The Real Estate Delusion

Building wealth requires hard work and discipline.

I’ve studied approaches to creating wealth with real estate.  Sometimes these approaches are remarkably successful.  Other times, they are spectacular failures.  Whatever you do, don’t consider a real estate investment “program” to be a panacea for your financial wounds.  Instead, walk in with your eyes wide open.  Know the risks and rewards.

Done right, and with a little luck, strategic investments in real estate can yield extraordinary wealth.  Buy homes or commercial property for as little money as possible and finance them with OPM, “other peoples’ money.”  Rent them out to cover interest and maintenance costs.  As the properties increase in value, sell them off.  Then reinvest the proceeds in multiple new properties.  If it works, there should be a multiplier effect and you can retire early.

The primary risks here are (1) that your rental income will not cover interest and maintenance costs and (2) that the property will not increase in value.  These risks can be higher than you think because the types of distressed properties which can be easily financed with OPM are usually the most difficult to rent, and may be the least likely to appreciate in value.

Furthermore, rental rates and real estate values tend to move together.  If you own 10 properties, their rental rates and market values will all move in the same direction, up or down.  This increases your risk – either you are going to make a lot of money (as many people do) or you are going to lose a lot of money (as many people do).  In investing, we call it “putting your eggs in one basket” and it is a dangerous proposition.

Real estate can be a great investment as part of a larger portfolio of investments that also include stocks, bonds and commodities like gold.  Furthermore, do not get caught in the trap of thinking that expensive properties will always appreciate ad infinitum.

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