Mr. Wonderful of Shark Tank Fame Thinks Real Estate Is a Crappy Investment

June 6, 2014 4 Comments »
Mr. Wonderful of Shark Tank Fame Thinks Real Estate Is a Crappy Investment

If you watch Shark Tank, you’re quite familiar with Kevin O’Leary, the cynical money loving, yet somehow likable venture capitalist.

Well, now he’s also a regular on CNBC, and he has no problem sharing his opinion on just about anything while also referring to himself as a “vampire” who has been around for 120 years.

One of his latest areas of critique centered on residential real estate, which O’Leary unsurprisingly referred to as a “crappy investment.”

I say that because O’Leary never seems that impressed with any investment, that is, unless he can earn a royalty for perpetuity.

Unfortunately, residential real estate doesn’t provide such certainty, though it’s pretty much guaranteed to rise in value over time. The question is will it outpace inflation or other investing options like stocks and bonds?

Don’t Buy Real Estate. Don’t Do It.

O’Leary points out that a hypothetical couple who take out a $200,000 mortgage on a $250,000 house would need the property value to rise six percent a year to cover the interest on the loan itself, along with transaction fees and property taxes.

And that’s apparently a tall order because O’Leary doesn’t even believe the home will be worth more than what the couple paid for it after five years.

Now that’s clearly a pessimistic outlook, but real estate appreciation has seemed to top out recently. Home prices are still going up, but it’s pretty obvious that the big gains have come and gone and year-over-year gains are trending lower each month.

So he has a point there – as for home prices falling over the next five years, or not rising at all, that’s a bit more of a stretch, though there are areas of the country that are experiencing brand new all-time highs, which if nothing else should give us all pause.

O’Leary instead recommends that investors put their money in the stock market, with a mix of 50% stocks and 50% bonds, which he believes will result in a better return.

Pretty Good Time to Buy…

Larry Kudlow also chimed in during the discussion, saying it was a “pretty good time to buy a home,” though he did hesitate a bit and also recommended buying stocks.

He argued that even if mortgage rates rise somewhat, they’re still low, and noted that there are several other advantages to owning a home, including tax benefits, such as the capital gains tax break, and the fact that buying a home provides tons of leverage.

For example, you can buy a home with very little down and experience relatively small percentage gains that result in large dollar gains. You can’t really do that with stocks unless you have a ton of capital.

I appreciate both their arguments, but wanted to point out that these guys are on an investing show talking about investments.

At the end of the day, buying a home isn’t just an investment. Remember, you can’t live in a stock or a bond, last I checked.

If you’re solely looking to purchase a property for the investment return, these arguments apply, but if you need shelter, or simply want to own the apartment/home you plan to live in, there’s not really an argument.

There are better and worse times to buy, but it’s not really up for debate if ownership is your ultimate goal.  And I guarantee you that both O’Leary and Kudlow own homes, probably multiple homes.

Read more: Should I rent or buy a house?

4 Comments

  1. Bud June 6, 2014 at 2:06 pm -

    Kevin O’Leary

  2. Colin Robertson June 6, 2014 at 4:32 pm -

    Haha, yes indeed.

  3. Barbara Press June 16, 2014 at 1:08 pm -

    Although I understand O’Leary’s comment I’m surprised by in because O’Leary owns a mortgage investment firm (O’Leary Mortgages).

    I made a nice living in sub-prime lending as a loan officer before the crash of 2008 in Ventura, CA then as a broker in NY. Without real estate I wouldn’t have had a job!

  4. Colin Robertson June 16, 2014 at 5:59 pm -

    Never knew that – very surprising that he has a mortgage company, but then again, the guy has a hand in just about everything.

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