Real Estate Part 2: Why You Shouldn’t Invest In Real Estate

In part 1 of this series I showed you why you shouldn’t buy a house. In this article I want to show you why you shouldn’t invest in real estate, some of the arguments carry over so make sure to read part 1 before you read this article, but there are issues specific to investing that you need to know.

Investing in real estate isn’t the sacred cow that home-ownership is, in fact many people look at it as a risky proposition, which it is but I respect any guy that’s got his mind in this direction because chances are he’s looking for passive income and getting out of the rat race, two things we absolutely support here.

Many men have built fortunes off of investing in real estate and the possibility of financial freedom is absolutely there but with it come risks, time, costs and friction, there are better ways to make money. Like we did in part 1 I’m going to debunk the most common reasons people invest in real estate and add some more key points to hammer it home.

Reasons Why People Invest In Real Estate

1) Passive Income

Many guys looking for a way out of wage slavery have realized they need passive income and I absolutely agree. Unfortunately landlording is not passive and in many cases, not income at all. Every property will have problems to deal with. Appliances break down, leaks need to be fixed, vacancies need to be filled, multiply those problems by how many properties you own and you’ve got a lot of problems.

You can hire a property manager but that cuts your margins even thinner. Despite what most real estate investment salesmen tell you cash flow is often a myth, if you’re breaking even you’re doing well, if you can make $100 a month you’re doing very well. Compare this to the smallest internet business where you can easily cash flow $100 a month while you sleep.

2) Leverage

If you walk into a bank and ask for 500% leverage to gamble on penny stocks they’ll look at you like you’re on bath salts, and rightfully so,  yet but if you tell them you want to gamble on the housing market they are more than happy to put you into lifelong debt.

A lot of guys get into real estate because it’s the only type of investment where they can get access to that kind of capital and want they to take advantage of those magnified returns. As we covered in part 1, leverage magnifies, its great when the market moves your way and a disaster when the market moves against you which can easily wipe out your equity.

I respect any guy who’s willing to take those risks but when you build a leveraged house of cards like a real estate portfolio, you’re always just a few steps away from it falling apart. If I was going to use leverage, I’d rather use it on something I can control, like my own business as opposed to something I can’t like housing prices. Or better yet, bankroll a low cost business to enter where I risk my time instead of my money.

3) Appreciation

As we covered in part 1, appreciation outside of a bubble is largely a myth, the reality is the bulk of appreciation is caused by inflation which gives the appearance of rising house prices. Houses will appreciate but compared to stocks or bonds they are the least appreciable asset class and the worst investment.

Robert Shiller, creator of the Case-Shiller housing index has shown that real gains in housing since 1890 adjusted for inflation only amount to 0.2% a year on average. Compare that to the S&P 500 index which on average has returned 8% a year. Housing has a lower appreciation rate than even the most conservative investment, treasury bonds.

4) Someone Else Pays For Your Asset 

This can be true when you have good tenants, low vacancy rates and are in positive cash flow. When you have problem tenants, a high vacancy rate and negative cash flow you can easily be going in your pocket every month for hundreds of dollars to cover the costs.

5) Real Estate Scams

Many guys get exposed to real estate investing from an “expert” through a free seminar which is really just a high pressure sales pitch masquerading as an information session. Participants are pressured by the scam artist to sign up for more courses, seminars and mentoring all at a hefty price tag where the majority of the information pitched is either a product or easily available online.

These “gurus” also pitch joint venture clubs where you invest with the guru who will give you ready-made deals and their “expertise” in exchange for your cash. Common selling feature include higher rental rates, the ability to buy properties on a discount and passive no-headache income but all you get is shady deals and your money in the guru’s pocket.

I’ve worked at a company that published a real estate investment magazine and a series of real estate events, there are some legitimate real estate advisors but the majority of the guys in that industry are scammers, guys I wouldn’t buy a cup of coffee from.

6) House Flipping

House flipping is a decent option for guys who are seasoned negotiators with lots of home improvement skill, time on their hands and decent savings but its a shitty option for the average guy with no skills, little free time and lots of debt. It means you have to go out of pocket for the renovations and if you’ve overpaid your flipping strategy is now worthless.

House flipping is a part time job at the least and a full time job if you’re serious, its involves a ton of friction and headaches that can be avoided in other businesses or investments. You also have to factor in all the transaction costs that you could have amortized on a longer time frame like agent’s commissions, the real estate transfer tax, escrow costs and carrying costs while the property is being remodeled.

In the wake of the housing crash we’ve also seen increased protection for distressed sellers and warranty requirements for renovated homes. These changes cut into profits for flipping houses because they limit the ability for you to find discounted property and increase your expenses to meet standards for renovating the property. Another downside to house flipping is selling a home that you have owned less than a year will result in the gains from the property being taxed as ordinary income as opposed to capital gains tax at 15%.

7) Housing Is Safer Than Stocks

This was a common myth for many years until the housing crisis destroyed that idea. Its true house prices don’t fall to zero like stock prices, but your equity in a house can easily fall to zero and below because you bought on leverage. It just takes prices to drop 10% with a 10% down payment on the house and you are completely wiped out while still owing the bank the purchase price you borrowed at plus interest.

With stocks its true that they can fall to zero but if you’ve held your shares to zero you’ve made a massive error, getting into a position without a stop loss is a terrible way to invest. Also chances are you didn’t have 500% leverage on your stock portfolio because the bank would never loan you that kind of money to gamble with. And with stocks lets say your shares drop 5% you can sell immediately with no friction.

Try doing that with a house and get the price you want. Housing is no less risky than stocks and with the amount of leverage generally used, it’s actually a much riskier investment.

8) Tax Breaks

A lot of guys think they can take advantage of tax breaks through buying properties, unfortunately many of those breaks don’t extend to investors and the ones that do, don’t justify the investment. The mortgage interest deduction is a great benefit for property owners but is offset by property taxes which you wouldn’t need to pay on other investments like stocks or bonds.

The deduction has also become vulnerable lately with the Obama administration debating whether it’s still feasible. If you take a loss on the sale of your home you can’t deduct that whereas with stocks you can deduct your losses against your gains.

Or ,If you lose money in your portable online business, you can deduct all your losses against gains in future years. Investors also don’t qualify for the tax exemption for selling a home because you have to have lived in the property as your primary residence for 2 out of 5 years.

Reasons Why You Shouldn’t Invest In Real Estate

1) Time

Owning multiple properties is not passive income, managing properties will take up as much time as a part-time business, except the payout is on the deferred life plan as opposed to an actual part-time business that could be paying you now.

Expect to have issues with your properties 4 or 5 times a year with a couple of those being major events. In one year an ex-colleague of mine had to deal with two separate issues with his property in England, one of them being a robbery, with him flying back both times.

The rest of his free time, went to his other two properties here in Toronto, whether it was fixing a chimney or installing a new fence, every single weekend he had a time-consuming project. Luckily he’s very capable at fixing things and has a great work ethic, but with a family and a full-time job to contend with he has no free time. He’ll have a nice nest egg to retire off of in his 60’s but until then he’s an exhausted corporate slave.

2) Opportunity Cost

We covered opportunity cost in part 1 but I want to reiterate that when you dump all your savings into multiple properties you’re still on the deferred life plan. It’s true that if you’re sharp, a shrewd negotiator have access to lots of capital, are lucky, extremely hard working and capable of doing repairs yourself then you can be financially free.

The problem is, it might take you 10 or 20 years to get there unless you utilize extremely aggressive financing and acquisitions. Even if you’re a phenomenal investor and can cash flow $2000 a year from each property, you would need 20 properties to pay your basic expenses.

Until then you’re still slaving away in corporate America and spending all your free time trying to build up your house of cards. Investing in real estate might accelerate your timeline to liberation but it’s not quick enough, do you want to work a corporate job for the next 20 years? You can take that money and put it into a business that’s going to feed you two years from now or use it to pay your basic expenses while you baseline an online business from a cheap country.

3) Maintenance

Owning multiple properties means lots of maintenance, and if you want to attempt to cash flow you’ll probably have to cut out the property manager. That means time and money. You’ll never have to repair an index fund or an online business.

4) Insurance

Insurance is similar to maintenance in the sense that owners must insure a house, but not stocks, bonds or your own business. Just another added expense and more friction with every new property.

5) Vacancy Costs

Vacancy is a hidden cost that you don’t have to worry about when you’re the sole owner of the property. But when you’re renting a property even one vacant month can easily wipe out your entire profit for the year or put you in the red.

6) Headaches

Landlording is a business where your tenants are your clients, it takes salesmanship and relationship management. It means you have to deal with people and people are headaches, especially when they can potentially damage your livelihood and personal property.

What You Should Do Instead

Every single man on the Forbes list is a business owner, you can’t get rich as an employee and the longer you stay one the longer it will take you to start compounding your money in a business. You want the business with the least upfront costs, and the highest potential returns.In our grandfathers’ day, real estate might have been one of the only avenues for a man to liberate himself but in this day and age we have options, if you want to go bricks and mortar you can start a service based business where all you need is a phone, internet connection and sales skills.

But how can you compare anything else to owning an online business ? Yes there are a million guys doing it but most of them are lazy and stupid. For a sharp guy with a ruthless work ethic there is no way you can’t make money online with a decent idea at a fraction of the cost of starting any other business. That’s an opportunity our grandfathers would have killed for. Invest in yourself.

  1. I’ve read your article about serviced based businesses and I’m still lost on the specifics, I have a phone, internet connection and many free hours every day after study so investing it into cold calls makes sense but I have no idea what specifically to do to get started.

    I don’t even know what a service based businesses actually are, What would one do to start a service based business? I don’t have any product to sell and I don’t have any service to offer, I have no idea what to do. I’d love any clarification you can offer thanks

  2. A service is something like real estate, insurance, personal training services, asphalt paving, anything that people will pay you for. Some of these you’ll need a designation for but some you can do starting today. Ideally it’s something you’re good at already and passionate for.

  3. Not sure I agree with this your leaving out several key factors that make real estate such a powerful tool. And rentals in its own respect is a business which can have employees and costs . I noticed you didn’t mention if the homes were payed off your opinion on that . I have seen many properties return as good as the stock market not including IRR. I personally own a business with employees we do landscaping and snow plowing and I own real estate to get monthly cash flow , mortgage pay down , appreciate if any , leverage my money at what ever percent I chose to finance , get depreciation write off, any expense write off, interest write off , tax write off. I do think real estate is a great tool to get u financially independent or out of the rat race . But like Anything you gotta work your ass off

  4. Hey Kyle, you’ve got some good points, and I know there are a lot of guys who’ve made money off real estate, but I still don’t think it’s the best tool for the vast majority of boys, which is a service business – which you own. My goal is to get guys independent first and in control of their revenue, then compound that revenue by reinvesting as much as they can in their business as well as building up their reserve cash for runway/emergency/security. Then at that point they can worry about what to do with the excess – that’s my take at least.

  5. 8 out of 10 millionaires made their money with some sort of real estate involvement. BUT you have to threat it like a real business, because it is one! It’s shelter business. And you can transform your taxes into privat equity. But it’s not for everybody.

  6. what if you inherit (debt-free) real estate? would you sell it and invest it into a business or an ETF fund rather?
    i have an apartment back in my home town that i’m renting out, but i figure the depreciation might be similar to the rent i’m receiving. although in the town the apartment is located in prices have increased 2-fold the last 3 years and projected to grow further because it was an undervalued market, so i would not sell it at least for now.

  7. I highly recommend you read the millionaire real estate investor by Gary Keller.

    There are hacks to every drawback you mentioned.

    1. A real estate deal is only a deal if you get it at minimum 20% below market value. Make money going in.

    2. You get bigger returns if from multifamily properties. Single family should be used as owner financing to increase profits because people don’t excercise their option to buy 90% of the time.

    3. Two forms of wealth, equity and cash flow. Loss of equity doesn’t automatically equal loss of cash flow.

    4. Big time investors don’t spend their time managing properties. They manage it’s manager.

    Bottom line is it is deferred but it is a great investment.

    No matter if you are in the rat race or not you need to set aside a big percentage of your income and reinvest it somewhere.

  8. One last point is you set standards. Your standard could be you net 200 bucks a month after allowing for those unknowns.
    Factor in insurance, vacancies of 1 to 2 months , 2-3 % maintenance vs value per year and see if the deal still makes sense.

    I had a guy tell me never buy one of anything. If you have 10 units the other 9 will cover the unexpected of 1.

  9. Thanks for your input Ben, I’m a fan of Gary Keller’s book the one thing, as well as him being a legit success. I also know my man Grant Cardone has a lot of good real estate advice. I’m still not sold on the U.S. but I might do a part 3, where I’m a lot more open to buying real estate here in Southeast Asia where I live although primarily as a method of wealth protection (although a bit of appreciation and income is always nice). Especially against a U.S. economic collapse, which I think we’ll probably see in our life time. That and you can buy without a mortgage and get a decent condo for $50,000.

  10. Do you think not buying a house applies to someone in their 50s?my girlfriend wants us to buy a house she says better investment and is willing to pay in half on it. Do you think it’s a good move?

  11. No one in their fucking right mind would “buy” a us home for living in or “investing” unless they bought for <200K back in the 80s-90s, are brain damaged/believe the us propaganda, or their parents/grandpappy left them a house–trust funders or rich kids. Otherwise, pretending to be Mr overzealous/exuberant (clueless) "investor" in real estate is a mindfuck.
    Leases, Schedule Cs, RE IRS bullshit forms, forms, forms, lawsuits, toilets, $ all tied up, hidden fees/taxes, realturds smiling as they fleece ya and tell ya what you wanna hear, repairs, maintenance, shitty tenants, tenants they play nice–then change to their real selfs–USians the empire of hustlers/hucksters galore. There's only 1 piece of advice that makes sense: Hit the road and do what Mr. Will Free Man did–he got the fuck out of dodge. He has real world brains, not some happy talk us bs artist; he tells the truth/realities about North American way of hell. Nothing more than tax and corporate slaves. There's only 1 benie of being a USian–taxation– Mr. John Richardson, a Canadian tax attorney.

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