Why I Stopped Buying Rental Properties To Buy REITs Instead – Part 2 | Seeking Alpha

On rental “investment” property

I found this an interesting read from seeking alpha. I have had many discussions with folks regarding real estate, particularly rental real estate. From my observations, real estate is an overly-emotional transaction. The seeking alpha article below takes a step back and examines some of the facts of purchasing Real Estate Investment Trusts (REITs) vs. rental property. I say “some” of the facts because the article omits the following critical costs of rental property ownership:

  1. Property taxes.
  2. That depreciation expense you take every year ultimately translates into repairs. “The chickens will come home to roost” so to speak. You depreciate $10,000 this year, eventually an AC or roof or fence or whatever needs to be repaired. And those expenses persist once you have exhausted all of your deprecation allowance.
  3. Insurance costs for rentals is higher than owner-occupied homes. Take a look at this 2022.10.14 article from Benzinga (via yahoo finance) titled “Insurance Costs Are Rising, But Real Estate Investors Could Lose More By Not Being Honest About Their Property”: HTML.
  4. What about vacancies? Many rental property owners assume properties will be rented 365 days year. That is simply untrue. And with turnover comes costs.

Myth: home prices always go up

While I am at it, let me share a couple charts to address the myth that “home prices always go up.” First, the S&P CoreLogic Case-Shiller home price index from 1986.01.01 to 2022.07.31:

Figure 1: S&P CoreLogic Case-Shiller US Home price index from 1986.01.01 to 2022.07.31. Source: Bloomberg.


We are all familiar with the Great Recession and subprime mortgage crisis around 2008. Figure 1 shows home prices dropped 26.76% from the 2006.06.30 peak to the 2011.12.30 low. Also note the incredible spike in prices towards the end of the data sample. This is not sustainable.

So how long did it take for home prices to reach their 2006.06.30 peak? Over ten years:

Figure 2: S&P CoreLogic Case-Shiller US Home price index from 2006.06.30 to 2016.12.31. Source: Bloomberg.


On home affordability

A recent NPR article titled “With mortgage rates near 7%, the housing party is over. Now it’s hangover time” (HTML) provides examples of folks stretching their budgets to overpay for a home they truly can not afford.  This relates to emotions involved in home purchases (be it rental or for your primary residence). Dave Ramsey has three simple criteria to assess whether or not you can truly afford the home you wish to purchase (HTML):

  1. 15 year fixed rate mortgage.
  2. 20% down payment.
  3. All-in monthly home payment less than 25% of take-home pay.

How many actually go through those calculations? How many disregard the results even if they did do the calculation? How many changed the 15 year term to 30, 40, or more years just so they could “afford” a more expensive house?

In conclusion, be careful when describing your real estate purchase as an “investment.” If you do the math, which means including ALL costs (insurance, vacancies, repairs, property taxes, real estate commissions when you sell, closing costs when you buy, etc.) you may see: (1) you couldn’t afford the home in the first place, (2) it was a poor investment, and (3) there are many better alternatives.

-Dr. Moore


Big Tech Founders Are America’s False Idols – The Atlantic

This is a long article but rich in content. Early in the article the author highlights the wide wealth gap: “The wealthiest 1 percent of Americans hold more than half the stocks owned by households; the bottom 90 percent hold just 11 percent.” Think of the simple math behind that: The wealthiest 10 percent of the US population owns 89% of equities.

How did we get here? The author notes this entrenched position is enabled by policies that favor the wealthy (entrench wealth):

“Start with the tax code. Income gained from selling stock in a company is taxed at a lower rate than income gained from actually working at that business. A second transfer from poor to rich: A homeowner may deduct mortgage interest on a first and second home, while the less wealthy pay nondeductible rent.”

I mention often in class that there are only two professions in life. Either you own the means of production (bourgeois or ownership class) or you do not and therefore you are the means of production (proletariat or working class). I’ll offer a third example of wealth transfer from poor to rich. If you have sufficient wealth, you drop $50,000 on solar panels and batteries for your expensive home. Then, although the person with solar panels and batteries in their expensive home can afford electricity, they actually generate their own and even sell some back to the grid. Now, who’s buying that electricity off the grid? The poor people who are renting or who own a home where $50,000 solar panels/batteries approaches the value of the home!

Moving on through the article, I really like the term “name inflation” coined by the author:

“The name inflation of the Big Tech CEO class corresponds to its wage inflation: Eight of the 10 wealthiest people in the world are current or former chief executives of American technology companies, and their wealth consists almost entirely of shareholdings in those companies”

What does he mean by “name inflation.” The author points out how many times CEO names are mentioned in S-1 filings (filings to go public) over time:

1980, Apple, Steve Jobs mentioned 8 times.

1986, Microsoft, Bill Gates mentioned 23 times

2019, WeWork, Adam Neumann mentioned 169 times.

2021, Affirm, Max Levchin mentioned 131 times.

2021, Robinhood, Vladimir Tenev mentioned 109 times.

I came to a conclusion during one of my book club meetings: Wealthy insecure alphas (or insecure alphas that come from wealth), who know they are not alphas, use their wealth to create a narrative of their greatness to mask their shortcomings. By using the phrase “False Idols” in the article title, the author tells us that many Americans are not seeing clearly. Rather, many Americans are buying the paid-for narratives and making these insecure alphas false idols.

As further evidence of broader idolatry, the author further notes how valuations have gotten way out of hand:

“three electric-vehicle firms—Tesla, Lucid, and Rivian—were together worth more than the rest of the auto and the airline industries combined.”

Towards the end, the author points out how what was supposed to be distributed ownership and decision-making (via going public) is, in practice, concentrated control in the hands of a few. And, speaking to the insecure alpha funding idolatry narratives, you often hear founders justify dual-class shares by stating “the dual-class share structure ensures this company remains founder-led.”

But wait a second. Who said the founder of a private company is the best person to lead a large public company? Different skill sets? Are we to just buy the “I’m an all-knowing tech god” narrative, buy non-voting shares, and transfer more ownership and control to the few? As an aside, please know that Elon Musk is not the founder of Tesla: HTML. If this is a surprise, may the fact that Elon Musk did not found Tesla liberate you from big tech founder (and he wasn’t even the founder) idolatry.

I’ll end here because it is late. But also because this Atlantic article, as I said, is rich in content. Please take the time to read it. I believe it is worthy of the time.

-Dr. Moore


ESG, explained: The investment strategy being pulled into America’s culture wars : NPR

Let me begin by quoting the last paragraph (beginning with the end in mind):

“Taking climate risk as investment risk is just good business,” says Henisz of the Wharton School. “Now, we can argue about how we do it and who does it well and who does it poorly. That’s a legitimate argument. [But] the idea that ESG is ideological and not economics is a political argument.”

The article, in my opinion, does a great job describing what ESG is and how it connects to investment decisions. It is yet another example of where politics should be set aside in order to clearly see the facts of the matter. Speaking of facts, it sure was hot in Sacramento last week…

Stay cool my friends,

-Dr. Moore


Inside the rise of ‘stealerships’ and the shady economics of car buying : Planet Money : NPR

Then, this NPR article pops up on my news feed. It has some good tips above and beyond bringing your HP12C (even though bringing your HP12C on the belt clip holster will really settle down salespeople). Of note is this quote:

“Earlier this summer, the FTC proposed new rules aimed at combating the graft and skulduggery found at many dealerships.”

Skulduggery? I must admit, I had to look that up (underhanded or unscrupulous behavior; trickery). Nevertheless, I think the best advice now is to have patience. Sooner or later this short supply of cars will normalize. Hold off participating in the skulduggery if you can. But if you must, here are a few considerations:

  1. Don’t trade your car in. As the article says: “One study found that dealerships tend to treat a buyer’s decision to trade in their used car like a neon sign on their foreheads, flashing, `Charge me more!’” If you need to unload your car, consider selling it directly to Carmax (I’ve done this twice) or shift.com (I almost did this to capture peak price for my car, but then had no idea what I would buy to replace it). There’s also Autotrader.com, your local newspaper, craigslist, etc.
  2. Narrow down what car you want and be patient.
  3. Get pre-approved at your credit union for an auto loan if you must have a loan. “Stealerships” will play around with rates and number of months to trick you into a monthly payment “that you can afford.” That should not be the case at your credit union. This is especially true if you follow #2.

Good luck…

-Dr. Moore


Bank of America: Zero-down-payment mortgage for first-time buyers

First, let me begin with a meme I received this morning:

At first I thought the news headline was fake. So I googled it. Much to my surprise, it is real. I find quotes from the article even more disturbing:

  • “Applicants do not have to be Black or Hispanic to qualify for the product, a bank representative said.” So, at first glance, one would say of course, discriminatory lending practices are illegal. But…
  • “Bank of America’s Countrywide Financial, a subprime lender it purchased in 2008, was fined $335 million in 2011 over claims that it charged Black and Hispanic homebuyers higher interest rates than white applicants.” And
  • “In 2012, Wells Fargo agreed to pay $175 million to settle claims that it targeted people of color with risky home loans that were more expensive.”

So, to say something is fishy here is an understatement. We have a looming recession, inflated asset prices (stocks, bonds, real estate, used cars, you name it), supply chain issues, natural disasters, etc. So this is the perfect environment to ramp up sub-prime lending like the 2008 financial crisis?

Another thought comes to mind: Just who are the sellers of the homes in the neighborhoods BofA is targeting? Remember, if someone is buying a home, then someone (or some business entity) is selling. Is there anyway to trace that ownership to Bank of America and the alleged hedge fund friends of the meme? I will leave that research to the readers. If you find something, post a comment.


-Dr. Moore


Inside the Crash of Three Arrows Capital

For all those with JOMO (joy of missing out), this long soap opera of a read is entertaining. Massachusetts, Singapore, New York, Dubai, Cayman Islands, super yacht, the mafia, greed, deception, hubris, arrogance, it’s all in there.

May this story serve as a reminder: if something seems to good to be true, it probably is.

-Dr. Moore


Elon Musk’s Flawed Vision and the Dangers of Trusting Billionaires | Time

Many students know I never “drank the Tesla Kool-Aid.” However, occasionally students get tired of listening to me. So, perhaps hearing this Tesla perspective from Time Magazine may help. The Time Magazine piece, in my opinion, does a great job explaining the big picture surrounding electric vehicles (EVs). For example:

“A much more sustainable alternative to mass ownership of electric vehicles is to get people out of cars altogether—that entails making serious investments to create more reliable public transit networks, building out cycling infrastructure so people can safely ride a bike, and revitalizing the rail network after decades of underinvestment.”

I teach finance. I am not a psychologist. But I have wondered why “cults” seem to form more frequently. E.g., crypto so-called currency cults, meme-stock cults, Tesla/Elon cult, former president cult leading to the January 6 incident (e.g.: HTML), etc.. In all these cases, a person, thing, or idea is treated as a God. When clear evidence showing these are not Gods and are far from perfect (even detrimental to the individual in the cult and society as a whole) is presented, people double-down on their flawed beliefs. I don’t get it.

Nevertheless, may all read the Time article with an open mind and gain broader perspective on the electric vehicle space.

-Dr. Moore


Celsius investors owed $4.7 billion beg judge to recover life savings

“Homeless, suicidal, down to last $1,000: Celsius investors beg bankruptcy judge for help.”

Wait a second. I thought a main motivation in “investing” in crypto “currency” was to get away from government and government regulation. Now, that the unregulated scheme took “investor” money they are asking that same government they were avoiding to bail them out?

“Celsius is down to $167 million ‘in cash on hand’, … owes its users around $4.7 billion… and has more than 100,000 creditors”

I would not count on the government and government regulation shunned by crypto “investors” to bail out the users “owed” $4.7 billion. If crypto “currency” is truly an “investment” then we all know there is risk of loss in investments. I remember many friends boasting about how crypto is not regulated and that was an advantage. Even Coinbase’s general counsel boasts how “Coinbase does not list securities. End of story.”: HTML.

Also some of the creditors “lent the platform cash without any collateral to back up the arrangement.” Please read the CNBC article linked below for even more dubious fine print in the Celsius agreements signed by retail investors hoping to get rich quick without government involvement. Regardless, “it is unclear whether customers will ever see their money again.”

“I believed in all the commercials, social media and advertising that showed Celsius was a high yield, low risk savings account. We were ensured that our funds are safer at Celsius than in a bank, This money is pretty much my life savings.”

Bank deposits are regulated and FDIC insured: HTML. Traditional brokerage accounts are regulated and SIPC insured: HTML. Crypto accounts are neither regulated (that’s how everyone wanted it right? – less government) nor insured. Well, regulation is on the way, but as of right now, not so much. So I don’t get why anyone would think funds are safer on a crypto platform than a regulated and insured account at a bank or brokerage.

I understand inflation is high driving up the cost of everyday goods and services. I understand folks are looking for ways to amplify their returns. But ignoring basics of regulation and insurance, and leveraging your life savings, in hopes of amplifying returns at best or getting rich quick at worst, is a recipe for the disasters we now see.

Several quotes come to mind: “slow and steady wins the race”, “be patient and move slowly to avoid mistakes”, “Truth is confirmed by inspection and delay, falsehood by haste and uncertainty”, “Dishonest money dwindles away, but he who gathers money little by little makes it grow.”, and “JOMO – Joy Of Missing Out.”

I hope those reading this post also read the CNBC article linked below. Also check out the recent NPR article “Amid the hype, they bought crypto near its peak. Now they cope with painful losses.”: HTML. Then sit down with a licensed and trusted financial advisor to map out a plan to recover if you lost money in crypto or continue to “gather little by little” if you avoided crypto and now experience JOMO.

-Dr. Moore


It’s been a vicious 6 months for the stock market. Here’s what they’re signaling : NPR

I found this article interesting regarding the recent stock market declines. Truth be told, stocks have been overvalued for some time relative to earnings (e.g., see www.multpl.com). Cheap money (low interest rates, federal stimulus, etc.) certainly contributed to the overvaluation. Nevertheless, my favorite part of the article is at the end:

“There is a huge desire, among policymakers and politicians especially, to see changes immediately, but to everyone’s frustration, it will take time to see if the Fed’s medicine is working.

If, in a few months, there are indications that the Fed is succeeding at bringing inflation under control, markets will stabilize. But if it becomes clear the Fed isn’t getting a handle on inflation, all bets are off.”

It is not just policy makers and politicians that want a quick fix. We as a society, as humans, have been conditioned to quick fixes, instant messages, microwaves, etc. Let’s have patience, choose the right actions, and see how this pans out.

-Dr. Moore