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Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 63236  
Subject: SWR for real estate Date: 2/7/2007 7:33 PM
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if thinking about <enough to ree-tire?> .... i'd be a bit more cautious ...

i watched (& actually benefited from) RE bubble pop here a few years ago. ...

of course, same is true of stocks (which is why i'm about 1/3 "bonds" ...and inching that up)


This is worth discussing in depth. Intercst's study is a reasonable prediction of what will happen if you use bonds and an S&P 500 index fund to fund retirement in various historical scenarios. But what about real estate?

I can't really contribute anything but vague generalizations myself, because I don't really know real estate. But some things cross my mind.

* Stocks are comparatively liquid. If your stock investments aren't throwing off enough dividends, you can reasonably generate income by selling shares. Nothing forces you to sell all of a position, you can sell just as much as you need.

By contrast, you can't sell off 10% of a multi-family house. Even if you're selling off an entire house, the frictional costs, in realtor fees, are considerable. It seems like if you're using real estate to fund retirement, it makes more sense to focus on net cash income from rents.

* Compared to stocks, rental income before leverage is relatively stable. It definitely goes down sometimes, but is a 50% drop in rental income something to worry about? Intercst's study on stocks takes into account cases where the market has lost 70% of its value in 3 years. Is real estate more stable?

* You probably still need a margin of safety. I.e. if you want $40K / year of income, how much rental income about $40K do you need to be safe?

* Leverage is common and traditional in real estate investing, but it increases risk in retirement enormously. 80% loan-to-value mortgages mean your net rental income is 5x more volatile than unencumbered properties.

I'm certainly going to stick with stocks, but I'm sure the answers to these questions would be valuable to people thinking in terms of real estate.

- Gus
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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1283 of 63236
Subject: Re: SWR for real estate Date: 2/7/2007 7:47 PM
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* Stocks are comparatively liquid. If your stock investments aren't throwing off enough dividends, you can reasonably generate income by selling shares. Nothing forces you to sell all of a position, you can sell just as much as you need.

By contrast, you can't sell off 10% of a multi-family house. Even if you're selling off an entire house, the frictional costs, in realtor fees, are considerable. It seems like if you're using real estate to fund retirement, it makes more sense to focus on net cash income from rents.


you can borrow against the equity... that's SOMEthing of a partial liquidity.


good question how much rents can fall .... there's inelasticity in that people don't Want to move (it's an expensive Pain / i recall when in 90 or so, RE was falling here and rents were falling ... i went to my landlord and said, "lower rent?" "No. Move if you want")


-j
....never considered Rental-investment because being a landlord sounds like W**k

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Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1297 of 63236
Subject: Re: SWR for real estate Date: 2/7/2007 8:43 PM
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good question how much rents can fall ....

I think to get real answers to these questions, you really need as much data as Intercst used. I.e. over 100 years of housing prices and rental rates for a market. Even better, for multiple markets, since we know real estate has behaved differently in San Francisco than in Houston.

- Gus

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Author: LtUhura Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1323 of 63236
Subject: Re: SWR for real estate Date: 2/7/2007 11:10 PM
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* Compared to stocks, rental income before leverage is relatively stable. It definitely goes down sometimes, but is a 50% drop in rental income something to worry about? Intercst's study on stocks takes into account cases where the market has lost 70% of its value in 3 years. Is real estate more stable?

I can answer part of this. Owning rental property can be a very stable investment if -- and that's a big IF -- you are willing to put a lot of work into it. We have an owner occupied two-family. In a perfect world the tenant pays 50%+ of your mortgage and you get a nice tax break every year. Once the mortgage is paid off you are guaranteed a steady income from rent. However, you need a cash pillow to get you through the year. Things break down and you are responsible for fixing them, water, sewer and maybe trash need to be paid and City Hall doesn't care to hear any of your excuses, tenants may or may not fall behind in rent. You have to determine where you level of risk is.

Uhura

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1324 of 63236
Subject: Re: SWR for real estate Date: 2/7/2007 11:22 PM
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Hmmmm. We have an older (By Los Angeles standards) house with a 1925 vintage one-car garage in back, on the alley. We have been wanting to replace it with a two- or three-car garage for a while, and are moving in that direction. Then we had the bright idea to add a one-bedroom apartment above the garage. Would cost in excess of $100K, but would rent for (guess) $1500 a month. $1000 minimum.

Advice?

cliff

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Author: LtUhura Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1327 of 63236
Subject: Re: SWR for real estate Date: 2/7/2007 11:34 PM
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Before you do anything, you need to check your neighborhood zoning codes. The last thing you wan to do is spend $100K on an apartment only to be told that it's illegal in your area.

Uhura

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1445 of 63236
Subject: Re: SWR for real estate Date: 2/8/2007 7:13 PM
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This is worth discussing in depth. Intercst's study is a reasonable prediction of what will happen if you use bonds and an S&P 500 index fund to fund retirement in various historical scenarios. But what about real estate?

This question was discussed a time or two on the RWCJ board, but I don't think the question is framed correctly. I didn't the question got dealt with very well over there because the some of the more prolific real estate proponents over there were...not entirely stable.

Investment real estate is supposed to flow cash (usually). The amount of cash left over after expenses is known as profits. You can spend as much of the profits as you like.

The other problem is that you can't really "withdraw" a percentage of your real estate portfolio. You sell it one parcel at a time.

I think the real question is "Is real estate a good use of investment funds?"




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Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1469 of 63236
Subject: Re: SWR for real estate Date: 2/8/2007 10:44 PM
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I think the real question is "Is real estate a good use of investment funds?"

Given that real estate income can be reasonably expected to keep pace with inflation, and the SWR with stocks is 4% due to volatility, you'd think it might be. A naive approach would be to assume it's safe to retire if your real estate income matches your expenses. I'm assuming that this is not true, that rental income may lag behind inflation for a while, or go down for a while, and that you need more of a margin.

Still, it seems like a viable route to me, in some markets, under some conditions. Right now income return is pretty low in many markets. Absurdly low in the Boston area, and certainly lower than I wanted in the Western Mass region. But if you can manage, say, 8% return, is it unreasonable to think that you can retire if your expenses are 6%? If so, it may actually require less capital. But more work, unless you've got a management company doing everything.

- Gus

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