This is Section/Lesson 4 covering Real Estate. If your initial reaction is to skip this section, please don't -- real estate can work well for those looking for income and those looking for growth. Again, it's easy reading, intended for someone who has had little if any investment experience. To start at the beginning, please go here. A glossary of investment terms is here.

Depending on how the investment is structured, real estate can have returns superior to that of stocks or bonds.

There are simple and convenient ways of doing this, like real estate mutual funds or Real Estate Investment Trusts, covered later.

But I want to focus on investments where you purchase an apartment and rent it, partly because I believe it can deliver superior results. And depending on the approach, it can work for those who were considering bonds and are looking for income, or for those who were considering stocks and are looking for growth. In the first case, you buy the apartment in cash and can achieve more income than bonds, plus, unlike bonds, the investment can also yield significant appreciation. In the second case, for those looking for growth, who may have less money to invest, you get a mortgage to purchase the apartment; although the investment does not provide income, it can have returns superior to that of stocks – with less volatility. And it's not as much of a hassle as you might initially think; more on that here.

Real Estate Purchased in Cash Principally for Income

If your interest is only in growth, skip this part and go to the next heading on this page.

The analysis that follows is intended for a person who has considered bonds and is looking for income. This works well for someone with considerable cash, perhaps a person who gets a sizeable amount of money from a divorce, or from the sale of a residence, and can pay cash for the apartment (why pay 6% to the bank for a mortgage on an investment property?).

In a recent analysis I compared $1 Million invested in high-quality (i.e., investment-grade) corporate bonds against the cash purchase of five $200,000 2-bedroom/2-bath condominiums for rental in the Miami area. (If you've got less cash, you can use these results by adjusting them downwards; so if you have $400,000, you'll be buying two of these condominiums, and your income and appreciation will be 40% of the numbers shown here.)

The results of the comparison between the bonds and the 5 condominiums were that both investments delivered almost exactly the same monthly income of $4,600, after allowing for condominium expenses such as management fees, property taxes and repairs, and for vacancies (details here). But there are two very important differences: the real estate delivers nearly 25% more after-tax income compared to bonds, and significant appreciation, with the real estate expected to grow to between $1.64 Million and $2.8 Million at 20 years, compared to bonds where the $1 Million didn't grow (details here).

If you choose to skip the next section (purchasing the apartment(s) with a mortgage), be sure to read the section after that, with comments on any real estate investments, including some of the downsides and ways of mitigating them.

Real Estate Purchased With a Mortgage for Growth

The analysis that follows is intended for someone who is looking for growth rather than income, and is considering investing in an apartment to rent out. In this case we'll be looking at financing part of the purchase. This works well for someone who has limited cash and also for an investor with cash who wants to use leverage to maximize returns (more on this later).

Here I looked at buying a $200,000 2-bedroom/2-bath condominium for rental in the Miami area with a $50,000 down payment and a $150,000 30-year mortgage at 6% interest (lenders typically require greater down payment and interest for investment property, compared to an owner-occupied property). The resulting monthly income would be $918 after allowing for condominium expenses such as management fees, property taxes and repairs, and for vacancies (details here) but before the mortgage payment and the insurance required by the lender. When the mortgage and insurance are considered, you have negative cash flow because the calculated monthly income is minus $70 (for the calculations and further details please go here).

However, your gains over time are appreciable. The property is forecast to deliver an annual return between 7.2% and 9.1% on your total investment (including the negative cash flow) over the 30-year period of the mortgage. That's comparable or better than the S&P 500 stock market index, which has had an average annual return of 6.1% over the past 20 years, and 9.7% over the past 30 years (details here). This is partly because you're leveraging the lender's money, namely that your property -- all of your property, initially $200,000 but increasing with time -- is appreciating but you only invested $70,500 over the 30-year period of the mortgage (including the time-discounted value of the $70 per month negative cash flow; see explanation here).

An additional advantage of this real-estate investment, which has a bearing on your return, is that it's likely to reduce your taxes on other income. Typically, when you add the depreciation of the property (the reduction that is allowed for tax purposes in the value of an asset with the passage of time, even though the property is appreciating) to your related expenses (including mortgage interest), the investment shows in your annual income taxes as a large loss, thereby reducing the total income for the year -- in effect shielding some of the income from other sources, like your salary. If this end-of-year tax savings is equal to your annual negative cash flow, then you don't have a negative cash flow from a net-tax standpoint, your investment is just the initial $50,000, and your return at 30 years is over 8.4% if we use the nationwide appreciation and nearly 10.4% if we use the Miami appreciation.

In short, for this example, the apartment-for-rent investment is comparable or superior to an investment in an S&P 500 stock market index mutual fund, with less volatility. I have been too lazy to analyze the return at the 10 and 20 year points, before the mortgage is paid off, but I expect that the results will be similar. The returns presented above are in table format below. Although I stand by it, at least one person finds fault with my comparison of this real-estate investment with an S&P 500 stock investment (details here).

It's important that you read the next section, with comments on real estate investments, including some of the downsides and ways of mitigating them.

Additional Must Read Information About Real Estate Investment

Again, this works for those who know or can get guidance about real estate, including the areas were appreciation is likely to occur, the expected rent for a unit, and the cost of maintenance and repairs. But you can get such guidance from a real-estate professional and someone (a friend?) who invests in real estate. There are techniques that minimize the hassles of being a landlord to the point where they can become insignificant; they are covered here.

To be fair, the real-estate examples presented above falls short of the so-called 1% Rule that experts recommend; the rule and why I don't adhere to it are covered here.

There is a new way to invest anywhere in the country with an online service ( that requires little effort by you. You select from properties that have been ranked for location, condition, income and tenant history, and they take care of everything, including finding you a company that will manage the property for you.

One important point is that this type of real estate investment has less liquidity; unlike stocks and bonds, if you need to cash out, it might take months to sell a property. For the average person, there are other more liquid ways of investing in real estate, such as a mutual fund that invests in real estate or a Real Estate Investment Trust (REIT) which owns real estate. I have little experience with them, but a good article on REITs and other forms of investing in real estate may be found here.

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1 This was updated in Oct. 2019. The views expressed here are mine and at times may depart from the norm. In preparing this article I first read several articles, and ideas or phrases from those articles may have unintentionally crept into mine; I am happy to remove any plagiarism if alerted.