Why Property Investments are Dumb

Recently, I went down the road of buying an investment property. And learnt a few lessons that leave me perplexed as to why people invest in properties (as opposed to other ‘tension free’ investments). While I am not opposed to home ownership (and believe that is one of the foremost joys that families can enjoy), this post isn’t about your primary residence.

It is about putting your hard earned cash into an investment property. I will argue that it doesn’t make sense from a ‘return on investment’ point of view.

The Stock Market has WAAAY better returns (see NFLX and AMZN returns below)

Take a 300 K property on which you take a loan for 240 k (assuming the normal 20% downpayment).

The 240k has an interest of 3% (assuming you got  a fixed 3% interest rate for 30 years).

So, you are paying 3% interest every year.

And what is your property appreciation? Typically, no more than 3% !

So, right there, you are just breaking even on the money.

Now, let us go through the purchase process and figure out how much EXTRA dollars you lose out on.

Additional Cash Down Required

There’s so many ‘hidden costs’ to closing on a property, that it may not be immediately obvious. For a 300K house, I learnt that your additional costs could range from $5k to $25k – depending on which aspects of closing are being paid by YOU (vs. the SELLER). Also, whether or not you are trying to buy points (a smart idea, but requires cash upfront).

The Difference between the appraised value and your offer – Cash Down

Say your property was ‘appraised’ (you will need to pay to get it appraised), and the appraisal value came back at $250k. Your offer (which was accepted) was of, say $260k.  So, now, you have an additional $10k to come up in cash. Since the appraisal value was low, your 20% down payment is also a little lower. But, the additional $10k is something that will be needed at closing. That’s another ‘cash down’ piece, that could be well invested elsewhere.

The Closing Costs – Cash Down

Loan Appraisal Cost

Inspection Costs

Escrow of your home owner’s insurance

The Additional Points Purchase – Cash Down

To really be ‘annual positive appreciation’ (most of the time, you will break even on the property appreciation vs. the loan interest that you pay annually), you will need to lower your interest rate as much as you can.  To do this, you will need to purchase points. These points cost cash ‘now’ as opposed to later. That’s additional cash that you need to put down – and that you COULD have invested elsewhere.

The Inspection and any repairs – Cash Down

You will always need to pay for the home inspection and a termite inspection. You will also need to either pay for certain repairs (or have them included in your closing costs from the seller)

The Loan Process

As you can tell by now, I am a bit jaded when it comes to going through the property buying and selling process. The processes are outdated and getting a loan is harder than giving up your first born (in spite of having good credit). The Freddie Maes and Macs still rely on jaded, antiquated ‘bank balance’ reviews, and if there’s even a dollar in there that they don’t like (for e.g. if your dollars came from Robinhood or gasp…coinbase…), they will outright reject you.

When you need to sell your property to raise cash

Selling a property can take anywhere from a month to 12 months, even in a fairly active market. Again , back to buyers getting loan approvals, brokers and title companies getting all the paperwork in place, getting a quality inspection and any repairs…the whole process is time consuming.

And let us not forget that you will lose 6% of your property value due to the broker commissions (I personally feel they deserve this, but nevertheless, it is a calculation to be accounted for).

You will ALMOST NEVER get the cash from your property in a time of need. It will tie you up and stress out your other finances.

Wealth is about having ‘disposable free time’

Properties do anything but provide you with the freedom and peace of mind. There’s always something going on with a property. And yes – you CAN have an excellent property manager to handle the bulk of it for you. But you are sill on the hook. Ultimately, YOU are the one who is responsible for everything on the investment property – including any repairs, property taxes, homeowner’s insurance, HOA and other fees.

So, if you want peace of mind and disposable time, and still need to invest, where should you be putting your hard earned money?

The Stock Market – NFLX and AMZN

If you had put that same 60k downpayment into an AMZN or a  NFLX stock, the re turns (over 20 years) would have been:

Hypothetically – if you bought AMZN in the year 2000 (2o years ago).

AMZN – 60k = 400 shares (@ $150 per share). 400 splits once to 800 and once more to 1600. 1600 shares at today’s price = $4.8 million (over a 20 year period). Show me ONE property that would turn a $60k into $5 million over 20 years.

NFLX – The same calculation would have turned $10,000 in NFLX (in 2002) into $3.4 million (by 2020).

The Bond Market 

A steady 4% return on your money, without worrying about maintenance, inspections, warranties…

Summary

I just don’t see it. Unless you live in a super hot market like San Francisco or Manhattan or Mumbai (where properties CAN appreciate 100 % in a few years), it seems that there’s better places to invest. Not to mention, headache free (no maintenance) and more liquid (easier to get out of).

Anyone have a different viewpoint? I am sure there are folks – cause almost everyone I know is investing in real estate like crazy.