Haven’t we seen a lot of those already? The personal finance blogosphere is filled with material, both strongly for and vehemently against, homeownership. Due to my preference for a globally mobile career and the ‘invincible’ DC market saga, you know which side of the fence I am on. But the real estate asset class can’t be broad brushed by individual experiences. It can be a delicious entree or a nice side dish in a fulfilling financial meal, if done well and in moderation. I will give you my personal recipe here.
Sorry for my food metaphors, but I couldn’t help it as I am working late today and…..hankering for a piping hot pizza verdure with grilled vegetables and roasted garlic amidst dollops of fresh mozzarella and nice basil, all baked on a hand rolled pie with almost crispy crust, sprinkled with grated flakes of the original parmigiano-reggiano. Oh, Mama Mia!
Unfortunately, there is no such menu item even within 50 miles of where I am working today. The nearest restaurant serves a greasy cheese pizza which looks synthetic in every way that it has been processed and oozes a strange liquid when you touch it. Yuck!
As I console myself to munch my crackers, you can munch this post. I like these organic Graham crackers, maybe you do too. No comparison to my pizza con verdure!
Just because I don’t see homeownership as critical in my 10! journey, it doesn’t mean I shun all real estate. I like real estate as an asset class, but don’t want to deal with the demands it can place on my time. I also want to minimize the costs of holding any real estate.
We all know there are very successful investors who made their wealth in real estate. Even among the personal finance blogging world, there are many in this camp, like Financial Samurai, Chad Carson and Mrs. & Mr. 1500, to name just a few. There are also many who are clearly in the other camp like Jim Collins, Jeremy at Go Curry Cracker, Mr. Tako, and the FIREcracker young Canadian couple. Of course, they all have good reasons.
I fall between the two camps, so I can negotiate a peace deal between them if they want me to!
I own a few small home sites in Asia. When I say small, I mean really small, like 1500 sq. ft. The ongoing costs of ownership of these sites are negligible (nothing to maintain!…and property taxes on empty home sites are, quite literally, chump change). Though there is no incoming cash flow, they provide steady appreciation beating local inflation handily (10-20% CAGR since my purchases), and hedge us against our future retirement in this part of the world. In Asia, land appreciates quite well in many places due to high population density and increasing disposable income. I own these sites in ‘bite size’ chunks, because I can liquidate each one if I choose to, which will pay for, say, 1-2 years of living expenses. Besides, many Asians build impressive homes on such small sites. Each site is worth between $30-80K. We intend to purchase our first home outright whenever and wherever we choose to retire, for which these sites also act as natural inflation cover. Our first home purchase will likely be our retirement home!
For the financial portfolio, I invest in Real Estate investment Trusts (REITs), which are about 15% of my total portfolio of diversified dividend paying stocks. They generate, collectively, close to 20% of my total dividend income. These large REIT companies own thousands of diversified commercial properties in good rentable locations, generate healthy dividends every quarter and the best part is, I don’t have to worry about a midnight call for a plumbing emergency or follow up on late rents! These REITs serve as my proxy for physical real estate in the US, and the proportion I have is still far less than most Americans’ proportion of wealth tied to real estate.
For those concerned about taxes, I must clarify that dividend income from REITs are ‘not qualified’ so you will not be able to use the special benefits given to ‘qualified’ dividends from other companies. Still, dividends themselves have a favorable tax treatment in US, so you can still shield over $80K of passive income from both federal and state taxes (if you live in a zero tax state) for a couple filing jointly, even if 20% or so of this income is from REITs.
Another reason I own REITs is I believe in the lower correlation of real estate to mainstream financial assets like stocks and bonds, although correlation between all asset classes seem to be increasing in recent times as the world becomes increasingly integrated, at least economically. Moreover, during times of deep recession, everything takes a hit!
So, it is possible to not like real estate for its physical ‘demands’ and recurring costs but still own them in the right ways and forms that meet your overall objectives. Benefit from real estate without the hassles! This way, you can have the pizza even without the veggies. There I go again….God, I miss that pizza verdure!
Raman Venkatesh is the founder of Ten Factorial Rocks. Raman is a ‘Gen X’ corporate executive in his mid 40’s. In addition to having a Ph.D. in engineering, he has worked in almost all continents of the world. Ten Factorial Rocks (TFR) was created to chronicle his journey towards retirement while sharing his views on the absurdities and pitfalls along the way. The name was taken from the mathematical function 10! (ten factorial) which is equal to 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 3,628,800.
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