Not Another Buy vs. Rent Post!

14Investing, Money

Haven’t we seen a lot of those already?  The personal finance blogosphere is filled with material, both strongly for and vehemently against, homeownership. Due to my preference for a globally mobile career and the ‘invincible’ DC market saga, you know which side of the fence I am on.   But the real estate asset class can’t be broad brushed by individual experiences.  It can be a delicious entree or a nice side dish in a fulfilling financial meal, if done well and in moderation. I will give you my personal recipe here.

What's definitely NOT for my dinner tonight :-(

What’s definitely NOT for my dinner tonight 🙁

Sorry for my food metaphors, but I couldn’t help it as I am working late today and…..hankering for a piping hot pizza verdure with grilled vegetables and roasted garlic amidst dollops of fresh mozzarella and nice basil, all baked on a hand rolled pie with almost crispy crust, sprinkled with grated flakes of the original parmigiano-reggiano.  Oh, Mama Mia!  

Unfortunately, there is no such menu item even within 50 miles of where I am working today.  The nearest restaurant serves a greasy cheese pizza which looks synthetic in every way that it has been processed and oozes a strange liquid when you touch it.  Yuck!

As I console myself to munch my crackers, you can munch this post. I like these organic Graham crackers, maybe you do too.  No comparison to my pizza con verdure!

Just because I don’t see homeownership as critical in my 10! journey, it doesn’t mean I shun all real estate.  I like real estate as an asset class, but don’t want to deal with the demands it can place on my time.  I also want to minimize the costs of holding any real estate.

To house or not to house, that is the question.

To house or not to house, that is the question.

We all know there are very successful investors who made their wealth in real estate. Even among the personal finance blogging world, there are many in this camp, like Financial Samurai, Chad Carson and Mrs. & Mr. 1500, to name just a few.  There are also many who are clearly in the other camp like Jim Collins, Jeremy at Go Curry Cracker, Mr. Tako, and the FIREcracker young Canadian couple.   Of course, they all have good reasons.

I fall between the two camps, so I can negotiate a peace deal between them if they want me to!

Yeah, you can roll this right onto my site, buddy.

Yeah, you can roll this right onto my site, buddy.

I own a few small home sites in Asia.  When I say small, I mean really small, like 1500 sq. ft.  The ongoing costs of ownership of these sites are negligible (nothing to maintain!…and property taxes on empty home sites are, quite literally, chump change). Though there is no incoming cash flow, they provide steady appreciation beating local inflation handily (10-20% CAGR since my purchases), and hedge us against our future retirement in this part of the world.  In Asia, land appreciates quite well in many places due to high population density and increasing disposable income.  I own these sites in ‘bite size’ chunks, because I can liquidate each one if I choose to, which will pay for, say, 1-2 years of living expenses.  Besides, many Asians build impressive homes on such small sites.  Each site is worth between $30-80K.  We intend to purchase our first home outright whenever and wherever we choose to retire, for which these sites also act as natural inflation cover.  Our first home purchase will likely be our retirement home!

It is a dollars and sense decision.

A dollars and sense decision.

For the financial portfolio, I invest in Real Estate investment Trusts (REITs), which are about 15% of my total portfolio of diversified dividend paying stocks.   They generate, collectively, close to 20% of my total dividend income.  These large REIT companies own thousands of diversified commercial properties in good rentable locations, generate healthy dividends every quarter and the best part is, I don’t have to worry about a midnight call for a plumbing emergency or follow up on late rents!  These REITs serve as my proxy for physical real estate in the US, and the proportion I have is still far less than most Americans’ proportion of wealth tied to real estate.

For those concerned about taxes, I must clarify that dividend income from REITs are ‘not qualified’ so you will not be able to use the special benefits given to ‘qualified’ dividends from other companies.  Still, dividends themselves have a favorable tax treatment in US, so you can still shield over $80K of passive income from both federal and state taxes (if you live in a zero tax state) for a couple filing jointly, even if 20% or so of this income is from REITs.

Another reason I own REITs is I believe in the lower correlation of real estate to mainstream financial assets like stocks and bonds, although correlation between all asset classes seem to be increasing in recent times as the world becomes increasingly integrated, at least economically.  Moreover, during times of deep recession, everything takes a hit!

So, it is possible to not like real estate for its physical ‘demands’ and recurring costs but still own them in the right ways and forms that meet your overall objectives.  Benefit from real estate without the hassles!  This way, you can have the pizza even without the veggies.  There I go again….God, I miss that pizza verdure!

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14 comments on “Not Another Buy vs. Rent Post!”

  1. By Bouchie

    Thank you for the sensible critique. Me and my neighbor were just preparing to do a little research on this. We got a grab a book from our area library but I think I learned more clear from this post. I am very glad to see such fantastic info being shared freely out there.

  3. By ZJ Thorne

    I, too, worry about owning in other countries because governments are (rightfully) quickest to screw over foreign investors in an emergency. Do you speak the languages in the areas where your little parcels are? That would be fascinating to read about. I worry about some folks who want to retire abroad, or early retire abroad, and don’t do the necessary things to be a good and safe neighbor while they are there. A friend was recently caught up in the Turkish coup, and she did not understand the emergency announcements or commands. It was terrifying and her assets were frozen. Friends wired her money to get out, but that 36 hours was unpleasant.

    • By TFRadmin

      You are right about this risk of ’eminent domain’ but unless you are investing in an autocratic country with no investor rights, this risk is overstated. Expatriation rights are also to be looked at. You need to know and trust the local co-investors and build true friendships. This is not a case of someone flying into a developing country for couple of weeks, doing real estate deals and flying out, and expect everything to be hunky dory. That’s where the real risk lies. You must have lived in that environment prior to buying there.

  4. By earlyretirementnow

    I’m no friend of REITs: They are quite overbought right now. Much higher volatility than other high-dividend stocks and quite a bit of risk if the Fed raises rates again. Not that I hope for that because it would be bad for all asset classes if the Fed raises too quickly, but I think all the yield-chasing assets, especially REITs, would get hurt the worst. I don’t think there is any alternative to owning “real” real estate. If done right, the rental yield is higher than today’s REIT yields and you don’t have the big price volatility.
    But still: best of luck! 🙂

    • By TFR

      Thanks ERN, I think we’ve discussed this point in one of your articles. The correlation of REITs to the broader market is relatively lower and like utilities, which are also interest rate sensitive, they can provide a good intra-portfolio diversification if held in moderation. It’s the ratio that matters here, can’t have a portfolio loaded with only REITs, on that we both agree. While you may get a higher yield than a good REIT with ‘real’ real estate, it requires careful selection, good cash flow management (for this, you need to maintain it yourself – hello midnight plumbing!), vacancy rate minimization, but still concentrated risk to one local market. In other words, both physical hassles and possibly some financial risk – that’s what the higher cash flow yield comes with.

  5. By Jax

    This is an interesting perspective and I love learning about how different bloggers choose their “path”. I am interested in exploring REITs more. I would love to read more about how you’ve chosen your land holdings and how you’ve made/maintained the relationships that led to them!

  6. By Jon @ Be Net Worthy

    Thanks for sharing your unique approach! If you end up retiring in Asia, you will certainly be enjoying a better lifestyle than the U.S.

    I wonder if/when grandkids come along if you will want to live closer to them, wherever they end up? That’s what I always wonder about when I consider retiring outside the U.S.

    I’ll be following along to see how your plan works out. Best of luck and keep everyone posted!

    • By TFR

      Thanks for checking in, Jon. Appreciate your perspective. I believe we are all in a ‘global village’ already (my extended family are in 7 countries) which in my grandkids time, may shrink even further to…a global street?!! Also, technology is continuously improving to reduce the need for frequent visits – already, thanks to Skype, my young nephew is speaking to and seeing his grandparents 10,000 miles away almost everyday! Anyway, this is far into the future (for me anyway) that I don’t think potential grandkids should drive our retirement location decision.

  7. By The Green Swan

    Interesting considerations on the REITs, thanks for sharing. Curious how you ended up finding/owning land in Asia? Sounds like there may be some unique risks involved with owning an asset like that, but that they still provide a pretty solid return.

      • By TFR

        Thanks GS and Matt. Remember the 10! Effect my website is based on? Also, you must have read my earlier post on working abroad. This is one of the ‘factorial’ benefits of forming global friendships and broadening your horizons. Every one of my home sites has a local friend or trusted contact I have made personally who identifies these deals, helps me with due diligence and in most cases, co-invests with me in the same place, like an adjacent site.

        Just like the ‘factorial’ math function, one action you do (like open your career horizons beyond your home country) leverages other benefits like opening your investment horizons to new ideas and helps think of a different way about real estate. Global friendships are an important side benefit of a global career, and how deep and meaningful these friendships become depend on you. Perhaps I should write a new article on this?

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