I’ve been meaning to do a real estate post for some time now. I’m finally getting to it with this one.
In my walks around the neighborhood I’ve been listening to The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss
and really enjoying it. The book is a good, solid primer on real estate investing and I wish I had read it before I got involved in real estate.
Anyway, listening to it has got my real estate juices flowing again and thus I HAD to post on the subject.
Many of you know my real estate background, but just to be sure everyone is up to speed, here’s a quick review (FYI, there are even more details later on in this post):
- In 2011 or 2012 (I can’t recall when I first started thinking about real estate as an investment option), I began putting together what would ultimately be my real estate investing objectives.
- Not too much later, I found a mentor who showed me the ropes and we began buying properties (he was my agent).
- I purchased places in 2012 and 2013 and ended up with three properties, five buildings, and 14 total rentable units. In all, these real estate investments have performed quite well. In addition to the monthly income they generate, they have also appreciated nicely.
- That said, it all hasn’t been rosy. I made lots of mistakes (the biggest being I should have been more aggressive and bought more places) and have taken some cost hits. But overall the experience has been a winner for me.
This past year was particularly good. I had several strong months of solid income and low expenses — maybe my best year yet in owning these places. I still am working through the final numbers as I prepare my taxes, but I’ll include additional thoughts when I give my 2019 financial review and 2020 projections like I do every year.
No matter the specifics, the conclusion will be the same — real estate has been very, very good to me.
And it’s not just me. Millionaires love real estate too. The ones I’ve interviewed invest at three times the rate of the average American. Coincidence that they do and are wealthy? I think not.
But there are some who don’t share our views.
Almost three years ago my friend and fellow blogger, Barbara Friedberg wrote a post titled Being a Landlord Sucks — Why You Shouldn’t Invest in Real Estate.
It was an interesting title that showed up in my feed reader. Since I’m a big fan of real estate investing, I clicked through, read the piece, and left this comment:
Hahahahaha!
I hear you, real estate is not for everyone.
On the plus side, RE was the main reason I retired at 52. It’s managed by a company for me, so I have very few hassles with it (I actually live over 1,000 miles away from my properties.)
Barbara saw the comment and sent me a note asking if I’d expand on my thoughts. I said I’d love to and wrote a guest post for her on why people should consider investing in real estate.
As I said in 12 Books that Will Make You a Financial Expert in a Year, “I think everyone needs to at least know enough about real estate to consider it as an investment option.” I strongly believe this.
Maybe real estate investing is for you and maybe it’s not. But you owe yourself at least investigating it honestly, without preconceived notions, to make your own decision.
After not buying enough properties, taking so long to get into the game was my biggest real estate investing mistake. But I had objection after objection, all of which either were non-existent or handled relatively easily. I wasted all that time being limited by my own beliefs/fears when I could have been buying a place each year and building up a fortune.
The following the post I wrote for Barbara in an attempt to keep others from making the same mistake I did. It’s mostly at it originally ran, but with a few minor updates as noted…
———————————————
The Downsides of Real Estate
Let’s begin by addressing Barbara’s concerns. Her objections to real estate investing basically boil down to this:
Lots of time and hassles.
She listed 26 steps to buying and managing real estate.
There’s also the hassle of bad tenants, 3 am toilet repairs, and all the rest. The end of her post also talked about a better alternative for investing in real estate which she hasn’t posted on yet.
Let me begin by saying that there is a time investment required in real estate investing. That’s for sure. There are also bad tenants and 3 am calls.
But there are also steps that can be taken to minimize these issues. Given the upside, I think real estate investing is great. I think it’s especially great since it allowed me to take early retirement and not spend a penny of my savings.
How Real Estate Allowed Me to Retire at 52
Before we get into why I like real estate, let’s take a quick look at my background for perspective:
- I bought my three places (14 total units) shortly after the housing collapse.
- I paid with cash. This allowed me to negotiate lower prices plus beat out other potential buyers who needed to get financing.
- I hired a contractor and as units came up for renewal, we remodeled them, making them much nicer.
- As a result of the investment in the units, we raised rents.
- Shortly after I bought my second place, I turned day-to-day operations over to professional managers.
- I net approximately 10% a year and my places have appreciated 45% to boot. [Update: The 45% number was an estimate from a couple years ago. It’s probably much higher now.]
- I now live 1,000 miles away from the properties.
- I spend about two hours a month managing them (simply looking over monthly income and expense reports) and they account for 70% of my retirement income. [Update: Since ESI Money and some of my other investments (like private real estate lending) have been doing so well my rental units make up maybe 40% of my retirement income. Still very good, of course. And it’s not like these have lost their earning power — their percentages have decreased only because I’ve created extra sources of income.]
- The worst thing I did: didn’t buy enough. I had a firm 10% return guideline. If I had relaxed a bit to just 9% I would have had twice the number of places and currently be making a fortune. [Update: I’m still kicking myself for this one!]
Why You Should Invest in Real Estate
Let’s get to the nitty gritty now. Here’s my list of the advantages of investing in real estate:
- Great returns — How would you like to make 10% on your money plus appreciation? It can be done. Here’s a list of my financial results as well as details on the appreciation my places have had since I bought them. Yes, it’s true that I purchased near the bottom of the housing collapse (which helps with the appreciation), but I’m looking at deals these days which still get me 7% return.
- Good source of income near retirement — If you want to retire, you’re going to have to either live off earnings from your savings, withdraw from savings, or find some other source of income. With the first two, you’re limited to 4% at most which means you’re going to have to save a boatload of money. This means you’ll probably have to work longer. Since real estate has higher returns, the amount you need to invest is lower so there are fewer years until retirement. So which sounds more appealing to you: $1 million at 4% withdrawal/return ($40k) or $400k at 10% return ($40k)? Both earn you the same amount but one is going to take over twice as long to reach.
- Don’t have to spend a fortune — I bought my places in a mid-sized Midwest town. They cost me a bit under $600k for 14 total units and produce $60k or so of income a year. You don’t need to spend $2 million in NYC to get the income you need.
- Pretty good business with low hours — Let’s say you owned a business that made $60k per year. How many hours do you think you’d have to work a week? It would be a ton. As I said, I spend about two to three hours max a month on my real estate investments. If we figured my hourly earnings over the life of my properties, it’s probably astronomical.
- Headaches can be minimized — This is the key that gets past Barbara’s objections: use professional real estate managers. I got mine shortly after I bought my second property and they have been awesome. Yes, they cost 8% of my rents. But they allow me total freedom and almost no time commitment. They also handle all those pesky early morning emergency calls and deal with bad tenants. It’s money well spent. There’s no way I could own my places and live half a country away without them.
- It’s a creative outlet — For someone who likes business and being creative, real estate is awesome. You get to make financial decisions and then design a living space based on your vision. With my places, we bought units that needed a bit of TLC, invested $10k in each, and went to work. They turned out stunning. Rents increased a couple hundred dollars a month per unit too. It was a fun process.
- Does require upfront time, but it’s fun — The largest time investment for me was actually finding the right places. But this is enjoyable too. I like looking at various homes and apartment units, imagining what they can become, and reviewing the possible financials. If you don’t enjoy this sort of thing, it can be a hassle. But if you do, it’s a blast.
I’d be remiss if I didn’t offer one piece of advice that can make all of these go much smoother: find a real estate mentor. When I finally found mine, I knew I was ready to buy. His advice and guidance through the process was invaluable.
[Update: In addition to finding a real estate mentor, I would suggest you do a bit of your own self-education along the way (I wish I had). If nothing else it gives you additional perspectives and information. Since we’re dealing with big-ticket investments, even one insight, finding, or fact could make you thousands of dollars better off than you would have been without it.
Here are the books I think are the ones to give you a solid real estate education:
- How to Invest in Real Estate
- Building Wealth One House at a Time
- The Book on Rental Property Investing
- The ABCs of Real Estate Investing ]
Summary
As I said in my comment on the original post, real estate investing isn’t for everyone. So if the points above turn you off, that’s fine. There are other ways to grow your net worth and retire early.
But if you want/need a solid source of income with good returns and you enjoy running your own mini-business, real estate investing just may be for you.
[Update: If the markets I’m interested in cool off a bit, I’ll be investing even more in real estate in the future. Both Grand Rapids (where my current places are) and Colorado Springs (where I live now) are too hot for my liking and prices make earning a decent return difficult (unless you bank on appreciation, which I don’t). I might also invest in a condo or home in a vacation location, using it part of the year and putting it on Homeaway the rest of the time, but that’s only a relatively undeveloped idea at this point. :)]
I remember when housing cap rates were double digits and I was too far away from that city to comfortably invest. Missed opportunity due to my conservatism.
I agree housing is pricey today and cash flow returns don’t seem high enough to dive in today.
Curious, what year did you add your last real estate holding?
2013
Great insights. I wish I would have picked up rentals when you did. Most of my investments are in tax differed accounts so I have been hesitant to take on the mortgage debt-this would also mean my returns would be lower than 10%. I have also been thinking of picking up a condo in a vacation area and renting it out when we are not there.
Cathy,
This is actually backwards. Leverage means your returns will be greater than 10%. As long as you can borrow money at a rate lower than your cap rate, borrowing increases returns per dollar invested. It also multiplies appreciation (and depreciation if the market goes down).
Leverage makes all the numbers in real estate work better. Far better. As long as you guarantee you cash flow. If you do that even if the value of the house drops, your cash on cash return is still higher with leverage and you have no need to sell.
Leverage done properly is the most powerful benefit of real estate investing.
It is true that with today’s prices it needs to be done more carefully than in 2010, but for any deal that is a GOOD DEAL with cash, it’s a better deal with leverage. Always …. Always!
Great post. The Millionaire Real Estate Investor is the best book ever. I read it yearly when I first started.
Do you buy these under your own name or under a dedicated business to separate risk?
In an LLC.
There’s so much good and bad to rental properties, it’s hard to know where to start. My dad bought lots of rentals and I helped him fix them up, so I had early motivation to do the same. I started buying properties as soon as I could. Bad renters meant lots of hassles kicking them out and uncollected rents, plus damages from their p’ssed off moveouts.
I tried using a rent mgmt. company once when I was living in San Antonio and renting out the house I had been living in at College Station. Things seemed to be going well enough. Then they let me know that the renters had moved out so there would be no rent payment until the place was rented out again. Wanting to see the condition of the place, I drove over to see the house. Imagine my surprise when the renters opened the door, and let me know that they had paid the rent, and didn’t know what the mgmt. co. was talking about. Yes, the lady at the mgmt. co. was trying to rip me off for the whole rent check. If I had been more than a couple hours away, I’d have never known.
In summary, two of my rent houses did fairly well most of the time. Five others had mixed results. Overall, they were more like forced savings accts where I got back about what I had put into them. I don’t have any rentals any more. Never again.
With experience as a real estate investor myself and coaching many clients that have owned rental properties over the years, biggest takeaways are to not disregard the risks involved, not use debt to purchase rental properties (which greatly increases your risk) and avoid rentals outside of your local area. While long-distance renting works for some, I have seen far too many get burned as very seldom does a property manager care about your rentals nearly as much as you do.
Leverage done correctly in real estate has almost no risk.
With zero debt rentals will rarely beat the SP500 long term given the compounding effect of the stocks. Rentals do not compound if you do not reinvest the gains into more properties. Purchased at the bottom of the worst housing recession in history (2010) they can, but otherwise leverage is what makes real estate beat most other investments.
I have two rules for debt:
1. Take out as much debt as the lender will possibly give you.
2. Take it out for as long as they will let you have it.
That’s how I built my portfolio from zero to more than double my 25 year salary as a technology manager for a fortune 100 company, and more than triple that salary when taking into account total profit counting mortgage equity pay down and appreciate. It is solely responsible for me retiring from corporate 3 years ago. Without leverage I wouldn’t have 1/5th the portfolio I have.
It does this every year by the way. And it has gotten more lucrative every year as prices continue to appreicate, rents keep rising, and I continue to expand the portfolio, using more leverage of course.
You have to buy properties correctly if you are doing that but if you buy correctly, leverage has very little risk.
If you want to grow a portfolio to a size where it can have a meaningful impact on your finances you need 1 of 3 things.
1. Already have a ton of cash.
2. Are willing to wait a very long time.
3. Have a little cash and use leverage.
It’s great that leverage has worked so well for you. I’d suggest a little caution might be in order. Some very successful real estate investors went bankrupt from their real estate investing, such as Albert J. Lowry, Robert Allen and Dave Ramsey. Real estate investing is not a guarantee of success!
You have a strange list of “successful” real estate investors.
Two hucksters who promoted nothing down investing and using leverage to the hilt and a guy who over levered and then spent the rest of his life getting rich telling people to avoid debt. I agree with Ramsey on consumer debt. I vehemently oppose him on investing leverage. They have nothing in common. The fact that Ramsey used it in a way that blew up on him does not mean it is inherently unsafe.
The problem with leverage is that many people do not have enough business sense to use it properly. For the masses that likely does make it unsafe. But none of these people has anything in common with what I do, nor with what thousands of truly successful real estate investors do. How I use leverage is very cautious with tons of margin for error.
If leverage scares you, don’t use it. But someone needs to try to balance the horror stories of the leverage monster that most people generically describe from Dave Ramsey to the common Joe Schmoe.
I have made a lot of money in the stock market, and I have lost a lot of money in the real estate market. To me, my rental properties are more like gambling than investing. One can have 30 thousand invested in a rental, and then have it tore up so bad you need 10 thousand to make it rentable again. I just sold a house I had owned for 43 years, and I am glad to be rid of it. I invested the money in REITs and now I’ll make dividends without the worry of having some creep tear up my A/C units to get $20 worth of copper. REITs are the only way to invest in real estate. And stock. McDonalds owns some of the best real estate in the world. If you want to know about the nature of man, go for the real estate. If you want to make money, stocks are the way to go. That is my opinion. I have been lied to, threatened, stolen form, and spent a lot of time fixing toilets and painting. With the new tax laws, only 80% of REIT dividends are taxable.
Your self reported inability to run a successful real estate business as opposed to a trip to the casino is not a valid commentary on the profitability of real estate for others.
The reverse is also true. Someone’s self-reported story of success doesn’t mean it will be great for everyone else. I know many fortunes have been made in real estate. But it’s not all fun and games. I did most of the maintenance on my places, which saves a lot of money, but it does get old fixing up the same place over and over.
I have a lot of faith in the economy, but it’s possible that things will go south, unemployment will go up, and having tenants who can’t pay rent becomes too commonplace and vacancies go up. If you’re highly leveraged and can’t collect rent, your empire will crash. There is risk in real estate.
That said, I salute everyone who has been successful with it.
Very well said, JJ.
I don’t disagree with any of that JJ.
I don’t believe I ever implied that leveraged real estate would work great for everyone. I did say this, “The problem with leverage is that many people do not have enough business sense to use it properly. For the masses that likely does make it unsafe.”
Real Estate is far more difficult to do well than investing in stocks. Real estate is not merely an investment, it must be run as a business. It is not for the faint of heart. It is not for those without a good business sense. It does have risk. Leverage increases that risk.
I am not trying to hide any of those truths. The point I am trying to counter is that it can be done in ways that make it far superior to stocks and can be done quite safely. Most anti-real estate and anti-leverage comments come at it from the approach that you would have to be a fool to ever get involved in such a thing because they know someone who failed spectacularly at it.
Again it has to be done well by a very competent business minded person. If you randomly picked 100 people out of the phone book, and hired them to invest and manage real estate for you, I am certain at least 90 of them would blow it up spectacularly. My comments are not for those people. Perhaps I need to add an explicit disclaimer. It is for those who have the potential and are scared off by those who imply that the entire enterprise is a fool’s errand.
Thanks Apex. I think we’ve taken a pretty good shot at discussing both sides. Many people have gotten rich off it, but some (like me), didn’t reap the rewards that others have. It’s not for everyone.
Interesting post. I have been investing is an alternative type of real estate that allows you to re-invest so you can obtain low teens rates of return & continue to re-invest or sell if you want the income. The investment type I am referring to is triple-net lease real estate. In this type of real estate, the investor is just collecting a rent check from mostly investment grade tenants. Let’s use the largest NNN real estate firm as O as an example. If you invested in O in Dec 2012, you would have generated a return of 139% to the end of 2019. 42% of the original investment would have been returned in the form of dividends. Given that this a publicly traded stock, the ability to monetize these gains is alot easier that the gains from real estate. In this case you can invest in a publicly traded security and get as much if not more than investing in rental properties.
O is not the only NNN real estate firm out there. There are others like STOR, BNL, NNN and WPC.
Packer
At the age of 60, I’m in the process of moving approximately half of our assets (mostly in growth stocks) into RE investments, and most of those will be Real Estate Investment Trusts spread over different classes of real estate (industrial, data centers, malls, office building, storage, etc.). Other money might be invested in stocks, like homebuilders (NVR – wish I had bought the stock when we bought our house) or related (Home Depot (a $500 DRIP purchase for my daughter 23 years ago now worth over $12k).
After working with a great contractor in prepping our house of 21 years for sale, my wife and I might team up to flip houses with him.
As mentioned in prior posts, CRE and crowdfunding are additional opportunities to invest in RE.
My point – I agree RE is a great place to invest money, but you don’t have to be a landlord.
I would caution on most homebuilders as they are levered bets on land values. This is due to the large land banks that most homebuilders hold. NVR is the exception as they option most of the their land. One way to measure this risk is inventory turnover. NVR has an inventory turnover of 5x the next closest homebuilder is 1.4x. What this means is in the next downturn NVR will be able to buy-back stock with cash flow while others will be fretting servicing debt to support land that will not be built on for at least a year.
I would also recommend looking at NNN firms as they are the most efficient operators out there as they few costs (highest margins) and long-term recurring cash flows (in most case 10 year leases). They also have outperformed more broad-based real estate firms over the past 15 to 20 years due to their low costs.
Packer
I have been considering and researching vacation rentals for about a year and am considering pulling the trigger in 2021. I’ve read some strong opinions in favor of using a loan instead of waiting to pay with cash. You mentioned at the end of your blog that you’re starting to consider a vacation rental. I’d be interested in your thoughts and math in a future post.
We’ll see if it gets that far. It’s a very abstract option at this point.
If the investment is a strong buy then waiting to accumulate enough cash to buy it with no debt is a mistake. It’s an investment mistake. It’s a business mistake. Every SP500 company’s balance sheet would seem to agree. They almost all use use leverage (except for companies like Apple who have so much cash on hand they could buy the entire state of Texas).
If leverage is so evil as many people want to say it is, then we should be very careful buying stocks since these companies all use debt of finance their business. If leverage made results worse why would these companies do this? If leverage is a huge risk then shouldn’t we hear of these companies going broke left and right, not due to their product being bad but because they got in debt over their heads and just went broke because of debt?
Leverage isn’t the problem, it’s people using it to buy things that are poor investments. And to be fair many people aren’t good enough investors / business people to know if it’s a poor investment and then they lose their shirt when they do it with leverage.
So if you don’t know what you are doing, then by all means, please don’t use leverage. I am dead serious about this. Are you sure you know enough about the vacation rental business to say it’s for sure a good business that you can run profitably. If you are sure then use leverage. Leverage makes every good deal better … and it makes every bad deal worse.
And by the way cash doesn’t make a bad deal good. It just leaves it as a bad deal rather than a catastrophic one. Buying a vacation rental property with $400,000 cash that throws off $50K in income and $40K of expenses would be a bad deal. $10K profit for a 2.5% return is a very bad deal. Some people might feel good because they made money, but those returns are a bad deal. With leverage you would lose your shirt. Frankly if it doesn’t work with leverage it’s a bad deal.
We started real estate investing about 20 years ago by buying a foreclosure house right next door to us. Nice single family that attracted good quality tenants over the years particularly since it was right next door to us. The last tenant stayed for 10 years and paid us in rent over $230,000 (we originally paid $134,000 in 2001). Overall a win. Then we had a chance to buy a condo right on Miami Beach (beach side) that doubled in price (appreciation) after a few years. It rents well, long term, and we clear $1000 each month. We have 2 other properties that also fare well in the Miami area. But the point is that it’s imperative to buy at the right price. Right now it’s not the right time for us to buy any more real estate but we are ready to pounce should the political winds in Washington change in 2020. We really expect real estate to tank should that happen. Anyway loved this post and glad you’ve done so well with real estate!
Looking forward to the 2019 numbers on your real estate portfolio!
After reading the “Being a landlord sucks post,” I couldn’t help but cringe. If you treat real estate like a business, rather than a hobby, you can mitigate 90% of the problems mentioned.
Why does everyone mention the 2am phone call? Who on earth likes to call a landlord in the wee hours of the morning?
Having rented to over 1,000 residents, I have only had that dreaded call 4 or 5 times over a 20 year time frame.
Each time, it was for something major like a fire or frozen pipes due to a furnace being out when it’s 20 below zero. I hope you call me when this happens!
In each case, I insurance covered the damages and I ended up with a better outcome financially had it not happened.
True story, one of my clients had a 8 unit apartment fire. No one was hurt and he walked with a $700,000 check on a $200,000 investment (it was a foreclosed that he fixed up). I want that phone call!
Having followed the buy one property a year strategy since 1998, I can assure you that if you invest in software, people and systems, managing residents is a breeze.
My property management software allows my residents to sign leases, pay rent and submit work orders online. All I need to do is show apartments and oversee my independant contractors. If I have a clogged toilet or drain, I text my plumber and he meets the tenant.
How difficult is that?
While direct real estate investing is not for everyone, it sure beats the stock market assuming you buy right and manage right. Every time I compare one of my real estate holdings over the long term to the stock market, my conservatively leveraged real estate wins by a long shot.
Let’s consider real estate versus investing in a small business.
1. The bank takes on 80% of the risk of by loaning you money for 30 years at an incredibly low fixed interest rate. Compared to a small business loan, this is a no brainer. Plus, you don’t have to pledge your entire net worth to obtain the loan.
2. Your residents pay off the loan for you.
3. The tax code encourages you to invest in real estate. In exchange for providing housing, you can write off your income against depreciation for 27 1/2 years! The only way you can write off depreciation in a business is to own the building or constantly upgrade your equipment every 1 to 10 years. Unlike a building, the equipment does not go up in value over the years.
4. Better yet, you can sell your property for a bigger and better one and pay no taxes. No other investment allows you to do this. All you can hope for with stocks is to defer, defer, defer in your retirement plan than get slammed at age 72 when you are forced to take more money out than you need and get tax at an ordinary income tax rate versus the lower capital gains rate. Whew…that was one long sentence.
5. Your cash flow keeps pace with inflation. Imagine owning a retail business where you are constantly battling Amazon or Wal Mart over price. Every year your margins are under pressure. My margins increase the longer I hold my property as rents continue to climb higher than my fixed costs or my mortgage.
6. If you don’t like managing your real estate business, you can hire it out for a small fee. All you need to do is find the right property manager and be like Mr. ESI. How much would it cost you to hire Mr. ESI to run your company?
I could go on and on.
I believe the biggest mistake people make is thinking real estate is all about flipping homes (real estate version of day trading) or simply kicking back and collecting rents. If you believe this, give me a shout and for only $50,000 I will teach you to be rich.
If you approach buy and hold real estate as a business, take care of your residents and buy in attractive areas, you can easily create a million dollar net worth in ten years or less. However, this will require work.
This is SPOT on.
I see people who know nothing about real estate, “generalizing” about the “real estate market “ as though it’s the stock market. There is no single real estate market. Rather there are many many sub markets that are independent of one-another. Indianapolis is not Vegas is not Nashville is not Cleveland.
What I see here is a group of people who mostly “diversify” inside of a single asset class – the market. That isn’t diversification unfortunately. Buying bonds to compliment stocks diversifies the asset class. What about numerous asset classes ? Enter real estate.
There is rarely anyone with substantial wealth and a knowledge of how tax efficiencies and high income works that does not own real estate. And a REIT is not real estate guys. That’s a product of the market. Not the same.
Making short-sighted mistakes in choosing properties or properly choosing financing is no reflection of the asset class. Most often It’s a reflection of the individual who didn’t take time to understand real estate or – as MI 10 says – make it a business. Buy and hold real estate investors who didn’t sell during the downturn, didn’t lose. If the financing was proper – read, “ locked rate” – they probably profited and then refinanced when lower rates came as a result. Inflation ? Real estate investors pray for it – rents go up. Buying opportunities tend to go up as well.
I’ve bought investment real estate for 15 years – 13 units bought since 2014. My cash on cash return on those 13 units – mostly single family in Nashville – have returned 18+% cash on cash during this time- that’s cashflow. Never mind the appreciation and depreciation. I’ve turned $550k invested into $1.4 million equity spinning off $130k per year in income.
It can happen.- is still happening.
I self manage and never change a light bulb or fix a toilet. There are automated processes where I barely speak with tenants or even prospective tenants. I have a “ real career “ – also largely passive – that spins off the bigger cash. But I cannot ignore the returns, appreciation and tax advantages of real estate.
This doesn’t even factor in a commercial property that I transferred a $1 million gain on in a 1031 exchange in 2019. Repositioned a loan on the paid-for building and pulled $800k out of the deal tax free and kept the asset. That was a 4.7% interest rate which is abated by the rent I receive on the rental spaces in the building. Tenants essentially pay the note.
So do I have stocks ? Yes. Probably 1/4 of my portfolio. Do they make me nervous. Much more so than my real estate – my business equity or my private money loans. Real estate is math. The market is subject to so much more volatility.
Take time to learn about real estate.
Really take time to understand the tax efficiencies and then truly passive nature of the income cycle.
It’s not for everyone but the reasons I see here for not owning it are just outrageous. And owning a house that’s costs you money doesn’t make that house an asset. You’re consuming ! It isn’t making money.
Learn. Build a detached garage and rent it out to cover your mortgage ? Then your house is becoming an asset.
Great commentary MI10. Finally someone that understands!
These two millionaires are correct.
Levered real estate is a superior investment.
Damn….nice job on the 1031. Imagine paying taxes on a 1 million gain on Apple or sitting in a retirement plan/401k knowing you are going to be taxed at ordinary income tax rates. It’s the ticking tax bomb.
I’m not knocking the stock market, just tired of everyone saying index funds are the de facto only solution for a tax favored investment plan. Why not invest in both?
Exactly !
The 1031 is such a good tool.
Again – thanks for your share !
I tend to agree that the “marathon” approach to RE is worthwhile. Own a number of rentals including some vacation rental properties now.
Personally waiting for an economic downturn to stress test the vacation rental market (much better returns vs standard rentals) since we’ve done so well with them in the past 4-5 years. Should things not crater my intent would be to add a couple of more vacation rentals.
Curious if any readers have looked at Crowdstreet and investing there? I like the idea of commercial real estate, especially since commercial tenants are a little more consistent than residential.
Wow so much discussion about leverage. Anyone who doubts the power, here is what you do. Run the numbers. Make the spreadsheet of expenses and income and have a cell that shows your % return based on the money you put in and the leverage you use. Play with numbers and you get the proof by seeing your return increase as leverage increases.
Couldn’t help but chime in here…Apex, MI10 and M-124 are absolutely spot on, and have shared a wealth on knowledge (above) that most readers (here) have thus far shunned solely because of their fears of the unknown. I’ve invested in both real estate and the stock market for many years, and I love both mediums. But my properly leveraged real estate investments have consistently outperformed my stock index investements my entire investing career, and they have been significantly more secure from an ownership standpoint for all the reasons already pointed out above. Don’t get me wrong, I love both. There is a place and time for each, but divesture into both is great, and even further divestures within each medium is truely optimal. Properly leveraged, well managed rental real estate, will consistently out perform standard stock index investing every time over any extended period. It’s not even close, that’s why most multi-millionaires own real estate, but it’s not a simple concept and somewhat intimidating to implement, so most will dismiss it outright.
Thanks Apex, MI10, and M-124 for the outstanding commentary above. “You can lead a horse to water…” But kudos for continuing to try and share the insider knowledge… Just smile internally and know you are right…your lives more than prove it.