When looking for investment strategies to help you pad your retirement, one of the hottest options out there right now is real estate. Pundit after pundit is screaming, “Buy real estate! Buy real estate!” And while I don’t necessarily disagree with this concept, I do have a few suggestions to make when it comes to plunking money down on any real estate investments.
Warren Buffett once said, “When others are greedy, be fearful, and when others are fearful be greedy.” The auspice behind that is that money flows to where investors are getting the best return at that time. However, that’s usually not the best way to invest. Here’s a real-life example of someone that I know that followed the money a few years back.
Back in about 2005, banks were loaning money to anybody and everybody to purchase real estate and investment properties. Basically, anybody and their brother could get a loan. I knew guys working for UPS that didn’t know a thing about building houses; then they decided they wanted to be contractors and were being approved for loans. Some of these guys did not even have contractor’s license, yet banks were handing over large sums of money to them. There were a lot of people cashing in their retirement accounts and buying hard real estate assets. One of our clients did just that. He withdrew a substantial portion of his retirement assets, like three-quarters, to purchase real estate.
Fast forward to today. If he had left the money in his portfolio, even in a basic, very expensive, mutual fund, it could have possibly returned somewhere around 300% over the last 12-years. However, he chose to follow the money at the time. Today the real estate he purchased is valued at the same price as it was when he initially bought it.
Don’t misunderstand me. I’m not saying real estate is a bad investment. On the contrary, one of the most significant advantages to investing in real estate is the fact that you get some pretty cool tax deductions by doing so. I actually advise a many of my clients to invest in real estate. What I don’t encourage is using funds from IRA’s, 401(k)’s, Roth IRA’s, or other retirement accounts to invest in the real estate. Listen, retirement accounts are governed by so many rules that you can end up costing yourself a lot of money.
Another situation that I discourage real estate as an investment is when someone is tempted to purchase it by paying cash. For the most part, that doesn’t make sense with the interest rates we are dealing with right now. The rates are low, and the whole idea of using someone else’s money combined with a little bit of your own money is arbitrage. You are building your net worth up with someone else’s money, which is pretty cool.
When it comes to all the media hype about buying real estate right now, it makes a lot of sense sometimes. However, it doesn’t make sense to dip into your retirement accounts to do it. Keep your retirement assets separate. If you were going to take a large chunk of your portfolio to throw in the real estate ring, then you should have done that about four years ago. Not now when everybody and their brother is starting to go into real estate—it just makes no sense. I understand you may think you can turn a quick profit. However, I see it day-in-day-out, people making poor decisions because they haven’t looked at their finances cohesively.
If you are going to buy real estate, which I have no problem with—go out and do it, as long as you are using non-qualified assets and the least amount of money down as long the cash flows. Make sure that you’re working with a CERTIFIED FINANCIAL PLANNER™, who is holistically looking at your life, not a stock jockey whose saying, “Hey, buy this stock or this stock this day” Find someone who knows what you’re trying to accomplish and let them guide you down a financially simple path.
If you have questions about investing in real estate, feel free to contact me, and we can discuss the specifics of your situation.