December 3

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Beer Keg On My Roof

I hope everyone had a good Thanksgiving. Did you know Benjamin Franklin wanted the turkey as the National Bird? He admired the turkey, calling it a more respectable bird than the bald eagle, which he felt had "bad moral character."

Jesse has been watching the "Karate Kid" movie over and over. Now, he wants to try out karate for himself. We are checking it out on Monday. A free karate uniform and four lessons for $39! Not bad. I expect a significant increase in karate chops and flying tornado kicks.

Senay is back for Thanksgiving, and the Florida Gators are having one of their best seasons in years. She is really getting into the games! It brings back memories of when I attended Penn State games and froze my behind off.

My oldest son, Chris, also got into the holiday spirit and created his own twist on a Thanksgiving side dish, as you can see below. I am so thankful for my kids. They are four gifts from God. 


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

You can’t go wrong with real estate, right? Owning something tangible, something you can touch and feel, is reassuring. Mutual funds and stocks are just numbers on a piece of paper. How do you know they even really exist?

You can use it as a rental property, collecting cash all the while as the home appreciates. Awesome!

Let’s dive a little deeper. I’ve witnessed hundreds of real-world experiences in this area.

Example #1: Bob Dickle

Bob buys an investment property in Sarasota. He pays $500,000 for an older 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 monthly payment is $3,000. With an additional $800 for property taxes and insurance, the total cost is around $4,000 per month. Of course, you are still responsible for the HOA and other maintenance-related bills. That's at least another $500 a month.

The numbers don’t quite work out. Yes, the house will appreciate. Historically, homes have increased in value by about 4% per year. But, you might say, "This is Florida. Prices will keep skyrocketing." Are you really that confident? Real estate in Florida moves in cycles, often decades apart.

Also, while the mortgage is getting paid down over time, the first ten years 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. The numbers don't work.

Example #2 Tom Jones

Tom buys an investment property in a somewhat decent part of Bradenton for $400,000. It’s a 3/2 with 1300 square feet. Tom can pay cash, so he doesn’t have to worry about sky-high interest rates. After a couple of 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. He's making $2300 a month before taxes. But don't forget the opportunity cost. Had Tom invested that same money in the stock market, he could expect a 10% over the long run. 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. With the home, Tom has a cash flow of $2300 a month, and it's appreciating at 4% 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 all adds up to $3300 monthly after cash flow and home appreciation. Tom would be lucky to make $35,000 a year in the real world, similar to the stock market but with significantly more risk. And WAAAAAY more work.

I’m not sure why real estate is so attractive. I rarely see it work out well. Finding great deals is one thing if you are a real estate agent with close connections. If you are a professional real estate investor with several properties with 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.

You hear stories about people "hitting it big" when their property doubles in value during a black swan event like everyone moving to Florida during COVID-19. That may be true, but it very rarely happens and is impossible to predict.

Black Swan events happen in the stock market, too. 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 instead, 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 period over the past 100 years.
•It's liquid. You can take the money out and put it in your bank anytime. 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.

Not to mention the incredible hassle required to book stays, answer inquiries, and address immediate issues. If you say "no pets," they sneak in their pets. If you say, "no smoking," they smoke. If you say, "no parties," you find an empty keg on the roof.

I hope I didn’t upset any of your rental owners. I hope this situation is working out well for you. While I admit that real estate is not my area of expertise, I have spoken with many rental owners over the past twenty years, and their experiences tend to be very similar.

Be Blessed,

Dave

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