Why I invest in Real Estate

Summary

People sometimes ask me why I invest in Real Estate. This is my answer.

Background

I had a few conversations recently with would-be Real Estate investors from work. These are people who are at a point in life where they believe that investing in real estate may be something they would want to do. And they would like to learn the ropes, as well as perfect their investment thesis.

As I was once a beginner too, and as I was also helped by more experienced investors once upon a time, I find it an important part of maintaining the cosmic justice to pay it forward and offer some data points.

Unfortunately, a decision to invest or not still stays with the person that asked the question. That final part of your path you must walk alone. But I can illustrate how I think about these things. So I try to do that, and hone my answer over time.

I’ll try to distill these into topics that are worth exploring and refining. Here’s one attempt.

My reasons

Here is something I distilled from those conversations: why I, in particular, invest in Real Estate, in particular. Some of my reasons below.

I like the work

It is crucially important that you like the kind of work that comes with finding, buying and protecting your real estate investment. This includes sifting through listings, talking to people (sorry, nerds, this is still a people business, there is no Bloomberg Terminal for real estate just yet!), sometimes spending time solving operational problems, rehabilitating and revitalizing properties etc. If you don’t like this sort of work, maybe don’t spend time on Real Estate.

I think it is worthwhile to me

I believe Real Estate investing is something I can do reasonably well. I also do not have many things that I can do considerably better.

You may or may not know, I have had a reasonable but not stellar career in technology. Exceptional engineers in computer and internet technology can earn preposterous amounts of money, and many do exactly that. For such people, spending time on investing in real estate might not be the best return on their invested time. As I’m not in that league, I have extra motivation to find other ways of getting the best investment returns on my skillset.

But if you are an exceptional engineer, for example, consider just focusing on what you do best. And if you want to diversify, consider buying into funds, or syndications, or other more passive ways to take part in real estate investment, if this is something you believe you simply must have.

I can be an expert

Real Estate evaluation still relies on hyper-local knowledge. This means, in Real Estate investing, it is still possible for someone like you or me to be the world’s foremost expert on our own neighborhood. There is simply no way for a financially well-endowed hedge fund from Manhattan to know more about the few blocks around my house than me. There is no way for a high-frequency trader to insert themselves in the middle of my buy or sell transaction and make money off of arbitrage. There is no way for a marketmaker to gain an upper hand over me because they are able to afford a shorter and fatter pipe to obtain market data.

This, in turn, means I can have a competitive advantage in a narrow niche. And since in theory any information asymmetry leads to gains, it is a way for me to convert my skills and knowledge into value.

I have help

I often say that the most important result of my investing career was to persuade my partner to go into it with me. Today, she handles the day-to-day management of our portfolio. If I had to balance full time work with the operations on our portfolio, I would not have been able to do it. While most of the time the volume of work is low, it’s sometimes necessary for someone to spend a day or three coordinating over the phone, or in person. And if you can not make time to do it, your portfolio suffers.

This is something that I rely on my life partner to do every day. We, of course, had to make some life decisions in a way that enabled such a division of labor. This was a decision we made together, and while it works for us, it does not necessarily translate to your situation.

I am able to afford it

I spent some time thinking where to put this reason in the relative ranking. In a way, without this one, you don’t really even get to wax poetic about what you like about investing.

Like it or not, real estate investing is very capital intensive. You need a pretty sum of money to put towards downpayments. You also need to wow lenders into writing you loans, which you do by showing a healthy personal financial statement. My gateway to real estate investing was a lucrative job in the San Francisco Bay Area, which provided us enough money for a reasonable middle-class life, but also enough left over that we could start thinking how to put it to work.

I like to think I understand what a privilege it is to be in such a position. I like to think I understand not everyone will be able to do this, now, or ever. I would also like to think that you understand that the only thing we do is use the tools we have at our disposal for our benefit.

I am able to understand it

The best kept secret of Real Estate is that it’s not all that difficult to understand. You can, of course, make mental models for yourself of different levels of sophistication. But the reality is, it is something that you or I can grasp relatively well, and basic mathematics is simple. I think we can do a better job of making this knowledge more widely accessible, but it’s not outside the skillset of most.

I am somewhat compelled to do it

As your run-off- the-mill software engineer in the San Francisco Bay Area, my hands are my most valuable tools. In a way, my worth to The System is only to the extent I can use my hands to command the software into what my boss wants it to do. If I lose that tool, I lose my worth to the economic machinery of the USA. Some health issues have turned my thoughts into what-if scenarios in which I might not be able to work in the near future. This meant that I had to find a way for securing some income no matter whether I am able to work or not. This brought me to thinking about investing, as a way to put money to work.

Ideally, we keep a reasonable minimum amount of cash on hand as an emergency fund, and try to put everything else to work.

Conclusion

Hopefully now you know a bit more about why I ended up investing in Real Estate in particular, instead of in something else. The downside of this knowledge is that it reads that a very personal set of circumstances led me in a particular direction, and there is no clear way for me to to generalize this experience into some form of advice to others. I only hope that revealing my reasons may help you do a similar kind of soul-searching yourself, so you can find your reasons.

And I hope that whatever you find in that search will be of use to you in your life. Good luck!