All-Cash Real Estate
Have you noticed lately that real estate investments aren’t being discussed as investment vehicles for the highly-leveraged; in fact, I think I’ve read more data about unleveraged real estate investments in the past two weeks than I have my whole life.
Back to Boring
When it comes to investing, those who do it best say boring is the way to go. Peter Lynch says the tenbagger stock should be as boring as possible, and unlikely to attract any speculative interest. Warren Buffett says buy only what you can understand, and for him, that generally means boring stocks.
But real estate, which is a mostly low-risk investment vehicle, is almost primed for excitement. Investors should almost crave leverage in this market, especially when rates are 5% and cap rates are 9-10%. Why not leverage up and go for it? Did investors learn their lesson?
Check out this article from the Wall Street Journal.
The article notes that all-cash buyers are having a heyday in the short-sale market, often walking away with homes discounted 10% from the asking price just because they had cash-in-hand. To banks, the availability of buyers is attractive with the sheer number of homes that sit in shadow inventory.
For investors, though, there is little cash on cash return. Without leverage, it is likely that property generate only a few percentage points over and above the rate of inflation assuming, of course, that there are tenants at all. On the upside, though, an unleveraged home is cash flow negative only when it is without a tenant, and only for the amount of the property taxes (roughly 1% per year, maybe?)
Back in Real Estate
My view is that there is no better investment than that of real estate. It is a long-term wealth builder, always (mostly) in demand, and it is limited in supply. The capitalization ratios are attractive, and provided that one is prudent enough with leverage, the possibility for long-term wealth creation is almost certain.
Of course, I’m not much for the idea of cash flow positive real estate. In many ways I think it to be a pipe dream, one that simply isn’t worth the risk, the leverage, or the time required to chase down a house. But hey, if that’s your kind of thing, you might like the 50/2 Rule for real estate investing. For the lazier investor, there’s always REITs, but I’m not a fan of their exposure to commercial property…not in the slightest!
