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Show#5 Millionaire or Bust – Real Estate

July 7th, 2006 · podcasts

Topic of the Week
This week we talk about real estate myths that people fall victim to.

Money Saving Tips
Money Saving Tip of the Week
Make sure you have the appropriate car & homeowner’s insurance. Have a reasonable deductible in order to have lower premiums, especially with older cars that you are more likely to want to replace anyway.
Talli’s Tightwad Tip of the Week
Going on vacation? Sign up for email notifications from discount travel sites. Often, you can get your flight and hotels for much cheaper than you could get them on your own. They have negotiated deals. Here are a couple sites we use:

Money Making Tip
If you have a large emergency fund, maybe putting a portion of it into a cd to earn a higher return on it is a good idea for you. (5 month cd 5.31%) (to check for rates)

Tool of the Week
Salvation Army donation valuation tool(value your donations appropriately)
Salvation Army

Financial Darwinism
These might sound common sense, but people do them…

People get emotional about investments. Then they buy high and sell low because they don’t have a strategy. Instead of picking good times to buy and sell, they buy when an investment is on fire and sell after it has fallen like a stone for a while. If you don’t know if you should be buying, you shouldn’t be because you’d be gambling. Instead get a yourself a financial adviser.

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1 response so far ↓

  • 1 David // Sep 26, 2006 at 7:58 am

    Here’s an excerpt of an email from a listener in the UK. I’ll just include the part that could be useful to you all.
    The audience you are speaking to will likely buy stock with all cash while they would buy an investment property with a loan (mortgage or trust deed securing the loan).

    Lets assume 20% down and an 80% loan. If the property does go up at 7% per year for 10 years then the stock market might look like a better investment. If one computes the cash on cash return (what I really earned on my capital and plus what I earned on the bank’s capital) the return would be much better for the RE investment. Clearly higher than the stock market. Leverage really does magnify the RE investment return while leverage is largely none existent for the average stock investor.

    RE and the stock market are generally pretty close to each other in terms of gross returns. RE is normally slightly lower. When you factor in leverage the RE investment will almost always beat the stock market. Rarely does anyone who invests active in the stock market notice.

    Why is this possible and yet a fair comparison? With RE you have an extra variable. A third party will step forward and pay the costs of the debt service (when you have a cash flow positive rental) where you can not really get someone to pay for a loan if you wanted to buy stock on margin. The level of leverage that is possible and yet is still conservative is much higher with RE compared to a margin account. A margin account for stock purchases is also marked to market daily so you can get a margin call. Lenders on RE do not revalue the asset securing the loan. You just need to keep the payments current and the lender will continue to be happy even if the asset’s value has changed.
    These are all great points that I wasn’t addressing in the show. Normally, I would just leave this type of information to a show that specializes in real estate, but since I did cover part of the story, I wanted to make sure these very good points were mentioned.

    If someone is securing the real estate with a loan and selling it again before paying it off, the returns here are most definitely correct. If you don’t they’d be somewhat lower, but still good assuming that the land appreciates at a faster clip than the interest rate on the property. Otherwise, you’d be experiencing an asset that was actually costing more than you paid for it, especially in a down real estate market where the real estate might actually be devaluing in real terms. I was also speaking more to people who hold nonrentals as investments, where they actually get nobody else to make their payments for them. Rentals make real estate a better idea, of course.

    These are all factors to consider though, not reasons why you should not hold real estate. The show should be looked at in the same light. The goal of this episode was to dissuade over enthusiasm in real estate, not discourage investment. Just go in with your eyes open and be prepared with how this type of investment might fit into your portfolio.

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