#7 for the New Year: To Become Wealthier by Investing in Real Estate


Do you invest in real estate? I’m not talking about your home. Owning a home has more to do with security (emotional and personal) than it has to do with building wealth. If you aren’t investing in real estate (raw land, housing developments, buy-and-flip or rental properties), you should think about doing so today. I love real estate. It’s not without its problems, but it is the best way I’ve found to accumulate a good deal of wealth on a part-time basis.

In the 10 or 12 years I’ve been actively investing in real estate, it has given me much-better-than-the-stock-market returns. In fact, I’d guess that my average ROI has been between 15% and 20%. I’ve had big hits too. The five $6 million mansions in Aspen, Colorado that gave me a 300% return on my investment in less than two years, for example. That was a limited-partnership deal in which my risk was limited to the money I invested. And I made more than 500% on a house that my brother rented from me. He and his family stayed in it for three years, paying below-market rents (which he appreciated) — yet, I was able to sell it for a bit more than twice what I paid for it.

Since I financed it at 80%, my return was huge, even when you take into account all the costs, including the cost of borrowing, the maintenance, and the theoretical loss of income by my charging a modest rent. I am netting $10,000 a year on a condo I bought for $65,000. That’s something like a 15% return, cash on cash. If I had financed it, my ROI would be much larger. And that’s not counting appreciation. The large, two-bedroom apartment is worth at least $110,000 today, so if you add that into the equation my return is more like 30%. Most importantly, this is $110,00 worth of value that has almost no chance of ever going down. (At least that’s the way I feel about property in my area.) I like real estate because the risk you take by taking out a mortgage is mitigated by the knowledge you have about the local real-estate market.

You don’t have to be a real-estate genius to get a sense of whether a particular neighborhood in your town is appreciating or depreciating. And as to the long-term trends, you can err on the side of being conservative and still do very well with real estate. That’s because with the mortgaging you typically use, the appreciation you get on a property’s value is leveraged. A typical 5% yearly rate of inflation in real property values will give you a 25% ROI if you borrow 80%. At 25%, a $10,000 investment becomes $1.2 million in about 21 years. With stocks (i.e., businesses) and commodities, the risk you take is greater — because your knowledge of those businesses and commodities is probably going to be less than your knowledge of local real estate. That isn’t always true.

Investment experts who specialize in certain areas (DC, who specializes in Canadian natural-resource businesses, comes to mind) often are able to beat the market consistently because of their long and hard-won experience. But I don’t have that kind of knowledge of such things and don’t expect I ever will. If you are not an expert in a special area of investing, I recommend that you consider real estate as a place to put some of your savings.

On my credenza in front of me, there are 24 little red binders. Each represents a separate real-estate investment that I am currently involved in. Some are individual properties I own entirely myself. Some are properties I own with friends. Some are direct investments. Others are in partnerships or corporations. Some are rental plays. Some are build-and-sells. If you decide that this is the year to begin a real-estate portfolio, start slowly. My first real-estate investment was a bad one. I have written about it before. It was a rental unit in Washington, D.C. that was overpriced and occupied by a prostitute who would neither pay me rent nor do her business elsewhere. It took me years to dig myself out of that mistake. I emerged a smarter (but not yet smart enough) real-estate investor. Take your time. Be selective. Educate yourself. Read books, but with skepticism. Some of what is on the bookshelves is full of somewhat misguided advice.

Subscribe to ETR’s real-estate program. That, you can trust. Take adult-education classes if you can find them. Be leery of free seminars; they are likely to be selling traps. Here’s a promise: If you have never before invested in rental real estate but start doing so this year, you’ll be glad you did. If you keep investing — buying at least one new property a year (which will be easy once you get going) — you will be a real-estate multimillionaire (not counting your other assets) when you retire. When you look back on all the wealth you acquired, you may feel the way I do now: that real estate was the easiest and — next to your personal business — the most lucrative wealth-building activity you ever got involved in. I’ll end today’s message with what is hopefully an inspirational account of the most recent deal I made.

About two years ago, I invested $30,000 to buy a $150,000 home that was, in my opinion, slightly under the market in a part of town that was destined to go up in value. I renovated the house, putting in more than I expected ($40,000) because my sister was going to be renting it (again, below market). I just had it appraised, and it’s worth about $300,000. Taking into consideration all costs and income to date, I’ve made about $130,000 on a $70,000 investment in less than three years. Not bad for a very part-time amateur.

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]