bostonbubble.com

[melonrightcoast]

[melonrightcoast]

[GenXer]

No, you don't buy individual corporate bonds. Fortunately there are muni bond funds which spread the risk around, and which are backed by the power of the state to raise revenue, and there are treasury bonds. Risk can not be compared to owning a house. Everything else being equal (forget other risks), a good bond portfolio is no match for a house when it comes to investment.

[JCK]

Or how about this scenario? I buy GenX's bond, lose my job, inflation shoots through the roof. Now my rent goes crazy high, my bond yield is now effectively negative. I can't afford to live anywhere, either buying or renting.

I'd rather be the guy with the hard asset (i.e., the triple decker) in that scenario. My value would be way up, the value of my debt would be way down, and my rents would be increasing.

Bottom line is that no single investment can protect you from both deflationary (real estate collapses) and inflationary scenarios.

I agree w/GenX that you need to diversify and that you shouldn't have all (or even a majority) of your assets and retirement savings tied into a single property.

Where I disagree is his assessment that a multifamily never makes sense or is never worth the risk.

[melonrightcoast]

Are these muni bond funds completely free of risk? What happens if a bunch of the munis are down graded and default on their debt? "Spreading the risk around" sounds a lot like the whole CDO debacle that desperately needs to be un-spread.

GenXer, it sounds like you have experience and are comfortable with financial products (bonds, etc.). I know a few people that swear by annuities and full life insurance policies. Personally, I have had some experience as an owner/landlord of a two-family house, and know many other people that are also owner/landlords. I am sure that you do research into the bond funds, etc. that you are comfortable investing in. It works the same way with other investments, including real estate. You can do your homework and do well. You can also do your homework, and get "unlucky", whether you are buying bond funds or real estate. That is the point of having a diversified portfolio (which can include real estate), insurance, and liquid assets ... so you can hedge your risks. You might rather invest in a REIT because you are more comfortable with financial products, but I know many people that either don't understand or don't trust those financial products, and they need to live somewhere, so why not have a multi-family house and rent out part of it? And/or, be able to provide a place for your parents/kids/sister/etc. to live?

And yes, rents might go down, taxes go up, you fall off a ladder changing a light bulb ... but I think the first one can be determined by some sleuthing and talking to other local landlords about rental histories of an area. Research, just like I expect you do for your bond funds.

If we did not have kids right now, we'd be looking at multi-families in East Arlington, some parts of Belmont, West Newton and Auburndale to renovate and live in it for at least the next 10 years. But only IF the numbers work out.
_________________
melonrightcoast ... are you?

[GenXer]

Ok, the point was to compare investment in real estate to investment in bonds. When you re-frame the problem to include possible scenarios, then you can not limit it to bonds vs. real estate, but you must look at the whole financial picture. This is why bond investment is only a fraction of the overall portfolio. Looking back, bonds beat stocks over the past 20 years, so if you did not hold bonds, only stocks and real estate, you probably did not do as well as those who held bonds as part of their portfolio. If you want to retire on real-estate, good luck, you'll need it (talk to millions who tried doing that, and lost 50% of the value of their homes when they needed it most).

If inflation goes up, interest rates rise, and bond price falls. A bond will pay out all of its principal, and there hasn't been a massive default on bonds yet that we know of (in NY it happened, and you got a new bond with a lower interest rate as a result), but this is why a bond fund contains hundreds of bonds. A good bond fund is actively managed (and they keep track of ratings - a couple of bonds in a bond fund will not spoil the whole thing, so its nowhere near anything you've heard of dealing with CDOs or anything of the sort - this is municipal debt we are talking about). And treasury bond funds are the safest. If these default, you'll have bigger problems to consider.

JCK: When inflation is up, interest rates will be up, completely demolishing house prices (if that ever happens). A bond may not keep up with a huge inflation, it is true. But this is why you must have a good stock portfolio as well. I prefer a total plan, not 'lets chase the current trend' plan, which is what most people opt to do.

I never said multifamily never makes sense - what I said was that you can not tell me what the risk premium is, because it depends on circumstances under which you buy, and on the market in the future. Same with stocks and bonds, but there it is much easier to plan (especially with bonds). Multifamily is pure gambling in my opinion. Doing the same with stocks (i.e. using so much leverage, even when buying dividend-paying stocks) can land you in the poorhouse.

[GenXer]

melonrightcoast: Look, I don't have a bias one way or the other. I'm trying to understand the larger picture first by trying to determine what we know about the markets, and then without making any assumptions whatsoever about what is a good investment and what is a bad one, I try to put together portfolios in a way that tries to take advantage of the fact that we DO NOT know anything about the future, and can not predict anything given what we know. All of this is a result of a number of important papers which appeared in the past 10 years. Most people are not aware of this, and are still operating by old rules of thumb which are plain wrong (or they are simply sold products such as annuities and insurance).

Big problems occur when people are emotionally attached to their 'investments', especially when they are 'comfortable' investing in certain things. This is already a problem. If you are COMFORTABLE, this means that you may throw caution to the wind and not do a thorough and unbiased assessment just because you think you know how it goes. It takes one look at most of these people to find out that they are over-extended and over-leveraged, and completely oblivious to their risks. But they are comfortable, and they 'stick with it' until they crash and burn (I don't need to give examples of that). We can say everybody is stupid, but that's not the case, clearly there are some smart people who did even worse than an average Joe, and you can not claim they were stupid after the fact - they weren't stupid when they made millions in the beginning.

[melonrightcoast]

When you re-frame the problem to include possible scenarios, then you can not limit it to bonds vs. real estate, but you must look at the whole financial picture.

[melonrightcoast]

[JCK]

[GenXer]

melonrightcoast: Lets not confuse buying stocks on margin with government-backed bonds. There is no comparison. Let's also not confuse your cash with your investments. Cash is cash, and should be in the safest investments possible (CDs, mms, etc). Investment money should be in stocks/bonds. How many people do you know who have their investment real estate comprise less than 50% of their portfolio? And that is probably 40% too much! We had a big discussion about the risks of Real Estate vs. REITs, and I think it is understood that REITs are not a heck of a lot riskier than multi-family homes, and REITs pay a huge dividend, which by the way goes up when the price of the REIT goes down. And I wouldn't hold more than 10% REITs in my portfolio, and I wouldn't recommend anybody to do so.

So you are telling me that all of a sudden, investment rules change just because 90% of all the people 'investing' (more like gambling) in real estate have most of their money in real estate, and very LITTLE in other investments? I don't buy it. Anybody who is a high net worth individual with a good adviser knows very well that they need a beefy portfolio with a large part of it in bonds. How is it that rules change all of a sudden for those who are NOT high net worth individuals to basically make their investments much more risky for them and much more prone to bankrupt them if prices go south? How is that different from your friend who buys stock on margin? He HOPES to make more money and he buys using leverage. If stock goes down, he's cooked. Same for the multi-family house investors. I personally know several, and they are definitely bleeding heavily, even though they did what you suggested, and did it well. Except that they got unlucky when prices plunged. Oh well.

[GenXer]

[melonrightcoast]

[balor123]

The same rules roughly apply to starting businesses as well by the way. You can think of doing it yourself is having the lowest possible expense ratio and you don't have to worry as much about fraud or overcompensation.

[GenXer]