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You're doing it wrong? Cashflow? I am slowly making my way to independent wealth BECAUSE of land/home investments. But it is because they are in production o

You're doing it wrong? Cashflow? I am slowly making my way to independent wealth BECAUSE of land/home investments. But it is because they are in production of providing good homes to people (multi-family residential), not farming (large part of the short article) nor waiting for the turf itself to appreciate. Even the investment in farmland is not taking the production of the business into account. Wouldn't that be similar to investing in some servers, but letting them sit and hoping they appreciate in value, rather than being involved in what the servers are doing? This article seems so at odds with land/home investment, I am wondering what Schiller's real motivation is with it, or if it is taken out of context... What am I missing?

gizmo 10y ago
Many folks (mostly boomers) believe that land/houses are by themselves a good investment. So they buy a larger house than they need and more land than they need and rationalize it saying it's the smart thing to do because "prices will always go up". Of course if you buy houses and rent them out you can make money. Being a good landlord takes work though, and it's by no means a guaranteed way to riches. Having unused rooms in your house or land that's idle? Lousy investment. Summer home? Lousy investment.
- analog31 10y ago
  I actually doubt that investment value is primarily what drove boomers to buy bigger houses. They did it because they wanted the comfort of a bigger house, and didn't value some things that they were giving up such as pedestrian neighborhoods. Indeed, being a landlord is work, but I think that being your own landlord and pocketing the tax deductions and "imputed rent" is quite manageable for a family.
yaacov 10y ago
Servers are a bad analogy because they don't come out with new versions of farmland every few years that make the old ones obselete. But I see your point that none of this really applies to homes.
ianai 10y ago
I think You can label the whole article as public outreach.
refurb 10y ago
A few thoughts: - Just because some gets you a positive return, doesn't mean it's an ideal investment. If you can get a 6% return, then an investment getting you 3% isn't that great. - Real estate is local. Schiller is looking at average across the entire country. Areas appreciate at different rates. If you're lucky enough to buy in an area where prices are rapidly appreciating, then it can be a great investment. If you're buying at the top, then it can be a really bad investment.
- pbreit 10y ago
  "Schiller is looking at average across the entire country" Which is silly because you'd never invest that way.
  - refurb 10y ago
    Of course. Averages can hide very dramatic trends. However, the average rate of return on real estate is pretty consistent. That would argue that although areas appreciate at different rates, over a long enough time period, they returns are all pretty small.
  - gizmo 10y ago
    The country as a whole -- by definition -- does get the average return. If you get an above-average return on your land value then somebody else has to get a below-average return, otherwise the average would be higher. As an individual investor you probably don't care about other people's returns, but an economic analysis has to look at the average case and not at what lucky/sophisticated investors get.
    - deleted 10y ago
      [deleted]
    - pbreit 10y ago
      But lots of people don't see housing as an investment.
  - blastrat 10y ago
riprock 10y ago
Any hints of which states you invest houses in that are cash flow positive? California seems to require ridiculous capital to even get started.
- breischl 10y ago
  Second and third tier cities and areas in the Midwest are usually better. Sometimes you can do OK in suburbs as well.
- raintrees 10y ago
  Based on my research, you would look for areas that have a strong work environment, geographical limitations that help (a river restricting how many units there are or can be), and so on. But based on my experience, I would recommend you just keep looking. We have a fourplex in California, it cashflows about $200 per unit, but part of that is due to the healthy down payment we put up. And this is in an economically depressed county, the work environment is so-so, _contrary_ to my research mentioned above. Due diligence is the key for us. I optimized on "most income potential for the down payment," then ended up paying extra because the previous owner had a firm line in the sand and someone else was also interested in the same property. Thanks to phantom cashflow (depreciation) and the repairs we make here or there, we put money in our pockets but are able to show the IRS a loss during _some_ years, based on the US tax code (conservatively legal). I have been corrected before on HN about "too good to be true" numbers, so I do need to point out YMMV. We were beneficiaries of being in the right place at the right time, but we also spent the previous years getting ready: reading books on residential rental real estate investing (note the specific angle there - many ways to make - and lose - money on real estate, be specific), cleaning up our credit reports, building up a down payment, learning the local markets so we could buy something local and keep an eye on our first property, learning about property management and being landlords, meeting and interviewing prospective property managers, meeting and interviewing prospective real estate agents, and then setting up the correct legal entity to hold the property in. We hired a coach after the first purchase, and had much of the same learning material, but far more compressed - We went over in 6 months what it took me 3 years of research to get on my own. And that does not include the invaluable tips one can get from someone who already walks the talk. We also evaluated at least 10 properties in person that did not pass muster, and that was after weeding out scores of properties that we did not even bother to visit. We had a few deals fall through, but usually because something was not good enough, usually not enough return on investment, or too much deferred maintenance (requires deeper pockets to get in, but can be more profitable in the end - IF you know what you are doing. And have a good team.). This specific deal earned us %13 - Not great, but definitely better than other deals. I have a friend who would not look at deals unless they had %28 ROI or more in them, but then he also talks a big game :) But it IS possible. In fact, thanks to the elastic property of real estate negotiations, it is a place where you can still get in with nothing down every once in awhile, but one really has to be prepared for those deals when they come through. Besides location, location, location, I think the bigger catchphrase should be financing, financing, financing. There is a lot to be said about the art of negotiation, when it comes to a buy/sell agreement. But again, YMMV, and I only got out of it what I put into it in sweat equity, as well as capital. And, we are still learning... We also own a rental in Florida, but that is a whole other story...
chrissnell 10y ago
Whether you profit on land is less about the type of land and more about the location and what you do with it. Obviously, as a real estate investor, you know this. Buying a home in the 'burbs is often a terrible investment. These homes are not often built with old world craftsmanship or remarkable architecture and the land itself is usually nothing special. In twenty years, you'll end up with a dated, aging property, surrounded by other dated properties. The neighborhood may be treed but probably not with stately, slow-growing hardwoods. Compare this with an established early 20th century neighborhood in the central part of a city. You have classic Craftsman architecture and homes built by people with real carpentry skills, using hardwoods, brick, stone, and other durable materials. These homes, properly maintained, will last another hundred years. Chances are (in 2016, anyway), it's a gentrified or gentrifying neighborhood. If you can pick up a home in this neighborhood, you've probably made a good investment.
- technofiend 10y ago
  How right you are! Unfortunately the developers in my city (Houston) have a lock on city council. We have zero zoning laws and very little power to preserve architecturally interesting areas. In fact modern architects and builders here have a really negative attitude towards Craftsmen and similar styles: as far as they're concerned it's all old and boring. The result is predictable; neighborhoods are razed flat for profitable high density dwellings which frankly are one notch above Soviet Brutalist style, usually clad in the least durable and cheapest exterior possible. Houston has incredibly low urban density and I'm not above improving that in places. But it should done with an eye towards a beautiful legacy. The only thing beautiful about block upon block of stucco and aluminum siding townhomes is the builder's bank balance.
  - mrcsparker 10y ago
    It seems like you want to live in another city. Part of what many people like about Houston is the lack of zoning. People tend to live close to where they work. The city doesn't really need a business area and a commercial area and a residential area. What neighborhoods are you talking about? I don't see anything near the Brutalist style anywhere in the city. A lot of the older parts of Houston have those three story townhomes, but they all look pretty nice. A lot of the homes that those places are replacing were pretty rough.
dforrestwilson1 10y ago
I'm not sure he's factoring in the savings for a home buyer vs a renter. To me it's not so much about building wealth in real estate, as saving money on living accommodations in order to build wealth elsewhere.
driverdan 10y ago
The author seems like he either knows nothing about real estate or, as you said, has other motives that aren't clear. He completely ignores the effect of mortgages (leverage) and the expense of renting instead of buying. He ignores investment property (as you highlighted), the ROI of building on vacant land, tax advantages of owning, and numerous other factors.
sytelus 10y ago
Article reminds me of joke but with different perspective: Bill Gates walks in to bar and everyone is billionaire, on average. The thing is that cities which have not resisted expansion (like Atlanta), prices of home has grew very modestly - far below S&P. For cities like NYC or SF there no end in sight. However if you average out then real estate may not be so appealing. So basically any statements like real estate is great or poor investments are wrong without proper context.
stevenwiles 10y ago
Do you have any advice to someone who wants to be financially independent and own a lot of land/home investments? I would like to be able to afford any lifestyle I want without having to work hard for it and it seems like rental properties are the way to go for that. Thank you.
- raintrees 10y ago
  Warning: I love to teach, so I may get verbose :) Real Estate works for us, more than paper assets, and less day to day time requirements than building a business for sale (exit plan) or that someone else operates for our profit. Everyone is different, YMMV. Education is key. If you would hire a coach for exercise/strength training in a gym/fitness club, then I would highly recommend hiring a coach for real estate investment. As I stated elsewhere in comments, we went over the same material (and more) in 6 months with a coach that it took me 3 years to piece together on my own. Patience - We were not ready to actually purchase our first piece of property until almost 4 years after we started preparing. Preparations for us included making our credit report as beneficial to us as possible, learning about the responsibilities of being a landlord, learning about the job duties of a property manage (even though we sub that out, we still want to know what is appropriate and what is not), learning about negotiations (did you know you can include almost anything in a buy/sell contract? "We'll pay $x and this 320i BMW in return for that piece of property" is a deal I heard referred to by another real estate investment expert), learning about the legalities of business entities with respect to real estate ownership, and so on. Now we just save up for the next down payment, then start looking for the next deal. And although there are ways to get into deals without a large (or any) down payment, they usually require considerably more effort and time, and I have a service business to keep going. So we do it the more lazy/easy way, with cash and financing. Due diligence - It is better to walk away from a deal that I just can't make cash flow enough, than to get stuck with a poor/sub-performing investment. We walked away from quite a few deals, even though there were several I was relatively sure I could make work. On-site inspections have uncovered many potential gotchas that would have been financially painful. Some landlords extract the most profit out of an investment they can, and this can frequently result in much deferred maintenance, which can get very expensive very quickly. And like a start-up, you can only sustain a given burn rate for so long, before the deal crashes. Teamwork - Although I have been gifted with what intelligence I have, it is not a good thing if I am the smartest person on my team/in the room. We all have different strengths, and I am not good at everything, so I try to surround myself with teammates that provide those missing/weak areas I have, as well as mentors who have already gone down that road. Having a good property manager go over a property will help me identify concerns, see places for improvement, etc. Having a reliable contractor (I am still looking for my next one, last one wasn't a good fit for us) can keep me out of those large up-front costs. A knowledgeable attorney for real estate investment in the area I am investing in is very important - It would be terrible to build up a portfolio then lose it all because I did not adequately protect ourselves (entity + insurance + operating practices). Okay, enough. Sorry for the deluge, but I really _like_ the process of real estate investing.

gizmo 10y ago

Many folks (mostly boomers) believe that land/houses are by themselves a good investment. So they buy a larger house than they need and more land than they need and rationalize it saying it's the smart thing to do because "prices will always go up". Of course if you buy houses and rent them out you can make money. Being a good landlord takes work though, and it's by no means a guaranteed way to riches. Having unused rooms in your house or land that's idle? Lousy investment. Summer home? Lousy investment.

analog31 10y ago
I actually doubt that investment value is primarily what drove boomers to buy bigger houses. They did it because they wanted the comfort of a bigger house, and didn't value some things that they were giving up such as pedestrian neighborhoods. Indeed, being a landlord is work, but I think that being your own landlord and pocketing the tax deductions and "imputed rent" is quite manageable for a family.

yaacov 10y ago

Servers are a bad analogy because they don't come out with new versions of farmland every few years that make the old ones obselete. But I see your point that none of this really applies to homes.

ianai 10y ago

I think You can label the whole article as public outreach.

refurb 10y ago

A few thoughts: - Just because some gets you a positive return, doesn't mean it's an ideal investment. If you can get a 6% return, then an investment getting you 3% isn't that great. - Real estate is local. Schiller is looking at average across the entire country. Areas appreciate at different rates. If you're lucky enough to buy in an area where prices are rapidly appreciating, then it can be a great investment. If you're buying at the top, then it can be a really bad investment.

pbreit 10y ago
"Schiller is looking at average across the entire country" Which is silly because you'd never invest that way.
- refurb 10y ago
  Of course. Averages can hide very dramatic trends. However, the average rate of return on real estate is pretty consistent. That would argue that although areas appreciate at different rates, over a long enough time period, they returns are all pretty small.
- gizmo 10y ago
  The country as a whole -- by definition -- does get the average return. If you get an above-average return on your land value then somebody else has to get a below-average return, otherwise the average would be higher. As an individual investor you probably don't care about other people's returns, but an economic analysis has to look at the average case and not at what lucky/sophisticated investors get.
  - deleted 10y ago
    [deleted]
  - pbreit 10y ago
    But lots of people don't see housing as an investment.
- blastrat 10y ago

riprock 10y ago

Any hints of which states you invest houses in that are cash flow positive? California seems to require ridiculous capital to even get started.

breischl 10y ago
Second and third tier cities and areas in the Midwest are usually better. Sometimes you can do OK in suburbs as well.
raintrees 10y ago
Based on my research, you would look for areas that have a strong work environment, geographical limitations that help (a river restricting how many units there are or can be), and so on. But based on my experience, I would recommend you just keep looking. We have a fourplex in California, it cashflows about $200 per unit, but part of that is due to the healthy down payment we put up. And this is in an economically depressed county, the work environment is so-so, _contrary_ to my research mentioned above. Due diligence is the key for us. I optimized on "most income potential for the down payment," then ended up paying extra because the previous owner had a firm line in the sand and someone else was also interested in the same property. Thanks to phantom cashflow (depreciation) and the repairs we make here or there, we put money in our pockets but are able to show the IRS a loss during _some_ years, based on the US tax code (conservatively legal). I have been corrected before on HN about "too good to be true" numbers, so I do need to point out YMMV. We were beneficiaries of being in the right place at the right time, but we also spent the previous years getting ready: reading books on residential rental real estate investing (note the specific angle there - many ways to make - and lose - money on real estate, be specific), cleaning up our credit reports, building up a down payment, learning the local markets so we could buy something local and keep an eye on our first property, learning about property management and being landlords, meeting and interviewing prospective property managers, meeting and interviewing prospective real estate agents, and then setting up the correct legal entity to hold the property in. We hired a coach after the first purchase, and had much of the same learning material, but far more compressed - We went over in 6 months what it took me 3 years of research to get on my own. And that does not include the invaluable tips one can get from someone who already walks the talk. We also evaluated at least 10 properties in person that did not pass muster, and that was after weeding out scores of properties that we did not even bother to visit. We had a few deals fall through, but usually because something was not good enough, usually not enough return on investment, or too much deferred maintenance (requires deeper pockets to get in, but can be more profitable in the end - IF you know what you are doing. And have a good team.). This specific deal earned us %13 - Not great, but definitely better than other deals. I have a friend who would not look at deals unless they had %28 ROI or more in them, but then he also talks a big game :) But it IS possible. In fact, thanks to the elastic property of real estate negotiations, it is a place where you can still get in with nothing down every once in awhile, but one really has to be prepared for those deals when they come through. Besides location, location, location, I think the bigger catchphrase should be financing, financing, financing. There is a lot to be said about the art of negotiation, when it comes to a buy/sell agreement. But again, YMMV, and I only got out of it what I put into it in sweat equity, as well as capital. And, we are still learning... We also own a rental in Florida, but that is a whole other story...

chrissnell 10y ago

Whether you profit on land is less about the type of land and more about the location and what you do with it. Obviously, as a real estate investor, you know this. Buying a home in the 'burbs is often a terrible investment. These homes are not often built with old world craftsmanship or remarkable architecture and the land itself is usually nothing special. In twenty years, you'll end up with a dated, aging property, surrounded by other dated properties. The neighborhood may be treed but probably not with stately, slow-growing hardwoods. Compare this with an established early 20th century neighborhood in the central part of a city. You have classic Craftsman architecture and homes built by people with real carpentry skills, using hardwoods, brick, stone, and other durable materials. These homes, properly maintained, will last another hundred years. Chances are (in 2016, anyway), it's a gentrified or gentrifying neighborhood. If you can pick up a home in this neighborhood, you've probably made a good investment.

technofiend 10y ago
How right you are! Unfortunately the developers in my city (Houston) have a lock on city council. We have zero zoning laws and very little power to preserve architecturally interesting areas. In fact modern architects and builders here have a really negative attitude towards Craftsmen and similar styles: as far as they're concerned it's all old and boring. The result is predictable; neighborhoods are razed flat for profitable high density dwellings which frankly are one notch above Soviet Brutalist style, usually clad in the least durable and cheapest exterior possible. Houston has incredibly low urban density and I'm not above improving that in places. But it should done with an eye towards a beautiful legacy. The only thing beautiful about block upon block of stucco and aluminum siding townhomes is the builder's bank balance.
- mrcsparker 10y ago
  It seems like you want to live in another city. Part of what many people like about Houston is the lack of zoning. People tend to live close to where they work. The city doesn't really need a business area and a commercial area and a residential area. What neighborhoods are you talking about? I don't see anything near the Brutalist style anywhere in the city. A lot of the older parts of Houston have those three story townhomes, but they all look pretty nice. A lot of the homes that those places are replacing were pretty rough.

dforrestwilson1 10y ago

I'm not sure he's factoring in the savings for a home buyer vs a renter. To me it's not so much about building wealth in real estate, as saving money on living accommodations in order to build wealth elsewhere.

driverdan 10y ago

The author seems like he either knows nothing about real estate or, as you said, has other motives that aren't clear. He completely ignores the effect of mortgages (leverage) and the expense of renting instead of buying. He ignores investment property (as you highlighted), the ROI of building on vacant land, tax advantages of owning, and numerous other factors.

sytelus 10y ago

Article reminds me of joke but with different perspective: Bill Gates walks in to bar and everyone is billionaire, on average. The thing is that cities which have not resisted expansion (like Atlanta), prices of home has grew very modestly - far below S&P. For cities like NYC or SF there no end in sight. However if you average out then real estate may not be so appealing. So basically any statements like real estate is great or poor investments are wrong without proper context.

stevenwiles 10y ago

Do you have any advice to someone who wants to be financially independent and own a lot of land/home investments? I would like to be able to afford any lifestyle I want without having to work hard for it and it seems like rental properties are the way to go for that. Thank you.

raintrees 10y ago
Warning: I love to teach, so I may get verbose :) Real Estate works for us, more than paper assets, and less day to day time requirements than building a business for sale (exit plan) or that someone else operates for our profit. Everyone is different, YMMV. Education is key. If you would hire a coach for exercise/strength training in a gym/fitness club, then I would highly recommend hiring a coach for real estate investment. As I stated elsewhere in comments, we went over the same material (and more) in 6 months with a coach that it took me 3 years to piece together on my own. Patience - We were not ready to actually purchase our first piece of property until almost 4 years after we started preparing. Preparations for us included making our credit report as beneficial to us as possible, learning about the responsibilities of being a landlord, learning about the job duties of a property manage (even though we sub that out, we still want to know what is appropriate and what is not), learning about negotiations (did you know you can include almost anything in a buy/sell contract? "We'll pay $x and this 320i BMW in return for that piece of property" is a deal I heard referred to by another real estate investment expert), learning about the legalities of business entities with respect to real estate ownership, and so on. Now we just save up for the next down payment, then start looking for the next deal. And although there are ways to get into deals without a large (or any) down payment, they usually require considerably more effort and time, and I have a service business to keep going. So we do it the more lazy/easy way, with cash and financing. Due diligence - It is better to walk away from a deal that I just can't make cash flow enough, than to get stuck with a poor/sub-performing investment. We walked away from quite a few deals, even though there were several I was relatively sure I could make work. On-site inspections have uncovered many potential gotchas that would have been financially painful. Some landlords extract the most profit out of an investment they can, and this can frequently result in much deferred maintenance, which can get very expensive very quickly. And like a start-up, you can only sustain a given burn rate for so long, before the deal crashes. Teamwork - Although I have been gifted with what intelligence I have, it is not a good thing if I am the smartest person on my team/in the room. We all have different strengths, and I am not good at everything, so I try to surround myself with teammates that provide those missing/weak areas I have, as well as mentors who have already gone down that road. Having a good property manager go over a property will help me identify concerns, see places for improvement, etc. Having a reliable contractor (I am still looking for my next one, last one wasn't a good fit for us) can keep me out of those large up-front costs. A knowledgeable attorney for real estate investment in the area I am investing in is very important - It would be terrible to build up a portfolio then lose it all because I did not adequately protect ourselves (entity + insurance + operating practices). Okay, enough. Sorry for the deluge, but I really _like_ the process of real estate investing.