Real Estate Investing

[voce]

No, this is a myth; hedge funds are no better than I am. I mean you can certainly read Flash Boys and see how they steal from small-time investors but almost no one beats good ol' index funds over decades. Even sovereign wealth funds and state pension plans have learned this.

Regular hedge funds are not primarily designed for returns. They are designed as insurance to hedge around risks. Index funds are not the ultimate for returns, but you'd have to have boatloads of cash to play with the elite quant fund traders.

Please look up the track record of Renaissance Technologies, before coming back here to tout index funds.

You have many valuable and valid points overall for the average investor, it's just that I can't agree with every technical assertion you make, as I have studied quantitative methods in finance, and generally hold the same views as Charlie Munger, who does see inflation on the horizon.

Agree generally that real estate investing is not the best based solely on returns, or even based on timing of the market, especially if you can't get the tax break by living at the property for 2 years. It's risky unless you know how to analyze the real estate markets and are comfortable leveraging, which is why I just put my money in REITs and let others do the work for me.

 

[whitewave]

Very sage advice.
It all depends on individual situations regarding income, investments, risk tolerance, etc.

But I would not be purchasing investment RE now unless I was in for the very long haul, getting a bargain price distressed property and buying cash.
Way too much uncertainty and way too much risk for me.

Remember back in 2006 when RE was rising dramatically? When most of us never considered that RE prices could actually fall--and fall dramatically? I knew lots of middle class people who fancied themselves RE investors back in 2004-2006. They were leveraging one property to buy another rental property and imagined they were building a RE empire. They ended up with 4-5 homes with 98% loans---and by 2008 they had lost all of them and declared bankruptcy and foreclosed.

That is why I am not a fan of leveraging to buy investment RE--and especially do not buy when the market is screaming hot!

Because the trains you don't see coming (COVID, 2007 RE Bubble) are the ones that can wipe you out if you are heavily leveraged. If our properties were leveraged we would not have survived the crash in 2008 and subsequent years of drastically reduced rent. Nor would we have survived COVID when many tenants have been behind on rent payments.

Yup. It’s a hard movie to understand unless you know a lot about it or are following along with a plot synopses, but The Big Short explains all of this.

 

[whitewave]

I'm with you @Elizabeth35. How you invest depends on so many variables.

However, I think @whitewave's CPA was trying to elude to retirement (tax-sheltered) investing as opposed to all investing in general. If so, @MRBXXXFVVS1 confirmed they were maxed out on retirement options and looking for additional creative investing (wealth building) opportunities.

I'm also not buying real estate right now. My speculation that prices are artificially inflated and will eventually stabilize aside, the reality of the matter is that right now it's hard to find a real estate deal. If a person is distressed & needs to sell quickly, they can do so pretty easily in today's market. This doesn't fair well for the investor, who should always be buying at discount and never market (let alone market + premium) prices.

If I'm going to buy at market or higher prices, I might as well invest in a mutual/index fund and enjoy those artificially inflated rates that are extremely liquid and easy to jump out of when market conditions change and a new opportunity presents itself. Saves me risk and headache.

It’s both. Definitely don’t take out of IRA, take the penalty and then buy short term Vacation rental property. Nope. That’s not good.

one realtor told me many of her clients were doing that since interest rates are so slow. Just so much wrong with that...


but also your extra money belongs in the stock market right now. we have too much money in a basically non interest savings account, so Dh opened a fidelity account and starting moving money into that and my God, it’s crazy. We are riding this bubble. (Out retirement portfolio is obviously managed by professionals).

my CPA’s advice was, dont take money out of retirement and put into second house and also put all extra money right now into stock market because that is where your returns are going to be for the near future.



for us, our second home is a inherited family home and is paid off and my eldest lives there. The beach town lot was a great price in a great area and is for our future weekend home, and possibly a short term rental when we aren’t there.

btw, random length lumber futures are finally slowing down today maybe with just short of the all time high, currently at $1607. This means we won’t be building until this comes back down to reality. Before the pandemic, it was around $350.

commodities are exploding also. Corn, grain, aluminum, copper etc are all nuts right now. Speculative greed is what I think this is.

 

[sledge]

Honestly, I would fire my CPA or financial advisor on the spot if they ever advised me to pull money from my retirement account. Except in very, very rare circumstances this is a HUGE no-no. Please, if anyone is reading this....DO NOT DO THIS!

Potential reasons might include a life/death medical emergency, to prevent actual foreclosure (not simply make a payment) or to possibly avoid issues with IRS because of back taxes (as those issues have their own sets of interest & penalties as well). And frankly, I'd scratch & claw to avoid it then.

Dangerously, the government waived the 10% early withdrawal penalty under the CARES act. What they didn't tout as loudly is you still have to pay the taxes. So you save 10%, weaken your position in retirement and they collect 20%+ tax revenue now vs later when you are in retirement.

Of course they do it when stocks are low, and people are panicking. Yet no one stops to realize it's all a PAPER LOSS. Assuming the stock market doesn't entirely collapse, it will rebound, so you only get hurt if you jump out of the roller coaster when it's at the low point. If you stay in, you can ride it back up to the next peak then exit. But those that jumped at the low point took not a paper loss, but a real monetary loss.

Assuming you aren't taking normal distributions, you have two ways to get money out:

1. Early withdrawal. Money is simply taken from the retirement account & cannot be put back and obviously cannot grow.

Plus, the IRS can take an automatic withholding of 20% to cover taxes. And if by chance, your tax bracket >20% then you will get to pay that at the end of the year when you file your taxes as this withdrawal gets reported as taxable income. As bonus points, if your adjusted gross income (AGI) is on the borderline, this additional "income" can push you into the next tax bracket so not only does the amount you withdrew get taxed at the higher tax rate, but so does ALL your earnings. Kapow!

But wait....there's more. To add insult to injury, you get penalized an additional 10% if you are < 59.5 years old. As noted above, was temporarily suspended due to CARES.

At the bare minimum, pulling $20k from your retirement account will cost you:

$20,000 / (1 - 0.30) = $28,571, where 0.30 represents 30% (=30/100).

And that doesn't factor in the opportunity cost. Using the Rule of 70, we can define how long it takes our money to double if we know the annual rate of return. For easy math, pretend annual return is 10%.

70 / 10 = 7 years

So in 7 years that $28.5k would have grown to $57k had you left it alone, and had you gotten 10% return every year. Can the thing you want to borrow the money for grow this fast?


2. 401k loan. Has to be done through an employer with a qualifying event. Involves modest origination fees. Moves the amount borrowed from actively invested to "frozen". The only way that money is growing is the minimal interest rate you are paying back using post-taxed dollars. Normally the interest rates are less than annual return rates of your portfolio. Pretend you pay yourself 4% interest.

70 / 4 = 17.5 years to double

Clearly, we are losing position in overall wealth/retirement building.

As an added bonus, when you leave your employer (and you eventually will, rather you are fired, die or quit) any loans outstanding become immediately due. If not paid, they will be counted as early distribution and become subject to the tax & early withdrawal implications already discussed.

 

[MRBXXXFVVS1]

I posted this about a year and a half ago, but updated it a bit. The way I recommend prioritizing finances are a bit like Maslow's hierarchy of needs:

1. Bills and basic living expenses
2. 401K match
3. HSA max
4. Pay off any credit card debt
5. 6 months living expenses
6. Buy a primary residence
7. 401K max
8. IRA max
9. Pay off all debt except mortgage (car and student loans)
10. 529 max (if you have kids)
11. Brokerage account for saving and investing

Pre-requisite for 12 & 13: Ability to pay off primary residence

12. Real estate investments (financing is OK, as long as it's to maximize ROI and you can afford to pay for it in cash to weather downturns)
13. Accredited investment opportunities

I am personally very, very conservative and believe larger discretionary purchases should wait until after #9 is accomplished, and that one should be able to afford a "total loss" on investments #11 and beyond.

*I am not a financial professional, this is just how I prioritize. Some points may vary based on personal circumstances. Often the interest rate on mortgages is low enough (and tax deductible) that you're better off investing in the stock market than paying off your mortgage, however paying off mortgage is guaranteed savings.

 

[LilAlex]

Please look up the track record of Renaissance Technologies, before coming back here to tout index funds.

Agree with the rest of what you say but these guys are an industry joke. No transparency. No clients. No one has any idea whether what they do bears any relation to what they self-report. They are completely unreflective of overall hedge-fund performance (which is generally unimpressive).

You are correct that hedge funds were designed to be uncorrelated (and that appropriately undermines my argument) -- now I think it is just a synonym for rich foolish people trying to outsmart the market via vanity vehicles.

 

[voce]

Agree with the rest of what you say but these guys are an industry joke. No transparency. No clients. No one has any idea whether what they do bears any relation to what they self-report. They are completely unreflective of overall hedge-fund performance (which is generally unimpressive).

You are correct that hedge funds were designed to be uncorrelated (and that appropriately undermines my argument) -- now I think it is just a synonym for rich foolish people trying to outsmart the market via vanity vehicles.

Disagree that Renaissance Technologies is industry joke. They are what most algorithmic Wall Street traders dream to be. Their recruitment criteria includes, among other things, a PhD from a prestigious university like MIT, Stanford, Caltech, Princeton, or Columbia, in mathematics or in physics.

They don't take outside money, and are entirely self-funded, because they are such good statisticians they know how to optimize their returns...aka there is such a thing as an optimal amount to invest for any given signal and correlation for the best rate of return. They do sensitivity analyses before trading and are careful not to tip into the regime where the conditions for their sophisticated models no longer hold and are careful to try to maximize the rate of return without getting into the situation of a diminishing rate of return. I know this about them because I was fortunate to have been acquainted with many quant finance insiders, including a professor who was a Nobel laureate and had been acquainted with some people there.

For them, getting high returns is not just about the sum total of money they make, but it's also intellectual pursuit and challenge to find new ideas about correlations in the real world and be monetarily rewarded for modeling the real world correctly. To do it year after year with such success... I do tip my hat off to them...

However... Totally true that they are the exception rather than the rule. I don't invest in hedge funds myself, not having that much capital to hedge anyway, it's just that Renaissance is foremost on my mind if you're talking about returns.

I would advise, if your investment horizon is longer, to go with equal weight index funds instead of traditional index funds.

 

[sledge]

More info on Rentec...

Renaissance Technologies - Wikipedia

en.wikipedia.org

Renaissance's flagship Medallion fund, which is run mostly for fund employees,[11] is famed for the best track record on Wall Street, returning more than 66 percent annualized before fees and 39 percent after fees over a 30-year span from 1988 to 2018.[12][13] Renaissance offers two portfolios to outside investors—Renaissance Institutional Equities Fund (RIEF) and Renaissance Institutional Diversified Alpha (RIDA).


Unfortunately it seems the outside investment funds are doing poorly and people are pulling funds.

Bloomberg - Are you a robot?

 

[voce]

Unfortunately it seems the outside investment funds are doing poorly and people are pulling funds.

Bloomberg - Are you a robot?

I take this as proof that their strategies do not scale, which is why they have historically been reluctant to take outside money, and maintain such secrecy.

 

[sledge]

I take this as proof that their strategies do not scale, which is why they have historically been reluctant to take outside money, and maintain such secrecy.

That could be one indicator.

What gets my goat is the 2020 REIF returns @ -19%! They have a lot of brain power & advanced trickery to yield such a poor result. I can see why people are upset.

In comparison, my caveman style investing yielded me 32.40% returns for 2020, and YTD returns are currently sitting at 48.66%.

#more-cowbell

While RIEF has outpaced the S&P in nine of the past 16 years, the 19% loss for 2020 lowered its annualized return since inception to 9.1% with returns reinvested, compared with 9.7% for the index. After January’s decline, the fund needs to return about 37% to get back to even.

 

[voce]

In comparison, my caveman style investing yielded me 32.40% returns for 2020, and YTD returns are currently sitting at 48.66%.

Holy moley, sledge, what has given 48.66% YTD? I got 60%+ on my stock portfolio last year, but this YTD has been pretty flat, around 11% when I looked yesterday.

 

[MRBXXXFVVS1]

Holy moley, sledge, what has given 48.66% YTD? I got 60%+ on my stock portfolio last year, but this YTD has been pretty flat, around 11% when I looked yesterday.

@sledge Are you open to sharing what yielded your 48.66% return YTD? I did pretty well on my stock portfolio last year, but am definitely not getting nearly as amazing returns this year.

 

[LilAlex]

^ Well this is timely!

As I said on the "bots" thread late last month:

Most of the ones on this forum seem designed to sell something. It's usually something tangentially related to the forum or to the theme of -- or a single keyword buried within -- a long-dormant thread.

 

[Wink]

When I was a much younger man, and had way more time on my hands, I bought cheap houses and made monthly low interest payments to the owners, who often needed a few hundred dollars to leave town to take a job elsewhere. I also bought foreclosures from banks who were glad to get out from under the bad "investment" made when loaning money to the wrong people.

Make no misunderstanding, these were NOT NICE HOUSES. I took over one house from a bank in exchange for spending $1,000 on a new roof as a down payment and taking over payments on a $16,000 mortgage. I put on the roof, rented the house, and eventually sold it after evicting a tenant from a hot warm place.

(Her idea of remodeling was to take a sledge hammer to the wall between the shower room and the laundry room so she would not have to walk through the living room and the kitchen to get from the shower to the laundry.)

I sold the house for $35,000 to a young man who fixed it up, rented it for a year and then sold it for $50,000 and change.

Eventually, I had about 25 rentals and tons of headaches. I sold them all off over a two year period, the last one was a house I had bought for $30,000 with a fifteen year balloon that I deflated by paying an extra $50 per month on the loan. That paid off the loan with six months to spare prior to the balloon coming due. That one sold for $125,000 to a fellow who had attended a class in California that advised him to go to places like Idaho, where the rubes did not know the value of their properties. ( I had listed the property for $110,000 and two "experts" from California got into a bidding war.) Six months later, I was approached by the winner, begging me to take the property back as the market had gotten very bad and he was going to lose the house. I told him I did not own his loan, the bank did and I never wanted to see the inside of that house again.

While I made good money on the houses I sold and on the rents received during the time I owned them, I needed to spend the time they took on building my diamond business, which I loved. I have never looked back, even though I know I could have made more money on real estate had I loved it enough to work as hard as I do with diamonds.