Real Estate vs. CD Market investments

[Ryan Daulton]

I am brand new to real estate investing, but I’ve been listening to BiggerPockets podcasts for the past 3 months and I read 2 of Robert Kiyosaki’s books. But when I told one of my family members about my interest in real estate, he was very skeptical. What can I explain to him are all the advantages of real estate over other forms of investment, like the CD market which guarantees a 5% return annually?

Here is what he said about why I’d be better off putting my money in an index fund or a CD. Italicized sentences are my sentences.  Italicized sentences are my words:

1. The mortgage interest rate is much higher than we’ve had over the past 20 years, so the returns would likely be much less for me if I bought something this year.
2. Appreciation cannot be assumed with interest rates as high as they are. Is this true? For example, he said his brother has looked at homes in the Dallas area that have depreciated in the past 12 months.
3. I will likely have some vacancies, and maybe evictions.
4. I will need to spend money on repairs and maintenance.
5. Other expenses: property tax, HOA (hopefully not), insurance, legal costs, and closing/selling.
6. He told me most landlords he has talked to had to mortgage their properties and that most are actually losing money in years 2023 and 2024.
7. Distressed sellers lack the capital for property maintenance. You can expect a lot of repairs to get the place up to par. Leaks, mold, and lots of hidden problems. He said this because I told him I was going to search for off-market deals.

How much are average closing/selling costs?

Here is what I told him were the advantages:

1. The landlords he knows who have been losing money are probably only describing their cash flow (rent payments). But I could also profit off depreciation of the property annually, appreciation (especially if I make improvements), and tax deductions.
2. Since I plan to buy a multi-family property and live in one of the units, this should give me a steadier cash flow even with vacancies.
3. Assuming that I 1031 this property or hold on to it, I would never pay sales taxes on it.

Are there any other advantages? Is anything above incorrect?

[Bruce Lynn]

Don't take financial advice from broke cousins.

Don't let them kill your dreams, because they don't have any.

I would go to far as to say, don't ever talk finances with that cousin again.  Don't tell him of your plans, don't tell him about your investments, don't ask him about his.  Not the right person to support you.

Disadvantages1-2-3-4-5-6-7 all true and possible, this smells like opportunity, probably more risks than that....and property is more work than T-bills.

Advantages....1 is possible....not sure I understand 2....no cash flow from your side if you have vacancy.  1031 defers taxes not eliminate it, but there are ways perhaps, for example if you get big enough and 1031 into QOZ you have the poential to eliminate 100% of the capitol gains taxes.

#4 you forgot about leverage....for the most part you can't leverage T-bills, maybe 50% on ETFs.  ETFs can fall to zero...or even lose 20-30% in a day.  People can and do lose money in ETFs, go back and find the paragraph about the average investor loss in Fidelity Magellen fund back during Peter Lynch tenure.  I forgot the numbers, but fund went up like crazy, but avg investor tried to time the market and lost money.  Buying at the highs, selling at the lows.

Ask relators and investors in the Abilene area if prices have gone up or down in 2023-2024 or if they wish they had more money to buy more homes in the 1970s, 1980s, 1990s, 2000s, or whatever decade.  I've never met a long term real estate investor who wished they had bought less property.

If you invest $100,000 in T-bills this year at 5% in a year your return is 5000.

If you invest $20,000 to buy $100,000 of real estate and it goes up 5% your return on the $20,000 is 25%, not including the rent, the depreciation, the tax advantage, the ability to defer taxes, and your tenant paid down $1000-$1500 of your mortgage....these are the bare basics.