This is Chapter/Lesson 4 covering Real Estate. If your initial reaction is to skip this chapter, please don't -- real estate can work well for those looking for income and those looking for growth, plus it adds diversification to your investments. To whet your appetite further, here are excerpts from a recent article cited later in this page: "Rental properties offer tremendous stability. Studies...show that investments in the single-family rentals market offer similar returns to the stock market, but with less volatility." "Returns on single-family rentals are uncorrelated to the stock market...[which]...makes single-family rentals an excellent choice for anyone who wants to diversify their portfolio and hedge against market downturns."
Like all the chapters, this is easy reading, intended for someone who has had little if any investment experience, and only takes a few minutes. When you've read the 5 chapters, you'll be ready to invest. If you're in a hurry, this page is summarized in the box on the right. If you're too busy now to go through these Chapters, read this 2-minute Summary. To start at the beginning, please go here. A glossary of investment terms is here.
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 which you might initially think are too much trouble but can be virtually hassle free: purchasing one or more apartments or duplexes and renting them. I cover this because these investments can deliver superior results. Depending on how they're structured, they can achieve more income than bonds plus, unlike bonds, the investment can also grow in value as the real estate appreciates. And if the investment is structured for growth, it can perform better than stocks with significantly less volatility.
While this investment can be virtually hassle free (more on that here), one drawback is liquidity. Unlike stocks and bonds, where you can sell and get your money out in a day, it takes several months to sell your property if you suddenly need money. But, like stocks, your purchase of a property to rent out should be a long-term investment.
Real Estate Purchased in Cash Principally for Income
If your interest is only in growth, go here but then come back to read the next section on must read information.
This is intended for a person who has considered bonds and is looking for income. This works well for someone with considerable cash (over $250,000), 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 property (why pay 5% - 6% interest to the bank (7% - 8% in 2022) for a mortgage on an investment property?).
In a 2019 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.)
An analysis can be done where you purchase duplexes, and the results are similar to those shown here. In Chapter 5, where we actually run some examples, we'll go through the numbers for BOTH a condo and a duplex.
I selected $200,000 condos because I've found that somewhere in the $200,000 to $350,000 range for condos and $400,000 - $550,000 range for duplexes is the sweet spot for good returns without excessive hassles; more on that here). In 2022 the sweet spot is somewhere in the $300,000 to $450,000 range for condos and $550,000 to $700,000 for duplexes, because of the recent sharp increase in real estate values, but rents have increased even more, so the conclusions here are still valid.
The results of the comparison between the bonds and the 5 condominiums were that the 5 condos delivered a bit more monthly income than the bonds ($4,750 vs $4,600) after allowing for condominium expenses such as maintenance fees, property taxes and repairs, and for vacancies (details here). But there are two very important differences: the real estate delivers nearly 28% 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 on both the after-tax advantages and appreciation, plus total returns are here).
Be sure to read the next section, with comments on other forms of real estate investments, some of the downsides of the investments described here and ways of mitigating them. Then go read the next Chapter, entitled Go Invest, where I take you by the hand and help you find the right properties to buy.
Additional Must Read Information About Real Estate Investment
Obviously, this requires more work than picking up the phone and telling your investment broker to buy a mutual fund or bonds, but as you've seen it is very rewarding, with returns that can be superior to stocks or bonds, and without the volatility of stocks. You do need some guidance about real estate, including the areas were appreciation is likely to occur and the expected rent for a unit, but you can get such guidance from a Realtor and from the next Chapter, where I take you by the hand and help you find the right properties to buy. Also, 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. Of course, their fees may reduce the financial returns but the yields may still be sizeable. This article has more details on Roofstock but also emphasizes the points made here, including the excerpts shown at the top of this page and repeated here: "Rental properties offer tremendous stability. Studies based on data from the U.S. Census Bureau, S&P 500 returns, and U.S. Treasury show that investments in the single-family rentals market offer similar returns to the stock market, but with less volatility." "Returns on single-family rentals are uncorrelated to the stock market...[which]...makes single-family rentals an excellent choice for anyone who wants to diversify their portfolio and hedge against market downturns."
One important point that was mentioned at the top of this page is worth repeating: that this type of real estate investment is considerably less liquid. Unlike stocks and bonds, if you need to cash out, it might take months to sell a property, so this is for money you know that you won't need for years. In that sense, it's the same as the advice I give on stocks, where you only invest with money you won't need for 5 - 10 years. For those who want a more liquid real-estate investment or those with less money to invest, there are other 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.
Please click on one of the buttons below to go to one of the other chapters on Investing. If you're considering buying real estate for investment, make sure you read the next Chapter, entitled Go Invest, where I take you by the hand and help you find the right properties to buy.
1 I am NOT an investment professional -- I'm an aerospace engineer with a Master's from Caltech who drifted to the business side and spent the last half of my 30-year career dealing mostly with financial matters. After retiring I've spent the last 20+ years investing in stocks, bonds and real estate. Although this was first updated in October 2019, I've been reviewing it regularly and make changes/additions in RED when warranted. 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.