Recently, I was in Austin, Texas hosting a commercial multifamily real estate educational luncheon. It was a great event and I was happy to share my story with so many of my fellow physicians. Afterwards, there were a lot of questions. It has become evident to me that there are a lot of myths when it comes to real estate investing. Let’s look at the top three.
Myth #1: Your house is a real estate investment.
I can’t tell you how many times I have heard someone say, “I’ve already invested in real estate, I own my house.” This myth gets propagated by financial advisors. These people are in the business of selling paper assets. They make commissions if they can convince you to buy stocks, mutual funds, and various other products that they sell.
Unfortunately, for them there is no commission to be made in convincing you that your portfolio is too heavy into paper assets and should be diversified with physical real estate. Consequently, when someone asks them about real estate the standard answer becomes, “You’ve already invested in real estate if you own your own home.”
Think about that for a second. Your home is a place to live, raise a family, and make memories. Maybe you will sell it someday and maybe you will even make money on it when you do it’s still not an investment.
If you wanted to buy stock in Tesla Motors, would you decide against it based on the premise that you already own a car? By that logic, as a car owner, you are already invested in the automobile industry and many of you are well diversified because you own multiple cars of various makes.
It doesn’t quite pass the sniff test, does it?
Myth #2: Real Estate = Landlord = Management Headaches
I will be the first to admit that active investing in real estate can be filled with management headaches. No doubt, I’ve been there done that. Getting calls in the middle of the night to deal with tenants or fix toilets can definitely be a drag. So why then would I put this as a myth if it is true?
This is only true for active real estate investing. There is another route to invest in real estate. Just like a person doesn’t have to become the CEO of Coca-Cola to invest in the company, they also DON’T have to become a landlord to invest in real estate. It’s called passive investing.
In fact, I like to invest in large commercial multifamily buildings passively as a fractional investor. In this way, I get all of the benefits of owning real estate without any of the headaches of management. Also, with large buildings, I get the economies of scale that I could not get with single-family homes, or other residential properties. This allows for better returns that are more reliable, and have less risk.
Myth #3: REITs provide real estate diversification.
Real estate investment trusts or REITs are paper assets that represent interest in a company that owns and operates income producing properties. While REITs typically own real estate, investors in REITs do not. This is why I like to call REITs real estate flavored stock.
Unfortunately, many investors invest in REITs mistakenly thinking that they are getting diversification for their paper asset heavy portfolio. Instead they get another paper asset that follows the economic cycles and closely correlates with the stock market just like everything else they own. Unlike direct ownership of real estate, REITs have a high degree of volatility, little to no tax benefits to the investor, and have historically lower returns.
For these reasons and more, I think of REITs as the margarine of real estate. You see, just like butter, real estate has been around for thousands of years. Sometime in the 1800’s someone decided that there was a need for imitation butter or margarine. Millions of dollars were spent trying to convince consumers that margarine was just as good as butter. In the end, margarine wasn’t as tasty as butter and it contained high amounts of harmful trans fats. Just like there is no substitute for butter, REITs are no match for leveraged direct ownership of actual real estate.
P.S. Debunk the myths and learn more about investing in commercial multifamily real estate by downloading your free copy of Evidence Based Investing.
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