You Should Have Bought Commercial Real Estate

I don’t own any self storages. I just think we should have an open mind. Maybe after looking at other options we still conclude single family housing is the best investment there is. Fine. After looking at it carefully.

I have very high and increasing leverage. If the underlying stocks increase just 30% my net will double. Underlying doubles and my net will be 7x. I’d rather bet big on a few mega caps instead of placing small bets on something small and unproven.

So aggressive… :slight_smile:

I’m using leverage in another way. I use it to purchase real estate. My net on all real estate purchases is infinity… pure gain on 100% leverage… :rofl:

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I plan to do that too, to slowly deleverage in the coming years.

It’s hard to figure out when to de-leverage. You reduce the amount of assets you hold everytime you de-leverage, thus reducing to potential to achieve more gain.

Deleverage from the stock market, and leverage that in real estate.

Um… not really inclined to give up stocks for real estate… :frowning:

[quote=“manch, post:41, topic:2830”]
Underlying doubles and my net will be 7x
[/quote]Net worth or value of stock portfolio? Max is 50% margin, how to achieve a double with 30% appreciation and 7x with doubling underlying. Should be 45% and 3x. Unless you long calls.

Google “portfolio margin”. “Net” means net liquidity in stock account: account value - margin debt.

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Are you using 6:1 margin? That’s even more leverage than most RE deals

Do they have any special requirement to allow this much margin?

We are the fortunate ones who own a home or two, but keep in mind that there are a lot of people scrapping by as it is. So as living expenses for housing and health care continue to go up and take more of people’s meager paychecks what has to give? Well, the extras, such as dining out or even renting of storage units. Come on, not too difficult to arrive at that conclusion, is it? If we think about it, why is there a show (granted fixed and staged) about the auctioning off of storage lockers (Storage Wars)? Because yes, when people get down on their luck the first things that go are the non necessity stuff like their stuff in storage lockers. The show may be fake but I do believe situations like this do come up and in increasing numbers. Yes, we are seeing the proliferation of RV living in the streets of our cities. Def more homeless out there. The income gap between the wealthy and poor is widening all the time. So if poor people are renting out fewer self storage lockers is the demand being absorbed by relatively richer folks? I say no because frankly I don’t know anybody with means renting out storage space. Smart, rich people don’t do that. They either have the storage space on-site or they simply don’t have that much junk in the first place. They certainly are smart enough to analyze whether their stuff is worth enough to warrant paying storage rent month after month. If it is, fine. But chances are, the answer is no, so what do smart people do? They donate the stuff away, get a tax deduction for doing that and wipe off another potential expense. Does that sound like an environment ripe for storage locker investment?

Now I’m getting worried. After reading this blog, it seems many people are using max leverage for buying stocks and rental investment (10 houses in 1 year in the same county, could single handedly push up prices in that county). So I’m no longer sure the next downturn would be mild, could be quite steep.

Are you referring to me? Buying 10 houses in 1 year in the same county is a drop in the bucket. I know somebody who owned more than 50 units in a Vallejo condo complex of 200 units. 50x$150k=$7.5M portfolio in that area alone.

Also, maybe @manch used max leverage, but I certainly didn’t. If the market dropped 50% I would still be fine and dandy. No margin calls for me even at that level.

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Actually I think you have it backward. Like @Elt1 said it’s the lower income people, the renters who rent self storage units. Rich people have big homes with garages. Why do they need self storages?

People accumulate stuff because of nostalgia. As people age their future is getting less and less exciting. You are what you are. There are no untapped potentials when you hit 40. So people tend to look back at their younger age. Why do you keep the coffee table from when you were 25? Because those were your happy days. When you don’t have much to look forward to, you look back.

So as your income gets lower, which means you rent instead of own, you take out storage units for your past belongings. It’s a psychological need. Something we do as humans.

I am nowhere near max. I don’t even know what max is. Portfolio margin means they look at your portfolio and calculate the value at risk to determine how much they lend you. They do show me a dollar figure saying how much more I can spend at 15% “down payment”.

So 100/15 = 6.7x. I am nowhere close.

But be afraid. Investors as a whole are very leveraged. BWAHAHAHAHA

Some buyer of my flip from last year put down $3000 for a $300k home. That’s 1% down payment! Definitely the most leveraged situation I’ve seen.

That house has since appreciated to $350k. So he made $50k/$3000 = 1600% gain in one year.

Too many investors using leverage is bad in that the bull run would run longer and higher as if it will go up forever creating a complacency like a frog being cooked in warm water. When the recession/ bear trend has begun, it is still interpreted as buy the dip opportunity and raked up even more debt, and by the time they realize is already too late. I don’t have any friends in the financial market so I don’t know how leverage are the market compare to 2006-7 period… may be someone who has friends can tell us.

Lenders are comfortable doing this now? Worry index just double.

Absolutely. Do worry! Most people in low end areas purchase homes using FHA which is a mere 3% down. Some (like my buyer) got away with next to nothing down (I have no idea how he did that… I thought the minimum was 3% for FHA).

I am certainly not raking up more debt. I have started to de-leverage a couple months back. My plan is to eventually reduce my margin debt to zero.

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I see both you and Jil sense danger :grinning: Better de-leverage while you can rather than wait till you have to.

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When talking about margin or LTV, we should calculate it as current debt / current value. Say that buyer bought a 300k house with $297k mortgage. His initial LTV is 97%, very high. However, when price rises to 600k after 5 years, and mortgage principal also dropped to 285k, then his current LTV is only 47.5%, which is really low.

This cycle can go on for quite many years. RE cycle can last very long. Eventually there might be a bust, but that bust may only come after Millenials bought their home, that’s 16 to 20 years later.

So before then, go ahead to cash out from your house with 47.5% LTV, buy another house at 75% LTV.

A large portion of investment gain comes from leverage. Without leverage, wealth gap will be much smaller. Think for a moment, how poorer will you be if you have to buy houses with cash?

I think the most effective means to achieve socialism and communism is to ban mortgage and ban stock margin use

Of course do everything at your own risk!