I think Ryan's missing my point. When I talk about income %, I'm talking about across an entire portfolio (that real estate should certainly be a part of).
So you're putting 25% of your cash down on a $5m property for $110k per year. Nice! How many such properties do you think the banks are going to let you buy? With the future values of these properties a bit murky, I imagine that someone with 4-5m in the bank ISN'T going to get the green light to buy $21m in properties (4 difference loans to service).
People keep bringing up INDIVIDUAL investments that can net a great return (in this case, 9%). That's missing the point. With big piles of money, you have diversified holdings. You're not going to drop 90% of your cash in real estate down payments. Nor are you going to drop it all in stocks. You're going to (generally) do a reasonable asset allocation to minimize the risk. While I did mention the S&P500's performance for comparative purposes, I wasn't advocating for a pure stock portfolio (any more than you're advocating for a pure real estate portfolio).
As he says, real estate has plenty of risk. You're betting on a local economy, construction pace, population growth, etc. But anyone with millions ought to be playing in real estate.
I really enjoyed your article, so I apologize if you felt like I was attacking you. That said, I think I disagree on a few points:
1) Commercial real estate underwriting much more heavily weighs the fundamentals of the property as opposed to the borrower. As a result, it's possible that you could have a lender who would be comfortable with you carrying several times your net worth in loans, provided the underlying collateral fundamentals are strong.
2) I'm skeptical that a long-term diversified portfolio will only return 5%, before inflation is taken into account. This would correspond to a real return of 2%, which seems overly-conservative. Don't wealth managers advise safely withdrawing 4% per year to protect your principal and keep pace with inflation? I may be mistaken here.
3) I'm not as gung-ho about diversification as you are. I think it can make sense, but as Buffett has said, it's a hedge against ignorance. If you sell a startup for $20m, you were highly under-diversified before the sale, but that doesn't make it a bad idea. Nor would it be a terrible idea to roll a significant portion of that capital back into a business that you knew well enough that the risk profile was low for you. This probably requires more work and self-assessment than most people are capable of or willing to engage in.
Anyway, thanks for your original post and your comment here. Food for thought, as always :)
Fair points. Regarding the 5%, that's my conservative # based on my personal feelings about the economy. The math holds up just fine if you nudge that up to 7%. You still go broke (unless you cut your spending, which I certainly would-- I've no need to live rich). 7% is pretty solid for a balanced portfolio.
I personally opt for a riskier portfolio than most (I have a few rental properties and assorted mutual funds), but I don't think you or I can pick 'em like Buffet! :-) It IS a hedge against ignorance, which I happily admit that I am (compared to buffet).
Interesting stuff, regardless-- I've actually never crunched the #s on big apartments. Thanks for doing it!
So you're putting 25% of your cash down on a $5m property for $110k per year. Nice! How many such properties do you think the banks are going to let you buy? With the future values of these properties a bit murky, I imagine that someone with 4-5m in the bank ISN'T going to get the green light to buy $21m in properties (4 difference loans to service).
People keep bringing up INDIVIDUAL investments that can net a great return (in this case, 9%). That's missing the point. With big piles of money, you have diversified holdings. You're not going to drop 90% of your cash in real estate down payments. Nor are you going to drop it all in stocks. You're going to (generally) do a reasonable asset allocation to minimize the risk. While I did mention the S&P500's performance for comparative purposes, I wasn't advocating for a pure stock portfolio (any more than you're advocating for a pure real estate portfolio).
As he says, real estate has plenty of risk. You're betting on a local economy, construction pace, population growth, etc. But anyone with millions ought to be playing in real estate.