Faithful followers of the Total Balance blog will know that I mainly invest in properties. I recently sunk the better part of my nest egg into a single property. It is not uncommon in the FI community to invest in properties, but most FI bloggers that I follow, tend to be more invested in stocks and bonds (and crowdlending).
The reason to favor stocks, over any other asset class is quite simple: The admission ticket to this asset class is very cheap. It is also a very liquid asset class, meaning that you can “withdraw” your money from the stock market within minutes (provided that someone out there is willing to buy your shares).
Having this amount of liquidity comes at a price though; volatility. One single tweet from you-know-who, and the worlds stock markets plummet.
Having learned from past mistakes (I owned a few stocks prior to the previous financial crisis), when I decided to re-enter the investment-sphere last year, I was pretty determined, not to repeat those past mistakes.
So, after we sold our summer house, and my pockets was suddenly full of money, I started searching for what people were investing in. It was then I came across a few blogs about the subject of FIRE, and the rest is history! – Well, sort of 😉
It quickly became apparent to me that Index investing was very popular, in the FIRE community (perhaps I’m biased here, but this is my perception anyway). I understand the allure of Index investing; It’s extremely simple, extremely passive, and from a historical point of view it’s extremely “safe”. It’s also EXTREMELY boring 😛 And also it quickly dawned on me that the FIRE people all have a pretty long investment strategy (for life…), so why “pay” for liquidity?
When I say “pay” for liquidity, I mean that the volatility and the fairly low average return, is the price you pay for simplicity (the average return of the stock market vary a bit, depending on who you ask, but somewhere between 7-12% seem to be the general consent).
I wasn’t really interested in the liquidity (and especially not the volatility). Also, I wasn’t looking for simplicity either – I was looking for a new hobby (it would seem…). Then I read Rich Dad Poor Dad (this was one of the first books I read on the subject). I don’t remember how I came across that particular book, but it remains my #1 inspiration source today. If you haven’t read it already, I suggest you go do it. It’s a little “american”, but it’s a fairly quick read.
There are many quotable passages from Robert Kiyosakis bestseller, but the one that I remember like I read it yesterday, is the alleged meeting between Ray Kroc (the founder of McDonald’s) and a bunch of university students in 1974. Ray is said to have asked the students:
What business am I in?
Everyone knows that McDonald’s is in the business of selling burgers, right?
Wrong. According to Kroc, his business is Real Estate…
Today, McDonald’s have more than 36.000 restaurants across the globe. And here is the big kicker: McDonald’s Corp own about 45% of the land that their restaurants are build on (and about 70% of the buildings). Only 15% of the restaurants are operated by McDonald’s Corp itself. The rest are franchise-operated – and the franchises pay RENT.
All this time, we thought that McDonald’s made their money, selling burgers. They do, but the majority of their profit comes in fact not from burgers – but from RENT from their franchise-operated restaurants…
Imagine any prime real estate location in the world, and there will be a McDonald’s within walking distance. Imagine that McDonald’s was a REIT; It would own Real Estate assets in the excess of $40 billion dollars, having a yearly revenue of more than $9 billion (rent!), of which $4 billion is pure profit. That’s 10% per year, for those who are counting 😉
And what happens to this prime real estate land every year?
– That’s right; it appreciates, as the globe becomes more and more overcrowded (supply and demand!), and thus rent increases as well. This revenue stream is thus inflation safe, and only goes one way: UP.
I’d take a bite of that any day (pun intended)!
I thus decided to look into Real Estate investing. I had little experience with property investing, as it’s not the typical beginner-investor segment. The reason for this is fairly obvious: The entry ticket is expensive, and the investment is extremely illiquid (your money is tied up for long periods of time, and cannot quickly be liquidated).
These traits appealed to me, for several reasons. One being: that tying the majority of my cash in illiquid assets would mean that I simply wouldn’t be tempted, to move in and out of the “market”. I’m extremely prone to suddenly following a whim (like investing in BANKS right before the financial crisis….), so having my money tied up in illiquid investments seemed like a good idea, to protect myself from “acting on future whims” 😛
Also, nobody checks the value of their properties on a daily basis (like I would do with my stock portfolio – stressing me out!), as all that really matters, is that the tenants pay their rent every month.
Ah, yes; tenants. That was the ONE thing that I just couldn’t reconcile with. Tenants = headaches & nightmares.
So, it quickly became apparent to me that I did not in fact dream about becoming a landlord!
I was then surprised to actually learn that there were many ways to become a property investor, without actually becoming a landlord at the same time! One way, is the increasingly popular method that I dubbed “the bricksters” in a previous post. Another way, is by investing with a (big time) developer, but this requires a substantial “down payment”, as you actually then become the owner of a large part (typically 10%) of a property. I found a few of these developers, and browsed through their previous projects, attended a few meetings, read through a lot of statistics on the real estate market, and decided: This was exactly what I had been looking for.
No more flipping hamburgers – real estate is where the money is!
So, what made me so sure that real estate was any better than stocks? Well, besides the before mentioned reasons, there are two main tendencies going on in Denmark: Urbanization and mobilization (people rent, rather than buy properties). The amount of people renting their home is rapidly increasing, as a clear tendency among the youth to fulfill a short-term “living situation/dream” arise, rather than to be tied down to one place for 20-30 years (as used to be the norm). This means that the demand for rentals is going to continue to rise in- and around the big cities (urbanization) for years to come. Supply and demand, baby – a winning cocktail (if you’re a property investor).
Don’t take my word for it, though. Read the stats for yourself at lbf.dk (sorry, it’s in danish!)
Now all there was left, was to find the right project. Which I believe I did, for now…
But Nick, you bought a Retail property…Does the same dynamic apply to those, as residential real estate?
In short: Yes. Where there’s people, there’ll be the need to buy stuff…
That being said, I do prefer residential real estate, no doubt. It’s simply more relateable, and I am planning for Property #2 to be of the residential kind. But until I have accumulated enough cash for another big property investment (wont be until another 2-3 years), I will have to make do with a little Brickshare in between 😉
I do contemplate adding stocks to the portfolio eventually, but for now I have plenty of exposure towards the stock market, via my Pension portfolio (if you ask me!).
McDonald’s stats (in english):
Rental price statistics (in danish):