Helms & Gray: Real Estate Investing 101

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We talk a lot on this site about the wisdom of owning tangible assets. And we've decided it's time to start focusing more intently on educating our readers how to invest in the largest tangible asset market of all: real estate.

The global real estate market currently stands at over $200 trillion. This dwarfs both the outstanding securitized debt and equity markets.

For centuries, ownership of land and property has been a direct indicator of wealth. That's still true today; the difference being nearly everyone can now gain access to this asset class, and the options for doing so are much more plentiful.

Real estate offers a path to build equity and income outside of the Wall Street casino, in ways that take advantages of tax incentives not available to stock and bond holders. It can also offer purchasing power protection during periods of currency devaluation.

But, education and timing are very important in this space. How can the novice investor get involved while reducing their risk of making costly mistakes? Real estate markets can enter price bubble territory (as many are in now) -- how can you determine when it's safe or too risky to invest?

We've invited Robert Helms and Russ Gray, better known as The Real Estate Guys, onto the podcast this week to provide a "Real Estate Investing 101" overview for the Peak Prosperity audience. In it, they cover the different ways to invest, how to identify which approach is best for you given your personal goals and risk appetite, and how to get started educating yourself towards becoming an active investor.

Despite the overvaluation of many real estate markets right now, we believe this sector has long term relevance and potential for most investors. So for those, like us, who are positioned defensively as we wait for the next major correction, now is the time to educate yourself. When the correction occurs, you want to be ready to deploy your dry powder swiftly and intelligently into this asset class once good values appear.

Expect more podcasts on this topic to come throughout the year, focused on specific steps in the real estate investment process (valuation, financing, property management, captial improvements, tax consideratons, etc). The more informed we all are, the more options we'll all have.

NOTE:

To learn more about or purchase "The Future of Money & Wealth" DVD set mentioned this podcast, click here.

Click the play button below to listen to Chris' interview with The Real Estate Guys (47m:15s).

This is a companion discussion topic for the original entry at https://peakprosperity.com/helms-gray-real-estate-investing-101/

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Some concerns about real estate (and a question at the end):

1.) Is the price of real estate indicative of value? Or is it just the result of low interest rates? RE prices move inversely to rates (just like bonds… since most people aren’t actually buying RE [the bank is], they are just issuing bonds). How much would RE prices be affected by a credit contraction? How much would my house be worth if prospective buyers had to put 50% down?
2.) Isnt this a crowded trade? Boomers loved real estate, and they still own a lot of it. As they croak over the next 30 years (forgive my insensitive style), and leave this stuff to milleneals, what will they do with it? Sell perhaps?
3.) Everyone needs a house, but does everyone need a big house? SqFt per occupant is incredibly high in the USA… Shouldn’t we expect that number to come down (almost like P/Es for the stock market)?
4.) Property taxes… Does anyone REALLY own their house??
5.) The sharing economy… AirBnb and other sites have added lots of rental inventory, compressing prices. Until now this is more of a short-term/vacation rental phenomenon that’s been eating the hotel chains’ lunch (when regulations/lobbyists allow). This calls back to points 2 and 3. Is this a crowded trade? Is usage and efficiency compressing prices? Is buying a rental property today similar to buying a taxi medallion 5 years ago?
I’m not anti-real estate. But I’m a little bit worried about it’s correlation to Fixed Income. Interest rates are at historic lows. No question that there are pockets of value (international RE, medical office, tax niches like bond financed property, assisted living, etc…), but there are also some BIG whammys out there (rates, retail glut created by Amazon, property taxes, etc).
Finally, a question… You said that anything I can do with equities, I should be able to do with real estate… How can I buy a protective put on my 80% levered condo in bankrupt Chicago? Assuming that renting in Chicago and owning elsewhere isn’t an option (due to logistical and marriage-related hurdles)… I would love it if Nasdaq made me a Chicago ETF that I could buy out-of-the-money puts on to hedge my RE risk.

Phew… That was a long one; really got out of hand fast!

Thanks for listening.

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We have bought productive farm land, as a course they often include a farm house. Where reasonable the house is restored and rented,these are revenue streams till they aren’t! We have used an intermediary RE agent cuz both Angie and I are acute “I’s” on Meyers-Briggs. The farm land is also a revenue stream. We have sold land recently as commodities are in a slump for a while and I am tired of seeing pts. Draft horses,gardening, and grass finished ruminants are the order till we find a good “Miller” and “tanner”.
husband,father,farmer,optometrist

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Interesting interview. Quite a compelling case made for investment in real estate in one form or another. Certainly more sensible than bonds or shares at this point but I can’t help but feel that for real estate as an investment to be successful, some approximation of BAU continuing indefinitely is necessary.
Perhaps I am too in thrall to the collapse narrative, but if one has high confidence that 1) both GFC II and an energy crunch are highly likely within the next two years, and 2) the result will be a more less permanent depression then most real estate investments strike me as pretty risky propositions, especially if leverage is involved.
Certainly commercial real estate would be. Residential real estate will lose value too I expect but could still provide an income stream so is perhaps atttactive from a diversification standpoint. Farmland/woodland will also likely fall in value but will be a source of secondary wealth so again probably worth considering.
So, while intrigued by the idea of investment in real estate I am not sure it will be a better bet than PMs.
And of course, I may have the collapse thing all wrong and we will have another 10 years of BAU, and another…that’s the reality we seem to be living in at the moment, anyway.
Would be curious to know what others make of the anticipated risk/reward trade-off in investing in real estate at this point.

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It was interesting in the last presidential debate cycle between Hillary and Trump, not a political statement here anybody, but Hillary was talking about how much she paid in taxes and was a little offended that Trump paid zero, but in fact, Trump is a real estate investor. And whether we think it is a good thing or a bad thing is a different discussion.
As this interview with the Real Estate Guys clearly demonstrates, the system is rigged in favor of a speculative mind set; others will be forced to pay for the right to access certain assets. By leveraging acquistions with fiat wealth, an expanding economy is a necessary ingredient for this to continue. Couple this with controlling the supply of the commodity and you have a win-win strategy. The real question, IMHO, is, who is adding the "real" productive wealth in these situations? For farmers, they can live on depreciation of farm equipment, but will eventually be required to replace worn out equipment. Not so, with real estate in an expanding economy where prices can continue to rise beyond the real intrinsic productive value of the asset. Also required is a certain stewardship of assets that does not always play out amongst certain players; slum-landlords vs. dirt-farmers. The Real Estate Guys may have a great strategy, but eventually somebody "gotta" pay. Is it any wonder that public, private and student debt continues to escalate. Regional governments continue to finance the corporate welfare state (how's your pension holding up) as the attached article highlights: http://www.datacenterdynamics.com/content-tracks/design-build/us-tax-breaks-state-by-state/95428.fullarticle Entrophy is alive and well and the readjustment will not come without a struggle. In the meantime:
"Whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them." Matthew 13:12
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macro2682 - right on!
The rising cost of living, energy crisis, and other societal changes will also radically change the real estate market in the coming decades. If you can navigate the real estate market in the mean time and have the capital it’s probably a good gig per aforementioned tax incentives.
Speaking of taxes, after moving out of Northern Virginia (DC beltway) to a more rural exurb, I’ve discovered that a lot of nice tracts (tens of thousands of acres suitable for self sufficient commuter homesteads) are owned by trusts and/or are in “land use”. These people pay little in the way of taxes since they have conservation easements or are used as pasture for the occassional ruminant. Really, it’s a way for the wealthy to shelter cash and maintain privacy buffer around their estates :slight_smile: It only echoes the point that the “old” wealth, regardless how they obtained their capital, use real estate as a means for fixed income and wealth preservation. I think the ship has largely sailed for my generation.

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Only a passing mention of high valuations due to the (still) very low interest rates globally. Sure there can’t be a margin call on your properties, but when prices fall, people shift towards buying instead of renting, and then you’re shouldering the mortgage for X number of unleased properties.
People can and do go bankrupt leveraging RE.
Also, the reason the tax code treats it as a depreciating asset is because it is. The only reason a house lasts as long as it does is because of all the inputs - materials, paint, energy, maintenance, repairs, pest control (if you’re into that).
It’s not like it’s an out-of-favor asset class, so I’d really be careful with this one.

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As several folks have asked for clarification: to learn more about and/or purchase “The Future of Money & Wealth” DVD discussed at the end of this podcast, click here

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It was said that you shouldn’t care if the house price goes down and never comes back up because your cash flow will pay off the loan and you’ll end up with a house that is still worth more than the cash you put in.
This ignores the fundamental point that rents drive the cash flow. If the economy tanks rents will go down so your cash flow won’t balance anymore. At that point you will have to be putting cash in each month to cover the mortgage. If you don’t the house is reposessed by the bank and you are out your investment. Either way you stand to lose significant sums.
The issue now is that in most areas housing is overvalued. If you invest in a rental now and the market crashes you’ll wish you had waited and bought that house after the crash instead.
Investing in real estate is just like investing in anything else. You can get hurt, you need to think through all the issues.