What is the The Purpose of Investing in Real Estate?

Last Saturday I wasn’t feeling well so I laid down for a while and flipped on the TV. I can’t think of more lazy and useless activity than laying around on a Saturday with the TV on, but I felt justified since I was “resting”. Anyway, I happened to see one of those real estate investing infomercials promoting a “real estate investment guru”. I watched it out of curiosity. What struck me was the lifestyle being promoted to those who might achieve success in real estate investing. If you believe the testimonials of others who have supposedly purchased the books and tapes, the fruit of your success will be the ability to live a lavish consumer consumption lifestyle. You’ll live in a big house, have boats and fancy cars and enjoy expensive vacations to exotic destinations.

This isn’t why people should invest in real estate, in my opinion, and the infomercial is obviously targeting the get-rich-quick dreams of people who might be able to afford to buy the books and tapes, but who probably won’t ever succeed in real estate investing.

One guy in the informercial boasted something like (I’m paraphrasing) “I just moved into a new house that is over 3000 square feet, I have two boats and several nice cars, including a corvette (pictures of these luxury items flash onto the screen), I only work part time and take several vacations each year (more pictures of resort living). My current net worth is $1.2 Million dollars. I own 12 rental properties that provide over $6,000 per month in positive cash flow, etc. etc. etc”.

Other testimonials were of a similar flavor, promising a flashy life of fancy things with very little effort or work, and all of it achieved with “no money down” by just following the simple and easy steps outlined in the books and tapes (CD’s actually). I thought to myself “what a load of bull”, and “none of that fancy living is really important in life anyway”.

I then started thinking about people I know who have been successful and attained wealth through real estate investing in Austin. None of them live the lifestyles portrayed in the infomercial. Then I started thinking about how boring and dull my own testimonial of real estate investing success might be if Sylvia and I were to give one. Ours would be something like …

“We live in a nice but modest home we built 3 years ago that meets our needs. It’s a big home but it’s hard to keep clean. We’ll probably downsize next time we move. We drive 5-year-old vehicles (2001 Dodge minivan and a 2001 Chevy Silverado pickup truck) that each have more than 100K miles.

We have no credit card debt and no car payments. We don’t have cable TV and our kids have no video games because we’d all rather spend time doing other things. We are blessed that real estate success allows our children to attend a private school that we like, but we don’t otherwise spoil them. We enjoy shopping for used clothes at Goodwill and on Ebay (I’m right now wearing a $6.95 pair of like-new Levis I scored last week at Goodwill!). We took a 6 week vacation in the minivan two summers ago after we sold our Property Management Company, camping in a tent and staying at modest motels (anything with a pool for the kids is good enough). We had the time of our lives, but usually we are content with shorter weekend trips and day-outings around Austin.

We have retirement accounts in place (SIMPLE and Roth IRAs) that haven’t returned much in the past 5 years. Our rental properties have negative cash flow ever since the rents in Austin cratered in 2002 while taxes and insurance costs have continued to go up. We’ve made money on most of our real estate investments, but we’ve made some mistakes also. Our current real estate portfolio is again growing in value now that the Austin economy has kicked back into gear, but some properties are about ready for new roofs and other deferred maintenance and repairs that will be costly.

We still work very hard full time and, if things work out, we hope to be able to retire and live solely off of retirement accounts and rental income in 13 years, after we get our kids through college”.

I don’t think our testimonial would sell many books and tapes, but it’s a closer reflection of the life lived by other real estate investors we know, most of whom own 1 to 5 properties. The real estate investors I know, and those new ones we meet and help, are mostly regular people like us, who are careful with their money and want to build a better life for their kids, and a more comfortable retirement. We’re not flashy big spenders trying to show off a lifestyle, as these infomercial investors do. In fact, most of our lifestyles are rather subdued and average. One might even look at us, the clothes we wear, the cars we drive, our furniture, etc. and assume that we are of more modest means than we really are. That’s because we, and most of the people we know, choose to live beneath our means. A novel concept in today’s consumer driven society, but a requirement for those of us dedicated to building long term wealth and ensuring a comfortable retirement.

While I don’t doubt that at least some people buy the real estate ‘guru’ books and tapes and are able to find success in real estate investing by following the concepts, they won’t have anything to show for it later on if they spend all their money on boats, expensive cars and fancy vacations. One does not build wealth by spending money on lifestyle and consumer luxury items that decrease in value. Even the smartest real estate investor will have a hard time in retirement if they use the benefits from investing to fund an expensive lifestyle.

None of the testimonials that I saw in the infomercial spoke of prudent wealth building or living a modest, humble or frugal lifestyle. It was all about spending money and living the “rich life”. One of my favorite books, “The Millionaire Next Door”, explains why the richer one appears to be, the more likely it is that they have a negative net worth. We should all remember that when we see these infomercials. And we should remember that real estate is just one of many wealth building opportunities, and it’s not the best one for everybody. Read Chapter 1 of the Millionaire Next Door and see what I mean. Better yet, buy the book and read the whole thing. It really is an eye opener with regard to how Americans spend and save money. It will help you determine what your real purpose is for investing in real estate.

8 thoughts on “What is the The Purpose of Investing in Real Estate?”

  1. Why are your properties showing negative cash flow? My wife and I follow a similar life style with several South Austin duplexes purchased in the last three years. We put in enough down payment to have a slight positive cash flow. Please keep posting about your landlord experiences.

  2. Hi Stephen,

    > Why are your properties showing negative cash flow?

    We’ve always purchased properties on 15 year notes with 20% down. In the 90’s this would always produce a positive cash flow before vacancy and repairs, but not anymore. Without going into all the details of what we own and where, I can give you one example.

    House purchased in 2001 for $120K with 20% down with an owner financed 15 year note of $108K at 8.0%. At the time of purchase, rent was $1325/mo, insurance $450, taxes (I don’t remember exactly but I think they were) about $3200/yr.

    Today, Rent = $1050/mo, Insurance $780/yr., property taxes $3878/yr.

    Then: PITI = $1298, rent = $1325 = slight positive before expenses, vacancy, etc.

    Now: PITI = $1420, rent = $1,050 = negative monthly cash flow of $370 before expenses, vacancy, etc.

    This isn’t as bad as it looks though. With a 15 year note, almost 1/2 of the pmt/interest is now equity paydown. Plus there are income tax advantages. In 10 more years that house will be free and clear. But I will certainly be happy when rents return to market value. See the rent history chart at:

  3. Steve, curious as to the appreciation you estimate on the unit over the last five years. Hopefully that has offset the cashflow issues somewhat.

  4. Hi Todd,

    No, it hasn’t increased in value at all yet. This home was purchase in July 2001, right before 9/11. I estimated it was worth about $135K when I bought it, and it’s worth about that still. Since I paid $120K, that helps, and I expect it will start increasing in value soon as Leander grows.

  5. Did you read today’s paper? It’s a great market right now. There are so many people looking but not enough inventory, in my opinion. Also–a lot of buyers are not willing to settle for anything less than exactly what they want, or they are willing to remodel within one year of buyers. I’m with Coldwell Banker United and lots of my buyers want a pool, especially the out-of-towners. For sellers wanting to sell in this market, make sure you have great landscaping, front and back, it will really add to the value of your home. Also–“depersonalize” your home and get rid of the clutter, especially in the closets and the garage. Make sure your home spells GREAT! It’ the second thing a buyer notices, after the landscaping and general curbside appearance.


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