Real estate used to be the holy grail of investing — you could do no wrong. For many years, you could buy good-quality property, as much as you could afford, and you were almost guaranteed to make money. That ended in 2008. Now folks are looking for bargains, hoping to profit from the crash.
So what’s changed? I don’t have to tell you that the commercial and residential real-estate markets took a huge hit in 2008 and have yet to fully recover. Many folks saw the value of their homes drop by 40% or more, and their net worth drop right along with it. In the meantime, bank short sales skyrocketed.
Opportunities to buy may be returning, but something else has also changed. Folks on either side of the retirement cusp are in a different place in life than when they bought their McMansions. Children have fled the coop, so their needs have changed. Also, retirees and folks approaching retirement cannot afford a do-over. We no longer have time to recover from investment losses … certainly not if we plan on staying retired.
When we conducted a survey of readers last fall to see what was on their minds — investment wise I mean — real estate investing was in the top 3. The other two were annuities and income investing. We’ve covered both several times, most recently here and here.
With real estate investing a hot topic, I’d like to review the Money Forever Five-Point Balancing Test and see how it applies to real estate. It’s the test we apply to all of our investments, not just stocks.
- Is it a solid company or investment vehicle?
- Does it provide good income?
- Is there good opportunity for appreciation?
- Does it protect against inflation?
- Is it easily reversible?
Some real estate may indeed meet all five criteria, but folks of retirement age must be much more selective.
My wife Jo and I moved to Fort Myers, Florida in 1985 – about the time that the new airport opened, which allowed bigger jets access to the southwest corridor of Florida. I-75 was also extended south from Sarasota down through Naples and over to Miami. Real estate in the southwest part of Florida exploded.
I had a good friend who put together several partnerships to invest in property. Twenty of us would put up 5% each, buy land, get the necessary permits, and then sell the property to a developer. We did well on several parcels.
One parcel we bought, which I thought would provide the greatest return of all, we still own over 20 years later. We’re still paying property taxes and associated costs after all these years.
The situation is almost funny. We have to pay a farmer to “rent” some cattle in order to maintain our agricultural exemption on the property. While it seemed like a good investment when I was 52, I would pass on it today at age 73. Why? Those types of partnerships do not provide income, nor are they liquid. That means they fail No. 2 and No. 5 on our Five-Point Balancing Test.
We have friends who for years bought homes and apartments, fixed them up, and then rented them out. Some resold them and some converted apartments into condominiums, often doing very well for themselves.
Today these same friends want passive investments. They are quick to remind me that being a landlord means running your own small business. Their investments demanded a big-time commitment; they were anything but passive.
Ask any active landlord and he will tell you of the amazing time commitment required – of the 3 a.m. phone calls from the fire department, the plumbing leaks and electrical mishaps, and the renters who never seem to pay on time. Retirees want to make money with their capital. They are not looking for a full-time job.
That’s why most folks on either side of the cusp of retirement are likely better off with investments that meet our Five-Point Balancing Test.
That does not mean that rental property or buying property for appreciation is out of the question. But we’re looking for real-estate investments that are professionally managed and liquid.
That’s why many smart investors are turning to real estate investment trusts (REITs). They offer all the income you could ask for, and they’re entirely passive — someone else does the work for you. You need to do your homeowrk, of course, but if you’re looking for income, you could do a lot worse than REITs.
We’ve recently added a real-estate investment in our portfolio that meets all five points in our balancing test. Use this link to start a 90-day risk-free trial to Money Forever and get the full report on our real-estate investment.
Making money in real estate is no easier than it is in the stock market. It requires a lot of work, patience, and in some cases a lot of luck. Retirement is not the time for a “get rich quick” scheme.