Originally posted by @Allan Glass:
@Gustave Stroes I understand your answer but still question your strategy. You're chasing upside without concern for mitigating your downside.
A single family home in an upscale and strong demand neighborhood like Beverly Hills is like a blue chip stock in your retirement portfolio.
I understand that it does not appreciate as rapidly as a growth stock and I also understand it does not yield dividends equal to a more speculative growth investment, but, when the markets turn, which they always do, It's more likely to retain it's value and provide you a hedge against the risk of more speculative investments.
I'm suggesting that by abandoning a solid and less risky investment in order to put all your eggs in a more speculative basket you're giving yourself a better chance of a larger income stream and perhaps better short term appreciation, but you are also risking all of your equity in a more speculative market by buying in less solid markets.
To me a smarter, safer move would be to retain a solid blue chip asset that pays for itself and perhaps also pays for the additional equity you could borrow against the asset (new loan or credit line), and then re-invest that borrowed equity in more speculative investments if you wish to generate additional cashflow.
If you've outspent yourself and need to generate cashflow quickly for another reason we haven't discussed here I understand that sometimes decisions must be made on a shorter time horizon. However you mentioned your wife views this purchase as her/your retirement nest egg. I would be less willing to cash in the blue chip investments in my retirement portfolio to speculate for short term cash flow. I would however be willing to use them as collateral, borrow my seed money (especially if it was non recourse debt) and take leveraged risks for additional cash flow.
Hi Allan - wow, that is an interesting post. It contradicts many of the views I've developed in my limited time following real estate investment.
I guess the first thing I am curious about is labeling rental property as a speculative investment. I've come away with the impression that it is the least speculative RE investment, as long as you do not count on appreciation. After all, when the economy is good, many people rent. When the economy is bad, more people rent. Where do you see the downside? High vacancy rates?
Also, although BH is pretty blue chip, the housing prices there go up and down with everything else. Maybe they don't go as low, and come back stronger afterwards, but they still swing. Here is a not so scientific chart I made for myself to investigate this:
This if for all of Beverly Hills. What I determined from this chart is that if I had taken the value of the house in 2006, and put it into some type of stock or mutual fund where interest is compounded, then over a ten year period I'd only have averaged a 1.3% annualized gain. That's not even keeping ahead of inflation. OK, so this includes one of the worst downturns we've had, but who's to say that won't happen again? No one really knows. I've been taught that banking on appreciation is just speculation, which is risk with no control (i.e. gambling).
As for my situation, I'll explain. I am 53. Until 2013 I had a job that paid over $300k/yr, but that is gone. Of course Uncle Sam took a huge bite out of my salary so it was not quite as rosy as it seems. I hated the job and was miserable, and have never regretted being self-employed. I've been flat broke several times in my life and it never bothered me that much. So I am not too terribly risk adverse. But my wife has never been in such a situation is and is much more risk adverse. We have no income right now, save restricted stock units from my old job. We have two homes with about $1.5M in equity each, one we live in and one we rent. We prefer the home we live in now, so I would like to convert the BH home into something other than measly cash flow with the possibility of appreciation. If we convert it to rental income with a cash flow that we can live on, then we can take on risk in other areas of RE investing.
Please go ahead and blow holes in anything I've written here. I won't be at all offended and will hope to learn something from it.
Gustave
