Shloimy Wein was busy at work but still had real estate on his mind. Sometimes it seemed like everyone in town was in the industry—and making big bucks. He also knew investors who were giving their savings to those doing “fix and flips” or buying large properties nationwide. They seemed to be doing well too.
But while the potential for profits was hard to pass up, Shloimy didn’t have the time or interest to join the industry. Nor did he like the idea of entrusting hard-earned dollars to others. Could he make money by just buying a nearby house and renting it out?
Did real estate investing make sense for him, or should he stick to his mutual funds?
Eat Your Own Cooking
I’m a huge believer in the earning potential of well-located property. Real estate investing has long been a fantastic way to make significant, relatively-secure returns. For multiple reasons, small, passive investors aren’t well suited to join partnerships or syndications. But buying, financing, and renting out a house on your own isn’t rocket science. And while there are pitfalls to be navigated, residential real estate is a tried and tested path. Indeed, millions of everyday investors use it to generate significant returns with contained risks.
When people think of landlords, they may imagine moguls with portfolios of large apartment buildings. But in reality, only about a third of renter households live in communities with over 100 apartments (16 million out of 43 million total). Another third of tenants live in smaller multi-unit buildings, and the final 14 million families rent single-family homes. Most of these single-family landlords are regular folks like Shloimy who buy a house, or perhaps a few, for investment purposes. And the reason so many pursue home rental investing is because it’s not too difficult to make good money on it.
Pretty Straightforward Homework
The research required to decide on a solid home rental is basic and commonsensical. Is the property in question located in a stable, or better yet, a growing neighborhood? Is it a safe, clean area? How much do houses go for, now and historically? What’s the rental market like? One also needs to calculate taxes and other expected expenses such as insurance and basic maintenance. Most of this information is easily accessible via a Google search or a phone call to local brokers, town officials, or service providers. In fact, most people like Shloimy have already done this kind of homework when they were buying a home to live in. Now they can do it again to buy a profitable investment house.
Help Closing the Deal
Getting a mortgage and closing the deal for a house is also a well-trodden path. Can something fall through the cracks when buying a house? Sure. But it’s relatively rare for something to really blow up in the residential world, as long as buyers retain competent help. There are many experienced home inspectors, mortgage brokers, attorneys, and title companies that can smooth out the process. And the very advantageous 15–30-year mortgages available to homeowners are accessible to landlords too, with generally similar rates and conditions. Access to these flexible loans is one of the main reasons residential real estate is such an attractive investment category.
Management Can Be Manageable
Besides finding the right house and coming up with a down payment, a big concern for many is the burden of property and tenant management. Unlike landlords of buildings, most small investors don’t have the luxury of relying on a super to deal with such hassles. Finding a good tenant can take time and effort, and occasionally they may not keep their end of the deal. This means a legal fight, even perhaps a very discomforting eviction.
Of course, every property also requires ongoing maintenance and repairs, and these nuisances tend to pop up at the most inconvenient times. There’s no sugarcoating this: real estate investing isn’t as neat and tidy as buying stocks. Everyone who gets involved in hands-on real estate needs to be prepared to roll up their sleeves from time to time. But many find the rewards to be well worth the headaches inherent in owning and renting out property.
Booms, Busts, and Reality
There are many misconceptions about realistic real estate investment returns. We can marvel at the fortunes made and lost from quick flips or spectacular busts. Sure, spectacular real estate profits and losses happen all the time for those who are trading quickly, with massive debt loads. But generally, such dramatic price rises are followed by years of stabilization with little gain—or even losses. Unless someone has tremendous mazal or trading acumen, the good, medium, and bad years tend to average out. Seasoned long-term investors across multiple real estate cycles, properties, and players expect solid but not eye-popping profits.
Based on my experience and research, before leverage, reasonably managed real estate investments have averaged 5–10% annual returns. These numbers combine rental income (minus expenses) and price appreciation. But with the smart use of debt, patient investors can often bring that baseline up to 10–15% or even more. Add in property owners’ tax benefits and it’s clear why so many fortunes have been built upon this wonderful asset class. Of course, there are huge variations in actual profits based on skill and mazal, but the potential rewards are definitely there.
But It Can Go Wrong Too
Don’t get me wrong, though. Making solid investment returns from real estate requires hard work, patience, and general financial stability. Assumptions about rental income can be off. Occasionally, a home inspector does miss a serious environmental or structural issue. Or a nightmare tenant drags out an eviction for months and then destroys the property as a goodbye gift. Unlike a boring mutual fund, even one serious misstep with real estate can easily consume most or all of your money. Investment analysis shouldn’t be overly optimistic and maintaining a significant reserve for the occasional period of vacancy or repair mishap is a must. It’s also important to diversify and never tie up short term savings in real estate. Real estate investment offers great possibilities. But risk and reward walk hand in hand.