During that same period, they pointed to a “solid but unimpressive annualized return of 8.6%” for residential real estate. The return calculated for real estate was based upon sort of a national average for appreciation in home values during that period.

There conclusion was therefore that in the long run, the stock market easily “crushes” real estate. The article also points to a study by Robert Shiller that suggests the “real” return of real estate is really somewhere close to 3%, barely better than the rate of inflation.

The problems with this article? The article is fatally flawed for the following reasons:

1) These two types of investments are so different that drawing a direct comparison is absurd. Think about a typical stock market investment. You buy x number of shares at $y. You hold them for some period of time in which the price per share goes up (hopefully for you). At some point, you decide to sell the shares.

Most buy and hold real estate investors leverage their money when they buy the real estate instead of paying cash and never putting financing on the property. At this point, the two start to diverge. However, these properties also produce income. The two investments diverge even further.

An investor who buys multiple income properties is building a business. It is much easier to draw a comparison between a buy and hold real estate business and, for example, a service business like a plumbing company or a franchise like a Subway. Perhaps the biggest difference is that real estate has an intrinsic value apart from the business. On the other hand, service businesses have much of their value in the intangible asset of its book of business / client list.

A stock market investment is much more comparable to, for example, art, precious metals, gems, or collectibles purchased with the anticipation that they will increase in value with time.

2) The S&P/Case-Shiller U.S. Home Price index on which the “unimpressive” rate of return for real estate was calculated (8.6%) is based upon home prices. The cash flow and tax benefits from real estate are completely overlooked by this oversimplification. Shame on the author for making this misrepresentation of the numbers. Because residential real estate creates passive income where stock do not, the analysis presented in this article is not valid.

3) For the average investor who does not have the time or inclination to invest in real estate, an investment in an indexed mutual fund based on the S&P 500 may be as good a move as any. That is, if they are able to really discipline themselves to hold onto these mutual funds for the long term.

The biggest advantage a guy who decides to start investing in rental residential real estate has over the guy who buys and holds mutual funds is control. The decisions that the real estate investor makes on a day to day basis determine his financial success. He will be able to do very well regardless if real estate prices are going up, down, or sideways.

Russell Cronwell was the first president of Temple University.  He is know for his "Acres of Diamonds" speach he delivered some 6,000 times. 

The main point of the speach is that you don’t need to go to some other location to find opportunity.  Opportunities abound all around us every single day.  The problems is that sometimes it’s just really hard to see those opportunities. 

I’ll give you a perfect example.  There is a neighborhood in my city that has a really bad reputation as a war zone. 

For years I resisted buying any properties from this area because I was so afraid of owning anything and getting in over my head.  I was afraid of what it would be like managing properties in this area. 

My first experience in this area was buy houses to do wholesale flips.   I ended up keeping two of the houses because I couldn’t find a buyer.  These were my first (and accidental) rentals in this neighborhood.    

You know what I found out?  Managing these properties wasn’t too much different than managing rental houses in other parts of the city.  

The real break through was recently getting a great deal on a package of four properties on this area.  My first instinct was flip them for a quick buck.  

But after I got over that – I couldn’t find a buyer for these because of the same other investors were having that I had – I got busy with rehabbing the first one.  

I was blown away by the level of demand for the property.  What I ended up with was a property that I had less than $20,000 invested in total that would rent easily for $500 per month.  Perhaps more if I were to push it.  

So will these types of investment strategies work in another market that is higher priced than the Oklahoma City market? 

Does the pope sleep at night?  

Of course you can make a rental strategy work.  You can make a strategy to flip properties work.  I don’t have room to go into the numbers, but that where you need to start.  

What are the numbers for your market?  What are your buy prices, and how much rent will these properties produce for you?  

I’m reading this book right now called “Mastering the Rockefeller Habits” by Verne Harnish.  He points out the three habits John D. Rockefeller felt were critical to his success in business. 

I’ll talk about how I feel the first of those habits – Priorities – comes into play for real estate investors in this blog post. 

Harnish talks about finding the top five priorities, and then isolating the very top priority from your top five priorities.  According to Harnish, you need to start with what he calls a “BHAG” (Big Hairy Audacious Goal).  This is your vision for 15 to 20 years down the road for your business. 

I have to admit I’ve got a fairly clear goal for 3 years into the future, but I didn’t really have a vision for 15 years into the future.  After I read the article, I realized I needed a BHAG to direct my short-term decision making. 

So I sat down with pen and paper.  I did an exercise I learned from Brian Tracy in which I imagined it was 15 years into the future.  I imagined that everything had gone right in my business.  I have to say the vision I came up with for my company was quite compelling. 

The interesting thing is that once you have a clear vision of your company, the priorities to create that vision start to be apparent. 

So I sat down with pen and paper again.  I put together a list of the top priorities for my company to create the conditions for my vision to become reality.  From that, it wasn’t hard to come up with the top five top priorities for my company.

My company does mostly buy and hold, and my plan is to focus on that business.  Here are the top five priorities I came up with for my business. 

1)      Having access to a reliable source of financing, both from commercial banks and from private lenders. 

2)      Having access to properties I can buy at $0.50 to $0.60 on the dollar.

3)      Having management systems in place to result in less than 10% vacancy. 

4)      Having systems and operating procedures that allow the business to operate smoothly.

5)      Having a skilled rehab and maintenance crews that operate under minimal supervision. 

I believe if I have these bases covered, my business will grow organically over the years into my vision. 

Have you ever felt like one of those guys stepping off the cliff when it comes to investing? Just about every time I’ve put money into the stock market, I’ve lost money.
The biggest problem with investing in an individual stock is that you can’t see all the things that are going on in the business that business. They may be cooking the books, or that they may be having problems with sales. You as an investor in a company like that don’t get wind of those types of problems until it’s too late. When you finally find out, everybody else know and your investment has already taken a hit.
But when you have almost complete control of your business, like for instance, if you’re buying and holding properties. In that case, you get to see everything that goes on AND you can have a direct influence on everything that happens. You have ultimate control on how you do in the business. That’s why I believe you can be so much more successful with type of business/investment.
You know just from common sense that people need a place to live. And you know times can get pretty tough, and there’s still going to be people who needs a place to rent.
A tough economic time is just a good indication that there will be more good real estate deals to be had. The tough economy creates uncertainty in the mind of the average investor. But I think just being able to control your business is the difference between making money and loosing money in this tough economy.
Every time I’ve gotten away from real estate as in investment, I have lost money. Particularly in the stock market. When you invest in stocks, you have two basic choices. The first option is own the stock (buy and hold). The second is to sell it. But with real estate, you have numerous choices. You can make any number of changes to a property to affect it appearance and/or function. You have rent it many different ways. You can sell it many different ways.
That’s why I prefer real estate to all other investments / businesses I’ve ever seen.
If you keep things simple, and do the things that make common sense, you’ll do fine in real estate investing. People have use buy and hold as way to get rich with real estate for hundred of years. If I can do it, you can as well.

Do you have any stories about money you’ve lost from investments where you should have know better in hindsight? Please write a comment if you do.