Challenging the Real Estate Investor Logic

[Brandon Wong]

Hello All,

First off want to thank everyone for reading this post. I have been wanting to get into the real estate investment industry for a while now after I saved a decent amount for a down payment + rehab. I wanted to challenge some ideas that the average real estate investor has when it comes to the finances of running their properties.

It bothers me that people say they are making XX% ROI on their property and they justify that it is better than market investment even though they are leveraged literally +150k in debt to only yield a 1%-2% alpha over the market avg.

I have spoken with 10+ of colleagues who are in the real estate market and red multiple posts from bigger pockets plus other sources. It confuses me on why real estate investors get excited over a 2% alpha (compared to the market avg) and then forget that they are still leveraged a large amount $$$ (+150k on avg or 4x their original investment). To me, it seems that a majority of real estate investors don't take the necessary precautions to mitigate/hedge the risk on their properties.

And this is why I'm here. Because, I need someone to challenge my logic and tell me why a 1%-2.5% alpha justifies a 4x leverage on your original investment and what happens when we have another black swan even like the one we are in right now? 

What do real estate investors do to mitigate their 4x leveraged investment?

How do investors solve the problem of tenants not paying for 2-3 months due to black swan events?

Do real estate investors have a margin of safety and if they do what are the rules/actions they take to ensure that they meet those requirements?

Answers to these questions would be greatly appreciated! If the answers are really good I'll send you a 5$ starbucks giftcard!

Thanks,

Wong

[Owen Dashner]

@Brandon Wong, welcome to BP and real estate investing!  I didn't understand about half of what you said, so I won't bother trying to sound smarter than you.

1. Appreciation (also forced appreciation)
2. Principal paydown (by someone else)
3. Huge tax breaks and deductions compared to any other investment
4. Cashflow
5. Ownership of a hard asset that produces income
6. Leverage (no other asset class provides the same type of leverage)
7. Creative deal structuring allows for ownership with no money
8. Inflation hedge 
9. People will always need a place to live
10. Nobody is making any more dirt
11. I can potentially find a property undervalued by $100K on any given day
12. Legacy wealth and pride of ownership

These are most of the reasons I invest in real estate.

Good luck to you - don't overthink it!