no means an expert in this area, but the experiences I have had have turned me off to putting my personal money in “physical” real estate for investment purposes. But that’s just me, I’m sure many others have done quite well and have the smarts and personality to make real estate a very attractive investment option. However, below outlines my reasons why “physical” real estate is not part of my portfolio mix.
Liquidity – Real estate is hard to buy and sell – especially in this market – and comes with substantial transaction costs. Not only do you have fees of 5 – 10% added to the transaction, equating to several thousand dollars, it may be many months, and sometimes years before you can unload the real estate as an investment. Plus going through the whole process of buying a home is stressful and nerve wracking and you feel you are being ripped off at every turn. Having gone through the process a couple of times, it is not something I ever want to repeat.
Managing Real Estate – My parents had a small apartment complex that I managed for a few years. It was probably one of the least enjoyable jobs of my life. Following up on late payments, getting calls in the middle of the night because something broke, tenants complaining about other tenants, property damage, drug busts, and lost weekends because of having to do some maintenance or fix something. Lots of sweat equity and the net return was certainly not worth it.
Mobility and Freedom – Owning physical real estate puts a major crimp on your mobility and freedom, especially if your real estate investment is the home you live in. I believe that is one of the major factors for the slow recovery in our economy, in that mobility has been impaired because people can’t afford to leave their existing homes that they can’t sell in order to take a job opportunity in another city. Also, keep in mind that when you buy a home, you could be stuck with unpleasant neighbors for years to come. I like my freedom and mobility to pull up stakes whenever I want to, on a whim, or an opportunity presents itself.
High Overhead – Insurance, taxes, maintenance and mortgage interest. Need I say more?
Historically Not a Great Investment – Real estate as an asset class hasn’t been all that great. And people who bought during the mid-2000s may have to wait decades to just break even. I admit that “physical” real estate may be one of the safest asset classes for principal preservation – if you bought the house at fair market value and intend to live in it for many years, but I wouldn’t expect to see any significant returns for many years in this current market.
So there you have it, why I don’t invest in “physical” real estate. However, there are probably just as many good reasons why someone should, but that’s not the purpose of this post. Some people may enjoy the process of managing real estate – I don’t! I’ve never had any luck with my real estate investments and based upon my experience with managing my parent’s apartment, they would have been better off just buying a U.S. Treasury bond, because the net return would have been about the same and they wouldn’t have had the headaches and invest an inordinate amount of time to make the investment profitable.
I will close in saying that I’m not totally turned off by real estate – just owning “physical” real estate. I do have investments in Real Estate Investment Trusts (REITs), which is an trust that owns and manages a pool of commercial properties and mortgages and other real estate assets and shares of the REIT can be bought and sold in the stock market. The benefit is that you can own real estate without having to be a landlord and it is highly liquid as a stock. So if you want to own real estate, but not have to put up with the hassles, this may be a good option to explore.