Here’s a subject I can’t wait to get your thoughts on.
As I noted in Financial Details of My Real Estate Investments, we ran into an older, retired gentleman at property #3. He was the owner and seller of the property. He walked us around and we chatted for 30 minutes or so. He was a very nice and interesting man.
As you might suspect, the subject came up of why he wanted to sell this property. He said that he had bought and managed rental places for years but that the work had just become too much for him. So he was selling his places and was going to take it easy.
He made a good living off properties and as we discussed them he told us what he considered the best investment advice for any young person. He said he’s told his grandchildren as well as children of friends and neighbors this advice for years.
He said the following was the key to investing well and becoming rich:
“Buy one house per year for 20 years. Rent it out during the time you own it. At the end of 20 years, you will be wealthy.”
The fact that I remember this advice these many years later is a testament to how much it impacted me. It’s an interesting idea and one worth considering in my opinion.
Do I believe it? Would I do it if I was younger?
I have done well with my real estate properties but that doesn’t mean I agree with this thinking 100%. A few thoughts:
- One key for the success of my properties was that I bought them when the market was low. If you were buying one place a year for 20 years, you would have times when the market was weak (and get good deals) but you’d also have times when it was high (and the deals weren’t so good). This would obviously eat into your return.
- Where is a young person going to get the money to buy 20 homes in 20 years? If each place cost $200k, that would add up to $4 million! That’s a chunk of change!
- There is zero diversification here into various asset classes. Yes, you can diversify with different types of houses in different areas of the country and different prices (and thus tenant types), but everything is still in real estate.
- If you could pull it off (and that’s a big if because of the money needed), then it would likely turn out well for you if you bought and managed correctly.
So would I do it if I was just starting out?
I don’t think so. I do think I would start buying (or at least looking for) properties at a much younger age than I did, but I’d probably buy five or six for $1 million or so (which tells you the sort of market I’d invest in) and call it quits.
As a counter-point, here’s a piece that agree’s with the advice. It’s a review of the book Building Wealth One House at a Time, Updated and Expanded, Second Edition
. The book includes this compelling quote:
“It’s not even important that your first house is a great deal. The first house I bought I paid retail price for and made a 20% down payment. The good news is that I could rent it for a high enough amount to pay the expenses and pay the loan. The reason it has been one of my best investments is that I still have it … An investor with a doctorate in finance would never have bought that house, and he would have never held it for 30 years without refinancing it … He would have never turned a $7,000 investment into more than $300,000, not counting the rent that was collected for 30 years and will continue to be collected for the next 30 years.”
And here’s another post (from one of my favorite bloggers) that says you should buy real estate as soon as you possibly can.
There are both sides of the issue. What do you think of the advice? Would you take it?
If you like this post, you’ll also like the following from ESI Money:
Did he say “buy and keep?” If you bought a new property every year but every few years flipped it into a better property, the outflow wouldn’t be quite as much.
Also, the counter to the “buying every year means you’re buying at high AND low prices” is that it is simply dollar cost averaging your real estate portfolio. If you put everything into the market in 2006 because you thought prices would just continue to climb you’d have bought at almost the top of the market. When you bought your properties it was “easy” to know that it was a good deal because prices had fallen so much. Without another real estate correction how can we be sure that the timing is right? Just dollar cost average into the market!
Yes, buy and keep.
Sorry for not making that clear.
I believe the strategy was more effective during times of higher inflation as the value of the house is rising faster than the fixed costs of the principal, insurance and property taxes. It may be harder to pull this off in a low inflation environment.
I also agree with you to have a mix of different asset classes to avoid over-concentration.
-Mike
Also, what is the location of the house in the picture? What a wonderful view!
-Mike
Ha! Not sure the location. I got the photo from a free image library.
I’d like to visit there though!!
Diversification can be good but it also can be bad. I don’t think Bill Gates or Steve Jobs or Mark Zuckerberg would have been the billionaires they are by diversifying from Microsoft, Apple or Facebook. Concentration can be good at building wealth while diversification helps preserve it.
Mutual funds are a good diversification of stocks. But I have two individual stocks that are Real Estate Investment Trusts (REIT) that I bought 3 months ago and both stocks have risen 24% and 29%. Both are well managed companies and provide a good paying dividend but the rise in stock value is scary but a good scary.
My point in this is if I did not take a chance on these two valuable stocks I would not have seen this great of a profit. I may have only seen a 10% return in a mutual fund. I don’t have enough funds to buy a piece of property so this is my next best thing to owning property is a REIT.
Individual pieces of real estate can be risky but it also can be rewarding. Having all your eggs in one basket goes against conventional financial planning wisdom but then again most successful business go against conventional financial planning wisdom.
I once heard a guy say his investment strategy was to:
1. Put all his eggs in one basket.
2. Watch the basket carefully.
Pretty sure that was Andrew Carnegie, and it worked pretty well for him.
Ha! Yes, it did! 🙂
It’s an interesting idea, buy a house every year for 20 years. I’ve been thinking about that myself as I look to increase my non-wage income. What if i buy one property every year for the next 5 or 10 years? But then I think, what if I take the $50k and just put it into a target date mutual fund – which one would have the greatest returns? Especially since we make too much to take the depreciation deduction on the rental properties… I need to run the math on both scenarios.
Maybe the idea is, invest $50k every year into any reasonably safe investment and you will be wealthy in 20 years! 🙂
Ha! Yes, that sounds like it would work!!!
I think what the old man was saying is this. You can invest relatively safely with money that might not even be your own and build wealth by buying one house a year for twenty years. If you make a great real estate buy each year that pays the mortgage plus some, manage it well, do a great job of screening tennants you have an incredibly good chance of being wealthy someday. You’ll probably have a portfolio of 1 million plus dollars that cash flows 7-8 grand a month and you possibly did this without investing hardly any of your own money. Seems like a pretty sweet deal to me.
This is a tough one. It worked well for the man. Mortgage rates were 18% in 1980, and 3% in 2016. The ‘equity increase’ for real estate is a direct result of financing interest-rate compression over that 36 year period.
Pretty tough to find a real estate purchase today, where the rent would cover the mortgage and taxes. Also, I’ve had to live through real estate downturns that lasted 15 years; not a lot of flexibility in those environments, and while those downturns are happening there is no end in sight.
In 2016, home ownership is at the lowest rate since 1965 (interest rates were 4% then). The driver for real estate price increase is purchases, and purchases are driven by jobs and married couples. Good paying jobs are trending down, and marriage rates are trending down. Not sure advice that worked for this gentleman then would work now. Interesting thought exercise, ESI!
JayCeezy,
I have similar thoughts. The dropping of interest rates steadily helped real estate in the past decades. Difficult to see that play out further from where we are today, and fixed costs of mortgage, insurance and taxes are not insignificant.
-Mike
Question #1: What do I think of the advice?: The advice is exceptional. This would work, no doubt, it’s 20 yr window after all.
The issue is the practicality. As you stated above ESI, most young adults would struggle to get into an investment property beyond their primary home, and the average person would be intimidated by the prospect to manage it.
However, if they were able to take the challenge, find the funding, gain the minimal skills required then there is no doubt in my mind at all that this method is sure fire recipe for being rich after 20 yrs.
Note: this does not mean that the individual will be rich along the way, and based on sequence of returns/risk there is a probability of early challenging experiences being heavily unfavorable putting the young person with limited means in a rough place… But that does not kill you makes you better!
Question #2, would I take this advice?: Well, I did not so hard to say. Hindsight is 20/20… I was able to grow my career in a field and unique opportunity (for me) that allowed me to get higher N.W. growth, so this would have likely detracted from my time in doing so, so not sure it would have been wise. I did collect property along the way when I was younger, but not 1 per year, but enough to well balance my portfolio, Real Estate was actually over-weighted in my portfolio in my 20’s early 30’s…
I think there are a lot of people still scared of real estate from the crash. It’s been a solid investment and will continue to be. Twenty houses is too much for me though. Beyond what we have, I’ll buy a REIT.
Sounds like an interesting guy! I think it’s pretty sound advice but it has to be modified to meet reality. I.e., unless you’re making a TON of money elsewhere, it’s going to be near impossible to buy a new property every year. Also, 20 rental units is a lot to manage in addition to a full-time job, especially if you have other side hustles going on. You could buy in cheaper areas out of state and hire a property manager, but I’m not super comfortable with that idea.
I have a fourplex in Orange County, CA, which was pricey, but it generates a lot of income because the rents are high here. Managing four sets of tenants myself is pretty easy. In the next 10 to 15 years, I plan to add one more pricey fourplex to my portfolio. Between the two properties and my small other investments, I should have more than enough income to cover all my retirement expenses, and I shouldn’t ever have to sell a building. I’m probably 90% or more invested in real estate, and I’m not that concerned about not being diversified.
Also, I don’t care much about whether I buy high or low because I don’t plan to sell anytime soon. For me, it’s just a question of whether I can afford it and how much income will it generate.
I’m a big fan of real estate and completely agree with the retired gentleman. I followed his formula after I settled down into my career at age 34 knowing I would be in the same city in the Midwest for the long term.
My first goal was ten properties in 10 years. I didn’t have a lot of money when I started and my first deal was a fixer upper where the seller financed the loan since he owned the property free and clear. It took a long time to find this deal, but it was well worth it.
After that one, I refinanced out my equity and purchased 2 more a few years later. I found you don’t have to buy every year as long as you buy right and create equity via improvements, better tenants, or getting creative with the use of the property.
For example, if you are buying 5 or more unit properties, you can force the appreciation through better management, lowering expenses, and focusing on improvements that allow you to raise rents.
The key is to hit your goal by year 10 or 20. If you don’t find the right deal in one of the years. no big deal. Just make sure you make up for it by purchasing 2 or 3 in the following years.
One of the biggest benefits to this advice is the mortgage pay down by tenants. If you can get ten 30 year fixed mortgages (it is harder now than in the past) you will have ten different parties making your mortgage payment, property taxes and insurance.
Almost all the cash flow will be tax free and your rents will continue to rise with inflation. Thus, while your net cost of debt drops due to inflation, your cash flow continues to rise due to inflation.
If you buy decent properties in decent neighborhoods and mange them correctly, you can’t help but become a millionaire just by having other people pay your debt. Just make sure you buy the right deal.
I tell everyone I know to buy one property a year once they settle down into a city where it makes sense.
Clearly, if you can’t cash flow in your market you need to move to a different market or buy in a different market.
After 18 years, I continue to hit my one property a year goal and then some. One property a year has allowed me to expand my net worth faster than the stock market. More importantly, it has given me the freedom to design my lifestyle.
Bottom line, if this is something you are interested in, it is better to start sooner than later.
I totally agree Mr. ten and with the older gentlemen’s advice. You don’t need the full $200K, you just need to save up enough for the down payments. If you choose houses that meet the 1% rule, you should choose houses where the rent you charge can cover the mortgage, property management, taxes, etc. Whatever is left over, save it up for the down payment on your next property. Or do as Mr. ten suggests and double down on purchasing houses if you skip a year.
None of this means that you don’t also invest in your 401K or other retirement accounts, you are just further diversifying your portfolio. I’m currently working on saving up for my first rental property and determining what area I want to focus on (there are a few college towns nearby, so I’m narrowing in on one of them). Putting all of your “eggs in one basket” where the basket is either the stock market or real estate, seems ill advised either way. I’d rather focus on both. 🙂
I’ve been intrigued by this one for a number of years. About 7 years ago when we were shopping for our first house, I talked to the seller of a potential property who said that her and her husband had 25 houses that they’d simply accumulated over the past 20 years. And since they put most 15 year mortgages, a bunch were paid off and cash flowing like crazy. Unfortunately, they had a divorce so that’s why they were selling, but it stuck in my head for a long time.
Here are some other thoughts.
1.) Rents usually go up and mortgages stay fixed (if you don’t refi or have ARMs). So the free cash flow grows over time.
2.) There is such a great debt market for real estate for the average person that they can leverage into this type of investment really easily. And with interest rates this low … enough said.
3.) For the average starter, most folks can get into a rental for $10-20k if they buy their first “door” for $100k or less. But I would recommend a higher down payment of $30k to cash flow better on the first one.
4.) The tax advantages are great for this type of investment.
We’re actually going to start on this “buy one per year” strategy next year. But we a goal to get to before we start. We’re on track to hit it Q2 of 2017.
The goal was
A.) Student loans paid off,
B.) One rental already in operation for 5 years so we know the drill.
C.) $500k in net worth
D.) 9 month liquid emergency fund
E.) 15% to savings automatically to each month.
All our extra will start going towards the rentals instead of paying off debt. We have a single income but live on only 50% of it, so we should be able to buy one per year on that income stream alone.
One great way to implement the strategy is to buy a multi-unit, live in one unit, and rent out the others. After a year, move out and repeat.
It’s a hassle, but I believe if you live in a place for a year and have four units or fewer you can get residential loan rates which are less expensive than commercial loans.
I think the key to this idea is to consistently find reasonably priced properties that require little or no maintenance. But this is an excellent idea that seems to be along the same lines as flipping houses. I wish that I had started something like this about ten years ago. It’s funny that now that I’m in my thirties, I’m more willing to take risks than when I was in my twenties.
Ha! Me too!
But you’re ahead of me — I started taking risks in my 40s!
I hear a lot about real estate – the good and the bad. And I’ve thought of buying real estate myself for rentals.
The problem is, I’m having trouble even buying my first house. Part of it is because the market here in Calgary (Canada) is crazy expensive ($450k for a single detached home in a good area) and part of it is lack of experience and fear (should I put the 20% down, should I wait it out?).
Right now, real estate seems like a pipe dream for awhile where I live.
Yes, living in an expensive market is tough. It requires a whole different level of planning and execution.
My problem is the same as Jaymee indicated. I live in Los Angeles County and right now the homes in my area are basically $550K and up for a single detached home in a decent area. Then add another $600 per month for property taxes! Maybe I’m nuts but I don’t get how the math on that is giving value to the buyer or workable for the average middle class couple or family. Many of my local homeowner friends indicate that if they were a first time home buyer now there is no way they could do it.
Cost of living is a KILLER in some locations and can really negatively impact your net worth. Check this out:
https://esimoney.com/where-you-live-has-a-big-impact-on-your-net-worth/
Selling 20 houses in retirement sounds like a giant undertaking. Eventually you have to get liquid.
Unless you have 20 homes by the time you’re 50 and those generate enough for you to retire (like my 14 units are doing for me).
Then you simply live on the income for 20+ years and pass the homes on to your heirs when you pass away and they can live on the income.
Inheriting real estate or any other illiquid asset is low key a curse and a big administrative hassle unless you just have the trustee liquidate. No client of mine likes inheriting real property. Even managed it’s a pain.
Yetisaurs comment is on point in this regard. It’s a hassle, and if you are passing 10 units in, say, OK, but your heirs live in NYC or (worse) abroad, it’s a curse.
So where do your clients earn 10% income back on their investments?
I mostly agree with this advice with the one caveat I’d put against it is that it really depends on what you want to achieve.. If fIRE is your goal than this is one part of an overall strategy that will get you there.. It then depends on where you live, how committed you are to the process etc
I suppose the factors I’ve mentioned above are relevant to anything in life however it’s a decent piece of advice if it fits for the person!
Cheers 🙂
That’s really interesting because it’s the plan I’m following for my real estate investments, 20 properties over a 20 year Air Force career. I’m also using my VA mortgage benefit to take advantage of lower down payments and interest rates. The only difference is that I’m not trying to force one property each year, instead, I am trying to average one property each year for the duration of my Air Force career while ensuring each one makes sense as a real estate investment. So far I have 2 properties in 3 years, here’s to 18 more!
It sort of worked for me. I bought 10 properties over the last 15 years. Today it’s worth $8.0 million. Some of the Properties have more than doubled. So my equity is close to $5.0 million. Hawaii real estate is very valuable. I try to buy the best location possible so easy to rent. I’m just a normal average working stiff like the next guy – my parents had no money to help me. I would say the single biggest difference between me and my friends is that I actually took action even though I was scared. I don’t just talk about it like most, I took action. I read books learned and just kept on pushing myself to keep on looking and buying. It is not easy but that’s why not many people do it. But in the end, the financial rewards are far beyond amazing.