Truth, Lies, and Hype: Filtering Through Messaging About Real Estate Investment

I find myself in a very interesting place in the investment world where I get skepticism from real estate investors for “not understanding how amazing real estate investing is,” while still getting flak from many traditional investors for investing—while speaking and teaching about real estate. As politics go, that’s probably a good sign. If you get flak from both sides, you’ve probably struck the right balance.

Let’s discuss some of that balance today.

Real Estate is a Second Career

Anti-real estate people like to say that real estate is a second job. Real estate people say, “Nah, it’s too easy and it’s a miserable income.” The truth is somewhere in between. If the default investment solution is to stick 20% of your gross income into index funds once a month (or even automate the process), YES, real estate investing will take more work than that. But real estate investing is a spectrum, and you can choose your passive level. From automatically depositing money into a housing index fund once a month to digging a hole to build a house.

But there are many things in between. As turnkey properties. You don’t even need to see your property across the country, and one hour a month is a reasonable expectation of time to spend on it. Or you can go with a private equity fund. Yes, there’s due diligence required and connections to be made, but after that, it’s basically mailbox money. I don’t even have to read occasional emails that are sent if I don’t want to. “Second job” is not the right description for that, even if it is more work than maintaining a portfolio of index funds.

There will be Toilet Calls at 3am

This is another favorite of the real estate crowd. Real estate aficionados consider that statement to be the prime sign of someone who has no idea about how real estate really works because most of them have never had a bathroom phone at 3am. They don’t just happen. And besides, if you’re serious about real estate, you’ve probably fired your managers by the time you’ve had a few properties. Just in case, that 3am bathroom call isn’t for you anyway.

But investing in the right place is like being called to the ED like a dermatologist. You won’t get called very often, but the possibility of it happening is always hanging over your head (kind of like that 24 hour overseas dispatch I got from the army on a Friday night at 9pm while I was moonlighting).

More info here:

How to Start Investing in Real Estate

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Big Tax Breaks

Real estate people love to talk about big tax breaks. However, most of the best tax breaks in real estate require an excellent commitment to the field. It doesn’t just happen to the average Joe and Jane with their rental property by mistake. For example, the Real Estate Professional Status (REPS) and the Short-Term Employment Allowance (STR) allow a person to use depreciation to offset a physician’s earned income. But REPS requires you to talk your spouse into becoming a real estate professional or reduce medication AND work 750 hours a year in real estate. That’s really a second job.

Depreciation-protected income can be great, too, but it’s really only tax-deferred unless you’re willing to commit to holding onto real estate and homes until you die. Also, a big investment commitment.

Real estate people often describe how painful it is to deal with one Schedule E, much less a dozen of them. And 20+ K-1s are enough to drive even the staunchest DIY tax preparer into the hands of a $10,000 annual tax company as they try to figure out which taxes to file this year. Below a certain level of wealth, the additional costs and difficulties of tax preparation eat up a significant portion of any excess returns generated.

That said, depreciating real estate income can be a much bigger tax break than the lower rate of tax on qualified dividends and the $3,000 loss per year from tax loss harvesting. Ignore it at your peril.

Here is my 2024 K-1 from blog sponsor DLP’s Housing Fund.

Let me explain this to those of you who are not used to watching K-1s. The fund sent me (well, technically, I reinvested) $28,414, but I only paid taxes on $598. And that doesn’t include another $6,083 in appreciation in 2024, which I haven’t been taxed on and won’t ever get out of this investment (if I get out before I die, that is).

The Stock Market is a casino

Real estate fans like to portray volatility in the stock market as a bad thing. But the truth is that the only reason stocks seem to be more volatile than real estate is because they are marked to market every day (in fact, every few seconds while the markets are open). Real estate investing can change once you do that. Don’t you believe me? Put them on the market. A real estate index fund fluctuates in price just as much as any other stock index fund. Liquidity and flexibility are a feature, not a bug. It is very hidden in the world of private houses.

More info here:

60+ Worst Real Estate Investing Mistakes

Diversification Is Always Important (My Total Investment Goes to Zero)

Securities Shares

They also like to say that stocks are just “paper assets” and that real investments can be touched and felt and moved. But talk to anyone who has worked for a publicly traded company about how real their business (and your investment) is. It’s not paper. Thousands of people go to work there every day in real factories and real retail locations and real gas stations and real grocery stores and make real products and provide real services to real people. This shows as much ignorance to an experienced investor as talking about three o’clock in the morning bathroom calls to an experienced real estate investor.

Other People’s Money

Real estate investors generally use more leverage than stock investors, even though many publicly traded companies have large debt levels. The verbiage around this can be ridiculous at times, though. I roll my eyes every time I hear the word “other people’s money.” No matter how much credit you use to buy the investment, you still have everything. If it goes down in price, you own all the losses, and vice versa. If you’re investing in debt—whether it’s real estate, stocks, or anything else—you may need to chart a balanced course. Earning too much will get you into trouble eventually, as will dirty words. But if you put down 40% in the area, you are not immune to financial disaster.

Infinite Returns

Another silly phrase I’ve written about in the past is “perpetual return,” which real estate investors use to describe their investments once they’ve withdrawn an amount equal to the actual principal on their investment. Give me a break. I think index fund investors should start doing this. Go ahead. Put $100,000 into an index fund. Next year, if it costs $112,000 or $104,000, take out your original $100,000, put it in another index fund, and start referring to that $4,000-$12,000 that’s left behind as “perpetual returns.” Using that phrase just tells me you don’t know how to honestly calculate a return on investment.

More info here:

The Legend of 2 Investors: How My Real Estate Investments Had Very Different Results

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Syndications Are A Scam

I can hear him too. Someone knows someone who has lost principal in a real estate deal, and they do it routinely in all real estate deals. Every private business, including every private corporation, is unique and must be evaluated on its own merits. There is a reason you have to be an accredited investor to invest in them. You really need to 1) be able to evaluate your investment potential without the help of an advisor, lawyer, or accountant, and 2) be able to lose all of your money without it affecting your financial health.

But don’t kid yourself that every organization has a crummy return. Most of them are doing well or very well. Like any other investment, you need diversification. Private equity funds are an easy way to do that. Instead of getting one property for your $100,000, you could get 15 of them. If you’ve just bought one stock and it’s gone, you won’t be surprised. But you if you just buy one syndication and tanks?

If you’re looking for the truth about real estate investing and want to avoid all the hype, we have three resources you should check out:

Interested in exploring private real estate investing? Start your due diligence with those who support The White Coat Investor site:

WHAT DO YOU THINK? Why are there so many lies and hype when it comes to real estate investing?