IMO- James is the best financial advisor on You Tube! Clear and concise. Much appreciate all your effort making these important videos. I learn so much.
Thoroughly covered. Just retired. I would not advise getting into real estate at or near retirement. I've had a sizeable rental property portfolio for many years and my focus now is liquidation. What the key phrases in the video are "over time", "if you have cash", and "ride it out". I put nothing down on my properties and leveraged everything...2004 - 2007. Never intended to be long term, but had little choice than to ride it out. Real Estate to me is not "Investing" it's a business. And for me, being in business isn't retirement. My retirement plan is solely based on my retirement savings in traditional 401k and Roth. My real estate now is just icing that I hope to be rid of asap.
The 10% rate of return is always quoted, but it is inflated. As a rule you need to stay diversified, so most people don’t attain 10% in their total portfolio, and there is always downside risk. Rental property also has some risk, but over time is more consistent and has less downside risk. It is also a Great way to diversify. True there is slightly more work, but much of that can be farmed out for a small fee. The people I know with small rental portfolios do pretty well with them, and get a nice income stream, and an asset that can be sold if need be. What is different with real estate, is that it is regional, and certainly there are better and worse places to own it.
Thankful to have a commercial property with a 6 percent cap rate and no debt. The tenant pays all expenses including property taxes and insurance so it’s turnkey for us. It’s a nice diversifier.
I totally agree with your analysis on if it’s right for you or not. My good friend has his money in the s&p. I have mine in rentals. He looks at rentals like toilets breaking etc. I think of it like forced savings, if I were to own stocks I would be tempted to cash out and buy something I don’t need, or sell at the wrong time. Rentals have luckily kept me saving through out the years through the good and bad years. I have children I will be passing my properties to. My friend doesn’t and will be spending every penny he has until passing. It just really depends on your temperament. Great video James.
Good presentation. Upon retirement we hired a great property manager for our RE portfolio, really helped with peace of mind. We like the diversification real estate gives us for our retirement cashflow, tax benefits and estate planning but likely won’t be adding properties-unless you want to do a video on strategies after depreciation has run out. 😊
Thanks so much James. You answered all the doubts in my mind which I had for a very long time. I am glad that I didn't go for a real estate. I went with the stock market..!!!!
I could tell you had an anti-real estate bias when you began your extremely clinical breakdown of real estate’s returns. A property for investment should rent for .8 to 1 percent per month, to begin with, so $500k of real estate should earn rent of $4k to 5k per month. You trot out the Triple-T bugaboos of tenants, termites, and toilets; but discount using a property manager. And you attribute the stock market with a 10 percent annual gain, which smooths over (or ignores completely) Inflation, emotion, taxes, fees, and volatility, all of which reduce actual returns in the market. My real estate advice would be that someone should not to get into real estate at retirement. However, for someone assembling their portfolio, real estate is a must. As Andrew Carnegie said, “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” Beyond physical ownership, real estate is great because of all of the tax benefits and strategies. The government incentivizes everyone to hold and provide housing, just as it does to give to charity, buy an electric vehicle, or provide capital for oil and gas exploration. The tax code is a handbook of thousands of pages for paying less tax by engaging in activities the government wants to see. But real estate investing requires financial advisors who have awareness and a working knowledge of these tax strategies. Recently, I took the CFP retirement planning course. The “value for retirement” of an $800k piece of real estate was calculated by subtracting selling expenses, depreciation recapture, and taxes, in order to leave $527k to throw into the stock market meat grinder. My first thought would have been to 1031 into a triple-net lease with one of those businesses you described walking by (Chipotle, CVS, etc.). But, even if you wanted out of real estate entirely, there are such better and more tax efficient ways to do it. In the last week, I listened to a podcast from a lawyer and CPA describing the Charitable Remainder Trust. A CRT would allow you to sell the piece of property, take a charitable donation, pay no taxes or depreciation recapture, control the use of the proceeds after the sale, generate and receive cash flow from the property sale proceeds for the rest of your life, obtain life insurance in an irrevocable trust for the heirs to replace the “loss” of that property value in the future estate, and have the charity that ultimately receives the charitable remainder be your own family foundation. It’s never too late to start in real estate-I bought my first investment property at 50. But, you must have a passion for it, and it’s essential to build a team of financial, accounting, and legal advisers who are familiar with real estate strategies.
Here is higher calculation of the returns available from real estate, and still using no trusts, self-directed Roth IRAs, or other features that can improve the outcomes (assets controlled and not surrendered) even further. th-cam.com/video/fHAJaneFqE0/w-d-xo.html
Good thoughts, thank you. The video you linked to is way off base. I think it showed returns of 71% when you add up the 5 different return components he listed. I’d encourage you to see if that passes the high level “sniff test” to see if the analysis is sound. In this example he used the $50k equity investment in the Memphis property would grow to $10.7M after 10 years if it grows by 71% per year. I see where his assumptions are off, but it’s very clear to see this analysis is wrong when you run the numbers.
@@RootFP Keith has been running an awesome weekly podcast for years, but I shouldn't have linked his video without more careful review. Especially so, since I would have preferred you responded to my points rather than his. My main concern, as I'm taking the CFP classes, is where and how do the CFPs overlap their planning expertise with the supercharging power of advice from the lawyer and the CPA on different asset structures and strategies? Personally, having acquired all the real estate I want to handle myself, I'm moving up to syndications: taking limited partner positions in apartment complexes that are under construction, at lease-up, or in need of rehab. I can even use my IRAs, now that I'm freeing those accounts from the Wall Street stock pushers who spend millions to advertise their copycat offerings in mass-market financial publications.
I was executor for my mom's estate. It was a nightmare as there was property that was under lease, so had to break the lease to sell the property in the estate. That cost $$$. If she had owned stocks instead, could have disposed of the stocks in a day. So may want to think about the heirs when owning property. Plus it creates a lot of bad feelings as there are those who will always say "we could have gotten more for the property".
Good basic rundown I would just clarify a few points. NOI does not equal cash flow and needs to be further diluted for capex investment which is what depreciation is basically compensating you for over time as improvements degrade (roof, paint, flooring, appliances, etc.). Depreciation is taxed on sale (recapture) so it is really just a time value of money benefit. Yes you can defer it with 1031 exchange under current tax law but eventually you repay it. Private real estate offers more opportunity for alpha for savvy operators but as highlighted it comes with increased risk and hassle factor.
I understood awhile ago that I did not have the patience and time for owning and maintaining real estate. I still like the asset class but decided that REITs were a better fit for me in my portfolio.
Great point. The problem with REITS is if they are held in a taxable account, they can be kind of tax burdensome since most of the income is passed through.
@@treesnmoguls Agreed, I hold some in my Roth and Rollover IRA's only. Some would argue that Roth should only be for growth assets but I like to have some bonds and REITs in my Roth just for generating income if I need it tax free. 🙂
Excellent analysis! Been watching your channel. What you said at 12:00 is totally true, as is what you talked about at 13:30. I would caution the standard "diversify your assets" really cannot be used as a hard switch without thinking through it. For example, you live in SD, let's say Del Mar. You have a chance to buy more property in Del Mar and you think, "hmmm, diversify my assets. I better not." Well, as you know, Del Mar is GOLD and you would probably make more LT by having that property in Del Mar than one in Phoenix and one in Albany for the same amount of money. Also, I lived in a foreign country that devalued their money. With the way the Biden Administration - heck really BOTH PARTIES - but especially this guy, is printing money, fixed assets will protect against demonetization that is and could happen. (Oil in Yen, anyone?) . You mention the downturn of 2004. Or 2008, or whatever year. Home values have recovered everywhere and those years are but blips. Thanks again for your videos you are one of the best.
Short-term rental property is another option to consider. I am not a fan of debt so we buy with cash, thus we don’t get the benefits of leverage, but we also have eliminated much of the risk. Short-terms require more involvement than with long-term rentals, but the returns can be much greater, and there are other benefits, such as meeting many new people and not having to deal with evictions or leases. We have a lake cottage that we use as a Vrbo/Airbnb short-term rental, it easily returns a CAP rate of nearly 20% and with it being a lake cottage the appreciation is almost always greater than most other real estate, because last I checked they aren’t making any more lakes.
Another well explained video. I will be retiring at the end of September, I'm 64 and taking the lump sum option and rolling it over to my existing 401K which will be close to $960K. We have a condo and will be selling it very soon, our current balance/mortgage is right at $200K, it will be listed for $435K which is very fare price, here in this part of SE Michigan. We will net after expenses around $187K. This sounds crazy but we will be purchasing a new manufactured home for cash, and will only have a lot rent of $525 a month and other basics. We no longer need a mortgage or a large home, I rather not touch my 401K, IRA, etc., or pull my SS right now and let it all grown. This will give us the freedom to travel in our coach.
The cost to liquidate an assett has to be factored into the comparison. In the example of the 500k home appreciating to 550k / 10% you still have to liquidate the real estate at a cost of approximately 6%.(sellers commission plus closing cost) Plus selling a piece of real estate that was used as a rental will be very taxiing due to the recapture of the depreciation which can lower your cost basis even further than what you paid for it.
I really liked this video but wish you'd contined with the percentage example comparison. You got to 9% for appreciation and income but then didn't provide the leverage and depreciation as an example percentage and wrap it up altogether to compare with the stock markets historical 10%.
I can remember when cap rates were MUCH HIGHER (when interest rates were much higher, LOL!). With a cap of 5%, your overall return in the short run can turn negative more readily than if it were 12%. If long term interest rates continue to go higher, cap rates will have to move higher as well, putting downward pressure on equity. If you are anywhere near retirement, I would not invest here, just my $0.02!
I don't know in the US, but I am not a fan of real state investments in my country, although many love it here as there is a low financial culture and it always has been the paradigm of a tangible asset and of a value reservoir against inflation. My reasons: I find real state extremely illiquid, needs oversight work, you don't always have it rented (bad assumptions are made by many people when doing the math here), fixed costs you cannot lower and many unforeseeable hidden costs, difficult to diversify unless you participate in a 'Listed Corporations for Investing in the Real Estate Market' (is this the term in English?), squatters, etc. As everything, there are ways to invest indirectly on real state owning stock of related companies, and the best thing is to be diversified in many different sectors.
I would not do real estate personally 1. I don't want no more work my career is enough 2. I'm not good at fixing things and I would have to pay for everything making it very expensive 3. I don't trust people and I couldn't stand to be a landlord. 4. My tax breaks in my 401k are appealing to me and I want zero other income in retirement. But I can respect someone that can do the job of being a landlord and like it. I do find that some people don't be honest about their expenses when they talk about being a landlord, sometimes they try to sell it to other people as the way to invest for everybody and I think it takes a special kind of person that's into that type of thing
I listened to the maintenance guy at the complex I live in, and after the story he told of what someone did in the water tank of the toilet, I have zero interest in renting property. Enough headaches in life as it is.
Real estate is a reliable vehicle for wealth accumulation but only if an investor is in for the long term ie 5+ years. However owning a portfolio of rental properties is not usually effort/stress free. I think most retirees would not be looking for this during their retirement years. Nonetheless up here (in Ontario) there is a boomer cohort of reirees that are involved in RE sales. Many retiring RE investors will want to liquidate their holdings in the first few years after retirement (ie when they no longer have working income as our progressive tax rates are brutal). This is especially valid if this enables them to delay registering for CPP/OAS (our government benefits) and/or delay dipping into retirement savings vehicles (RRSP/LIRA). James, you have fans north of the border. Almost all the concepts you speak to are portable to "THE GREAT WHITE NORTH".
I have no interest in real estate. I already own my home and that's half my net worth right now at 33! Even if it eventually becomes 20-25% of my net worth that is plenty, I'll put the rest in 500 different companies. Besides, then government LOVES to mess with housing since it is something everyone needs. I'd hate to have housing prices plummet because housing is somehow suddenly more subsidized by some new law.
IMO- James is the best financial advisor on You Tube!
Clear and concise.
Much appreciate all your effort making these important videos. I learn so much.
Definitely one of the best if not the best
Thank you!
Thoroughly covered. Just retired. I would not advise getting into real estate at or near retirement. I've had a sizeable rental property portfolio for many years and my focus now is liquidation. What the key phrases in the video are "over time", "if you have cash", and "ride it out". I put nothing down on my properties and leveraged everything...2004 - 2007. Never intended to be long term, but had little choice than to ride it out. Real Estate to me is not "Investing" it's a business. And for me, being in business isn't retirement. My retirement plan is solely based on my retirement savings in traditional 401k and Roth. My real estate now is just icing that I hope to be rid of asap.
Good feedback. Thanks, Ted.
The 10% rate of return is always quoted, but it is inflated. As a rule you need to stay diversified, so most people don’t attain 10% in their total portfolio, and there is always downside risk.
Rental property also has some risk, but over time is more consistent and has less downside risk. It is also a Great way to diversify. True there is slightly more work, but much of that can be farmed out for a small fee.
The people I know with small rental portfolios do pretty well with them, and get a nice income stream, and an asset that can be sold if need be.
What is different with real estate, is that it is regional, and certainly there are better and worse places to own it.
I like real state. Planning on retiring early (57) and live from my rentals while applying for SS.
Thankful to have a commercial property with a 6 percent cap rate and no debt. The tenant pays all expenses including property taxes and insurance so it’s turnkey for us. It’s a nice diversifier.
I totally agree with your analysis on if it’s right for you or not. My good friend has his money in the s&p. I have mine in rentals. He looks at rentals like toilets breaking etc. I think of it like forced savings, if I were to own stocks I would be tempted to cash out and buy something I don’t need, or sell at the wrong time. Rentals have luckily kept me saving through out the years through the good and bad years. I have children I will be passing my properties to. My friend doesn’t and will be spending every penny he has until passing. It just really depends on your temperament. Great video James.
Thank you!
A true unbiased comparison, always appreciated👍
Thank you, Lucas
Good presentation. Upon retirement we hired a great property manager for our RE portfolio, really helped with peace of mind. We like the diversification real estate gives us for our retirement cashflow, tax benefits and estate planning but likely won’t be adding properties-unless you want to do a video on strategies after depreciation has run out. 😊
Thanks so much James. You answered all the doubts in my mind which I had for a very long time. I am glad that I didn't go for a real estate. I went with the stock market..!!!!
Excellent video thank you for sharing this information, James!
You’re welcome!
I'm planning on retiring when my kids finish college.
I could tell you had an anti-real estate bias when you began your extremely clinical breakdown of real estate’s returns. A property for investment should rent for .8 to 1 percent per month, to begin with, so $500k of real estate should earn rent of $4k to 5k per month. You trot out the Triple-T bugaboos of tenants, termites, and toilets; but discount using a property manager. And you attribute the stock market with a 10 percent annual gain, which smooths over (or ignores completely) Inflation, emotion, taxes, fees, and volatility, all of which reduce actual returns in the market. My real estate advice would be that someone should not to get into real estate at retirement. However, for someone assembling their portfolio, real estate is a must. As Andrew Carnegie said, “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” Beyond physical ownership, real estate is great because of all of the tax benefits and strategies. The government incentivizes everyone to hold and provide housing, just as it does to give to charity, buy an electric vehicle, or provide capital for oil and gas exploration. The tax code is a handbook of thousands of pages for paying less tax by engaging in activities the government wants to see. But real estate investing requires financial advisors who have awareness and a working knowledge of these tax strategies. Recently, I took the CFP retirement planning course. The “value for retirement” of an $800k piece of real estate was calculated by subtracting selling expenses, depreciation recapture, and taxes, in order to leave $527k to throw into the stock market meat grinder. My first thought would have been to 1031 into a triple-net lease with one of those businesses you described walking by (Chipotle, CVS, etc.). But, even if you wanted out of real estate entirely, there are such better and more tax efficient ways to do it. In the last week, I listened to a podcast from a lawyer and CPA describing the Charitable Remainder Trust. A CRT would allow you to sell the piece of property, take a charitable donation, pay no taxes or depreciation recapture, control the use of the proceeds after the sale, generate and receive cash flow from the property sale proceeds for the rest of your life, obtain life insurance in an irrevocable trust for the heirs to replace the “loss” of that property value in the future estate, and have the charity that ultimately receives the charitable remainder be your own family foundation. It’s never too late to start in real estate-I bought my first investment property at 50. But, you must have a passion for it, and it’s essential to build a team of financial, accounting, and legal advisers who are familiar with real estate strategies.
Here is higher calculation of the returns available from real estate, and still using no trusts, self-directed Roth IRAs, or other features that can improve the outcomes (assets controlled and not surrendered) even further. th-cam.com/video/fHAJaneFqE0/w-d-xo.html
Good thoughts, thank you. The video you linked to is way off base. I think it showed returns of 71% when you add up the 5 different return components he listed. I’d encourage you to see if that passes the high level “sniff test” to see if the analysis is sound. In this example he used the $50k equity investment in the Memphis property would grow to $10.7M after 10 years if it grows by 71% per year. I see where his assumptions are off, but it’s very clear to see this analysis is wrong when you run the numbers.
@@RootFP Keith has been running an awesome weekly podcast for years, but I shouldn't have linked his video without more careful review. Especially so, since I would have preferred you responded to my points rather than his. My main concern, as I'm taking the CFP classes, is where and how do the CFPs overlap their planning expertise with the supercharging power of advice from the lawyer and the CPA on different asset structures and strategies? Personally, having acquired all the real estate I want to handle myself, I'm moving up to syndications: taking limited partner positions in apartment complexes that are under construction, at lease-up, or in need of rehab. I can even use my IRAs, now that I'm freeing those accounts from the Wall Street stock pushers who spend millions to advertise their copycat offerings in mass-market financial publications.
I was executor for my mom's estate. It was a nightmare as there was property that was under lease, so had to break the lease to sell the property in the estate. That cost $$$. If she had owned stocks instead, could have disposed of the stocks in a day. So may want to think about the heirs when owning property. Plus it creates a lot of bad feelings as there are those who will always say "we could have gotten more for the property".
Plus no cost to liqueat stocks vs the 5to6% commission plus closing cost to liquidate real estate.
Excellent advice. Thanks!
You’re welcome!
Great video man. It doesn't have to be either, or though
Good basic rundown I would just clarify a few points. NOI does not equal cash flow and needs to be further diluted for capex investment which is what depreciation is basically compensating you for over time as improvements degrade (roof, paint, flooring, appliances, etc.). Depreciation is taxed on sale (recapture) so it is really just a time value of money benefit. Yes you can defer it with 1031 exchange under current tax law but eventually you repay it. Private real estate offers more opportunity for alpha for savvy operators but as highlighted it comes with increased risk and hassle factor.
I understood awhile ago that I did not have the patience and time for owning and maintaining real estate. I still like the asset class but decided that REITs were a better fit for me in my portfolio.
Great point. The problem with REITS is if they are held in a taxable account, they can be kind of tax burdensome since most of the income is passed through.
@@treesnmoguls Agreed, I hold some in my Roth and Rollover IRA's only. Some would argue that Roth should only be for growth assets but I like to have some bonds and REITs in my Roth just for generating income if I need it tax free. 🙂
Excellent analysis! Been watching your channel. What you said at 12:00 is totally true, as is what you talked about at 13:30. I would caution the standard "diversify your assets" really cannot be used as a hard switch without thinking through it. For example, you live in SD, let's say Del Mar. You have a chance to buy more property in Del Mar and you think, "hmmm, diversify my assets. I better not." Well, as you know, Del Mar is GOLD and you would probably make more LT by having that property in Del Mar than one in Phoenix and one in Albany for the same amount of money. Also, I lived in a foreign country that devalued their money. With the way the Biden Administration - heck really BOTH PARTIES - but especially this guy, is printing money, fixed assets will protect against demonetization that is and could happen. (Oil in Yen, anyone?) . You mention the downturn of 2004. Or 2008, or whatever year. Home values have recovered everywhere and those years are but blips. Thanks again for your videos you are one of the best.
Short-term rental property is another option to consider. I am not a fan of debt so we buy with cash, thus we don’t get the benefits of leverage, but we also have eliminated much of the risk. Short-terms require more involvement than with long-term rentals, but the returns can be much greater, and there are other benefits, such as meeting many new people and not having to deal with evictions or leases. We have a lake cottage that we use as a Vrbo/Airbnb short-term rental, it easily returns a CAP rate of nearly 20% and with it being a lake cottage the appreciation is almost always greater than most other real estate, because last I checked they aren’t making any more lakes.
Yes, short term rentals will look a little different than this example I used
Another well explained video. I will be retiring at the end of September, I'm 64 and taking the lump sum option and rolling it over to my existing 401K which will be close to $960K. We have a condo and will be selling it very soon, our current balance/mortgage is right at $200K, it will be listed for $435K which is very fare price, here in this part of SE Michigan. We will net after expenses around $187K. This sounds crazy but we will be purchasing a new manufactured home for cash, and will only have a lot rent of $525 a month and other basics. We no longer need a mortgage or a large home, I rather not touch my 401K, IRA, etc., or pull my SS right now and let it all grown. This will give us the freedom to travel in our coach.
Thank you
The cost to liquidate an assett has to be factored into the comparison.
In the example of the 500k home appreciating to 550k / 10% you still have to liquidate the real estate at a cost of approximately 6%.(sellers commission plus closing cost)
Plus selling a piece of real estate that was used as a rental will be very taxiing due to the recapture of the depreciation which can lower your cost basis even further than what you paid for it.
Good points
did you mention that s&p is more like 6%?
I really liked this video but wish you'd contined with the percentage example comparison. You got to 9% for appreciation and income but then didn't provide the leverage and depreciation as an example percentage and wrap it up altogether to compare with the stock markets historical 10%.
I can remember when cap rates were MUCH HIGHER (when interest rates were much higher, LOL!). With a cap of 5%, your overall return in the short run can turn negative more readily than if it were 12%. If long term interest rates continue to go higher, cap rates will have to move higher as well, putting downward pressure on equity. If you are anywhere near retirement, I would not invest here, just my $0.02!
Good feedback
I don't know in the US, but I am not a fan of real state investments in my country, although many love it here as there is a low financial culture and it always has been the paradigm of a tangible asset and of a value reservoir against inflation. My reasons: I find real state extremely illiquid, needs oversight work, you don't always have it rented (bad assumptions are made by many people when doing the math here), fixed costs you cannot lower and many unforeseeable hidden costs, difficult to diversify unless you participate in a 'Listed Corporations for Investing in the Real Estate Market' (is this the term in English?), squatters, etc. As everything, there are ways to invest indirectly on real state owning stock of related companies, and the best thing is to be diversified in many different sectors.
I would not do real estate personally
1. I don't want no more work my career is enough
2. I'm not good at fixing things and I would have to pay for everything making it very expensive
3. I don't trust people and I couldn't stand to be a landlord.
4. My tax breaks in my 401k are appealing to me and I want zero other income in retirement.
But I can respect someone that can do the job of being a landlord and like it. I do find that some people don't be honest about their expenses when they talk about being a landlord, sometimes they try to sell it to other people as the way to invest for everybody and I think it takes a special kind of person that's into that type of thing
I listened to the maintenance guy at the complex I live in, and after the story he told of what someone did in the water tank of the toilet, I have zero interest in renting property. Enough headaches in life as it is.
Real estate is a reliable vehicle for wealth accumulation but only if an investor is in for the long term ie 5+ years. However owning a portfolio of rental properties is not usually effort/stress free. I think most retirees would not be looking for this during their retirement years. Nonetheless up here (in Ontario) there is a boomer cohort of reirees that are involved in RE sales. Many retiring RE investors will want to liquidate their holdings in the first few years after retirement (ie when they no longer have working income as our progressive tax rates are brutal). This is especially valid if this enables them to delay registering for CPP/OAS (our government benefits) and/or delay dipping into retirement savings vehicles (RRSP/LIRA). James, you have fans north of the border. Almost all the concepts you speak to are portable to "THE GREAT WHITE NORTH".
Thanks Ken!
I have no interest in real estate. I already own my home and that's half my net worth right now at 33! Even if it eventually becomes 20-25% of my net worth that is plenty, I'll put the rest in 500 different companies. Besides, then government LOVES to mess with housing since it is something everyone needs. I'd hate to have housing prices plummet because housing is somehow suddenly more subsidized by some new law.
LIke all CFP''s...advise against real estate because he clearly doesn't understand the power of rental real estate done right
You look too young to be a financial advisor. I love real estate. My home has increased four times in value.
He's too young