Watching youtube videos in my spare time trying to learn something new, I sometimes come across some interesting guys. One person in particular is the youtuber Graham Stephen. He is a finance youtuber that is in his late 20s that has made over a million dollars. His millions were actually created through real estate, which he defines as the best mode of achieving wealth.
As I watch his youtube videos I realize he has some great points. As an Expat, a teacher, and a traveler, I find real estate as not the best investment as Graham Stephen claims it is. It can lock you up in one place, and there is management.
There is a time commitment to find a property, make it suitable, and find tenants as well. My teaching job takes a ton of my time, my wife takes some more of my time, and I live in Taipei, Taiwan, and quite frankly real estate in Taipei is quite expensive.
I am not saying that real estate is bad investment, I am just saying my lifestyle is not suitable for it. That begs the question, is Real Estate a good investment?
Is Real Estate a Good Investment?
Let’s break everything down nice and simple. There are two ways you can invest into real estate. There is the owning of property, which most people think about. There are also REITs.
Let's Look at REITs
REITs are Real Estate Investment Trusts. These are companies that invest into multiple properties. People invest in them, and the trusts go out and buy certain types of properties like strip malls, senior housing, and retail property. They pay the owners in dividends. It makes it a nice payday.
Here are some of the advantages of REITs. It makes it easy to enter into Real Estate. They are quite easy to buy. You go to the stock market, pick the one you want, and then quick buy. There is not a down payment required. You can literally start with $50-$100.
The time spent with REITs is quite minimum. You do not need to manage the property. It is taken care of by the REIT. If something breaks you are not the landlord that has to spend money to fix it. The REIT takes care of that. The time commitment is quite small.
REITs are also quite easy to sell. The REIT has a high liquidity. You just need to push the sell button, and boom the money should be in your bank quite quickly. This makes selling real estate quite easy. No 5% commission charge to your agent you just press sell.
The REIT is also quite diversified. There can be 100s to 1000s of different properties in one REIT. This gives it lots of diversification. That is some great news. If you own real estate it is one property and does not give you as much diversification.
REITs sound great! With every investment there can be disadvantages as well. REITs have a couple of disadvantages compared to regular Real Estate.
Some Disadvantages of REITs
Firstly, taxes can be killer. All of those dividends are taxed as normal income. If your rate is at 22%, those dividends are taxed at 22%. This is a great negative because this can cause unnecessary taxes.
Another disadvantage is that the REIT does not increase in value that much. It usually keeps up with inflation, but it is not an investment that you should expect to grow as fast as some stocks that are businesses growing. It is the nature of the beast. Lots of dividends, but not much growth.
There is also no control over the investment. When I buy a stock, I know what company I am buying into. If you buy a property you can pick and choose which property you would like to invest in. It is the control factor. With a REIT, the company chooses the property. Some people like their control.
Lastly, REITs cannot build equity like a real estate investment property. It is like a stock you can buy or trade. Equity is the value built into a property, which you can use to borrow money against. Real estate people love the equity that a property has. It gives them leverage.
The Advantages of Owning Real Estate Property.
Now that we have talked about REITs let's talk about Real Estate property. People love real estate. My in-laws live in Australia and Australians are all about their properties. Here are great things about property.
Property creates equity, which creates leverage. You can use the property as leverage to get other loans to get more properties. You can even borrow money for other things like investments.
Taxes can also be decreased. You can use the interest on the loan to decrease taxes. The depreciation of the property can also lower your taxes. If the property is not your sole residence then you can use any spending on the property to deduct taxes. These are all some pluses.
Lastly, you are in sole control of this property. With REITs it is the trust that has the control. If you own real estate property you are the full owner and control which property to buy and make it the way you would like.
The Disadvantages of Owning Real Estate Property.
Real Estate oftentimes has a high barrier to enter. You need a down payment of 20%, which can be quite costly. You will have to plan, save, and work hard to get that money. Plus you will need a credit score to guarantee a great mortgage rate. Even when rates are low, you still need a good score for a better rate.
With Real Estate property comes a huge time commitment. Time is something that is hard to give away, but with real estate you need to find a property, buy the property, renovate, and find some tenants. Plus if anything breaks, you as the landlord need to fix it. The time it takes may be something you are not too patient about.
Lastly, property is just not a liquid asset. It can take 30-60 days to receive the money that was guaranteed for the sale of the property. There are also the 5% commissions paid to the agent. Plus it may take a while to sell it. If you need money, a quick property is not the place to get it from.
Is Real estate right for you?
I have watched numerous people believe that real estate is the best at creating wealth. There are two ways to own real estate through owning properties and REITs. If I was going to invest, I think that REITs would be my way to go.
Owning property as a primary residence and claiming it is an investment is not a great way to think. How is somewhere you live an investment? If you have ever seen the movie Money Pit you can understand how a property can literally suck you try of your money, patience, and time.
I have a friend in South Carolina building a home. His construction loan was for one year, but it looks like the project will be completed in 14 months or longer. He was doing this to have a suite for his father-in-law, rooms for his kids, and a $400K mortgage on top of that. His kids will be fully moved out in the next year to 2 years, and still he will have a massive mortgage on top of almost not much savings for retirement. I hope he can pay off that mortgage before he retires.
Why is it so ingrained in us to own a house? Is it the stability? Is it the thinking that we are not paying rent? If houses go down in value and the government still taxes you for owning property then you are paying some form of rent to the government. As housing prices go up, property taxes also go up.
If you really want to make a primary residence into an investment it would be time to include house hacking techniques.
House hacking is when you use other tenants to supplement your mortgage payment. Usually if there is another unit a part of yours like a duplex, the other unit’s rent can help pay off the mortgage.
The other way to house hack is having a roommate. A roommate can help pay off the mortgage as you are saving your income instead. This is a plus.
Should you own property?
It is all up to you if you want to own property. As the landlord you are in charge of damages done to the property. You need to pay taxes on the property, and it is all about management of the property.
There are numerous ways to make some good money from owning properties like through house hacking, renting, or even the brrrr method, which is a simple acronym for buy, repair, refinance, rent, and repeat.
Owning your primary residence sounds nice, but willing are you to continue to pay the upkeep of the property. If owning your home was cheaper than renting then that would be a no-brainer. Do not look at just mortgage payments, take a look at the taxes, mortgage payments, issuance, and constant maintenance of the property when you seek out to see what is most cost-effective.
Jeremy from Gocurrycracker.com talks about being a renter for life. He once owned property, sold it, and didn’t even reap a good return. The stock market would have had a better return for his money.
Would I own property?
That is truly an honest question that I do not have a definite answer to. If I were to move to Australia to be closer to in-laws then maybe yes. I could use the property and do some debt recycling in order to use a bank loan to buy more investments. Every aspect of life changes.
At this point in life, my rent is cheap, my life is convenient, and having extra unneeded space is just a hassle. With interest rates low, it almost seems like a great idea to jump in, but who knows what will happen in this world.
What will you do? Do you want to want to own property?
” Spend less than you make, stay out of debt, and invest the rest”
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.