Author Topic: If there was an MMM real estate strategy, what would it look like?  (Read 8054 times)

KBecks

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So I'm thinking about real estate and how it might fit into an MMM-inspired / early retirement plan.

Haven't read every article, but am aware that MMM has one rental for sure, maybe a couple.

If there were an MMM strategy or do's and don'ts regarding real estate investing, what would they be?  What would the MMM community's strategies and do's and don'ts look like?  I'm talking general big-picture.

Thanks!

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #1 on: March 10, 2014, 08:17:28 AM »
Maybe not exactly MMM himself, but the Mustachian mindset:
1) Find a place that needs some fixing up.
2) Repair it with your awesome handyman skills.
3) Rent it out for long term profit, allowing you to shave on expenses by being your own property manager and handyman at a very decent dollar per hour rate.

I'm not 100% sure what you're asking, so my apologies if this didn't answer your question.

(And I personally don't follow this route, due to lack of awesome handyman skills/no desire for the extra work involved.)
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KBecks

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #2 on: March 10, 2014, 09:29:06 AM »
I think you nailed it for what MMM does, and what his advice might be, generally speaking.

I am interested in real estate and enjoy reading / learning, but as you know, have not gotten started.  I still have decisions to make about whether to pursue real estate, when, how, where, how much.

Loved the question you asked on another thread about setting a goal for real estate investing.

So if the goal is early retirement with a great, low-expense, high interest lifestyle (instead of say, building a real estate business / investment career for massive fortune-building), how does RE fit into that picture? 

Did I ask that any better?  I am looking for ideas personally and also interested in general.  :)


Elaine

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #3 on: March 10, 2014, 09:33:24 AM »
I agree, MMM seems to have a specific liking for single family homes that need lots of hands on work. I think real estate investing is pretty dependent on where you live, what your specific skills are, what your goals are, etc. For that reason a lot of MMM real estate advice doesn't help me much- for a wider range of types of investing and just basics learning I have had success browsing on biggerpockets.com

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #4 on: March 10, 2014, 09:35:37 AM »
So if the goal is early retirement with a great, low-expense, high interest lifestyle (instead of say, building a real estate business / investment career for massive fortune-building), how does RE fit into that picture? 

Okay, I think I see where you're going. Let's define this a little.

What is a "high interest lifestyle"?  What do you want your participation level to be?  What sort of returns are you seeking?  How much education do you want to get? How much time do you want to invest before, and after, FIRE?  What skills or knowledge do you already have?  What is your comfort level with distance, neighborhood qualities, etc.?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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KBecks

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #5 on: March 10, 2014, 10:41:51 AM »
So if the goal is early retirement with a great, low-expense, high interest lifestyle (instead of say, building a real estate business / investment career for massive fortune-building), how does RE fit into that picture? 

Okay, I think I see where you're going. Let's define this a little.

What is a "high interest lifestyle"?  What do you want your participation level to be?  What sort of returns are you seeking?  How much education do you want to get? How much time do you want to invest before, and after, FIRE?  What skills or knowledge do you already have?  What is your comfort level with distance, neighborhood qualities, etc.?

Let's take these questions and answer them with the outlook of the average, new-to-mustashian life person, combined with mustachian ideas and principles.  Here are my guesses to the answers. Correct me if you see these very differently, I'm still new here!

High interest lifestyle -- With MMM we are talking about 1)  accumulating assets for retirement or building up the post-retirement 'stache  2) living on low expenses  3) making work mostly optional / low hours per week / high enjoyment for the work you do   4) going easy on the environment / energy savings and 5)  being smart, self-sufficient, bad@ss.

Pre-retirement, MMM would focus on building / maintaining assets.  Post retirement it would be more about maintaining assets with ease.

Does this sound about right?   I am trying to put in general answers bases on MMM principles.   I have not read enough about MMM's investing, but I would guess that an "average-ish" return would be acceptable from MMM's point of view. 

For the most part we're talking about building  a retirement lifestyle, not building a business or a career. 

Just a start, loose thinking.

the fixer

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #6 on: March 10, 2014, 01:27:34 PM »
Granted I'm very new at this, but one thing I'm realizing quickly is that making money through real estate is a lot like any other business venture: you need a "business plan" that's highly tailored to your market, abilities, assets, and available time. Coming up with this is tough. It took me months of thinking about it to come up with one suitable for me and the current Seattle housing market, but even then I may be doing it entirely wrong and won't know until after the fact. Such a risk is inherent in starting almost any business, so I think you just have to be comfortable with that.

There are some common threads that you'll see in many investors' plans. MMM's personal ones include (from what I've read):
  • Buying or building houses at very cheap, below-market prices. Being able to do this requires certain skills, experience, and assets that not everyone will have. I think SFRs are the best choice for this kind of investing, so it also requires a compatible market for that type of property.
  • Buy and hold houses to rent out to tenants, as opposed to fixing and flipping.
  • Position your property in a way that maximizes rental income and minimizes long-term expenses from vacancy and repairs. MMM does this by making his houses appeal to a "luxury" rental market so he can charge higher rent, while also attracting long-term tenants that like the place and want to stay for a long time. This is a sharp contrast to many of the landlords on BiggerPockets who seem more interested in minimizing upkeep that costs money and amenities the tenants could break. I've read posts from people who don't even provide refrigerators if they can get away with it.
  • Manage your own properties as a form of self-employment, instead of outsourcing to a management company. This decision requires investing locally, instead of out-of-state or internationally.
  • Concentrate on a small number of very profitable rentals to generate income. This also seems like a rare strategy from my experience, as many books and forums I've read suggest it's common to aspire to own many properties and manage them extremely passively.
Note that I'm not trying to judge any of the above, just pointing out the choices. There are many successful landlords that apply many different strategies to make it work. I'm personally trying to incorporate most of MMM's strategy, but not quite all because of experience and local housing market differences.

KBecks

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #7 on: March 11, 2014, 08:15:07 AM »
Good stuff, Fixer.   It is interesting to note that MMM is more of an accidental landlord (as a result of the home building business experimentation that morphed into a rental property),  and I'm looking at this as an intentional move to include a rental home(s) into an appreciating asset/income stream kind part of the 'stache.

Really good notes on property quality.  For me I think this adds to the pleasure of ownership / pride of ownership and not too much of a PITA part of the lifestyle equation.




Mr Mark

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #8 on: March 11, 2014, 11:19:20 AM »
Great summary fixer!

MMM is living in a part of the country with a pretty strong economy and net inflow of professionals. By having just 1 quality property, low maintenance, he secures  high rentals which also mean high quality tenants with longer term stays, less hassle factor. This rental income will flow pretty much no matter what the stock market does, and is inherently inflation proof. He breaks the 'rule of thumb' for the 50% rule [half rent equals expenses and vacancy], and also has a rental more expensive than the 2% rule I'd guess (2400 rent x 50 = 120k house value, his is probably more like 300k?). But he makes it work.

Just 1 rental is also highly tax advantaged.

MMM has got it to where the rental income alone plus bits and pieces fully fund his lifestyle. This totally insulates him from the vagaries of the market, helping underpin a long term investment strategy too.  His portfolio can do its own thing.

This is why MMM has found something special.

By that I mean a niche in the system where anyone with 500k, owns their own house and the will can FIRE
« Last Edit: March 11, 2014, 11:22:45 AM by Mr Mark »

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #9 on: March 11, 2014, 11:29:07 AM »
This is why MMM has found something special.

I'd say his real estate investing strategy is available almost anywhere, and with work and willingness to take on other real estate risk (that can be mitigated with knowledge and due diligence) can even be improved on.

I wouldn't call it "something special" because that will make others think they can't do it, or at least not in their area.

Pretty much anyone can, and with not much work (but lots of knowledge).

EDIT: I see you edited and added the last line while I was typing.  :)  That is indeed special in today's world, being able to FIRE.  I had understood it to mean his rental was special, based on the rest of the post.  Thanks for clarifying!
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Mr Mark

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #10 on: March 11, 2014, 12:41:06 PM »
As soon as I reread it I realized it sounded that way.

His real estate approach is not the conventional one. But it works becuase of the integration with the rest of the MMM approach.

DoubleDown

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #11 on: March 11, 2014, 08:50:38 PM »
All good advice here so far. I'll add a couple of thoughts that we sometimes overlook even though they should be obvious. These two things can make it exceedingly simple to build wealth through real estate. Basically it's just "buy and hold":

1. If you approach this as a long term investment instead of short term, you can generally take a more passive approach and build wealth just by holding. Even if you don't start with a great cash flowing property, over time you should do well (as long as you follow #2 below...). I'm now down to owning just one rental house, and it really is a poor cash flowing property (only breaking even on total carrying costs). But it is in a super desirable and expensive area, an established neighborhood, great schools, blah blah blah, with values skyrocketing and lots of insanely expensive new construction as older homes are torn down and $1 million homes are built on the lots. I can't predict the future, but I fully expect that through appreciation that home will generate substantially more wealth for us than if I sold it and invested the money elsewhere, or if I had invested in a cash-flowing property somewhere else.

2. If you own real estate in a good neighborhood, it's almost impossible not to build significant wealth over enough time. The magic of paying down the mortgage, appreciation, rising rents/inflation, and leverage is sometimes hard to overemphasize.  A reasonable 5% gain on the value of a home can of course dwarf much larger percentage gains in other investments. As an example, if you put 20% down on a $200,000 house, your "investment" or equity would be $40,000. If the house goes up in value 5% in one year, you will have made $10,000. But if you had put your $40,000 into stocks, you would need a 25% increase to match that $10,000 gain (and if anyone knows a reliable stock buying strategy that returns 25%, let me know). And of course stocks don't give you any tax advantages while you hold them like real estate can, nor can they generate rent payments like real estate.

So, if you're buying a good home in a good area, and can hold it for the long term, you can potentially give in on some of those other "rules" about getting a perfect cash flowing property. There are literally zero homes where I live that meet the 50% rule or the 1-2% rule, and if I had limited myself by those rules I would have missed out on large gains over the years. "Buy and hold" can be a perfectly acceptable strategy.

DoubleDown

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #12 on: March 11, 2014, 08:59:39 PM »
And as I re-read fixer's post above, I see that he/she already mostly covered a lot of what I wrote! So, I should have just said "+1" and given credit where it's due. Sorry fixer, and I agree!

Okay, maybe tweaked slightly to say I think it's okay to give in on some of the rental income or cash flow aspects in return for higher appreciation expectations over the long haul. This, admittedly, can be a little riskier, but not too much if you are confident you can hold the place even through hard times (such as a job loss), and you've bought a good house in a good neighborhood that you know, feel good about its future prospects, and keep up on.

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #13 on: March 11, 2014, 09:05:29 PM »
I like appreciation.  I just plan to FIRE on cash flow.

Some people give up cash flow for appreciation.  I want both.  :D
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DoubleDown

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #14 on: March 13, 2014, 11:09:28 AM »
I like appreciation.  I just plan to FIRE on cash flow.

Some people give up cash flow for appreciation.  I want both.  :D

Ha, of course! I'd always take both if available.

Where I live in Northern Virginia, it's essentially impossible for a regular small time investor to find any kind of cash flowing property. Even seasoned investors buying auctioned properties on the courthouse steps are getting very minimal or no cash flow returns on rentals. Instead, they're flipping them, because real estate is just too overpriced here, and there's a lot of competition.

I don't know where the OP lives, I just wouldn't want them to be completely discouraged from investing in real estate if they're in a similar area, and can't find a good cash flowing property. I think you'd agree owning real estate can still be a lucrative long term investment in a market like this with poor cash flow opportunities.

For me, living in a market like this, I'd rather cede on cash flow and invest locally in neighborhoods I know well, than to take my $ into a non-local market that offers good cash flow, but that I don't have personal, eyes-on and long term experience with. But that's a personal choice of mine, either way can work.

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #15 on: March 13, 2014, 12:26:43 PM »
I am going to agree with folks that you can do just fine without hitting the 1-2%/50% rules. You just need to be in a position where you A) know your local market for both rentals AND sales, and B) can handle the cost of replacing the roof (or whatever) if/when needed without causing yourself terrible hardship. If you have a good understanding of your area and plenty of resources to deal with setbacks, you can make things work without necessarily seeing any cashflow. *Especially* when the government is essentially giving away money with ~4% (and under) fixed rate mortgages. I bought a couple of houses that are arguably cash flow negative because I felt they were cheap for the price, likely to appreciate, and I wanted that inflation hedge of a 30 year fixed rate loan.

The downsides to remember are that you pay a fortune to get into/out of a RE investment as compared to stocks or bonds or what have you. Assuming you're going to pay an agent and a broker and such when you sell, plus capital gains, stocks do start out with a big head start (plus no work/hassle) - but unless you're very willing to take big risks and financially savvy, you aren't going to be able to use much/any leverage as you can with RE.

I think the answer to "what is a MMM strategy for ____" is always going to be something like, "be honest with yourself, run the numbers and think hard, and be willing to take some risks. Be ready to learn from your mistakes and assume you'll make some. Life satisfaction is more important than chasing every last iota of income. Oh, and don't be a dick to your tenants."

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #16 on: March 13, 2014, 01:02:16 PM »
For me, living in a market like this, I'd rather cede on cash flow and invest locally in neighborhoods I know well, than to take my $ into a non-local market that offers good cash flow, but that I don't have personal, eyes-on and long term experience with. But that's a personal choice of mine, either way can work.

Sure.  And I can understand that.  I just it's better to research other markets, build or find a good team there, and invest there, over locally.  But that's a personal choice of mine, either way can work.
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DoubleDown

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #17 on: March 14, 2014, 12:41:48 PM »
^^^ Man that is awesome! There's a reason you are the youngest person I've ever heard of to own so many properties and already have all your current living expenses covered by the cash flow alone, let alone all the equity that must be in those properties!

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #18 on: March 14, 2014, 10:49:00 PM »
^^^ Man that is awesome! There's a reason you are the youngest person I've ever heard of to own so many properties and already have all your current living expenses covered by the cash flow alone, let alone all the equity that must be in those properties!

Thanks.  :D

The best part is, it's really fun!

I can see how someone like Joshua Kennon gets really into investigating companies to invest in - he's good at it an enjoys it.  It' straight index funds for me in terms of equity investments, but I'm the same way as a value investor, but in real estate.  Just enjoy the research and number crunching and learning.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Connemara

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #19 on: March 15, 2014, 03:28:22 PM »
What do folks think about buying a rowhouse/brownstone and renting out one or two floors as apartments? I would imagine it's easier to be an active rather than passive landlord when you live on the premises.

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #20 on: March 15, 2014, 03:32:15 PM »
What do folks think about buying a rowhouse/brownstone and renting out one or two floors as apartments? I would imagine it's easier to be an active rather than passive landlord when you live on the premises.

Buying a small multifamily (duplex, triplex, or quad) and living in one unit while renting out the others is a common beginning real estate strategy, and a pretty good one if the numbers make sense.

You also get the benefit of it being "owner occupied" for both mortgage purposes and potential capital gains when you sell.
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If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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the fixer

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #21 on: March 16, 2014, 11:51:53 AM »
What do folks think about buying a rowhouse/brownstone and renting out one or two floors as apartments? I would imagine it's easier to be an active rather than passive landlord when you live on the premises.
This is what I'm trying to do. As ARS says it depends on if the numbers work and a few other things. One challenge in my area is that they're aren't many multifamily houses out there, so opportunities even at retail price are rare. I think they're all just grandfathered in to the current zoning, so supply is limited.

Another aspect of this decision that you shouldn't really care about but a nonmustachian would is that multifamily dwellings are typically maintained as rentals. They don't usually have nice, renovated kitchens with granite countertops and all the fixings you expect in the stereotypical American Dream home. Renovations and repairs should be getting done only if they would allow a unit to command a higher rent, so it's all done with tenants and the rental market in mind. If you intend to occupy one unit, the unit you take will be a rental-quality living space, and if you're smart it will be the worst-condition unit that brings in the least amount of rent. There are exceptions to this, some duplexes are really nicely done. In any case, if you are approaching this decision as an investor none of it should matter to you.

needmyfi

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #22 on: March 16, 2014, 12:35:23 PM »


Buying a small multifamily (duplex, triplex, or quad) and living in one unit while renting out the others is a common beginning real estate strategy, and a pretty good one if the numbers make sense.

You also get the benefit of it being "owner occupied" for both mortgage purposes and potential capital gains when you sell.
+1 not only cheaper mortgage rates-usually up to fourplex, cheaper insurance and often cheaper taxes since there is usually at least some homeowners exemption.  Worked really well for me in my 20's .

Daleth

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #23 on: March 16, 2014, 02:27:44 PM »
There are some common threads that you'll see in many investors' plans. MMM's personal ones include (from what I've read):
  • Buying or building houses at very cheap, below-market prices. Being able to do this requires certain skills, experience, and assets that not everyone will have. I think SFRs are the best choice for this kind of investing, so it also requires a compatible market for that type of property.

I'm not really in agreement re: SFRs, for two reasons. First, with a multi-unit one vacancy doesn't put you at $0 for the month. While you're between tenants on one unit, you probably have tenants in the other unit(s), so you're better protected against the vacancy risk. As for cost, I got a duplex (two 2BR apartments) for about 25% less than a SFR, and then had to put 10% of the purchase price into it for repairs to get it rented (I lack time and awesome DIY skills.... although yes, that was me grouting the bathtub at 1am). So the duplex still cost less than the SFR... in my case that's because the duplex is in a less desirable neighborhood. Not dramatically so--these neighborhoods would be next to each other on the desirability scale, but it's clear which one is lower. Both these properties had good tenants in them almost immediately--the duplex got its first tenant 3 weeks after purchase (we fixed the apartment that was in the best shape first, got it rented, then fixed the other one and the second tenants moved in a month after the first ones).

Obviously everyone's market is different, but I'm just saying this because 2 to 4 units have some huge advantages over SFR (which I'll list in a second) and they're not always a bigger investment than SFRs, especially when you compare the potential rental income from each (assuming equivalent neighborhoods and an urban environment, two 2BR apartments bring in more rent and rent more quickly than one 4BR SFR). Anyway, here are the advantages of 2 to 4 units over SFR's:
- You're better protected against the vacancy risk
- Because of that protection, eviction decisions, when necessary, may be easier to make
- Only one roof to fix, one yard to maintain, one place to send your handyman or your awesome-DIY self, etc.
- Possible shared resources (laundry room)

  • Position your property in a way that maximizes rental income and minimizes long-term expenses from vacancy and repairs. MMM does this by making his houses appeal to a "luxury" rental market so he can charge higher rent, while also attracting long-term tenants that like the place and want to stay for a long time.
How to position yourself is also something that varies by market. If you're in a college town or an urban area with lots of young professionals, or if you're near a major hospital (especially a teaching hospital), apartments or small well-located SFRs are a great bet for getting good tenants--i.e. grad students, medical residents and young professionals.[/list]

Daleth

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #24 on: March 16, 2014, 02:30:54 PM »
A reasonable 5% gain on the value of a home can of course dwarf much larger percentage gains in other investments. As an example, if you put 20% down on a $200,000 house, your "investment" or equity would be $40,000. If the house goes up in value 5% in one year, you will have made $10,000. But if you had put your $40,000 into stocks, you would need a 25% increase to match that $10,000 gain (and if anyone knows a reliable stock buying strategy that returns 25%, let me know). And of course stocks don't give you any tax advantages while you hold them like real estate can, nor can they generate rent payments like real estate.

That is a REALLY good point. The other thing I love about real estate is that unlike basically every other investment you could make, you can insure it! House burns down, tornado wrecks it, whatever, landlord insurance will not only cover that loss but also cover your resulting rental losses.

slugsworth

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #25 on: March 17, 2014, 10:21:40 PM »
I just feel like being a bit contrarian.

Sure real estate is leveraged, you can also buy stock on margin, and get leveraged returns too.  . . and you don't have a 10% transaction fee.

Insurance, well you can buy puts or just diversify your portfolio to reduce risk. 

Stocks generate dividends.

I think r.e. can be a great investment, but it isn't the only one and has distinct downsides too!

arebelspy

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Re: If there was an MMM real estate strategy, what would it look like?
« Reply #26 on: March 18, 2014, 07:09:51 AM »
Of course.

You forgot to mention the Ts: Tenants, Toilets, Termites, Trash.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

T-Rex

  • Bristles
  • ***
  • Posts: 414
  • Location: SF
  • Thirtysomething woman, military vet
Re: If there was an MMM real estate strategy, what would it look like?
« Reply #27 on: March 28, 2014, 10:03:42 AM »
This is totally the question I was trying to ask :P