Here’s a riddle worth solving.
How can real estate qualify as one of the two perpetual sources of family wealth, now that reckless real estate lending has crippled the global economy?
There are two prisms through which we can examine real estate:
- Single family housing versus income producing real estate
- Private ownership versus Wall Street ownership
We all know what happens now, when unqualified buyers used liar loans to buy houses they could never afford. This was insanity on a colossal, global scale.
The damage is exacerbated by the fact that a detached, single family home straddles two markets.
- First is the intended use as shelter for a family, where the imputed rent (i.e. the rent you would have paid if the house were a rental) is the return on ownership.
- Second is the acquisition of houses for the express purpose of investment, either by long term rental and appreciation gains, or immediate turnover (flipping houses).
Just as prudent owners who did not overpay, and used conventional financing will escape the crash unscathed, so also will the prudent investors who have sufficient rental income to service their debt obligations.
The second filter is the form of ownership.
When Mom and Pop buy real estate, there is no unwieldy structure of ancillary payments to promoters, syndicators, packagers, brokers, managers, and other such unsavory hangers-on.
Nothing chastens our improvident impulses quite so much as when we spend our own money on our own behalf…the foundation of private ownership.
Unfortunately, Wall Street got involved.
When they discovered the unique attributes of investment real estate (almost a hybrid of a bond, due to steady rental income, and a stock, due to potential capital gains) Wall Street reverted to form, and stuffed their offerings with an outrageous superstructure of fee income.
These include brokerage fees for selling partnership interests, fees for collecting and investing the cash proceeds, acquisition fees in addition to normal brokerage fees, partnership management fees, and worst of all, the infamous 2 and 20 fee structure, bleeding the underlying investments of 2% annually, in addition to a 20% slice of the ultimate profit.
Quite simply, these parasites designed an investment structure that sucked so much money out of these public and hedge fund partnerships that little or nothing remained to the hapless investors.
What happens when you kick these bums out, and only buy what you can afford and understand?
You then have stumbled on to the most widespread wealth creation asset class available to private individuals and families.
Yes, you’ll get stuck with collection and maintenance chores. But what makes real estate work is that leverage is alive and well, and your rental income will eventually retire the mortgage.
Your tenants will ultimately pay long enough so that you can own the property free and clear.
It doesn’t get much better than that