One of the most common investments that people make is buying their own residence. If the amount that you would pay in rent and the amount that you would pay in the mortgage is about the same, and if you are planning to stay at the same place for more than 5 years, then buying a property should be a no-brainer.

Assuming that you take care of your property and the neighborhood does not deteriorate, your property will probably go up in value at the rate of inflation (let’s say 2%). In addition, every time you pay your mortgage, you are building equity.

But let’s say that you would like to consider real estate as an investment, then there are different scenarios that would allow you to make some money. I will mention the two that I know, but the list is much bigger than that.

1. The landlord.

Here, the objective is to buy a property and rent it out. A bit of work needs to be done to put this plan into practice. You need to find a property, buy it and rent it at a price that will cover all your expenses. The way to calculate this is to imagine that the bank is giving you a loan without you having to put down any down payment. Add to the cost of the property any additional expenses related to the purchase, such costs could be inspection, notary, and taxes. Once you figure out your total cost, calculate a 25-year mortgage at the present interest rate, then add the regular monthly expenses, such as city taxes, insurance, maintenance costs, and allowance for vacancies. On top of all that, add the net cash flow that you would like to have, let’s say $100 per month. Then you have to get a tenant whose rent would pay for all of these costs.

2. The flipper

This model is simple to understand but I don’t know how simple it is to implement. The idea is to buy a property at a discount and sell it at market price or slightly below. Let’s say that your best friend gets a job in China and she has to move by the end of the week. She is in a hurry to sell her house and to sell it fast she decides to sell it 20% below market value. You believe you can sell the house at a higher price if you had some time. You buy the house from your friend and put it for sale at 5% below market value, and you sell the house within one month. There, you just made a ton of money.

People who do flipping professionally don’t rely on their best friends moving away. They market themselves all the time, make business cards, send thousands of letters by mail, and create websites offering to buy houses. They offer fast cash whenever they see a deal and make the process as easy as possible. This kind of investing is not for me. I don’t see it as investing but as a full-time job. Certainly, I don’t consider this passive income.

People invest in real estate for a few reasons:

1. It is easy to understand. You do the math; if what you collect in rent is enough to pay all your expenses, then you are doing good. If the rent doesn’t cover your expenses, then you are doing badly.

2. It gives you a lot of time off. As a real estate investor, you have to be available when something goes wrong with your property, but the property could go for many years without having any problems. A tenant might call you in the middle of the night to let you know that something is wrong but other than those rare moments, you have a lot of time off.

3. You decide your income. In the corporate world, your income depends 100% on your employer. If your employer doesn’t like you, then you will have a hard time getting a raise. On the other hand, as a real estate investor, if you want to have more income, all you have to do is to buy another property and put it for rent. It is as easy as that.

4. Automatic retirement plan. Every month when you pay your mortgage you are actually putting away money towards your retirement. One day that property will be totally paid for. From then on each additional rent payment, you receive will be mostly profit. Assuming that you have four properties, each one valued at about $250K, in 25 years, that will be one million dollars-completely yours.

5. You are helping people. As a real estate investor, you can take pride in helping people find a place to live.

Investing in real estate has changed my life completely. I have a lot of time to read, study, to develop other dreams. All of that while saving for my retirement.

Update: June 2019

Real estate has been good to me. In six-seven years, I didn’t run into too many problems. I had some minor plumbing problems, at different times I had bed bugs in the different apartments, and another inconvenience is that it’s not always easy to get along with other co-owners.

After two condos, I didn’t continue buying anymore. I chickened out at the idea of borrowing more money. I hesitated to put more eggs in the same basket.

Also, I realized that there is a strong cultural pull towards the idea of earning money through real estate. Real estate investing is as old as farming and it has been ingrained into our subconscious for hundreds of years as one of the best investments opportunities out there.

In my case, after a few years of reflection, I realized that:

• Return on capital is inferior to the stock market. The return on real estate is 2%-3% per year, while the return on the stock market is about 6%-8% per year.
• Real estate is NOT a passive investment. Even, if you don’t do much for years, you are responsible if anything happens. You can never be 100% disconnected. As opposed to the stock market, your chances of making long term money goes up the less you play with your investment.
• There is no liquidity in real estate. If ever you are in a hurry to sell, you have to go as low as 20% below market. In the stock market, you can sell at market price, within seconds.
• In real estate, you are less diversified. You can easily invest $500,000 in one single property. In the stock market, with those $500,000 you can buy 500 different companies. Thus, your risk is higher in real estate.

Overall, I satisfied my need/desire to own real estate and now I am eager to sell.

Update: April 2023

I decided to go back into real estate:

• I have enough money in the stock market to make a nice living. I don’t need to invest any more in the stock market
• Having a property (or two) would allow me to diversify from the stock market
• I am getting old, I think that I can stay in a property (or stay invested in a property over 5 years.
• I have plenty of leisure time, I can devote some time to looking after a property.

Other real estate posts

• I am a landlord, I am happy my tenant was able to pay the rent