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Flotsam: Yes, there is a remote possibility that my government can take my property. But look at it this way. If one always played it safe, the returns will be commensurate with the low risk. It comes down to how much risk is one comfortable with, and how much real rate of return do you truly expect? I’m realistic enough to accept the small risk, in return for the higher rewards. |
Mike: The classic example of a risk free investment is Treasuries, as there is no beta risk, as compared to something like stocks. However, risk-free also means very little real rate of return on Treasuries. Therefore, technically speaking, Treasuries would be safer than real estate. But as I said to Flotsam, safety is not a concern for me since I’m quite comfortable with the risks associated with real estate.
Neighborhoods that have gone down in value: Michigan in the 80’s when there were plant closings because US automakers could not compete with the Japanese. Those closings lead to a downward spiral in real estate, urban blight, and some regions in the rust belt of America, still has not fully recovered. In the late 70’s, there was a period of hyper-inflation, where the interest rates were 15% to 18%. Needless to say, typical demand went flat, and even with all the creative financing, some markets declined in value. There was also a 4-5 month period right after 9/11, where the real estate prices went down in some markets. After the dot-com bust, we also saw some markets go down, especially the commercial office space market, and some markets have yet to recover and vacancy rates are still pretty high in some markets. Then we also have some extraordinary events that dampened the surrounding real estate value, ie: Three Mile Island, and other sites that surround the Superfund toxin waste cleanup, etc. Lastly, we also experienced some base closings that some smaller communities singularly depend on, and it devastated their local economy. Therefore, real estate price can, and have come down in certain markets under certain conditions. But I would agree that the long-term outlook of real estate in great locations, are a pretty low risk proposition, relative to other alternative investment vehicles.
There is a remote possibility that our government can take our real property, but there is just compensation, so I’m not losing any sleep over it. This is reasonable risk that I gladly take.
I don’t do any of my own property management because in this litigious society, I rather leave that to professional property managers. Also, since I don’t always invest locally, it becomes a logistical nightmare if I needed to fly to my property every time some tenant had a problem. I use local property managers, as well as handymen to take care of the small stuff.
I do the financial analysis for a potential property, and if the numbers make sense, I buy it, then monitor the ROE, and when it dips below a certain point because of appreciation and equity buildup, I either refi to re-leverage the property, or do a 1031 exchange. If your property is large enough, you can get some great property managers by going to the IREM site at:
and look up a CPM (Certified Property Managers) in your area. On-site management may be best in the hands of a qualified tenant in your building because they are there to watch the property to make sure they report anything out of the ordinary. In return, I give that tenant a break on the rent, and in some cases, additional amenities like free cable TV to help watch my property and take care of the little headaches that come up, like clogged toilet, loud music disturbing the quiet enjoyment of the property by other tenants, etc.
And of course, for those just starting out owning income property, you can go to a site like:
which has some good tools and some are even free.