Once you’ve simplified your investments and you’re contributing to all of your tax-advantaged accounts, it’s time to start looking at other types of asset classes to diversify your investments. My personal favorite is investing in real estate. There are lots of ways to invest in real estate, such as fixing and flipping, purchasing notes (basically becoming the bank and receiving payments), buying into a private syndication (a mid-size company that handles buying, selling, and managing properties), purchasing REITs (Real Estate Investment Trusts — kind of like syndications on a larger scale, and you can buy and sell like stocks), and buying and holding individual houses.
After about 18 months of doing research, reading forums, listening to podcasts, and reading books, I decided that I wanted to buy and hold single family homes. There are many benefits to this strategy, and I’ll go into the big ones below.
- Passive income — this was the main reason I first got interested in real estate. After subtracting expenses and additional budget savings, the leftover rent goes directly into your pocket (called cash flow). With enough rentals, you can eventually replace some, most, or all of your income to accelerate your path to a more comfortable retirement.
- Leverage — Another word for using other people’s money, or in the context of real estate, getting a mortgage. Would you rather buy a single house for $100,000 or five houses, each with $20,000 down payments? While you have to be sure you’re not over-extending your finances (called being over-leveraged), the returns are always better when you’re using leverage.
- Mortgage pay down — Also known as “tenants paying your mortgage.” Assuming your property has cash flow, the tenants will be fully paying your mortgage for you. Of course there are times when the rent isn’t coming in, but that’s one of the things you budget for in the good times. Eventually the mortgage is paid off and your cash flow can easily double or more!
- Appreciation — This is the value of the house gradually increasing over time. While not as guaranteed as it was before 2008, over the long-run, the value usually at least meets or beats inflation. Some areas have less appreciation but more cash flow if that’s more important to you.
- Tax deductions — I don’t know the specifics here as my CPA handles the details, but there are benefits to property ownership that you can take advantage of.
- Control — This is the main reason I decided to do buy and hold for single family houses over the other real estate strategies. I can control every single thing about each property, understand the trade-offs, and have full say over what happens. For example, I could raise the rent to increase my cash flow, I could patch a roof instead of doing a full replacement, I could add a bathroom to increase the equity and rent, and when I’m ready to sell, I can list the home on the normal MLS to sell to an individual (vs multi-family that generally sell to other investors also trying to make a buck).