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Is your principal residence a real estate investment?

Posted by John T. Reed on

I recommend a principal residence as the only real estate investment you’ll ever need for net worth-increasing purposes. One reader says that should not be discussed on the Reddit subgroup titled “real estate investing.”
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Reddit readers get both “real estate” and “real estate investing” when they choose “real estate investing”

I always go to the “real estate investing” subgroup, but often find as I scroll down that I am also in the “real estate” subgroup. No big deal. There is much overlap between the two and the Reddit people are the ones who have decided that if you select one you should also get the other as you scroll.

Then there is ‘house hacking’

The phrase “house hacking” is often used at Reddit. I had to ask what it means. I was told it refers to sharing your principal residence with a tenant(s) who rents a room or in a duplex or larger building, apartment(s).

That is an example of overlap between “real estate” and “real estate investing” as defined at Reddit and as defined in the dictionary.
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In grad school, people kept using the word “constraint.” I finally asked why they were not using the word “limit.” Basically, constraint sound fancier.
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“House hacking” strikes me as a similarly useless phrase. It has a connotation of getting away with something. Hacking generally refers to breaking into a private computer file—which is usually illegal. The phrases “renting out a room” or “living in a duplex that you own” had the matter fully taken care of and have no inappropriate connotation of putting something over on anyone.
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I lived in a triplex and a duplex that I owned in my youth. Perfectly legitimate real estate investments.
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Actually, being an owner occupant and a landlord in the same building are very interesting in ways that I have never seen discussed at Reddit. Mainly, pertinent landlord-tenant laws are often far more favorable to the landlord in owner-occupied rental buildings.
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For example, rooming houses are often very disliked by neighbors and zoning and so on. And you have the various eviction laws that apply to them. But even here in CA, generally an anti-landlord state, if a person is rooming in your house and you want them out, you just tell them to leave and that’s pretty much the end of it legally.
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There are also various laws that exempt owner-occupied one-, two-, three- or four-family buildings like rent control. That is a really big deal from an investment standpoint.
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And rental houses

Many real estate investors buy single-family houses to rent them. Invitation Homes and other big companies do that. How is a single-family rental house a real estate investment, but an identical owner-occupied, single-family house is not? Is the property the investment, or the tenant?
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What is investing?

When you look at the average person’s personal balance sheet, the investment assets are typically stocks, bonds, maybe some gold and solver coins, retirement savings plans like IRA, SEP, 401(k), home, and second home. Furthermore, for most seniors, the largest or second-largest component of their net worth is their home equity.
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So the highest or second highest asset in your list of investments is not an investment? Because it has no tenants? The stocks, bonds, coins, and certificates of deposit don’t have tenants either.
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Clearly, your principal residence is both a place to live and an investment, like the “house hacking” that is so welcome on Reddit.
Many have businesses. A photographer friend of mine once called me to say he wanted to invest in apartments and asked for advice.
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Me: “Who owns that building where you have your photography studio in San Francisco?”
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Photographer: “A landlord. Why?”
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Me: “So why don’t you buy that instead? You are right there every business day. Far simpler and easier than buying an apartment building in the next county.”
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So he bought the building his studio was in as an investment instead of a rental property rented to strangers. A few years later, he and his wife took me to dinner to thank me for that advice. The building had gone up dramatically in value and all he had to do extra compared to when he was a tenant was pay the building’s bills.
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But wait. He had no tenants. That cannot count as an investment. Yeah, it does. And while tenants are greatly loved by the novices at the Reddit subgroup, they are generally considered a necessary evil for those on whom the novelty of being a landlord has worn off.
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Outside-the-box thinking

Maybe tenants are not necessary. I had them for 23 years. I also managed other people’s buildings that had tenants. And I invested in real estate without tenants for 47 years. I also invested in a single-family home jointly-owned by one of my sons who lives in it since 2017.

Actress/comedian/singer Sophie Tucker said. “I've been rich and I've been poor; Believe me, honey, rich is better. I have that experience, too, and agree with her on that. But I also say, “I’ve had real estate with tenants and I’ve had real estate without tenants. Believe me, honey, without is better.”

I made far more money on my principal residences than on my rental properties.
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At the Reddit subgroup and maybe most real estate investing groups, tenantless properties are outside the box. But outside-the-box thinking is good.
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Wikipedia says, “To think outside the box is to look further and to try not thinking of the obvious things, but to try thinking of the things beyond them or even other than them.”
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Vocabulary-com says, “thinking that moves away in diverging directions so as to involve a variety of aspects and which sometimes lead to novel ideas and solutions; associated with creativity.”
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Lifehack dot org (there’s that “hack” word again) says, “It means approaching problems in new, innovative ways; conceptualizing problems differently; and understanding your position in relation to any particular situation in a way you’d never thought of before. Ironically, its a cliché that means to think of clichéd situations in ways that aren’t clichéd.”
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Ah! Well put!
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One of the most popular Harvard Business Review articles ever was titled “Marketing Myopia.” It condemned defining one’s business too narrowly. It singled out the railroad industry for thinking they were in the business of operating trains and thereby thinking of motor vehicles, ships, and planes as competition.
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Instead, said the author, they should have realized they were in the transporting-of-goods business and partnered with the other modes. Nowadays, we recognize the shipping container as the defining object and trains as just one way, along with trucks and ships, to move goods. The typical container now probably travels part way on each of the three.
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Increasing net worth through real estate

I have long defined real estate investing as increasing your net worth through real estate. At the Reddit subgroup, the implicit definition of real estate investing seems to be “fee-simple ownership and maybe rehab of residential apartments.” Talk about defining your business too narrowly.
  • You can do tenantless investing in many ways.

  • You can do residential tenantless investing in many ways.

  • You can do deedless real estate investing.

  • You can invest with less than a fee simple relationship to the property.

I do not get the impression readers at Reddit are really against increasing net worth through real estate. Rather, that is the sort of inside-the-very-tiny-little-box assumption there.
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Need tenants to brag about being a big-shot real estate investor

I must add that the aversion of discussing principal residences as real estate investments seems to stem from the difficulty of bragging about owning one residence compared to bragging about your “portfolio of 17 duplexes” at backyard barbecues.
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Which weighs more, a pound of feathers or a pound of lead?
Which person has the higher net worth? The guy who owns a $2 million principal residence or the guy who owns five rented-to-others duplexes worth $2 million total? Each has total mortgages of $600,000.
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Admitting you were wrong

Another issue is how much of the resistance to principal residence ownership here is that doing it would require admitting that you were wrong to accumulate a “portfolio” of properties rented to strangers instead of just buying a principal residence and moving up to better locations as you were able over time.
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In initially made that mistake—for 23 years. I am a slow learner. I started buying single-family principal residences in 1974 and have done that for 42 years. I started in 1969 with duplexes and triplexes, but I felt those were not “big time” enough. Big-time guys do not own “plexes” unless they are “complexes.” I wanted to be big time.
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I would now argue that 2- to 4-plexes are better investments than buildings with five or more units in them for reasons having to do with political risk and financing. But owner-occupied, single-family are infinitely better.
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KISS and holistic

I am 75. Are 75-year olds smarter than younger people? In some ways, yes. Two that probably apply to the Reddit real estate investing subgroup are the KISS principle (Keep It Simple, Stupid) and the adjective “holistic.”
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Owning your home is a simpler form of real estate investment than owning one or more rental properties. Owning the home in fee simple is simpler than owning it in an LLC. Indeed, part of the attraction of the LLC seems to be its complexity for complexity’s sake. It sounds sophisticated, shrewd, clever.
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The young tend to see their lives divided like the tab dividers in high school and college binders—English, math, house, rental property, spouse, and so on.
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Older people see it more as a single, interrelated entity where whatever you do in one affects all the others, which is the more accurate view.
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Everybody, including the richest man, Amazon’s Jeff Bezos and the homeless addict have the same 24 hours per day. Every new activity you adopt—getting married, having kids, buying a home, buying a rental property, adopting a hobby—takes time away from the other activities.
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That includes real estate investing. Managing residential property takes about 3.6 hours per unit per month. The more square feet of rental space you own the more hours it will consume. Same is true of the more acreage (under your rental buildings) you own.
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Marshall McLuhan said one of my favorite quotes: “To the spoils belongs the victor.” No. I did not mix that up. He did not mean to say, “To the victor belongs the spoils.” His point is that the more stuff you own, the more the stuff owns you. Every new acquisition is, in part, a new job.
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I recall many news articles about some new star moving into the former mansion of some deceased big star. Those are usually followed later by that same no longer new star moving into a smaller place because the mansion was not really needed and too much work even when you “have people.”
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So the question should arise, “What way of real estate investing takes the least of my 24-hour day?” Answer: Owning one property at a time and owning a property that serves multiple needs in your life, like a place to live and an investment and work and exercise.

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