This is Section/Lesson 3 covering Real Estate. If your initial reaction is to skip this section, please don't -- real estate can have returns superior to stocks. 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.

As mentioned above, real estate can have returns superior to that of stocks, and can be a good choice for growth.

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. For growth you get a mortgage to finance 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). And it's not as much of a hassle as you might initially think. Later we'll cover things that can be done to substantially mitigate the issues of dealing with tenants, maintenance, getting paid, etc. I bought my first unit 24 years ago and I now own four, and it's nearly hassle free. Although I'm an advocate, I will try to be neutral. It's not the kind of thing where you buy and forget, and it's not as liquid an investment as stocks, but it can be the superior investment for those who know or can get guidance about real estate.

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 (www.roofstock.com) 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, 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.

You can click on the NEXT button below to go to the final section on Investing.

__________________________
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.