Investing in Residential Real Estate

“Real Estate has made more wealth for more people than any other investment vehicle.”

That is the claim, anyway. I’ve heard it quoted over and over. I don’t know whether it is true or not, but it doesn’t matter, because the substance here is even better than the sizzle. Real Estate investing is something that is relatively accessible compared to other investments. It requires no specialized education. It does not require advanced skills or talents. It does not have to involve a lot of money and it does not have to involve a lot of time, depending on how you invest. If you are careful and move slowly, you have a good chance of doing well. It is also a favored asset in terms of financing, which means that banks will lend money to you on the easier end of the difficulty scale so that you can buy a house and rehab it for rent or resale. By contrast, banks are less likely to lend to you to start a small business. If you want to engage a bank to lend you money to start to speculate in the stock market, good luck.

Real Estate investing is something that can be done while a person works a full-time job. Just as you can manage to find the time to buy a house to live in while you are employed full-time, you can also find the time to buy a house to invest in. This benefit to real estate investing should not be overlooked, because you can size your investment difficulty to the time and capital (money) requirements that you have. In other words, you don’t have to make your life miserable and work all of the time just to invest in real estate.

I started to invest in real estate when I changed employers. I decided that my 90 minute commute for the former employer was something I would never do again, and started to look for housing next to where I was hired. Admittedly, I was considering renting an apartment. I wasn’t looking to own. When I looked for apartments for rent, there were not very many in the area in which I was searching, and there were zero that I both wanted and could afford. With such limited options, I decided to look for a place that I could purchase.

Ultimately, I decided to buy a two unit duplex where I would live on the top floor and rent the bottom. The top floor was in very poor condition. The bottom floor was acceptable. That made where I wanted to live an easy choice. Renting the superior unit was easier, and by occupying the unit that needed a lot of work, I could pace myself. My investing got off to a rocky start, but it quickly became something that I learned how to do and how to succeed at.

When you think of investing in real estate, you probably think of rent. That was about all I thought about when I started. However, it did not take very long, but real estate investing had more benefits than I originally considered.

IncomeĀ 

Yes, there was rent. That first rent check was the first time that I collected any significant income that was not a function of my employer. Knowing that I had other income was a great feeling, and it meant that I was less dependent upon my employer. Subsequent properties, each producing rent, would only add to that.

Amortization

Even though I was living in half of the structure, my monthly rent was paying most of the mortgage, and the mortgage was going down by an increasing amount each month. That is called amortization. The loan balance goes down and there is less interest that the bank can charge. Since the mortgage payment stayed the same, there was more and more money going to pay down the loan (principal) each month.

Appreciation

Beyond rent and amortization, I found over time that the property also increased in value year after year, though slowly. This is referred to as appreciation. That first property appreciated modestly, but after 5 years I found it was worth about 11% more than I paid for it. After 10 years, it was about 25%. In reality, it did only slightly better than inflation, but this was just one of the benefits of investing.

Depreciation

Next, there was depreciation. When I did my taxes, I was allowed to write off a percentage of the value of the property. This meant that I paid less in income taxes. What I also discovered is that if the depreciation pushed my rental property to have no profit, on paper, then I would actually be able to take the rental loss (up to $25,000 at that time) off of my income. So, my own wages, in effect, were reduced somewhat for tax purposes. I paid less in taxes because of my real estate, and that was ultimately due to depreciation.

Experience

The next thing that I gained from real estate investing was experience. Before I started to invest, I had never used a table saw. I never snaked a sewer. I did not know how to unlock siding. I gave no though to downspouts and water drainage. I didn’t even really own any tools. Also, I never had applied for a loan, I did not think anything about the value of a credit score and I had never had to itemize on my taxes. By investing in real estate, I learned a lot about home repairs, legal expectations, finances and a lot of other things, too.

Opportunities

Finally, there were opportunities that came from learning so much from over a decade of real estate investment. I got into real estate to make extra income. It accomplished that, and grew slowly over time as I continued to invest. However, beyond everything else just discussed, I started teaching dance for a local college. Then the thought came to me that I could surely also teach real estate, which I did. Furthermore, the writing that you are now reading can be traced back to real estate. While I write about many topics, I got into writing because I initially wanted to write about real estate, since it was so interesting to me. Both teaching and writing are two things that I love to do, and they can be traced back to the experiences that I gained from investing in real estate. Even the dancing that I just mentioned was a function of real estate, but that’s a subject for another time.

Real Estate investing offers a lot of benefits. This was an example of how to buy and hold, but there is also the option of rehabbing and selling, also called flipping. I have also done this, though it is not my preferred method of investing as it is a high intensity activity, which is more like a business than an investment. There are other less common ways to profit from real estate, but between buy and sell and buy and hold you have the majority of what people do in real estate.

If you would like to learn more about real estate investing, keep reading, or check out the videos and books on the topic.