Wealthyness Weekly — 3: My Top 3 Reasons to Invest in Real Estate

Short one this week as I have and will be traveling. I will be updating my portfolio progress this week and the top 3 reasons why I have been diversifying my holdings more and more into real estate in the past few years.

Week 3 in Review

Under-performed the Market

Retirement (+$3K)

Sizable gain for my retirement fund (+3% as well!) but no real movement. The biggest story here is a rebound in Netflix, which is my largest holding in my retirement fund. This was somewhat in line with a general rebound in tech, alongside more positive indicators around content quality (Emmy nominations) and global expansion plans (CEO Reed Hastings talked about Europe strategy).

Investment (Flat)

On the flip side, my stock investment holdings were flat, which under-performed the market. The culprit is my WMT call options, which lost significantly more value and my holding in SNAP.

My holdings in SNAP are small, but the company lost a significant chunk of value in the past week after falling below its IPO price and being downgraded by Morgan Stanley, one of its IPO underwriters. Having been the research analyst on various IPOs, this is a fairly negative sign. This means that the situation at SNAP has changed enough that whatever assumptions made 3 months ago no longer hold. This generally either means that the company made bad assumptions during the IPO process or that the company has low visibility on its business model or the competitive market. However, it doesn’t necessarily mean a death knell for SNAP as even underwriter group analysts typically lose access to extra information after the company goes public. I am holding on here because I haven’t really had time to formulate a strategy around entering or exiting. It was an off the cuff investment that hasn’t worked out. Most likely, revenue numbers will be okay this quarter with their new self-service ad platform so lets see if that is enough to get a rebound in what must be very negative sentiment.

On my WMT call options, they decline in value as WMT slid during Amazon’s Prime Day. I like Amazon, but I also feel like WMT is the only retailer that has the scale and resources to compete. Holding on to at least after Q2 earnings to see if Walmart’s E-commerce growth acceleration continues.

Cryptocurrency (-$1K)

Holy wild-west. Its been an extremely bump ride for cryptocurrency. Around half of my holdings here is in Bitcoin and the other half is in Ethereum. The latter suffered heavy losses. The movement is speculated to be due to ICOs unwinding the Ethereum they have fund-raised. Little oversight, no regulations… its likely that the wild ride is far from over. My view on cryptocurrency is more like a call option. If cryptocurrency makes good on its potential, a few coins will be worth a lot of money.

Top 3 Reasons Why I Invest in Real-Estate

I do think there is somewhat of a real-estate bubble in certain markets. I am less sure on how unsustainable they are. My theory is that the large increases in real estate prices in markets like San Francisco have been a factor of more than rising incomes and buying power. I will probably go into more depth on the next episode. Despite all of this, I still view real estate as a very compelling investment due to these 3 reasons.

  1. Leverage at low cost. For a small individual investor, access to capital is generally hard to get and costly. The big exception is for real estate. I can borrow hundreds of thousands at historically low prices and lock in those rates for 30 years! In many markets, you can find a home that will be cash flow positive after mortgage, tax, repairs, property management and other costs. The returns get better from there as there are opportunities to slowly increase rent and as amortization schedules shift to more principal on the loan. On top of that, there is potential for appreciation (although it shouldn’t be counted on).
  2. Diversification. The vast majority of my net worth is locked in stocks and RSUs. Given the almost decade run of stocks, its getting harder and harder to feel good about putting more money into the stock market. Real estate allows me to diversify my holdings.
  3. Generating monthly income. As I look to increase my financial independence, I am increasingly looking into investments that can generate monthly income. Real-estate fits this bill. If I can build up a decent size monthly income, I feel like I would be more willing to take more risks around my career without worrying about negatively impacting my wealth. This is probably a mentality that is too risk adverse but that is a story for another time.

Signing off for this week. Leave a comment if you liked the read and/or have any questions. Looking forward to seeing you all next week, where I will be talking about my theories on why real estate in areas like SF is so expensive. As always, happy Wealthyness!