Is real estate an adequate investment to achieve financial independence? – 05/03/2023 – From Grain to Grain

On the road to financial independence, selected investments need to meet at least two simple criteria. I explain these two criteria and whether the application in real estate fits.

Contrary to what many imagine, real estate investment is part of the variable income set of your portfolio. Remember that an investment is characterized as variable income if there is no pre-established return on the investment contract.

At this time, we will only address investment in direct physical property. It is also possible to make investments in the real estate segment through real estate funds. The analysis of the latter will be done in the next chapter.

When thinking about investing in physical property, it is possible to separate the investment for housing from the purchase as a financial investment.

Although I believe that the two are part of the same decision, I understand that most individuals attribute subjective elements to the personal return calculation when referring to their own housing. To clarify, I live on rent as I have explained in the past, as I only consider the financial aspect of the decision.

In the equity formation process, two criteria must be considered: diversification and reasonable risk-adjusted return predictability.

If you already live in your own property, you already have a large part of your equity concentrated in a single asset. Therefore, adding yet another real estate investment is out of the question.

Real estate naturally has high value. Therefore, investing in a single property, even as a financial investment, will concentrate a large part of your assets.

Therefore, they do not meet the diversification criterion.

Concentration on a single asset makes the plan for independence highly dependent on the outcome of this investment. Therefore, the risk of eventually not achieving the objective increases considerably.

The other point is the risk-adjusted return predictability. If you own a property or if you intend to buy one, I will ask you a question: how much do you expect to earn in return per year in the next five to ten years for this investment?

You may ask me, why is knowing profitability so important?

Remember what we learned in Part 1 of the Journey to Financial Independence. Review this part at the links below.

Having some predictability of the return is crucial in the plan so that you can understand whether, along the way, we are moving towards the goal or moving away from it.

The risk-adjusted return predictability of a single property is very low.

It also weighs against the ability to switch the application after noticing that it is not performing as expected.

Remember, in investing we only hear the success stories. Few go out boasting that they made a bad deal. The same goes for real estate investments.

I reinforce that the risk does not exist just because the probability of losing money in 10 years is low. I’ve seen this argument used several times.

Risk means uncertainty about future returns. Having a low return for 10 years on an asset that represents more than 30% of your portfolio represents a huge risk.

If there is already enough risk involved in buying a property, it becomes even greater when buying financed. Naturally, if you are still forming equity, you will end up taking out a loan for the acquisition.

The return on investment financed in property is almost always zero or very low. Most often, the investor does not consider the cost of financing the account.

Therefore, the investment in real estate directly does not meet the minimum criteria to compose your portfolio on the journey to achieve financial independence.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan
Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence
Chapter 8 Before making any investment, define these two factors
Fixed Income
Chapter 9 You should not build an income portfolio if you want to reach equity to live on income
Chapter 10 Avoid these two common fixed income investor mistakes
Chapter 11 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 12 Discover how to win the private fixed income premium, but with low risk
Chapter 13 This is the simplest way to plan your financial independence with fixed income
Chapter 14 With our interest rates, find out if it pays to invest in dollars
Variable income
Chapter 15 Taking a risk can accelerate your journey to financial independence
Chapter 16 What is multimarket funds and how did they come about?
Chapter 17 Understand how to select hedge funds
Chapter 18 Is Real Estate an Appropriate Investment for Achieving Financial Independence?
Chapter 19 Real Estate Investment Funds
Chapter 20 Actions
Chapter 21 Alternative Investments
Chapter 22 When Should I Trade a Risky Investment That Is Not Performing?
Investment funds and Private Pension

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