For those who have stopped by before, you may have seen that I have a goal this year to dive into the world of real estate and purchase and rental property.
However, I’ve yet to really explain why it is I’m choosing this route. After all, depending on whom you talk to, real estate could be either the easiest/best thing ever, or a “why on earth would you do that” type deal.
There’s real risk involved in real estate, and if you don’t know what you’re doing it could turn out very poorly.
Despite all the risk involved, I’m still determined to jump in. There’s several reasons for that, but here are a few of the bigger ones:
Diversification
Currently I’ve got about 86% of my Net Worth tied up in stock market investments. The rest is in cash/my car.
If I were not saving up for a rental property, that percentage would likely be even higher. If you ask me, that’s a pretty substantial portion of my Net Worth in the stock market.
As the realist in me would say: I have all my eggs in one basket.
When things are going well (as they have for the past 8-9 years) that’s great; but we all know that the good times don’t last forever.
What’s more, sure, historically the stock market has returned 7% on average annually, but that does not guarantee a 7% average is what we’ll get in the future.
Don’t get me wrong, I’m not saying I’m going to stop investing in the stock market. I will absolutely still take advantage of my tax advantaged accounts and max those out for the near future.
However, I do realize that the future isn’t going to be all roses. And when the bad times come, I don’t want all my eggs in that one basket.
Enter real estate: a great way to diversify my investments and give me an asset that isn’t directly linked to the stock market.
By identifying and managing a good rental property, there are many other benefits that can come from it. Such as…
Cash Flow
One of the things that really caught my eye when it came to real estate: the cash flow.
There are several markets where you can purchase a good property and then rent it out for a positive cash flow.
What does that mean? It means that each month, the rent you collect from tenants is higher than all of your expenses (mortgage, taxes, insurance, maintenance, etc).
That positive cash flow each month is straight income that you can do whatever you want with!
Maybe save it in cash for property emergencies, or save up for another rental property. Heck you could even take that income and invest it into the market!
What cash flow really has me intrigued about is what that does for my FIRE plans.
Lets say I’m going to spend $40,000 a year in retirement. The 4% rule says I need to have $1 million dollars in order to be Financially Independent.
However, if I can find a property that, on average, nets $500/month in cash flow, That’s $6,000/year. Now I only need to cover $34,000 worth of expenses every year. This means I only need $850,000 in investments to pull from!
The more cash flow, the more my expenses would be funded, the less I would need to save total.
I can’t forget to mention another benefit:
Loan Pay Down
I’m not in a position to be paying cash for properties, so I’ll surely be getting a loan to finance the rental property.
But guess what.. I won’t be paying it!
Yep imagine that, taking out a loan and getting income from it (positive cash flow) while not paying it off yourself (can my car loan work that way please??)
The thing is, the tenants of your rental property are going to be the ones paying your mortgage for you. Each month, they’ll be the one’s chipping away at that loan through their rent payment as you gain more and more equity.
Eventually, that loan is going to get paid off in full. Now you completely own a property without having had to pay any of the mortgage… how cool is that!?
Plus, even more monthly cash flow now 🙂
In Control
Lastly, I like the sense of control that investing in real estate can bring.
When investing in the stock market, you are completely at the mercy of Wall Street or economic conditions you have no control over.
For whatever reason, it can sometimes leave me with an uneasy feeling knowing that.
With real estate, you are largely, if not all in control. Sure, you can’t control the appreciation and changes to your overall rental market, but you can control most everything else.
You choose the property, you choose the property manager/tenants. You choose rent prices, renovations, etc. You’re your own CEO! (make sure to pay yourself the big bucks 😉 )
Coming back full circle… so why real estate? My answer is why not real estate?
There are plenty of risks involved, but you can say that about any investment.
I’m definitely no guru, and I’m sure whenever I pull the trigger on my first property I’ll take some lumps and learn many things the hard way.
Despite all this I see enough potential in this area to truly think this could be a great path going forward.
I’ll be sailing in uncharted waters (for me) but I’m steering the ship and a few people have left me some pretty reliable maps 🙂
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Do you own any rental properties? How has your real estate journey gone? If no, would you ever consider it? Why/Why not?
I don’t know much about real estate investing and to me, it seems too risky to jump in to something you describe above. It’s a much more active investment than other forms, such as stocks.
How easy is it to find tenants? What if they fall behind on payments? Do you really want that call at 10pm on Sunday night when something breaks? I think being in control is just as much of a negative as it is a positive. You’re responsible for everything, and there can be many issues with tenants, renovations and maintenance.
I view this form of investing as very risky (but that also means potentially highly lucrative to be fair), and probably too much risk (and work) for me to be willing to take on. If you have the motivation, knowledge and patience to do it, it’s probably worth a shot. For me personally, I don’t have either of those three traits when it comes to this topic. 😂
Totally agree, definitely a lot more risky and active that just picking index funds. However, the potential for greater return is also there!
My plan isn’t really to be very active once I pick out and buy the property. Since I’ll be probably investing out of state, I’m going to hire a property manager who will take care of all that for me.
It’ll definitely be a learning experience going through this first one, but I’m learning as much as I can prior to going forward with it!
Real estate is a great way to diversity your investments, and leverage is an amazing thing! We’ve done that and are very happy with the 15 property portfolio we’ve built up over time and is a big part of our FIRE plan.
Yes there are a lot of risks so you need to start with educating yourself and doing some window shopping. If you haven’t already, definitely sign up for biggerpockets.com and peruse the forums. Also find local REIA’s in your area – some are great at education, and they provide great opportunities to network.
Wow 15!? I need to go read your story!
I haven’t signed up on bigger pockets but definitely have already been browsing through their site for all the real estate information I’ve been looking for
Good luck man, you should talk to GuyOnFire but I’m sure you already are!
Thanks! Yep we’ve chatted briefly about it but definitely need to sit down with him and pick his brain!
I’m completely on board with the real estate plan. It’s something that I’m trying to do currently as well. I just got licensed as a real estate agent. While it’s not mandatory to have a license to get into rental property, I felt the education was invaluable and I learned so much about real estate laws that will keep me out of trouble down the road.
Wow that’s interesting! The thought had never occurred to me to do that, but maybe once I’ve picked out the state I want to invest in that could be worth it
This is a big strategy for me moving forward. Nothing like some rentals to begin supplementing W-2 income and phase out of corporate!
Absolutely! Plus having the income coming in to cover at least some expenses I think will help with the mental block of having to withdraw large sums from your investments outside of corporate life and/or in early retirement
Real estate sounds like such a fantastic investment if all goes well, but carries a lot of risk if it doesn’t. But the fact that it’s such a different kind of risk than investing in the stock market makes me very eager to diversify my portfolio that way, too. I also don’t want all my eggs to stay in the one basket they’re currently in!
Right!? Definitely lots of risk, but hopefully I can go at it the right way and turn it into success. That would really help my FI Plan if all goes well!
I am a huge fan of real estate and have really been concentrating my investing dollars into it for the past year. I am not too keen to have a second job as a landlord so the options I have chosen are more passive real estate opportunities (mainly private syndication deals but before that crowdfunding platforms). You hit the nail on the head that the best thing about real estate is cash flow. You can get a decent yield on your investment (much more than stock dividends or bond interest) and there are great tax breaks.
I haven’t really considered those other avenues of passive real estate but maybe I should! Making it as passive as possible does sound pretty enticing so I don’t have to necessarily be actively involved in the day to day of everything. Cash (Flow) is king!