4 ms·

Why is it, exactly, that, as a rule of thumb, almost all people who start life poor and end up rich do it with real estate.

splike 7y ago
Where might I learn why that is?
- deleted 7y ago
  [deleted]
gryn 7y ago
Where do you recommend looking to learn more about this ?
icebraining 7y ago
Simple: it's one of the four monopolies. https://en.wikipedia.org/wiki/Benjamin_Tucker#Four_monopolies https://en.wikipedia.org/wiki/Benjamin_Tucker#Four_monopolie...
omarhaneef 7y ago
Because it’s really the only place where a non-rich person can get massive 4:1 leverage on their assets, and where there has been a secular growth trend over the last 50 years.
- H8crilA 7y ago
  This. Never underestimate the power of leverage combined with luck (good asset selection, which almost always is luck). TQQQ, a NASDAQ 3x leveraged ETF is up almost 50x since 2010. Real estate has insane leverage via mortgage. 10% downpayment results in a 10x leverage, 5% downpayment is a 20x leverage. Imagine a house that was purchased at 10% downpayment. A 2x (+100%) house value appreciation gives you a 11x (+1000%) return on that 10% downpayment.
  - BeetleB 7y ago
    > Imagine a house that was purchased at 10% downpayment. A 2x (+100%) house value appreciation gives you a 11x (+1000%) return on that 10% downpayment. A 2x appreciation is probably something 95+% of houses will never get to in a decent amount of time. As a benchmark, the S&P 500 tends to double every 10 years after adjusting for inflation. Not many houses do that. Yes, there are always markets where this happens, but it's not the norm and is pretty much a speculation game like stocks are. Of course, taking leverage into account you don't need it to appreciate 2x. With a 10% downpayment you just need it to appreciate about 9-10% to double your investment (probably more than 10% to make up for all the fees you'll pay). And don't forget to subtract all the interest payments you made while you wait for it to appreciate. Factor that in your ROI. Most of the gains in real estate these days is finding crappy houses that you cannot get a bank loan for. So you buy it at a big discount if you have the funds, or you get a private loan at high interest. Spend 3-6 months bringing the house up to code and then refinance to rent or sell (i.e. flip).
barrkel 7y ago
That's mostly down to financialization of the economy in recent decades combined with low interest rates. Financialization generally reduces risk (when done properly) and increases the mobility of capital both across borders and over time. Reduced risk and higher capital availability means more loans. That has enabled people to put down more money today on the basis of future income streams, which has inflated asset prices, and asset price inflation encourages more people to buy as an "investment". This goes around in a loop until interest rates go up or bad debts come due. I wouldn't bet on asset price appreciation being a reliable route to wealth any more without an information or leverage edge, like planning decisions, political and regulation shifts, etc. which have long-term effects that result in net present value asset price changes. Sometimes the edge is basically corruption, but sometimes it's bets based on trends.
gizmo 7y ago
Essentially every real estate business is the same. Buy cheap; fix up; sell with profit. As a consequence it's not so intimidating, and you only need street smarts to succeed. People who want to start a business but who have no unique skills tend to start generic businesses where you can follow a known business model, like restaurants, coffee shops, and real estate. Since you can't make money with the first two it should be no surprise that real estate is the visible outlier. Buy low, sell high, and you get leverage provided to you by a bank. It shouldn't surprise anybody that it's an easy source of wealth! There are also poor people who get rich with a carpet cleaning or cement delivery business, but they have to overcome challenges unique to their situation. So every success story looks like an irreplicable outlier.
rb808 7y ago
Only since the 70s when inflation was killed and interest rates started tumbling. The next 50 years wont be so kind, a lot of people will go back to poor.

splike 7y ago

Where might I learn why that is?

deleted 7y ago
[deleted]

gryn 7y ago

Where do you recommend looking to learn more about this ?

icebraining 7y ago

Simple: it's one of the four monopolies. https://en.wikipedia.org/wiki/Benjamin_Tucker#Four_monopolies https://en.wikipedia.org/wiki/Benjamin_Tucker#Four_monopolie...

omarhaneef 7y ago

Because it’s really the only place where a non-rich person can get massive 4:1 leverage on their assets, and where there has been a secular growth trend over the last 50 years.

H8crilA 7y ago
This. Never underestimate the power of leverage combined with luck (good asset selection, which almost always is luck). TQQQ, a NASDAQ 3x leveraged ETF is up almost 50x since 2010. Real estate has insane leverage via mortgage. 10% downpayment results in a 10x leverage, 5% downpayment is a 20x leverage. Imagine a house that was purchased at 10% downpayment. A 2x (+100%) house value appreciation gives you a 11x (+1000%) return on that 10% downpayment.
- BeetleB 7y ago
  > Imagine a house that was purchased at 10% downpayment. A 2x (+100%) house value appreciation gives you a 11x (+1000%) return on that 10% downpayment. A 2x appreciation is probably something 95+% of houses will never get to in a decent amount of time. As a benchmark, the S&P 500 tends to double every 10 years after adjusting for inflation. Not many houses do that. Yes, there are always markets where this happens, but it's not the norm and is pretty much a speculation game like stocks are. Of course, taking leverage into account you don't need it to appreciate 2x. With a 10% downpayment you just need it to appreciate about 9-10% to double your investment (probably more than 10% to make up for all the fees you'll pay). And don't forget to subtract all the interest payments you made while you wait for it to appreciate. Factor that in your ROI. Most of the gains in real estate these days is finding crappy houses that you cannot get a bank loan for. So you buy it at a big discount if you have the funds, or you get a private loan at high interest. Spend 3-6 months bringing the house up to code and then refinance to rent or sell (i.e. flip).

barrkel 7y ago

That's mostly down to financialization of the economy in recent decades combined with low interest rates. Financialization generally reduces risk (when done properly) and increases the mobility of capital both across borders and over time. Reduced risk and higher capital availability means more loans. That has enabled people to put down more money today on the basis of future income streams, which has inflated asset prices, and asset price inflation encourages more people to buy as an "investment". This goes around in a loop until interest rates go up or bad debts come due. I wouldn't bet on asset price appreciation being a reliable route to wealth any more without an information or leverage edge, like planning decisions, political and regulation shifts, etc. which have long-term effects that result in net present value asset price changes. Sometimes the edge is basically corruption, but sometimes it's bets based on trends.

gizmo 7y ago

Essentially every real estate business is the same. Buy cheap; fix up; sell with profit. As a consequence it's not so intimidating, and you only need street smarts to succeed. People who want to start a business but who have no unique skills tend to start generic businesses where you can follow a known business model, like restaurants, coffee shops, and real estate. Since you can't make money with the first two it should be no surprise that real estate is the visible outlier. Buy low, sell high, and you get leverage provided to you by a bank. It shouldn't surprise anybody that it's an easy source of wealth! There are also poor people who get rich with a carpet cleaning or cement delivery business, but they have to overcome challenges unique to their situation. So every success story looks like an irreplicable outlier.

rb808 7y ago

Only since the 70s when inflation was killed and interest rates started tumbling. The next 50 years wont be so kind, a lot of people will go back to poor.