You forgot to factor in capital gain taxes on the original sales price.
Depending on where you live that could put a substantial dent in your 'take home'.
And leveraging (to use a popular word) that money to obtain a much larger property by financing is actually a fairly risky strategy, especially if you are going to put the rest of your money in to different investments.
You forgot to factor in capital gain taxes on the original sales price.
I believe Tony already took that into account in his article?
Leverage increases the risk, yes, but that doesn't make it "risky". It's very much the norm in the real estate world, which has a pretty stellar track record for creating wealth, once you get out of the levels where soccer moms are flipping houses. Buying commercial multifamily real estate isn't about the value of the property; it's about the value of the cashflow stream that you're buying. For certain markets and with long-term demographic trends and forecasts being what they are, I'm very comfortable with that level of risk.
If it makes you feel better, run the numbers where you put $2mm or $3mm down, which reduces your return, but also decreases your risk.
It makes it risky in the sense that if you only buy what you can pay right off the bat that you will reduce your income, but if the market tanks and you have to sell for whatever reason that you won't suddenly be working for a bank.
Tying yourself up like that might come back to bite you and if something unforeseen happens you're back where you started or worse.
You do raise a good point, in that you're in some sense risking your other assets as well. You can secure nonrecourse debt for real estate like this, though this is harder to do than it was a few years ago.
But the other way to look at this is that you're going to risk the money one way or the other: either you risk it as indirect collateral by guaranteeing a loan at 80% LTV or you risk it directly by buying the property outright. The advantage in the first scenario is that you get a higher return. YMMV, but again, I'm comfortable with this level of risk.
I think that's why any investment advise or plan should always start with an analysis of the risk profile of the person doing the investing. And some of the risks are not always evident.
The point is that it's disingenuous to say you're only using ~25% of your money to buy the property, when in reality all of your money is at risk, because you're leveraging. If you invest 25% in the stock market, you won't lose more than 25%. The returns on the real estate is higher, because you are leveraging. Just because 20% down payment real estate loans are common doesn't change that fact.
I agree with the idea that real estate can be a good investment, but this article has very little to do specifically with investing after a startup exit. The article should be called "Why to invest in real estate."
> this article has very little to do specifically with investing after a startup exit. The article should be called "Why to invest in real estate."
Or, perhaps it should be called "A plan for generating retirement-suitable income using approximately $1mm of capital".
Oh, hey, that's what it _is_ called (modulo some aggressive rounding).
I agree with the first paragraph, though, that if it does turn out that you have $5mm, and if it does turn out that you can't secure nonrecourse debt, then it is true that you're also taking on extra risk.
Depending on where you live that could put a substantial dent in your 'take home'.
And leveraging (to use a popular word) that money to obtain a much larger property by financing is actually a fairly risky strategy, especially if you are going to put the rest of your money in to different investments.