Ep # 48: Is Real Estate A Good Investment?

Benjamin Haas |


  • Our views on your primary residence as an investment - 1:53
  • Using real estate to make money - 4:07
  • Thinking about your liquidity needs - 7:12
  • Using real estate to diversify your investments? - 9:33
  • Historical facts on home appreciation - 11:35
  • Qualification process for a second property - 14:30

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Full Transcript:

Benjamin Haas  00:02

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Welcome back, Adam. How are you today?


Adam Werner  00:29

Fine and dandy. How about yourself?


Benjamin Haas  00:31

Good. Big weekend plans for you I hope. Holiday weekend?


Adam Werner  00:36

Yes. Do you want me to elaborate?


Benjamin Haas  00:39

You're going to share, like what?


Adam Werner  00:41

No, big plans, not going to share them. Thanks for asking. Saturday, Sunday, both days. Final races of the point season for myself, Ava, and my dad. So we'll see how it all shakes out.


Benjamin Haas  00:56

Very good. Hopefully, good weather for a little picnic on our end but otherwise, abruptly got back into school. So maybe it'll feel good to have a long weekend not doing much. Yeah, my kids are already looking forward to a long weekend after. Just try to enjoy our real estate and segue. Today's topic, A/B conversations. We will often get a question from, you know, through the financial planning process, is real estate a good investment? We live in, we work in a college town here where there's a bunch of people we run into who own another property based on rental units. So it's not uncommon for us to have that and thought it'd be a good conversation today. So I'll throw it to you, the question we get is real estate a good investment?


Adam Werner  01:53

And that is such a loaded question. It's usually met with a well, let's talk about it, it depends. Let's talk about some pros and cons and I think my initial thought was, let's just start ground floor for anyone who's thinking of their primary residence as a potential investment. We certainly don't view it that way from an investment standpoint, it either needs to appreciate to some level that at some point, you're going to, quote unquote, cash out, or it's generating some sort of income, dividends, interest, rental payments, whatever that may look like. So from a primary residence standpoint, we certainly don't view that as an investment per se. I'll maybe throw out a compliance curse word of a reverse mortgage. I'm sure there are a lot of people that have heard of those or how that may play a role. But other than that, and that can be its own thing. Yeah, we really don't see your personal home being an investment in your future.


Benjamin Haas  03:03

Yeah, totally agree. Most people would mortgage that property anyway. So you're probably paying a little extra than the value of the home over time. The only other time your primary residence comes into focus with us, we work with a lot of retirees and at some point, there are those that go, gee, maintaining this property, having these three extra bedrooms when the kids are gone, downsizing might be a thing. And if that allows you to exchange one thing of greater value for something of lesser value, then maybe the difference becomes a part of a financial plan but yeah, totally with you. The home is a roof over your head, it's a place to squat, raise a family, call your own. It is the American dream or what I should say, it’s not really an investment so let's just let's put a pin in that and then we'll jump forward. I think the nature of the question really more commonly to us is, hey, is this another way for me to try to make some money?


Adam Werner  04:07

Yeah, and then that certainly goes down the road of now, multiple properties or at least a secondary property that is hopefully a rental. Whether that's residential, a vacation property, or something that feels like it has investment potential, or at least that's the idea, right? I'm going to buy this property, rent it out, I'm going to get some income, and that is my return on investment. And often what we see is, it's not always that straightforward. There are a lot of variables when it comes to owning a property that are completely different than owning a stock or a bond or an investment in the market.


Benjamin Haas  04:49

Yeah, like plunging toilets and getting phone calls in the middle of the night because something's not working and guess what, you own it.


Adam Werner  04:58

Yeah, Warren Buffett hasn't call me up in the middle of the night to come plunge the S&P 500 yet?


Benjamin Haas  05:05

Well, yeah, some days It feels like that but anyway, the point being I think property management, that's the first question. How passive is this as an investment versus what is your active role? Most people that we would see as really into investment management, it's a job. They own multiple of them but that means they are probably the general contractor; they are probably a little bit of the electrician. It is blood, sweat, and tears that go into that as a job, which I would put it there, that's the way they earn income. That's different than passive investing. I don't have to do anything other than save when I'm trying to make money with my own financial plan.


Adam Werner  05:49

Yeah, and so the other side of that is, if you're not necessarily that do it yourselfer, and the one who's handyman and maintenance and everything that goes into the physical caring of the property, if the tenants are not going to be fully responsible, then farming that out to professionals that can do that is certainly a thing. But then that does eat into your profits or your investment returns from said property.


Benjamin Haas  06:20

So that's probably a good segue into when we say it depends whether this is a good investment or not. In our world, we call that capitalization rate. I mean, the technical term doesn't really matter. What we're trying to get somebody to do is really look at the hard rate of return the money in their pocket from this property. And if you're having to farm out property management, you're needing to make repairs, do improvements. You're paying the utility bills. You're paying the taxes, whatever the agreements are, right, then it's not as simple as saying, here's the rent I'm taking in versus what the value of the property is. That's what is the net income to me based on the value of the whole property. And that is a percentage rate of return that now we can compare to something else that might be out there, whether it's a bond, a stock, any other investment that we would be looking to appreciate over time.


Adam Werner  07:12

Yeah, that's a way to your point to just be able to look at it as a more apples and apples comparison, at least from that standpoint but then there still is that just the unknown. So maybe I'm diverting a little bit further down the conversation but it's liquidity, right. So in the future, let's just assume that at some point, you either don't want the property anymore or it's just, you're having trouble renting it out, you're having trouble with tenants, and you just don't want to do it anymore. Whatever that decision is that you come to now finally try to dispose of this property. It's not like an investment in the stock market where you click a button and it's done and it's in cash in three days. I mean, obviously, anyone who's bought or sold a home knows that it's if not a fun process. But also, depending on the market conditions that can really dictate how quickly you can get cash back out of it. God forbid, we're in a, you know, late 2000s, where the market feels the housing market feels like it's crashing. Now you're trying to unload a property because you needed the cash and now it's not necessarily the seller's market that we're kind of in today. Now your hands are somewhat tied and trying to access some of your investment.


Benjamin Haas  08:33

Yeah, I think that's really well said and that's why I think, to answer this question is that a good investment really does tie back to financial planning and an individual and what else they have. I think we often run into and see, the people that really want to do this as an investment, typically are actually real estate heavy. That's where we would say, man, you're not really liquid and diversified in the way that we would want you to be for anything that may come around the corner versus the other side of this people that may be do have a lot of savings. Maybe they saw an opportunity to buy another property and have somebody pay the mortgage for them. So really, all that was lost to them was an extra thing on their credit report. That is a diversifier where we may say, yeah, that looks like a really good idea. I certainly think liquidity is a part of it. I think diversification is part of it and I'm glad you brought those two things up because those are two big inputs into our response to is it a good idea or not?


Adam Werner  09:33

So in that thought of diversification, not putting all of your eggs in one basket. Obviously, that's something that we strongly, strongly believe in. When it comes to the real estate side of things, if somebody already has all of the other things and that investment wise, right? You have stocks, you have bonds, mutual funds, ETFs, whatever that may be and they want to add real estate as just another piece of that big pie. We've often seen though, that for those that may be a little risk off.


Benjamin Haas  10:08

Risk adverse.


Adam Werner  10:09

Thank you. That was a word that was not popping into my head. We've seen to the point where if they have kind of everything set up to take care of their situation, they don't necessarily need to take on more risk even though they may have an appetite for it and vice versa. They may need to take more risk and not have the appetite for it. Where I guess the whole point is, it can certainly play a role but we would just want that person to be mindful of how involved and how far do they want to go down that road, knowing that real estate is a very different experience than the electronic world of investing.


Benjamin Haas  10:48

So there's my takeaway, there are many different ways for people to build their wealth. We often talk in our line of business clearly on stocks and bonds and here we go real estate. People do it with businesses but it's just one other way to do it and I guess that's the takeaway. It depends on how much risk, how much liquidity, and again, I think it really comes down to how actively do you want to be involved in this process? But then let's quantify this a little bit. When people talk about this, is it a good investment? I think what they're trying to get at is, what's my rate of return? What can I expect? And I don't know, I don't know if you know. I did a quick Google search on this yesterday, since 1940. Do you know the year over year average appreciation of a home value?


Adam Werner  11:38

No, I don't but if I had to guess, I want to say it's somewhere in the 2%. Two and a half percent range historically.


Benjamin Haas  11:48

So I'm going to say yes, that is accurate. If we account for inflation, it's around the 5% range. If you peel out like historical inflation between two to 3%. It's like there. Stock market. If you look at the S&P 500 over the last 80 years, not including this year, 7 or 8%, after you account for inflation. So I would look at this as it's a different way to go about diversifying your portfolio. Maybe it's more like an income stream. Rental income later in life or the appreciation feels more like a bond, not necessarily a stock. So yeah, I guess I bring this up to kind of get out of 2021 world where we've seen home prices just explode. Is real estate a get rich, quick thing? Historically, no, not at all.


Adam Werner  12:41

So you're saying is the housing market a meme stock? The answer's no.


Benjamin Haas  12:46

Is it a Bitcoin?


Adam Werner  12:53

I could go all day with those but I'll stop. Yeah, I certainly think that the real estate as an investment when it comes to like rental properties, it very much falls in between the bond and the stock world and that there are certainly times like the last 18 months where the housing market just seems to be on a tear and you're seeing these numbers up 15-20% in market value appreciation for home prices over the last year, year and a half. That doesn't seem sustainable so anyone who would do your point to get rich quick scheme, buy a house a year ago and now are looking to sell it this year, can absolutely make some money. Same can be said for the stock market. If you bought something 12 months ago, it's probably up. Generally, it's probably higher today, too. So yes, we certainly would view that more as the income side of things which now leads it closer to the bond. However, I guess in a worst-case scenario, if you own a rental property and things went sideways, you can't go live in a bond.


Benjamin Haas  13:58

A barn. Yes, you can actually live near one.


Adam Werner  14:02

Did I misspeak.


Benjamin Haas  14:04

A bond? Yes. So I have one last thought and I don't want to rush to the conclusion here if like you've got other notes you want to share. But my other thought was, again, to bring it back to if you are considering this. It's more than just liquidity and diversification that I would want to bring somebody's attention to, the qualification process for a second property is different than a primary property.


Adam Werner  14:32

That's right.


Benjamin Haas  14:33

And I'm not going to get into all the details of that because I don't think that's what this podcast is about but it is. A second property is going to be looked at as an investment and therefore the qualification process is different. All the way down to the interest rates that you're going to pay on a loan if you try to do that are different. So it really is, if it's something you're going to get serious about. I think it requires a financial plan. It requires a good lender to actually walk you through what it would be before you just jump into something.


Adam Werner  15:04

I 100% agree.


Benjamin Haas  15:08

All right, so let's answer the question is real estate a good investment?


Adam Werner  15:12



Benjamin Haas  15:13

Could be? Question mark. Yeah, get a financial plan. Figure out that you one, want to check all these boxes and that you've been really thoughtful about this and by the way, buying property right now, I might wait.


Adam Werner  15:30



Benjamin Haas  15:33

All right. Well, enjoy your racing weekend. I'm going to enjoy smoked pulled pork probably, maybe throw a quoit or two.


Adam Werner  15:44

Enjoy it.


Benjamin Haas  15:45

Alright. Bye.


Adam Werner  15:48



Benjamin Haas  15:56

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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