Real estate is my favorite investment asset class to build wealth for regular folks. For hundreds of years, real estate has built tremendous wealth for millions of people. I don't expect this trend to ever change in our lifetimes.
Today, investors can invest in high quality residential and industrial real estate across the country with platforms such as Fundrise. Fundrise is my favorite private real estate company that has multiple funds investing in the Sunbelt region, where prices are lower and yields are higher. Its investment minimum is only $10.
Real Estate Is A Big Reason For My Financial Freedom
Real estate is the main investment the enabled me to retire from finance at 34. Currently, real estate takes up about 50% of my net worth and generate roughly $200,000 a year in passive income. Stocks take up 32% and the rest consists of bonds, alternatives, and risk-free assets.
Real estate is all about asymmetric risk and reward. When the government gives you subsidies in the form of mortgage interest tax deductions, a $250K/$500K tax-free profit, and bailouts for overextended homeowners over and over again, you'd be silly not to invest in real estate!
Real estate is also a great beneficiary of inflation. It benefits from rising rents and rising property values. And when stocks and bonds are declining, mainly due to inflation, real estate tends to outperform. Fundrise funds for example, outperformed the S&P 500 by over 25% in 2022.
When you can invest lots of other people's money and not have to split the proceeds if you make a killing, that's a wonderful thing!
Real Estate: Favorite Investment Asset Class For The Wealthy
There's a reason why every rich person you know owns multiple properties. There's a reason why enormous fortunes have been made through real estate as well. How can President Donald Trump still be a billionaire after declaring bankruptcy? Asymmetric risk and reward.
It's no wonder property owners were once called lords, or now more colloquially, landlords. The wealthy own assets, while the not-so-wealthy lease assets. After 30 years of paying $2,000 a month in rent, your return on $720,000 in rent is negative 100%.
At least through a mortgage you've got an asset which you can live in rent free or pass on to your children once paid off. You might not make money as the downturn has certainly shown, but at least you have a chance.
In an inflationary environment, like we will probably experience post pandemic, you want to own property with a fixed-rate mortgage.
As inflation picks up, the cost of the mortgage declines in real dollars. Meanwhile, the principal value of the home increases with inflation. This one-two combination is one of the reasons why the average homeowner is so much wealthier than the average renter.
When it comes to making money, if there is no risk, there is very little reward. The biggest reason for the widening wealth gap is due to the ownership and lack of ownership in real estate.
Example Of How My Favorite Investment Asset Class Can Make You Rich
In early 2003, I put down 20% on a $580,000 condo. My mortgage payment was roughly $2,400 a month at 5.75%. I had just turned 26 and was nervous but adamant I didn't want to pay more than $2,000 a month on rent.
The $464,000 mortgage payment was split $500 to principal and $1,900 to interest. Rent for a comparable property at the time was $2,000 a month. Therefore, things were essentially a wash if you include property taxes and deductions.
In 2013, the mortgage rate was 3.375% thanks to several refinances on a loan of $285,000 (from $464,000). I've painlessly paid down $180,000 (39% of entire loan) in principal through my PMI loan and the occasional ad hoc principal payments. The mortgage fell to just $1,300 with $500 of it going towards principal. Meanwhile, I was renting the place out for $3,400 a month!
Mortgage interest not only dropped from $1,900 to $800 (-58%) during this time, rent went up from $2,000 to $3,400 (+70%).
There are several reasons for this phenomena: 1) Supply is tight in San Francisco due to building restrictions on our 7 mile by 7 mile city, 2) Demand continues to rise due to an increase in jobs from new startups, 3) The economic crisis caused bonds to rise and yields to fall, and 4) The Federal Reserve continues to conduct very loose monetary policy. If you've ever deliberated between good location and higher prices or bad location and lower prices, consider the former.
Today, the mortgage is zero because I finally paid the sucker off in 2015 after receiving an influx of cash. I'm now charging $4,400 a month in rent while collecting roughly $3,000 a month in net cash flow after HOA, taxes and maintenance.
10X Greater Home Equity
My $116,100 downpayment has turned into a cool $1,250,000 15 years later with very little work on my part. For 13 years, my tenants helped pay down my principal. All I had to do was find good tenants about once every two to three years.
If I want to sell the property, I can without having to pay any long term capital gains tax due to the 1031 Exchange system. A 1031 exchange lets me defer or never pay taxes if I find a similar income property within 180 days of sale. Talk about pro government housing!
More Reasons Why Real Estate Is A Great Asset
1) Real estate is a hedge against inflation.
You only hate inflation if you don't have an asset that is inflating. If you own an oil field, a private university, and organic farm, a gold mine, or a rental property, you are loving inflation!
Inflation is increasing the prices of your goods hopefully faster than the input costs and the costs to operate your asset. You think rents and prices are expensive now, but I promise you they'll look cheap 10 years from now.
As we come out of the global pandemic, inflation will likely stay higher than normal. The ability to earn higher rents and see higher capital appreciation is a powerful combination for wealth creation.
2) Real estate is a money-making play on inflation.
Forget about protecting yourself against inflation. Owning real estate is a play on making money with inflation. If there so happens to be hyperinflation, your cash is devaluing rapidly as your real assets start surging in nominal value. We are experiencing higher inflation expectations as we get out of the pandemic.
With inflation, you get to benefit from property price appreciation and rental price appreciation if you own rental properties. Given interest rates have tanked due to the global pandemic, the value of rental income has gone way up. It takes a lot more capital to generate the same amount of risk-adjusted income today.
3) Generational wealth transfer.
You can pass on property from generation to generation, conceivably making their lives a little bit better. Think about all the college graduates nowadays who are complaining they will never be able to afford a home like their parents due to exorbitant prices. Now think how much worse it will be for their children.
If your parents happen to just give you one of their properties, life becomes much less stressful as you don't need to pay rent anymore! You don't have to study as hard to succeed either. You can pursue un-lucrative fields such as music, dance, and other fine arts if you so choose because those are your dreams.
The median age for a first-time homebuyer is now about 34. The sooner a person can get neutral real estate by owning their primary residence, the better.
4) Little effort to build wealth.
The most effort comes from researching the property you want to buy and finding the right tenants to pay your mortgage. Once you've run various scenario analysis and screened your applicants, you can basically set it and forget it.
My average tenant turnover is 2.5 years. I host two open houses for 1.5 hours each, spend another two hours reviewing applicants, and another hour coordinating the move in and that's it.
Meanwhile, to turn $116,000 into $1,000,000 through equity investing is no easy feat, neither is saving another $884,000 over 14 years. The whole idea is to invest in assets that work for you, and not the other way around.
There is a life goes on home-buying cycle that is unstoppable. The implicit demand will always be there because people get richer, older, have kids, and want to enjoy life. And part of enjoying life is upgrading homes.
5) Real estate generates tax-free profits.
The first $250,000 in profits for singles and $500,000 for couples is tax free if you live in your property for the last two years before sale! If you so happen to be in the top income tax bracket, this is absolutely music to your ears!
In order to bank $250,000 in after-tax profits as a top income tax bracket earner, you've got to make around $450,000 in gross profits. This special feature alone makes me want to buy property over and over again. Real estate is a very tax-efficient way to make money.
6) Real estate serves a utility function.
Unlike cash, which serves no utility function, property addresses a fundamental human need, shelter. If our financial system goes to hell, at least you will have a tangible asset you can actually utilize. The only thing I can do with cash is make paper airplanes and perhaps start a fire.
7) Real estate provides semi-passive income generation.
Not only do you get to benefit from rising principal values due to inflation, job growth, and income growth, you get to also benefit from rising rents due to the same reasons!
I first started renting my rental condo out for $2,300 back in 2005. Now I'm charging $4,200 a month for rent going into 2021. That's a 83% increase in rent while my mortgage payments stayed the same or declined.
You can also potentially earn healthy returns (8% – 15%) that are 100% passive through real estate crowdfunding and owning public REITs. I'm all about taking advantage of real estate crowdfunding to invest in the heartland of America where valuations are lower and yields are higher.
As a retiree, your favorite investment asset class should be able to generate reliable passive income to fund your lifestyle. Currently, real estate accounts for roughly $190,000 of our annual passive income. This way, both my wife and I can stay jobless to take care of your two young children.
8) Real estate is almost dummy proof.
There were a lot of people who didn't understand the terms of their loans (neg am, balloon payments etc) or who borrowed way more than four times their income with no savings buffer. Good thing for you, you're no dummy because you're reading this article and other articles about real estate investing.
Once you run the realistic cost and revenue numbers based on data provided by the seller and comparable properties, you have a base case assumption. If you are achieving a rental yield of 7% and can borrow for less after a downturn, your month should be salivating for such an attractive immediate spread with principal appreciation potential.
When interest rates plummeting during the pandemic, the value of cash flow went way up. But when mortgages rates are elevated, it typically means real estate prices will fade a little bit.
See the 2023 housing price forecasts as well as the 2024 housing price forecasts to get more insights on buying opportunities.
9) Real estate is measurable wealth.
I know that after I finish paying off a mortgage, my net worth will equal the market value of the property. When you invest in private equity, or even public equity, you are taking a massive leap off faith that management and other exogenous variables don't crush your returns. You pretty much know what you're going to get in real estate if you follow the course.
When you retire, it's nice to know you have an asset that's fully paid off. Eventually, you can leave the property to your kids, who should receive a stepped-up basis to avoid paying capital gains tax.
My favorite investment asset class should continue to have favorable tax treatment. After all, owning real estate is part of the American dream.
Unlike stocks, real estate doesn't just lose 30%+ of its value over night due to some slight earnings miss. Real estate values are much steadier, which provides more peace of mind. There is a triple benefit to paying off your mortgage and owning real estate free and clear.
10) Priceless feeling when you own real estate.
There's something nobody really tells you when you finally purchase your own home. Perhaps because that something is unquantifiable. Even though you likely won't own the house outright in the beginning, it feels wonderful not to pay someone else's mortgage anymore.
It's an amazing feeling to be the king or queen of your own castle. To do what you please is great. So long as you pay your mortgage, nobody will ever be able to kick you out. You grow roots and finally gain conviction to launch your life.
In October 2023, I climbed to the top of the property ladder by buying a forever home. I didn't feel much happier for long, but I do feel much more satisfied as a father. I'm doing my duty of providing the best possible lifestyle for my wife and two kids. The feeling of satisfaction lasts forever.
11) Real estate provides career insurance policy for your kids.
As a dad of two kids now, all I think about is how to take care of my kids. A rental property portfolio can help take care of your kids by providing shelter and or a job. It's a competitive world out there! Real estate acts as an insurance policy for your greatest asset, your kids!
A lot of high-income earners with children are experiencing a lot of anxiety today. Ironically, the higher their incomes, the more anxiety they experience given the lower the likelihood their kids will experience upward mobility.
One solution to getting rid of parental anxiety is amassing generational wealth so that they no longer have to worry as much about their kids' futures. An elite college rejects your child? No sweat! Goldman Sachs doesn't offer your kid an interview? No big deal. They are already set for life!
12) Real estate is less risky than stocks
Because real estate is less risky than stocks, people can ironically make more from real estate. Due to less risk, people are more willing to buy real estate and with debt. Many people are too afraid to invest in stocks because its value could get cut in half over night. As a result, the average person can get richer off real estate than stocks.
13) Real estate is a safer haven during times of uncertainty
The pandemic and the war in Ukraine have show the desirability of real estate during times of uncertainty. When the state of the world is uncertain, investors look for real assets that provide utility.
Since the pandemic began, real estate has surged in value along with equities. However, during geopolitical uncertainty, you are seeing real estate outperform as equities correct.
Take a look at this Fundrise returns. Fundrise funds outperformed public REITs by over 33% and the S&P 500 by over 29% in 2022. Fundrise also significantly outperformed in 2018 when both public REITs and the S&P 500 were down as well.
Owning physical real estate tends to outperform publicly-traded REITs and stocks in a downturn. Owning private real estate funds that invest in the Sunbelt may perform even better.
I'm a believer in work from home and the demographic shift towards lower-cost areas of the country. As a result, I have diversified $954,000 of capital into private real estate through platforms like Fundrise.
14) The law and the government is on the residential real estate owner's side
Roughly 65% of Americans own homes. As a result, both the government and laws are very pro-housing. With the NAR settlement on real estate commission price fixing, the President and many politicians cheered it was a huge win for homeowners.
I agree. A decline in real estate commissions means residential real estate owners should see an immediate 1% – 4% boost in their real estate values. Our politicians want our votes. As a result, they will always do things favorably for the majority of Americans who own their homes.
Below is a chart I put together that shows how residential real estate investors and homeowners should see a 1% to 6% boost in the values of their properties over time. The price fixing settlement is a huge win for consumers.
Take Advantage My Favorite Investment Asset Class
I didn't buy my house with the primary hopes of creating more wealth. I bought my house because I didn't want to live in a crappy apartment anymore. Here's my housing expense history if you're interested with a housing expense framework to help keep your finances in order.
I wanted my own deck, backyard, and freedom to turn up the home theatre system as loud as I wanted. At the age of 28, I wanted to start living a better life after slaving away in the office for the past six years.
If I wanted to make more money through real estate, I would have bought a multi-unit building instead. Life can't all be about making money. Funny how we like to justify our purchases.
For those who don't have the downpayment, don't know whether you plan to live in one city for more than five years, or don't want to go through the hassle of managing tenants, consider real estate crowdsourcing.
I've personally invested $810,000 in real estate crowdfunding. My goal is to gain more exposure to the heartland of America where valuations are lower. Yields tend to also bee higher than coastal city property. The older I get, the more passive I want my income to be.
Renting has its benefits, namely flexibility. But renting itself does not build any wealth. If you are considering investing your money that's sitting in low yielding accounts, consider investing in real estate. It may be a tough slog the first two years. But in ten years, you'll probably wish you had bought more!
Explore Real Estate Crowdsourcing
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise. Fundrise is one of the largest real estate companies today with over $3.5 billion under management and 500,000+ investors. The minimum investment is only $10.
Utilize Fundrise to invest in my favorite investment asset class to build wealth. Real estate crowdsourcing allows you to be more flexible in your real estate investments. Fundrise is also the pioneer in the private eREIT, which I think is appropriate to gain real estate exposure for the average investor.
If you are an accredited investor, also take a look at CrowdStreet. CrowdStreet focuses on individual real estate opportunities mostly in 18-hour cities. 18-hour cities like Austin and Memphis have lower valuations and higher cap rates. Further, with geoarbitrage and working from home now common, there should be a good trend towards moving to lower-cost areas.
Both platforms are long-term sponsors of Financial Samurai and Financial Samurai is an investor in Fundrise funds.
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What are your thoughts on the IRS silently changing the step up in basis for Trusts? New IRS rule, Revenue Ruling 2023-2.
It is what it is. What are your thoughts?
For background:
The IRS released an advance version of Rev. Rul. 2023-2 [PDF 130 KB], which concludes that the basis adjustment under section 1014 generally does not apply to the assets of an irrevocable grantor trust not included in a deceased grantor’s gross estate for federal estate tax purposes.
Section 1014 generally provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent, if not sold, exchanged, or otherwise disposed of before the decedent’s death by that person, is the fair market value of the property at the date of the decedent’s death.
In Rev. Rul. 2023-2, the IRS determined that the basis “step-up” under section 1014 does not apply to assets gifted to an irrevocable grantor trust by completed gift in cases in which such assets are not included in the gross estate of the owner of the trust for federal estate tax purposes. In such cases, even though the grantor trust’s owner is liable for federal income tax on the trust’s income, the assets of the grantor trust are not considered as acquired or passed from a decedent by bequest, devise, inheritance, or otherwise within the meaning of section 1014(b), and therefore section 1014(a) does not apply.
I followed your news letter for a while, you mentioned access allocation should be 50%real estate, 30% stocks and rest other. I still have not figured out that real estate crowdfunding (like RealtyMogul) belong to real estate or alternative (other)? And would you please compare Fundrise , realtymogul and Crowdstreet, while one better? Thanks
That’s my asset allocation preference. But it doesn’t mean it should be your asset allocation. See: Recommended Net Worth Allocation By Age.
My favorite private real estate platform is Fundrise. I think it’s better for investors to invest in funds versus trying to pick individual real estate investments. It’s similar to my belief to buy the S&P 500 index versus buying individual stocks. Fundrise has been around since 2012 and its returns are solid, especially during down years.
However, like stocks, I do like investing about 20% of my stock allocation into individual stocks. Hence, it’s worth checking out both CrowdStreet and RealtyMogul to see what they have to offer. You can invest in individual speciality deals in areas you are more bullish on.
Now understand relationships between fundrise and realtymogul/crowdstreet. However, all real estate crowdfunding investment as a whole, it should be classified as part of real estate holding or should classify as a separate assets class? Look like invest in fundrise , because it is an REIT, it has less risk. Classified as part of real estate is fine. If invest in individual project, you are invest in equity, if house price drop you may lose all investment. By this point, crowdfunding may classify as venture capital? Correct me if I am wrong, I think real estate mean small risk, no just tangible house?
I don’t quite understand. But real estate crowdfunding is considered real estate. Please spend time reading Real Estate Crowdfunding Learning Center and all the posts. It’s a great resource.
Thanks!
Great article – I’ve always considered my primary route to financial independence to be via stock markets, especially given the fact the gov in the UK is closing some of the old tax breaks for landlords. The fact you can leverage your investment and have some tenants pay off your principal really means I need to revisit what this means in the UK – thanks for the nudge!
You have recommended Fundrise for non-accredited investors. Do you have any recommendations for accredited investors?
Hi George, for accredited investors, my favorite platform is RealtyMogul. I had lunch with the CEO and co-founder earlier this year and really liked the way she approached vetting investments and building her business for the long-term.
Related: How RealtyMogul Does Their Investment Due Diligence
Must say I agree with this amongst other articles by Mr. Dogen. Anxious to read more.
Side note: Would love to see him chime in on kitv.com, the article about the rich living longer. Sadly, most people in Hawaii, probably 90%??? (guessing) have no clue why. You can’t have an intelligent engaging empowering conversation with most and I believe our mental health plays an important part on our physical health. Taking risks, up for challenges, always thinking, sharing ideas, striving for more, healthy and strong family relationships and friends who are like minded. JUST SAYING.
Sam,
It’s incredible how timely your advice was in 2012 and how spot on your suggestion of investing in real estate was for your audience. I wonder how many people you influenced to make the plunge. I’m a real estate broker and real estate investor (on and off since 1986). The first building I purchased was in 1992 in the Bay Area, It was a 4 unit building I raised my 3 children in, but that is not the example I want to use because it was like buying Apple Stock, (too much luck) to use as an example. I want to share an example of a purchase I made in January 2014 at age 54 for a 4 unit apartment building in a rural area (along a main Interstate in CA) with your audience. The building had been on the market a long time at the price of $399,000. I paid $335,000 with a 20% down payment and a fixed interest rate loan of 5% (RE investment rate) The 4 rents for the 2 bed 2 bath units averaged 725 per month at the time of purchase. My Gross Scheduled Rents were 34,800 per year for the first 12 months. The Owner paid water and sewer for all 4 tenants. Expenses were about 15,000 year following my purchase and the mortgage payments (principal and interest) totaled 16,668 per year. The expense number includes a reserve account of $2,000 per year to be applied toward capital improvements such as roof and painting. Here are the updated numbers as of December 2018. Average rents are now 965 per month per unit. The Gross scheduled rents are 46,320 per year. The water and sewer are now separately metered and the tenants pay their own water charges. Separate water meters were put in on grant funding by the city municipality and I realize that was a lucky break (Each unit already had individual lines). My 2018 annual expenses are 11,800 per year. Annual Cash flow after owning this building 5 years is 17,852. The tenants are paying down my loan at approximately 420 per month which adds 5,040 to my annual return and I’m depreciating the asset (9,745 per year) So I’m saving about 3,500 on my taxes. These 4 units are not tough to manage, housing is in short supply and it is providing a annual financial benefit, after just 5 years, of 26,392. This purchase was not exceptional. My rents could be raised even further at this time. I believe the building would easily sell today for about $500,000. My initial investment was 67,000 down payment plus closing costs of 5,000 for total 72,000. My current mortgage balance is approximately $242,000. Thank you for your encouragement. What I have learned over the years. When 20% down payment on real estate gets you a break even or better cash flow on a real estate investment before taxes, or even a slight negative cash flow, the real estate market is at a bottom and it;s time to buy with both hands. The 4 plex example I mentioned above is one of 5 real estate investments I made during that period.
Haven’t gotten any responses yet….so I can still expand the question. Considering doing such investments using a structure I learned about at https://www.401kcheckbook.com/ that enables me to invest retirement funds, but retirement funds are not something I want to take chances with. What are your thoughts? If it’s a good safe investment, then it would be ideal, but if not….
To elaborate, the incentive structure is less than ideal as investment platforms get compensated based on deal volume, regardless of performance, and their management fee comes off the top.
How do Realty Shares deals actually perform? I’m concerned that profits could get stripped before reaching the crowdfunding investor.
Hi I love your website and am a regular reader.
I live in Los Angeles and make between 110-120k a year, my rent is only $1350 but goes up about 10% a year. Here it is at least 600-700 to buy a tiny fixer in an area I don’t even really like so I’ve been struggling if I should just make the plunge and get something, or keep renting and saving. Anything cheaper would add to my already horrendous commute.
I currently invest $1100 weekly into my Vanguard account, I plan on living in the area for at least 5-10 years, however I work in entertainment so things can change quickly, but I’ve been gainfully employed for as long as I’ve been here and keep about 25k in checking just in case of emergency. I’m really afraid that with my luck if I were to go for it, the economy will crash or we’ll have a giant earthquake not soon after and I’ll be stuck owning a 300k house with a 600k mortgage. Thanks for any words of wisdoms and thank you again for all your great writing!
Hi Sam,
Thanks for the quick response!
By the way, before I continue… my son’s name is Samuel & we call him Sam, Samuel or Sammy depending on the situation.
I was thinking of a guest post that would analyze in a little more detail some of the commercial deals I’ve done to contrast them to traditional residential real estate investments. Sort of a case study.
The Boat & RV Storage deal that I did earlier this year is a great one to look at:
– $650,000 = purchase price in Jan
– approx. 10% cap rate on date of purchase
– probably abt. $50k in upgrades
– increase rents by 40% to 50% after about four months
– property value increases to +-$950,000
I would provide initial projections & pro-forma along with updated IRR, cap rates based on today’s numbers. I only purchased the property in January of this year.
The other deal I’m looking at, the 7 Acre property… it has a small house on it being leased out for $1,000 per month. The rest of the land is covered in trees. However, it’s unrestricted so it can be used commercially. It’s close to a large airport (Bush International) and is on a 2-lanes each way road with a center turn-lane.
I believe the property can be easily converted into boat & rv storage with some parking also for 18-wheelers that are busy in the area due to the proximity to the airport and a large industrial manufacturing area.
The deal I’ve struck with the owners is to lease me the land for $1,000 per month for 12 months so it will give me the time to convert it to vehicle storage and then I can buy it in 12 months for $400,000 – they agreed to a purchase option for that price. By that time the income will be there to support the purchase. In the meantime I’ll be building the value of the property.
The projected IRR on this investment is, at the moment, 128% on a leveraged investment (20% deposits) or 36% on an all cash investment.
The business is fairly hands-off… my current boat & rv storage has no-one on site. Each tenant has a code to get through the gate and I only go there to sign a lease for a new tenant. Or to sweep out a vacant space if someone moves out. We don’t have a lot of turnover. Maybe once a month. We have 44 tenants & I’m adding two new buildings to add 16 more spaces so we’ll have 60 indoor tenants and I also have some outdoor tenants.
It’s nice to have 50+ tenants…. when you have 1 tenant the tenant has a lot of leverage. When you have 50 or more tenants, each tenant has very little leverage!
Let me know what you think.
B. Regards,
Lance.
832-483 8655
All this sounds very interesting and exciting, Lance! Personally I also prefer much more real estate than stocks etc, not only because I understand it better and feel I can be a better active investor (meaning I really choose what I invest in – as in where, what etc) as compared to stock where I’d have to be just passive adding money to the amount, rather than actively choosing good stocks as I do not feel confident, but also because I love the leverage that can be achieved, which increases your wealth in that much more.
Now these commercial real estate deals that you are talking about are very creative! I live in Australia and here investors can only borrow 50 to max 60% of purchase price for commercial vs 80 to 95% for residential, which offsets some of the better rental returns in my opinion, if you don’t have a big stash to start with.
Nonetheless, if there is a guest post by you on FS, I’ll make sure I pay very good attention to it!
And thank you to Sam for attracting such good readers and comments :)
Hi Sam,
I recently found your site & really like what you’ve done here. Congratulations!
I’m also glad that you’ve discovered the power of real estate as an investment class. Many of the other financial bloggers focus purely on investing in mutual funds and I think they’re missing a BIG opportunity not only for themselves but also an opportunity to educate their readers.
As a broker I’ve been privy to many hundreds of deals and I’ve had close-up views of exactly who the winners have been.
I’ve watched people invest in rental homes, strip centers, mobile home parks, industrial warehouses and commercial land.
The winning investors have been those that have invested in commercial land. It was not even close. Their investments grew faster than any of the other real estate investments and, here in the Houston area where I live, that seems to be the prognosis for the foreseeable future as well.
The thing with buying vacant commercial land though is that it has no income. So, the trick is to buy commercial land that has some income being generated from maybe one corner of the land. This is what I try to do.
For probably the last 15 to 20 I read all the great investment books and did the whole Buffet / Benjamin Graham / Vanguard / ETF index investing thing and obediently added funds every year but the portfolios grew more by me adding cash than by themselves increasing in value. Even with dividends staying in.
I got tired of it all eventually and cashed in my ROTH and used the money to buy commercial real estate and commercial land instead. I started about 3 years ago with a small 3.2 Acre tract. This year I purchased a boat & rv storage business + the underlying 4.7 Acres and also another 5 Acre property that had a commercial building on one corner.
I have never been happier with my portfolios…. in about two years I’ve created close to $1M USD in new equity and in addition a very strong and growing cash flow to go with it. In fact, the cash flow in the next six months will grow to the equivalent of a 4% safe withdrawal rate from a mutual fund investment of about $1.8M USD.
So, not only did I create $1M USD in equity, the cash flow is like I have another $1.8 USD in the bank!!! And this cash-flow requires VERY little effort to maintain.
So, I doubt I will ever go back to stocks. In fact, now that my eyes have been opened to the incredible opportunities, in commercial land especially, I am looking to increase my investments in this area. The IRR projections on a new 7-Acre commercial land project I’m looking to undertake is 128% on some fairly conservative assumptions over a 3-year period. Try doing that in the stock market! :)
One of the key advantages of many commercial real estate income deals is that in many instances you can pass the property tax, building insurance & maintenance costs on to the tenant. This is one of the key reasons that commercial real estate investments will generally outperform a residential rental house investment.
I can guest post some of my deals with more detailed analysis if you are interested. I think it’s definitely something to look into. As William Penn famously said…. don’t wait to buy land, buy land and wait!
Good last famous quote! I penned a post on that concept called, Buy Real Estate As Young As You Can.
I’ve been looking at more commercial real estate investments lately with RealtyShares. They are a real estate crowdsourcing company based here in San Francisco. I invested my first $10,000 into a Conshy, Pennsylvania office property that will hopefully achieve a 12% – 18% IRR over the next five years.
A guest post on commercial real estate investing is intriguing. Let me know if you are up for it and what specifically you have in mind.
Thanks for your blog – I’m subscribed via RSS, email, your new FB page, and visit the site frequently. Awesome stuff!
I wanted to ask a question regarding how to choose a market where to buy real estate.
I currently have $100k liquid (sold everything before Bretix!) and instead of buying VTI next week I’m thinking of going into Real Estate. I have the credit to buy up to $600k, thinking of buying a multi-unit in some market.
How do you choose your market? I was thinking Vallejo (close to SF, ferry to SF in 1 hr, electric vehicle factory in 3 years, bankrupt a few years ago). But this would be my first investment property (already own a house in the peninsula) …
Any guidance thoughts? Thanks in advance!
Go Bears!
I recommend buying a place YOU want to live in for at least 5-10 years. Then rent it out and buy a new place.
Vallejo is cheap, but it is cheap for a reason. If you want to live there and can take the commute, great. If not, I’d keep looking.
Best,
Sam
Related: Real Estate for Lifestyle
Thanks Sam – I already bought a house in the peninsula where I will be for at least 5-10 years. But now I want to buy ANOTHER property for investment. I don’t have the downpayment (or leverage) to buy another in the area I currently live in – max I can spend for a property is $500k (I was wrong, thought it was $600k) and a 2/1 here is ~$700k.
Thanks again in advance!
After years of investing in stocks and mutual funds, I finally took the plunge and purchased my first rental property (a duplex). It’s articles like this that make me realize how real estate can be a powerful wealth building asset. Thanks for sharing this.
by direct investment I meant the direct purchase of real estate titled in my name or my entity.
I believe strongly in real estate as an investment towards real estate the negative correlation with bonds and equities is attractive additionally the inefficiencies in the real estate market allow for value plays not available elsewhere. I wonder what your thoughts are on allocation…. would it be irresponsible to allocate 50% of a retirement portfolio dedicated to real estate maybe 15% to direct investment and the remaining to REITS and limited partnerships to allow for some diversification. I would love to hear your thoughts on the matter.
What is considered a direct investment?
Real estate is less efficient than publicly traded bonds and stocks. However, I would consider real estate closer to bonds.
See:
Should I Buy A Home In A Rising Interest Rate Environment? Good Overview On Interest Rates
While I appreciate real estate vs. stock investment arguments since I enjoy both sides of the argument, your story isn’t a very realistic example. You bought low in San Francisco, and that turned out to be a booming real estate market. It’s far from the norm – look at the flip-side and see how many people are under water on their homes. You basically *got lucky*. The market could’ve tanked and you’d be paying $2,400/mo + property taxes + maintenance + depreciation whereas you could’ve just paid $2,000/mo for a place to live/rent and come out far ahead of where you are now. I think it’s an unfortunate example to use because I’m reading the comments on here and all of these people seem to think it’s completely feasible to buy a place for 580k, rent it for 3.4k/mo, and then sell it for 30% more later on. There’s a reason why every major city is absolutely saturated with foreclosed rental properties, and it’s not because the profits on them are booming.
What you’re saying is akin to me talking about my stock experiences – I purchased into Tesla when it was ~$40/share and sold it when it was a bit over $210/share. Is that a good example for why stocks are better than real estate? Not really, just happened to be a fortuitous experience for me. Overall I’ve averaged about 12% yearly returns in the stock market, so nowhere near my Tesla experience, but fairly good for a completely passive approach to investing. I’m very interested in trying out some real estate investing, but I’m not hedging my bets on whatever market i invest in to turn out like san fran did.
You’re right. I got lucky with my decision to buy real estate in 2003 and in 2005. I wonder if I will be lucky again with my more recent 2014 Golden Gate Heights house purchase 10 years from now.
So far, the comps have been trading OK. Take a look at this post on Buying Real Estate For Lifestyle. Comps went from around $715/sqft to $1,000/sqft, but I think it’s probably an anomaly.
I guess the question I’ve got to think about is: when I was saving money pre 2003 and taking the risk of buying then whether I was feeling lucky, or I was taking risk.
What is your current real estate and stock composition and history so I can gain perspective about you?
Sam, what is your term of your mortage, in years? how did you pick the term?
Question. I live in a very large home on the waterfront (bluff) in anchorege, ak. Our kids are grown and i was going to sell it but then i thought to make it into s triplex and we would stay in our part. Only id probably need about 200k to get the 2 other high end units with incredible views ready to rent out st 3k/month. I still owe 590k. Who would loan me the money? Banks dont seem to want too! But if i was buying the place i could get the money. In a 203b loan or construction loan….they wont loan anything to me now i already own it. This would be a fantastic opportunity make money and pay this off in 15 yrs! or less if we put even more money in per month!
These posts are very interesting! I currently own an auto sales business in upstate New York where cash is king. I use my own money to reinvest into buying and selling vehicles. I’m currently paying 1000 a month in rent and I’m located off the beaten path (terrible location). I want to own a commercial property! I just came across an opportunity to purchase a building listed for 125k- after speaking with the motivated seller he would take $100k and hold financing at 5.5 percent interest with 10k down. I’m hoping to have him hold the note for 10 years and have it paid off. My monthly payment based on 10 years would be 950 per month+ taxes ins and common area maint. If I paid off in 5 years it would be $1500 nnn. I will also have to invest approx 30k into fixing up the property but will considerably raise the property value. I’m wondering if I’m foolish to not going conventional financing for a 20 yr term. Banks will most likely require 20 percent down etc. Do you have any recommendations?
I wish I was the seller lending you money at 5.5%!
Do you think I’d be better off going conventional? Hear me out for one second…the list price on the building is 120 and I’ve negotiated him down to 100 and having him hold the note for 10 years at 5% interest. He will be making around 20,000 in interest over that 10 year period. I’m basically giving him full asking price for 0% interest- that’s the way I’m looking at it. Also Instead of coming up with 20 to 25% down on a conventional mortgage I will essentially be come up with nothing down applying the opm principle. However the building is in need of repairs and could cost approximately 30,000. So instead of giving the bank 20 to 25% I can reinvest it into the building. The payments would be $1000 a month +500 for taxes and cam. This would be my first commercial property purchase so please feel free to make any suggestions
If the market is efficient, owning your own business should give you roughly the same result as working for a W-2 income and investing the difference in passive mutual funds.
Money put into a small business really should be thought of as venture capital – and published rates of return for venture capital funds aren’t all that great considering the large risk being taken on.
The problem is you are assuming everything goes well and ignoring the downside risk. What happens if, for example, we have another real estate crash, or the neighborhood becomes less desirable and rents become more modest or stagnate, or what happens if you get a nightmare tenant?
Your entire argument essentially hinges on assuming that both rents and prices will rise faster than inflation forever (and in case you got the memo, it was the exact assumption you are making that crashed our economy 7 years ago!)
There are no guarantees in life, except for renting, which guarantees you a 100% negative return every single month. Oh, and taxes and death too.
Are you a renter or homeowner? If you are a renter, I strongly encourage you to find some place where you would like to settle down and buy. Inflation is just too difficult a force to overcome over the long term.
Rent vs. ownership is apples to oranges. Either you compare ownership to renting and investing the difference (in which case neither is a -100% return), or you compare renting to net present user cost of ownership (in which case both are a -100% return).
I have no reason to take advice based on this type of flawed argumentation.
It’s cool. Do you rent now? And if so, do you ever plan to buy?
Hi Highvid Cole,
My experience is that those who potty mouth real estate investing are people who don’t own real estate and they are just justifying the status quo in their lives, or they bought and had to sell early on a downturn, and were either unable or unwiling to hold on to the property to allow appreciation, principal pay down, and tax advantages to work for you.
There is a plethora of data out there available that supports that investment properties are typically a great investment, returning a yearly ROI of 35 – 45 %, as long as you hold on for the long term. And home ownership is great, too, as long as you are not biting off more than you can chew and is within the realm of what one would be paying for rents.
Kevin
Thanks! that was my thinking exactly!
Hey FS
Not sure if you check comments on old posts or not but been spending some time over at a RE forum and I keep hearing that monthly rents should be at least 1% (of the purchase price) or yields of 12%.
it strikes me as crazy but loads of people use that as a basis for searching
rob
Hi Rob,
Congrats on getting more rental property. The formulas for a great rental purchase differ among cities for sure. If you can get a 12% yield, I’d be buying all day long. But those properties are generally cheaper, and in more difficult neighborhoods. No free lunch!
Hey Sam,
Is it better to rent in the south bay area than to buy? At this time the prices for condos in mountain view, Santa clara and sunnyvale are already pretty high so it makes it difficult to buy. do you think it is still a good time to invest in real estate? what if you rented out the property right off the bat? would that still be valuable?
Thanks
Pawan
With UBer, Airbnb, Box going public over the next three years and Apple and Facebook at all time highs, it feels like the party will continue.
Check out this post: https://www.financialsamurai.com/increasing-passive-income-through-leverage/
I tend to shy away from real estate during a boom like this since prices are high due to loose ecenomic policy. Economic tightness would lower prices and leave you with an underwater mortgage. It’s better to buy when prices are lower and mortgage rates are higher then refinance when rates go down.
What did you end up buying in 2008-2012?