Your writing has helped me to shape how I'm teaching my adult children on this topic, which coincidentially is not too different to lessons passed to me by my Grandfather!
Thanks for this, lots to unpick and learn from here. ‘The lesson being… don’t size up into non-yielding real estate before a banking crisis.’ Q1. If we assume we can’t foresee banking crisis, how could we avoid this mistake other than never sizing up? Q2. How was this a problem if it was debt free?
Being free is worth more than being rich. Never risk freedom to become rich.
When we're young, we don't have much financial wealth to lose and we are rich in time. That is a good time to size up, which I did in my mid-20s.
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Good Q2... the issue was the amount of capital held in a negative yielding asset. I needed to put that money to work on the investment side of the family balance sheet.
Over the following years, I downsized from the big house. That let me pull ~65% of the equity out and left me with a $3,250 per month payment on a new house (mortgage, taxes, insurance). The new place was modestly leveraged, and the first $500,000 of gain was tax free (married, filing jointly) when we sold. When we bought in early 2013, the cost of ownership was ~65% of the cost to rent.
Whenever I look at real estate, I consider:
1/ cost to own
2/ cost to rent
3/ effective yield compared to other asset classes
So many overlaps with my own story G. Thank you for sharing this experiences, they resonate and amplify in what is important 🤙🏼
Thanks Iñaki
Your writing has helped me to shape how I'm teaching my adult children on this topic, which coincidentially is not too different to lessons passed to me by my Grandfather!
Thanks Andrew. We both keep paying it forward.
Thanks for this, lots to unpick and learn from here. ‘The lesson being… don’t size up into non-yielding real estate before a banking crisis.’ Q1. If we assume we can’t foresee banking crisis, how could we avoid this mistake other than never sizing up? Q2. How was this a problem if it was debt free?
If I was considering sizing up then the best place for it is inside a non-recourse investment vehicle, with capital I can afford to lose.
Or... be the manager of such a vehicle and earn a profit share on the gains, with limited personal capital on the line.
See: https://truewealth.substack.com/p/the-free-money-era
Being free is worth more than being rich. Never risk freedom to become rich.
When we're young, we don't have much financial wealth to lose and we are rich in time. That is a good time to size up, which I did in my mid-20s.
+++
Good Q2... the issue was the amount of capital held in a negative yielding asset. I needed to put that money to work on the investment side of the family balance sheet.
Over the following years, I downsized from the big house. That let me pull ~65% of the equity out and left me with a $3,250 per month payment on a new house (mortgage, taxes, insurance). The new place was modestly leveraged, and the first $500,000 of gain was tax free (married, filing jointly) when we sold. When we bought in early 2013, the cost of ownership was ~65% of the cost to rent.
Whenever I look at real estate, I consider:
1/ cost to own
2/ cost to rent
3/ effective yield compared to other asset classes
4/ replacement cost for the buildings
Lots more on real estate in my archive blog:
https://feelthebyrn.blog/?s=real+estate&submit=Search
g