It’s safe to say I have more experience than most when it comes to real estate investing. I’ve been investing personally for years; I regularly network with other real estate investors; and I’ve helped educate hundreds of individuals on the subject through my investment property seminars, classes, and radio shows. But once the basics of real estate investing are covered, it’s time to turn the focus to strategy and consider how real estate will fit into your broader investment portfolio and your future plans.
With real estate, it’s important to differentiate between properties as assets and as investments. An asset is a thing of value—a stock, a house, etc. An investment is merely an asset that generates income. Every homeowner has an asset: the house. But the point of real estate investing is to turn that asset into an investment, and the best way to do that is to use a house to generate income. While houses will almost always appreciate—with the housing collapse a notable exception to that rule—you will see far greater returns through renting the house out.
It used to be that investing in rental properties had two steps: first, one would use the rental income to help pay down the mortgage; then, once the mortgage is paid off, the house would be ‘cash-flowing’ and generating positive income each month. However, the last few years have allowed both steps to occur at once. Since it now costs less to own a home than to rent, an investor can take out a standard 30-year mortgage—and sometimes even a 15-year mortgage—and collect rents in excess of the mortgage and maintenance costs. With my last few properties, I immediately achieved positive cash-flow. Now, my renters are both paying down the mortgage at no net-cost to me and putting a couple hundred dollars in my pocket each month.
Compared to investing in the stock market, real estate has obvious and immediate benefits. You can entirely leverage the asset, have someone else pay down the mortgage over time, accumulate equity as the house appreciates, and earn income month-to-month. That is impossible to do with stocks and most other investments. It would be like taking out a loan to buy stocks, having someone else pay down the loan for you, while you collect dividends plus the value of the stocks once liquidated. Furthermore, the returns on real estate are far higher. Once a rental property is paid for, it will on average cash-flow at five times the rate of return on stocks. That is, $1 million in real estate will generate the same returns as $5 million in stocks.
But, of course, stocks are always an integral part of any investment portfolio. It would be foolish to invest entirely in real estate. Heaven forbid a person has 100% of their net worth in real estate and then retires during a time like the Great Recession. It is always important to diversify—to hold stocks, property, and cash so that each acts as a hedge against the others.
There are, of course, unlimited strategies investors can deploy to achieve their goals, both short-term and long-term. But considering the cost of real estate, it’s unwise for amateur investors to experiment with actual houses. That’s why education is crucial: take time to study the market and study others who have invested in real estate. Talk with people who have done it, talk with real estate agents, and read books by real estate investors. Learn as much as you can before investing in earnest, and you’ll reap the rewards with as little risk as possible.
5-16-15 Real Estate Investment Strategies