Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
There’s a saying in computer science that goes: garbage in, garbage out.
What that means is – even if you have the biggest, most expensive and most powerful computer on the planet, if you feed garbage data or garbage assumptions into it, all you’re going to get is garbage out of it.
Your brain works the same way, which brings me to today’s lesson…
Is real estate really the 'best' investment?
I read an article recently that immediately made me think of this garbage saying: "Is Real Estate Really the 'Best' Investment?"
It piqued my interest because I’m a former finance guy. You know, Investment Banking, Corporate Finance, ROI, and all of that. (I know, I know, some you are yawning after reading that snoozefest of a list…)
Anyway…
I treat my real estate investing as an investing activity. It pays for my kid’s private school. It pays for our family vacations. And it’s going to be the thing that funds my retirement.
So this is real life for me.
In fact, I know dozens and dozens of people - just like you and me, who count on their real estate investing activities to live off of.
Crazy writer = nonsensical article?
I dug into the article to see what kind of analysis the writer put together to answer the question. But I knew after reading the first sentence that the author was full of crap.
Why?
Because for one thing, he started with his conclusion first. And secondly, because his conclusion was “Yes, but only if you’re rich.”
Huh?
But that wasn’t all…
Right after he wrote the rich thing, he started going schizo and made two statements in SUPPORT of real estate.
He wrote:
“A lot of real estate in the world really does offer higher returns than you can get pretty much anywhere else. … Compounded that's a more than respectable 20% for the year, almost double what the S&P usually returns over that same period. Buying real estate also requires less expertise than picking stocks.”
Both of these statements are absolutely true based on what I have seen over the past 10 years. So what’s the issue then?
Well, he went off the deep end...
He continued:
"On the flip side, of course, investors are hard pressed to diversify risk in real estate. … Your house, on the other hand, can become worthless overnight in the event of a natural disaster, or if the neighborhood takes a turn for the worse. In fact, not counting tax incentives, real estate can be a pretty risky proposition."
I was scratching my head when I read this stuff. Are you?
Firstly, investors aren’t “hard pressed” in any way to diversify the risk in real estate.
It’s simple - you know your market, know your prices, and for us rental-house guys, we key in on school districts.
And voila - our risk is diversified.
I didn’t get his point on natural disasters either. I mean, isn’t that exactly what insurance is for?
And the part about it being “a pretty risky proposition?” Show me an investment that isn’t. I’ll bet all the people that had their life savings invested in GM or Lehman Brothers would, in hindsight, have much preferred to have their money in real estate.
But as I read further in the article everything became clear…
The guy was shilling paper investments – basically, mutual funds. And his whole article was a sales pitch for what he was selling – probably in response to the article I wrote about a while back on millionaires starting to focus on real estate.
So he wasn’t really anything close to an objective writer. All he was doing was selling something.
So my point its, be careful what you read, and be even more careful about what you believe.
Because if you put garbage like this into your analysis, you’re going to get a garbage result.
What do you Think?
Am I full of garbage? I’m curious to hear your take. Let me know by commenting below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.