February 9


Concrete in My Toilet


Hello. I am Jesse. I am 12. my dad wanted me to write this.

What is your favorite food? Chocolate Poptarts.

What is your favorite thing to do? Play video games. I like fortnite and minecraft and third person shooters.

I like school but sometimes it gets boring. my desk can get really messy. i like math and rubix cubes. my favorite person is my mom. I like my dogs. desmond is cuter but hes getting fat. my cat hemi is also fat. my dad has been making me a lot of chocolate milkshakes. I also like to make frozen pizzas. my microwave is broken and it keeps burning my popcorn. my friend matt likes to hang out over here. we have sleepovers sometimes. he doesn't like too much sauce on his pizza. he likes to get away from his brothers. my dad and I have been watching the simpsons. it is funny. my mom wants me to exercise more. i don't like watching sports. my dad turns the internet off at night. desmond sleeps with me and cuddles me. i like to swim. i don't play an instrument. thats it.

(Above are some parrots in a tree in our yard.) -Dad

Warning: This newsletter may be controversial to many of my readers.

You can’t go wrong with real estate, right? It’s reassuring to own something tangible, something you can touch and feel.

You can use it as a rental property, collecting cash while the home appreciates in value. Awesome!
Let’s dive a little deeper. I’ve witnessed over twenty years of real-world experiences in this area.

Example #1: Bob Dickle

Bob buys an investment property in Sarasota. He pays $500,000 for a three-bedroom, two-bath, 1500-square-foot home. He needs to finance the property, and with today's rates, he’s looking at 8% interest. With 20% down, he needs to get a loan for $420,000. He thinks, I can refinance this when rates drop.

The payment is $3000 a month. Property taxes and insurance add another $800 a month. You’re looking at around $4000/month in rent in today’s market.

Of course, you are still responsible for the HOA and other maintenance-related bills. Let’s call that another $450 a month.

The numbers don’t quite work out. Yes, the house will appreciate in value. Historically, homes have increased in value by about 3% per year. But, as you might say, "This is Florida. Prices will keep skyrocketing." Are you really that confident?

Also, consider that the mortgage is getting paid down over time, but the first ten years or so are almost exclusively interest payments.

Even if you assume you don’t get a bad tenant and the place is rented 365 days a year, you’re just not going to make much money.

Example #2 Tom Jones

Tom buys an investment property in Bradenton (east of 75) for $400,000. It’s a 3/2 with 1500 square feet. Tom can pay cash, so he doesn’t have to worry about sky-high interest rates. After a few months of searching, he gets $3500 monthly rent.

Taxes, insurance, and bills are around $1000 a month. HOA is $200.

Not too bad, you might think. But remember the opportunity cost. Had Tom invested that same money in the stock market, he could expect a 10% return long term. So, that $400,000 could be making him $40,000 a year, or around $3300 a month.

The numbers don’t look as good now. Tom has a cash flow of $2800 a month, and the home is appreciating at 3% a year. But this is a perfect scenario. What about a new air conditioner? What if the water heater fails? Hurricane damage? And the worst-case scenario: a tenant who refuses to pay. Eviction takes months; meanwhile, they might flush concrete down the toilet.

This adds up to $3800 monthly after cash flow and home appreciation. In the real world, Tom would be lucky to make $40,000 a year, the same as the stock market but with significantly more risk.

I’m not sure why real estate is so attractive. I rarely see it work out well. If you are a real estate agent with close connection, finding great deals, that’s one thing. If you are a professional real estate investor with several properties and your own maintenance crews, that's another story.

Clients often tell me how successful their properties are, but when we actually crunch the numbers, their return on investment is 5% or less.

And you hear these stories about people "hitting it big" when their property doubled in value during some black swan event like everyone moving to Florida during COVID. That may be true, but it very rarely happens and is impossible to predict.

I could say the same about stock market investing. You can hit it big there, too. For the same amount of risk as a rental, you can hit it really really big.

If you invested $10,000 in 2004 in Apple, it would now be worth 5.1 million. At that point, if you had a rental it would need a new $30,000 roof.

Investing in stocks and bonds:

It's easy. You don’t have to fix a toilet at 2:00 A.M.
It's simple. All you do is click a few buttons, and the money starts working for you.
It's consistent. The markets have returned around 10% on average over any meaningful time period over the past 100 years.
It's liquid. You can take the money out and put it in your bank anytime you want. You definitely can’t do that if you own a house.

Here are some common objections to my views:

"Dave, I can write things off and depreciate my property."

Yes, but you must pay all those taxes back when you sell. Paying them all at once can hit you with a big tax bill, pushing you into a higher tax bracket. It might feel good up front, but you will end up paying more taxes overall.

"Dave, I’m making more money than that. I’m using my property as a short-term rental."

While this has worked recently, it hasn’t over the previous decades. Occupancy rates for short-term rentals have dropped from 70% to 58% in the past three years. Oversupply and legislative changes could be real dangers.

I hope I didn’t upset any of your rental owners out there. Maybe it is working out well for you. I will freely admit that real estate is not my expertise. But for over twenty years, I’ve talked to hundreds of rental owners and the story is almost always the same.

Be Blessed,


Share this Post:

You may also like

Investing in Tulips?
Can It Get Any Worse?