How much do YOU think YOU need to retire? ...and at what age will you (and spouse) retire? (Part 1)

Parents Forum Parent Cafe
13481

I don’t think it was anything shady, but clearly he structured the deal to protect himself. But as I said, he had a track record of successful developments of that type, and had no shortage of people who thought the potential reward of an 18% profit after 9 months was an adequate reward for the risks. We decided it wasn’t for us.

It was all there in the paperwork, I was just too inexperienced to puzzle it out without some help. It’s a good cautionary tale of making sure you know exactly what you are investing in.

How is this any different than handling the ups and downs of the stock market? Or any other investment? There’s volatility in everything you invest in.

There are plenty of REITs that don’t touch retail properties, if you don’t want to be in the particular sector.

13482

For many years now DW and I have been making loans secured by real estate. Many of these have been funded from our IRA accounts. Typical yields are 12-15%.

13483

@sherpa - yes, this please.

We have one done and another in the works. Both are people we feel comfortable working with. Nothing else available right now to do with them.

The question is how do we find more?

@ucbalumnus - we did a major downsize and are in a small condo. No mortgage. No debt at all. Condo value is not a large part of our net worth.

13484

It would be the ultimate CC moment if HogGirl invested in Coralbrook’s flip!

13485

@notrichenough - forgot to add. We are not opposed to starting a business, though with what we are seeking to do, I’m not sure how involved we would have to be??? I can certainly see a benefit in perhaps setting up a business structure for such a purpose.

13486

Agreed. Its one thing to become an active investor/property manager in RE. Its another to take a small position just to "diversify’ your portfolio. But, from a practical matter, such diversification would only be a small portion of the total portfolio, and in your mid-50’s, the risk does not equal the reward, IMO.

13487

Why do you think REITs are so much more risky than other investments? Historically, REITs have half or less the volatility of stocks.

Writing RE loans for 12-15% interest seems insanely risky to me. How bad is the credit of people who have to pay these kinds of interest rates? Are you sure you can properly appraise the property? If one of these loans goes bad you are in for years of legal wrangling as you try to foreclose. Apparently sherpa has a system that works for them, but holy cow, REITs are like savings bonds compared to this.

13488

I purchased REITs as a hedge against inflation, hoping that it will keep pace with inflation. So far it’s been doing OK, but so has everything in the stock market. To me, it’s just another investment class. I’ve never written RE loans at high interest rates–those are VERY high to me.

13489

How about a REIT that invests in properties where, for example, residential, medical facilities, cell phone towers or even industrial or office properties in specific locations, say like Silicon Valley, Reno, NV, Denver, CO, etc.? (I’m more familiar with the Western US)

I wouldn’t ignore all REIT’s, because if you’re selective with your investment, REIT’s can and will provide a stable income stream with good upside potential.

13490

In addition to REITs, you can buy sector funds specializing in real estate. Fidelity, as an example, has a handful of such funds. Although there can be volatility like any sector fund, the benefits are: a portfolio manager who knows more about the market than the average investor, diversity, and liquidity.

13491

“REIT’s can and will provide a stable income stream with good upside potential.”

as with the stock market, past performance is NO guarantee of future performance. and returns on most REIT,S recently has been dismal at best.

https://seekingalpha.com/article/4161393-state-reits-april-2018-edition

^scroll down to get a comprehensive look at the returns for hundreds of REIT’s.

REIT’s have good returns when the properties they invest in go up in value. Or are fully rented out.
A lot of the increase in property values already happened during the past 10 years since the financial crisis, and the cost of entry into hot real estate markets, in both commercial and residential properties , and on land that they are built on, are now very expensive, relative to the past, and are now leveling off in many parts of the country .

13492

Seeking Alpha is such a RAG.

https://seekingalpha.com/article/4186352-state-reits-july-2018-edition

Lol.

13493

I certainly wouldn’t recommend it for anyone who doesn’t understand the business well.

It may come as a surprise, but I don’t look at their credit. My primary concerns are the loan to value ratio and the borrower’s “exit strategy”.

Yes, and I won’t make a loan unless I conclude that I’d be perfectly happy owning the property for the amount I’m loaning.

Out of roughly 100 loans we’ve made, we’ve foreclosed on 6 or 7. All but two of those were quick and easy 120 day foreclosures. On one the borrower filed bankruptcy, which delayed the foreclosure a few months, but at the foreclosure sale we were paid all of our principal, interest, and attorney fees.

Then there was the loan from hell. The title company made a mistake on the documents, the borrower disputed the validity of the loan, and a lawsuit ensued. We made the loan ten years ago this month and the case is currently in front of of the state Supreme Court.

The dispute has been irrational, with the combined legal fees for both sides totaling over five times the original loan amount.

Which leads me to the most important point: never make one of these loans without title insurance. Since we required title insurance, none of the legal fees in the above case have fallen on us. We’ve been willing to settle all along, but the borrower and the title company both continue to fight it out, to the tune of over a million dollars per side.

For us, we’re happy with either potential outcome. If the title company prevails we’ll get the property, which is much more valuable than the amount we loaned. If the borrower wins the title company will repay us the original loan amount.

The accounting is a little tricky, but even if we lose, the loan will end up yielding about 4% per year.

13494

Yes, we all know past performance is not a guarantee of future performance. That’s a given with any investment.

You’re article looks at one quarter (1st Q 2018). Here’s a snapshot of 10 years of the Vanguard REIT Index, which I’m only using as an illustration of ALL REIT’s, but I’m not recommending to buy it:

https://www.morningstar.com/funds/XNAS/VGSIX/quote.html

Yes, while no high flier, overall, all REIT’s have doubled (2x) in value in the last 10 years, while paying a reliable stream of dividends (roughly an avg. of 4.0 to 4.25%). And the real estate market remains warm-to-hot, in some specific areas (Reno, Denver, Seattle, SF Bay Area) of the country and in some specific sectors/categories of REIT.

In a well-diversfied portfolio, you should definitely have a % of your money in real estate and not just your house.

13495

However, real estate will never be like a high-flying FAANG (Facebook, Amazon, Apple, Netflix and Google) stock. That’s for sure.

13496

If you want to use your IRA’s to make real estate loans, I’d recommend finding an IRA custodian which will allow you to create a Limited Liability Company, of which the IRA’s are the members and you are personally the manager. That way you can operate more like a business, without having to deal with a lot of back and forth instructions, authorizations, etc.

Two other pieces of advice: don’t loan against people’s personal residences, and always insist on being on first position.

Personally, I like land loans that are less than 50% LTV.

13497

“In a well-diversfied portfolio, you should definitely have a % of your money in real estate and not just your house.”

If folks are investing in broad-based or index funds, they are bound to have exposure. Since many folks’ homes do represent a chunk of their net worth, why do you think they should have more to be “well-diversified”? If anything, I’d think the risk is over-exposure to real estate and its vagaries.

13498

Rick Ferri is one FA that recommend including 10% of RE to a total portfolio. While the sector play maybe ok for the long term, not sure that it makes sense for someone in thier 50’s, with retirement right around the corner. IMO, there is not much time to recover from a significant decline in this sector. But if a sector play is what is desired, why not Tech or Health Care?

https://www.forbes.com/sites/rickferri/2012/02/27/the-total-economy-portfolio/

Not sure that is true anymore.

https://finance.zacks.com/correlation-reits-stock-market-6586.html

13499

For me, the only thing that matters is total return. And I generally prefer cap gains to (higher-taxed) income. Of course, that won’t matter if the REIT income stream is in an IRA, along with your bond portfolio.

13500

I’m not a fan of broad-based or index funds, but in terms of the Vanguard 500 Index, which for illustrative purposes only (again, I’m not recommending it), “real estate” represents 2.9% of the index:

https://investor.vanguard.com/mutual-funds/profile/VFINX

I don’t know how much “your” (not you specifically, but everyone) home represents of “your” net worth, everyone in this country is different. And a lot of young people don’t have much, if any, equity at all. However, people invest in real estate just like any other investment, to make more money. Why do real estate developers, investors and lenders buy and lend on more property? To make more money.

The real estate sector definitely goes in cycles, we’ve all been through many. I know I have. But real estate is a limited resource and development is becoming more and more difficult everyday.