Real estate portfolio
This might be a very naive and stupid question but for those with a lot of experience in the real estate industry, why don’t you have a huge real estate portfolio or syndication portfolio like folks on bigger pockets? Do you feel that real estate is a great wealth generator?
Family has a small real estate portfolio and going into re so can try and take this. I don’t believe it is the great wealth generator of old. Real estate has enjoyed a period of lowering interest rates, compressing cap rates, continued rent growth, and compressed treasury yields for almost two decades now. I think this is what lead to it becoming a sort of retirement strategy for a lot of middle-class or wealthy people. This period is obviously over and right now, real estate probably looks less attractive than treasury bonds. Why would a retiree take the operational and financing risk of investing in real estate when they can make 5% in treasuries or invest in a near-bottomed stock market. Not to mention the cap rate expansion and correction occurring in the re private markets, with literally nothing penciling at the moment. If even the megafunds have basically paused acquisition activity with their scale, resources, expertise, and need to push capital out the door, not sure how it could be accretive in any way for a retiree or most individual investors to do so. The counter to this might be that institutional investors are mostly looking at large deals whereas investors typically look at things like sfr or small commercial deals with less competition and probably less reliance on leverage. But when you look at companies like Carlyle and Starwood who have made big pushes into this space, they’ve still struggled quite a bit.
That’s awesome, I’m trying to build a portfolio like your parents! So ironic, I’m actually under contract for my first house and I’m buying it from Amherst’s SFR company. My bosses, say this dip in the market is only going to be temporary, and we’ll see money flooding in after a recession.
I think this is answering a different question than OP is asking given they're referencing the BiggerPockets syndicators who are primarily buying SFH and small multifamily.
IBD24 is correct in terms of the current market for CRE - it has evolved from a wild west investing environment to become an institutional-quality asset class, and as such it is a lot harder to make substantial wealth in real estate than it used to be. The remaining paths as a true entrepreneur are being one of the lucky ones, pursuing a new/niche asset class, or focusing on development in a market that has limited institutional investment. Making it big in a major metropolitan is exceptionally prohibitive nowadays with the competition from large scale investment platforms.
But if you're asking about the BiggerPockets guys building portfolios of SFH, duplexes, triplexes, etc. I think its a two part answer. Part 1 is that this type of investing is and will continue to be profitable and smart if you can buy the real estate well. There's a huge constraint on housing supply in NA and in good markets pricing will only continue to rise in the long-term, and assuming you're not retiring in the near future you can ride out any downturns. That being said, the type of investment strategy has changed from what used to be focused on cash flow to now being focused more on long-term appreciation as housing prices have risen to the point that it is difficult to buy into an immediately cash flowing investment unless you're operating it as more of a hospitality asset through AirBnB or similar.
Part 2 of the answer is the reason that, despite this, less people are pursuing this path, and it is directly linked to #1. Real estate as an investment has become far more popular in recent decades, and compounded with the lack of new housing supply, has created considerable barriers to entry for new investors. It takes money to make money ,and particularly when it comes to buying housing where many investors tend to finance their next purchases through cash-out refis.
RE is still a great path to create wealth. It is just like it used to be, you just have to be the operator. If you invest in REITs and REPEs the fees will suck any excess value out of the room.
Do you think it will ever go back to an investment around cash flow?
Given the rise in interest rates, appreciation is not guaranteed so I think there may be a re-set. From an investment theory standpoint, if you have no real way of determining the exit value (terminal value), so then wouldn't you look to the cash flow to value the property?
Would love to hear some opinions on this.
RE will continue to be the long term wealth generator is has been in the past, just more slowly. Well, in the US and a few other places at least. Downward demographic trends globally will create huge problems that will drag everything down with it. If the US gets off its ass, sets up a logical immigration system, eases some unnecessary enviromental regulations, and steam rolls local complainers the RE market will be the best place to be as we need to completely reindustrialize. The best two markets will be RE and robotics/industrial tech.
However, what is most likely to happen? The idiot mobs will continue to whiplash the country from extreme to extreme on the policy side. Unions will continue to defend their outdated business models so immigration will continue to suffer and we will let in millions of low value, high cost individuals while keeping out high value low cost individuals. People will continue to protest industrial development (I am talking about real industry, not the industrial RE asset class) and we will likely miss the boat on the window of opportunity that is coming from the collapse of China and Russia. At the end of the day, India, if they can ever get over their myriad of problems, is likely to be the lead global superpower 50 - 100 years from now.
Or if we tell the children that run this country to sit down and shut up the US will continue to dominate the global system for the next 250+ years.
Just like the above poster, my family also has a RE portfolio. Although unlike biggerpockets, almost all our stuff is CRE. Regarding biggerpockets, most of that crowd is in SFR. I can tell you right now that SFR are the freaken worst. Not from a return profile, but from the amount of time I have to spend in it.
To put it in perspective, we have net leased retail centers, I maybe spend 2 hours a month of work on them. Mostly accounting related. We previously had 4 SFRs and holey crapp I wanted to get rid of them as fast as possible. Tenants destroy the properties, their dogs destroy the properties, something always seems to break. Mind you, these SFRs were in nice areas. Hell, one of our tenants was a well respected doctor, but his three kids and 2 dogs destroyed the place. In this example, the 5 years they stayed, we netted around $10K. Thats right. After 5 years we netted $10K total after factoring in the rehab we had to do. Not even worth it to take them to court, the state thinks landlords are the second coming to Satan. Spent $8K on legal fees one time trying to evict a tenant and he wasn't budging. You know how I got him out, I signed him up for a 6 month lease elsewhere and paid for it so he'd get out of here, even paid his moving costs.
SFR is easy to scale if you make it your full time job and build scale around you. You have to be super handy and be operational.
I'll add one last point, RE and CRE make you money, but I am guessing you're under the age of 30. If so, you experienced the biggest boom cycle of real estate in history due to mass money printing and constantly reduced interest rates. When I was helping my parents in the early 2000s, the returns were more balanced and they made sense. The reason why you see so many syndicators, tiktokers, biggerpocketers, etc. is because they are a byproduct of this period. They could literally buy any garbage over the past decade and it would appreciate, not to mention, Covid made the cycle even hotter. Everyone made money in RE, housewives with RE licenses were slinging tons of deals.
TLDR, RE is a phenomenal business, but do not take the past decade and think that can be replicated. Lots of people, especially the over leveraged ones will lose this cycle. I'm in the business as both a full-time job and due to my family business but I am honest with myself that things will get harder and worse. You can still invest in RE, but just make sound financial decisions and ignore the influencers.
^completely agree with the poster above. CRE is much better than SFR long term.
Think of all the AirBnBs on 80% LTV variable rate mortgages that are going to be/in the process of going under because they are no longer cash flowing. As soon as I started seeing people on tiktok tout "AirBnB arbitrage" a.k.a super leveraged, risky real estate investments I knew we were in a bubble.
Ozymandia I’d like to hear thoughts? Quite an interesting topic.
NO!! Why would you summon the devil!!
Because the devil is much better informed and much more eloquent in expressing that information than you?
I think a lot of people don't live in markets where it's feasible to build a portfolio (costs too high / too much competition), don't have the startup capital needed, and/or don't have the spare time to deal with self management.
What about SE markets like Raleigh-Durham (Triangle), Charlotte, Nashville, etc... where it is still relatively cheap compared to west coast and north east counter parts.
Sure, if that's where you're based, but a lot of people here live or aspire to live in very HCOL areas where a lot of the best jobs are. I live in a similarly cheap market and own some investment properties. I wouldn't be able to do it if I was in NYC/SF etc where the price per unit on multifamily is more than a nice SFH in most of the country.
As others mentioned the only real way to really make a lot of money in real estate on the ownership side is to be the operator, and that requires a significant amount of risk. You are putting a lot of capital on the line, often taking full-recourse loans, etc., and that level of risk is too high for most people. Life is all about the trade offs, I could either keep working for a company that pays me well, gives me a solid bonus, maybe offers some carry and matches my 401k contributions and end up retiring comfortably without having to take any real risk of my own capital, or I could liquidate my 401k and all my investments, strike out on my own, find capital partners and start my own thing, where you pretty much have three outcomes: you lose your shirt, you break even/scrape by, or do well enough to live large, and it's not evenly weighted. A lot of people just don't want to take the risk.
I don't know anything about biggerpockets, but building a huge real estate portfolio takes a lot of time and money. All of the influencer "real estate" "investors" seem to be flippers, people engaging in mortgage fraud, people who are way overleveraged, etc. As many others are saying, it was easy to be a real estate investor over the last 15 years or so.
If you want to build a sustainable real estate business, you either need a lot of money or a lot of specific knowledge. For example, maybe you self perform a lot of the work in your portfolio to keep costs down. Maybe you know how to build certain types of assets in certain markets that gives you a competitive advantage.
Real estate is a great wealth generator over the course of generations. Anyone telling you that they've made a ton of money from real estate over the course of a couple years was no more or less lucky than someone who made a ton of money on a hot streak at a casino
Thanks, what do you think will make the next 15 years different from the past that will greatly affect rents/ valuations? Is it simply credit will be a lot tighter in the future? What will be the next big opportunity then?
I mean, it is hard to imagine debt being as cheap as it has been the last decade, so that is the first difference. How that will affect the markets is a long and highly variable answer I won't get into, but different people will view it differently. I know PEarbitrage thinks we'll have double digit inflation for the foreseeable future, which I don't agree with, but he could be right. The people who will do well are the ones who call it correctly.
And if I knew the next big opportunity I'd be doing it now. I don't view real estate as a get rich quick game; I don't care about trying to identify the next "big thing" so I can front run it and make a huge multiple. I'd rather focus on something solid that will continue to have demand and which will appreciate in value over the coming decades - in my case, affordable MF. Hit a bunch of low-risk singles year after year instead of hoping for that home run which lets me skip a decade or two of capital accumulation
BiggerPockets is a circlejerk of losers trying to convince other losers they are wealthy. "I have a $5M net worth"* (*owns $5M of highly leveraged, dumpy single family homes and almost all of the equity was syndicated).
Investing in the small stuff is a lot of work and highly competitive. A good friend of mine did this in Chicago for several years. At the peak, probably owned 30ish units in good areas and ended up selling most of it. Made $1M+. He'll be the first to tell you he's not always sure it was worth it.
I'd much rather have promote interests in my firm's deals, promote interest in my own CRE deals, and LP interests in other operator's deals who I trust. Way more lucrative and way less bullshit.
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