Been interested in expanding my portfolio beyond stock for a while. I’ve gone down the real estate rabbit hole several times over the past few years and my conclusion is always that I can’t convince myself it’s a better investment than leaving the cash in stock so I have to be missing something. I look through dozens of properties, do the math, and while a handful are positive cash flow, it’s like 1/10th of what the cash could make in the stock market. Even accounting for property appreciation, it doesn’t seem worth it. Seems like the “rent at 1% of purchase price” works, but I’ve never come across a property where this is possible.
Tell me what I’m missing. Is it just about finding those unicorn properties that are seriously underpriced? Is it less about making more money and more about diversifying? Tax write offs? Or is everyone just house hacking? I rent my guest house to a friend and that’s a great deal but wouldn’t make any sense if I wasn’t already paying the mortgage.
How does anyone make any money doing this?
byu/Healthy_Bus3445 inrealestateinvesting
Posted by Healthy_Bus3445
34 Comments
There are no guarantees, so just don’t buy more than you need, and there is nothing wrong with waiting till a better opportunity arises.
You might not ever break even, or have a gain, particularly if you compare the opportunity cost of buying, to renting and investing in a 401k, or similar program. Real property ownership, has a lot of disadvantages as a residence, and as an investment. Real property is close to an all time high, yet dropping in most metro markets, while interest rates are still high. Homes now, are at one of only two of the highest peaks in un affordability, the other being in 1981, and is no guarantee of anything but expenses and risk. Most of the gains in real property, can be a product of leverage, which cuts both ways.
If you put that extra money into a diversified portfolio, in a combo of a tax deductible tax deferred plans, like a 401k, get a write off at your state and Federal marginal bracket, or a Roth, pay off debts, add to a taxable brokerage account, etc., chances are quite good, you are better off not buying Real property, possibly not even buying a house or condo to live in.
Long term real returns in stocks, are somewhat better than real estate. Real property generally has huge expenses, a mortgage, property tax, homeowners insurance, repairs, maintenance, utilities, some have a HOA and assessment potential, plus litigation potential. With real property, your risk can be greater than your net worth. The estimates you see of real property appreciation percentage rates, don’t take into account expenses like the mortgage, property tax, homeowners insurance, repairs, maintenance, improvements, etc. These appreciation rates are also generally misleading, as they are expressed in nominal rates of return, not taking into account inflation.
Every time you sell, it may take months, you may pay 6% of the property price, have to fix the place up, there may be sales related litigation, assessments, then if you buy again, you may have to fix that place up, and maybe mortgage rates will be high. Selling stocks is quick, costs pennies, and settlement takes days.
If people want to avoid many of the risks and expenses, of direct real property investments, and diversify to include real property returns, they can do this quickly and cheaply, by buying Reits, and have income, quick cheap liquidity, and even leverage.
If you have or get a mortgage, you really don’t improve your cost of living till the mortgage is paid off. Stocks average about a 10% rate of return long term, they generate income, can be leveraged if you want, are liquid quickly and cheaply, LTCG income has favorable tax treatment, and dividends may as well.
The money you pay into principal, is not available quickly or cheaply, if you could put that extra amount every two weeks into a deductible deferred account, like a 401k, etc., you save at your state and Federal marginal rate, and income and gains are tax deferred, then when you accumulate enough in your stocks, you can pay off the mortgage if you want, but all the time you were accumulating, you have had more diversification. In your 70’s, you begin minimum distributions, but they commence at about 3.7% of your balance, and are generally lower than your rate of return, till your 90’s. Your beneficiaries typically get up to 10 years of tax deferral.
I did a comparison of what if we had rented in 2005, vs bought, and invested the difference in Spy. Would have come out ahead to rent. There are downsides to renting of course. You have exposure to rental increases, and the landlord can call any time, and say we are selling, I need the place back, as we are getting a divorce, whatever. Another aspect is you really can’t justify doing much to change or improve the property, so it is not strictly an economic decision. If you have, get, or lose a partner, your plans may change. In my comparison, I found we would have been better off if we waited till 2012 to buy, as prices had bottomed out, but nobody has perfect precognition.
I am in the same boat as you, and have gone down the RE many, many times and come to the same conclusion. In for some insight from others. My theory is that it’s more difficult for those that have had success in the market and started there first to jump to RE. In my short time, market returns have been strong and it’s easy to see compound interest at work. That paired with known expenses and high levels of liquidity should it be needed make it pretty attractive.
It only makes sense if you’re handy or can do a lot of the improvements, renos and installations yourself. If you need to call a handyman or a tech for every issue you’re fucked.
Pre COVID you had a chance but no longer
It’s hard to make the numbers work right now, unless you can hit the 1% rule. But, even the 1% rule isn’t great for all investments — for example you can buy a dumpy SFH in a LCOL area for $100k and rent it for $1000/mo and I assure you your cashflow will be close to zero.
IMO the only way to beat the market is through appreciation and a mortgage. If you put $200k down on a $1M property and that property appreciates 20% in 5 years, then congrats, you actually just doubled your money ($200k equity is now $400k equity). If you bought some good quality real estate in 2019, you’d have made some serious cash in the recent housing bubble.
That being said, the stock market has been on such a tear recently that it’s hard to look at real estate right now. I suspect real estate will stay pretty flat for a while until there’s a big stock crash.
Buy 15 years ago.
Takes a long time tbh
Its just like any industry; if you don’t have significant startup capital, you have a much tougher time making money with it.
Its the way of capitalism. The best way to make more money is to already have some.
A lot of the wisdom you’ll see was relevant 10 or more years ago. The market isn’t where it was.
The supply isn’t where it was. You are indeed looking for that sweet spot or the unicorn. They do exist.
Start off with house hacking. Do that for a few years, and then rents might’ve increased enough to make it profitable as a standalone rental. Then you can move to a new place to househack again while renting out your first one.
Where are you buying?
Values are too high currently so nothing makes sense. Back in 2018 when I started, it made sense. That stopped in 2022.
Well no one will lend you money to invest in stocks, but they will lend you money to invest in real estate.
Real estate CAN be a great investment, but not all the time and not for every individual. When you see people talk about THEIR real estate investments (or made up ones), you have zero context. They could have bough 30+ years ago. They could have inherited it. They could have used family money. They could just happen to have been living in a booming market 15+ years ago in a low interest environment where everybody was a genius.
YOU have to decide if the best use of your capital in TODAY’s environment is real estate or something else.
Can’t leverage into a large stock portfolio. I can however leverage a “small” amount of cash to buy an asset and have the tenants pay for the asset for me. I can turn 20-30k into 500-700k+ over 30 years.
Rents prices need to go up a lot or housing prices need to come down a lot, before new rental acquisitions make sense over the stock market
Diversification is definitely a big part of it. I also like the part where it can bring in cash flow while also appreciating over time.
You have the ability to move from one investment to another without having to deal with the immediate capital gains if you utilize a 1031, so that’s a plus.
And also, and I may be in a minority with this, but I think you have the ability to help your family/children as they ease into their future. Imagine if you could allow your post-college child a free or reduced rent while they got adjusted to the work force and saves for retirement and whatnot? And it would be cheaper than paying for them to rent somewhere else, because you would basically get a de facto tax break in doing so.
Honestly half of houses are money pits and too high of a price these days to be lucrative. It was 10-20 years ago. We’ve since sold the majority of our homes over the past couple years. Great time to sell
It is a long game:
1. Your tenants are paying off your mortgage.
2. Your real estate will appreciate over time.
3. Rents go up, but your mortgage stays the same (assuming fixed rates).
4. You get tax write-offs.
As an example, I bought a little 2 bedroom townhome for $85K in 2018. Today it is worth $225K and I owe $50K on it. I have made $90K in 7 years. My total monthly expenses are $550. The rent is $1650 (rent when I bought it was $800). My profit per month is now $1100. My rentals give me depreciation tax write-offs, lowering my taxes.
Purchase some “REIT”ETFS OR funds real estate investment trust,some pay 6,7,8 % disbursed monthly, Annual amount)
Make money 4 ways in real estate: cash flow, appreciation, mortage pay down, and depreciation from the IRS.
You are in more control of your money owning real estate imo , plus leverage.
I dont know if tax write offs are worth the headaches of needing to fix the place constantly. At least something always pops up in my properties.
Leverage – if you have $100k in stock market and it gets 10%, you made $10k profit.
If you put 10% down and use the $100k to buy a $1m house and it gets 10%, you made $100k profit.
(This is WAY oversimplified and there are a ton of other factors and costs (eg interest) I’ve ignored for the sake of simplicity / to directly answer the question)
Adding the concept of forced appreciation to what everyone else has listed. We not only renovated properties that had years of deferred maintenance, we added value often by adding bathrooms or in the case of our current flip, we will be enclosing a sad unused porch and adding a much needed small mud room.
It’s fun for us and lets us work together and combine our skill sets. And to help us not feel like vampires living off of people that have no choice but to rent, we actually have done a little build to rent and are looking for opportunities to do more. Maybe build a couple starter homes to sell to pay it forward.
Looking forward to diverse revenue streams when we retire, we are 50/50 real estate and stocks rn
If you want it to perform better than than stocks, you need to buy with leverage, while also being careful not to over leverage.
Buying real estate outright will cash flow, but the performance is terrible compared to other investments.
Have you thought about going back in time to 2014-2019 and buying then? That’s the way to do it!
It typically takes a couple to a few years
I totally get where you are coming from. The math can be super frustrating right now with high interest rates. Most people making it work aren’t just looking at cash flow, they are banking on the tax benefits like depreciation and the fact that someone else is paying down the principal for them. It is definitely more of a long term wealth game than a quick way to get monthly cash compared to stocks.
It’s a long term project. I’ll give an example of a property I own, smaller duplex, tenants can be great or sometimes terrible because it’s on the smaller side and rent is relatively affordable for an expensive area. Bought it in 2017, put 25% down. After expenses, taxes and a remodel after a bad tenant, and 8 years it’s cash flowing 1/4 of my down payment annually, it’s more than doubled in price, and I’ve been making extra payments on the mortgage, so for no additional money out of my pocket other than the initial outlay, I’ve got an asset with equity 5x the input, cash flow monthly, several thousands in an emergency fund, and a debt that is being paid by others. Investing that same sum in the market would not have returned anything close to that. It can be a pain in the ass when you get a call Sunday night about heating going out, or water leak etc, but over time you build a good list of who to call.
The last few years prices have been ridiculous.
All the properties I bought from 2010-2020 have made bonkers money and have had insane tax benefits to go along with it
Everything 2020 and beyond in shocked folks paid what they did.
I have 25 units and I haven’t bought anything in the last 5 years
How can I find serious cash buyers in Connecticut for an off-market property that I would like to sell ASAP? Any recommendations?
It’s like starting a grocery store but you buy all of your food and supplies from Walmart. If you get on realtor.com or any website you’re essentially buying retail. All the real money is made in wholesale.
Then you can buy distressed properties and ride your own GC side of things and boost the return even more.
I have bought many many properties for half of retail including rehab costs. Meanwhile retail investors only truly make money with high levels of appreciation. It’s easy to make money if your market is reliably gaining 5% per year. You can buy it retail and make money. But when the market changes all the retail investors get wiped out.
I’ve had the same dilema as OP’s. I’ve owned one rental for over 10 years, and it’s been great from all the vantage points mentioned here already. But, every year I go down the rabbit hole of finding another property I could replicate that formula with, and I just can’t get there in the current market.
Cost of capital has increased significantly (mortgage rates up), property prices ballooned, and legislation has become less owner-friendly in some jurisdictions.
I always decide against plowing more money into RE. And I’d exit my current rental, if it weren’t for the ridiculous capital gains taxes I’d incur.
1. RE appreciates with inflation
2. You get 4-5x leverage on your appreciation
3. I’ve been finding deals that cash flow 8% unlevered which I can lever to 14%
4. You don’t pay taxes on your cash flow EVER until you sell property
5. The money you use to pay back the loan is worth less than when you borrowed it (inflation)
Put all these together, handle a ton of headaches, and it makes sense similarly to stock market or better.
Cash flow with no tax is the main advantage. Get 100 units cash flowing $500 a month each and you’re looking at $50k a month tax deferred (until you sell) add in another $300-500 a month and increasing of principal pay down (retirement savings, or equity to be borrow against later) it starts looking good.
This is my experience. Most of the people that are making money are the bigger investors, those that can really scale, banks, and developers.
The small time investor is going to have a tough time unless they are willing to put in some sweat labor and find a market that is too small for a major investor, but big enough to have profit potential and scalability.
I think the best small time investors are ones, that are slow and steady, handyman types, who build up a small portfolio that secretly makes them like 100-200k a year. They also typically are contractors that build their own product and make a lot of money on the purchase of the product.
The problem with most investors on reddit,.I’m assuming now, don’t know for sure, is they are likely working a job, and trying to invest part time, and have a mindset of “passive” income. Making serious money in real estate is a full time effort and passive investment just siphons off too much money in other fees and services that a.full time person could avoid.