2008-04-18

Simon Says, Buy Real Estate

So I’ve been explaining that our big “get rich” plan continues to be based primarily on the “Slow and Steady” strategy—save and invest regularly, especially through “automatic” vehicles that I think (hope?) even I can’t screw up. (This is where money is automatically taken out of our accounts each month and put directly into pre-planned investments, before we can touch it.) Boring, huh?

Boring like a fox.

Yeah, nonsensical metaphors will be par for the course after a long week at work. Just so you’re warned.

But I’ve also been mentioning here and again how intrigued I am by real estate, despite its attendant risks.

Is it time to buy real estate?

This seems to be the implicit suggestion of a MarketWatch article titled, “Sunny side of the street: America’s wealthy see buying opportunities in sluggish real-estate market.”

The article reports on a survey done by American Express Publishing Corp. and Harrison Group. The survey categorized its respondents into four categories based on income:

  1. “upper middle class”—incomes from $100,000-$149,000;
  2. “affluent”—incomes from $150,000-$249,000;
  3. “super affluent”—incomes from $250,000-$499,000; and
  4. “wealthy”—incomes of $500,000 and up.

How they picked these names and dividing lines could be a whole post by itself—but for today, let’s look at what they found. The following percentages of folks said they think “real estate presents a ‘real opportunity’ right now.

  • 77% of the “wealthy” said this about real estate;
  • 72% of the “super affluent” and “affluent” agreed; and
  • 67% of the “upper middle class” agreed.

And many were planning to act soon:

  • 40% of the “wealthy” said they plan to buy real estate this year;
  • 26% of the “super affluent” said this;
  • 24% of the “affluent” said this; and
  • 17% of the “upper middle class” said this.

The article suggests these plans are investment and diversification strategies:

“They’re treating it as a portfolio play, rather than a recreation play,” [Jim] Taylor said. . . . adding that the wealthy use second homes to help balance their overall investment portfolio.

Interestingly, 79% of the survey’s respondents (presumably across all categories) thought that the U.S. is in a recession—but 88% were confident that real estate prices would rebound.

So we should go out and buy real estate?

As my mama used to say, if a bunch of lemmings were walking backwards off a cliff, would you still have played instead of studying and gotten this C- on this math test?

Yeah, my childhood was confusing at times.

I’m as guilty as the next person as gawking a bit at the rich—and even trying to study them to see if I can learn anything—and copy what seems good. (As illustrated in my post, Success Factors of the Really Rich?, and is sort of the underlying point of books like, The Millionaire Next Door.) But I try to draw some lines around my stupidity.

For instance, I try not to copy Donald Trump’s hair.

I’d be more curious about what Trump is doing in real estate—except that what he does might have little or no application to the modest residential real-estate investments I might consider.

I like the idea of considering being more aggressive when lots of people think the market is bad. But I quite frankly don’t have much of a clue whether it’s time to buy real estate. Real estate is not a strength for me; and I haven’t even been trying to figure it out lately, because we have some major expenses coming this year which will impact our cash flow—so we are very unlikely to do anything in real estate anytime soon. Also, between the equity in our home and our one modest investment property, I feel like our portfolio has a decent exposure to real estate already (for better or worse).

And I’m certainly not doing anything because of this article (or the survey on which it reports). First, the survey’s “rich” respondents were picked (or at least described in the article) based on annual income. How bizarre. What if one of the respondents has fantastic income but terrible net worth? Isn’t that an indicator that the person is a terrible saver or investor (or both)? Is that someone we should want to copy??

Even if some of these folks have strong net worths, I’d want to know how they got there. If someone is doing great but she’s been centered on a stock-market strategy, how do I know whether she knows anything about real estate?

So I was curious to read about the survey, but it’s not changing our plans.

Simon says, sit on your hands until you know what you’re doing.

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