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:
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 ]
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. :)]