At one point in my life you
might have heard me say something like, “I’ve probably made more money in real
estate by accident than I have in the market on purpose.” 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 has 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 have 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.
1.
Is it a
solid company or investment vehicle?
2.
Does it
provide good income?
3.
Is there
good opportunity for appreciation?
4.
Does it
protect against inflation?
5.
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.
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.
We need investments that
meet our five criteria. One area of real estate that sadly many retirees have
been convinced is the next best thing to a “get rich quick” scheme is reverse
mortgages. While not real estate investments as most people view them, they are
often portrayed as a way to make easy money during retirement.
Source: forbes.com
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