Is Real Estate Worth it?
You have a lot of options when it comes to where to invest your money. But with so many out there how do you know which are the best? One form of asset building that comes to my mind is real estate investing, so the question goes, is real estate a good investment? And with it being more of an active investment in comparison to stocks for example, is real estate worth it?
What is Considered a Good Investment?
There’s a lot that goes into determining if something is a good investment. To help better understand this I’ve broken it down into three categories.
1. Financial Goals
If you asked 20 random people on the street what a good ROI (return on investment) is you’d probably get 20 different answers. So establishing what you personally consider a good ROI and at what point is it to low to consider is the first step. This number you decide on can be based on your goals, what you’ve received in the past or by some basic research.
2. Risk Tolerance
Making a lot of money isn’t great if you proceed to lose it all shortly after. Understanding your risk tolerance is just as important as your ROI goals. If you’re younger, have cash reserves and a stable income consider taking riskier investments. If you’re closer to retirement and can’t afford short term loses than look for something more conservative.
3. Time Goals
This has a double meaning. Since real estate is an active investment. Example: finding tenants, making repairs, collecting rent, etc. Make sure you have the time to manage this asset. Also, is real estate investing and the strategy you use going to meet your timeline. If you want to be a millionaire by 30, is real estate investing going to achieve that? You must do the calculations.
Once you know these 3 things then you can begin to do property analysis to identify the individual property that boasts being the best investment.
Live Example: Real Estate Investing Spreadsheet
Here’s a great example of a duplex I found that I was going to owner occupy. Owner Occupying means you get a normal 30 year fixed rate mortgage and live in one of the units while still renting out the other. This is great for people getting started in real estate investing. If you don’t have any capital to get started you might want to consider investing in real estate with no money, it even works if you have bed credit as well.
Here is the fair market value for the home. You can see the purchase price, down payment, and the loan terms.
Here is the rental income. Unit A rents for $750 and unit B rents for $625 but since I would be owner occupying, I would live in that unit and therefore collect no rent from it.
Here are all the expenses including property taxes, insurance, PMI and a maintenance reserve for any unexpected repairs.
After calculating all my expenses the monthly cash flow comes out to be -$103.25. Why is this good? Well for the same down payment I could’ve used to buy a single family property I now could own a duplex, rent one unit out and live there for only $103 a month. Not too shabby for my first year.
*This means next year, when I would’ve moved out and rented both units I’d have a cash flow somewhere around $500/mo.
Now comes down to the 3 main ways to make money with real estate. And now you’ll see why cashflow isn’t everything. Thanks to my tenant living there he paid $1,578 of my mortgage principal that year.
Thanks to leverage and being able to own a property with only a 15% down payment, I got to benefit from the sweet 3% appreciation, not on my investment but the VALUE of the home which is $130,000. This means by owning the place I made $3,660 in appreciation. And even with the -$1,239 in cash flow that year I made $3,999 on my $21,300 investment which is a 18.77% ROI. (And I lived for almost free)
Oh.. and if I purchases the duplex as an investment and didn’t owner occupy.. here are the numbers. $10,822 return on a $21,300 investment equaling a 50.81% ROI. Basically doubling my money every 2 years!
Pros and Cons of Real Estate Investing
Pros: This consists of great appreciation, ability to use leverage, easy scalability, monthly cashflow, great tax benefits, tenants paying down your mortgage, and the ability to live for free if you owner occupy.
Cons: This consists of evictions, terrible tenants, costly repairs, late rent, must live nearby, and the overall time commitment.
video transcript:
Is real estate, a good investment. When you have to deal with expensive home repairs, terrible tenants who destroy the place late rent, not to mention evictions, massive debt and whatever the heck this is. Well, my answer might just surprise you. Hey there, my name is grant I’m a 24 year old real estate investor, and I oftentimes get asked.
Is real estate worth. It is real estate. It’s a good investment. Should I be looking into it? What makes it better than something like that? The stocks, for example. And so for any of you watching who are interested in getting into real estate investing, you need to watch this video first because I’ve designed it specifically for you.
And though the allure of passive income is quite great. The tax incentives, the appreciation I get it, it’s all there, but there are definitely only things that other real estate investors don’t want you to know. Hey. So if you’re brand new to the channel, welcome, it’s awesome to have you here. If you found this video helpful, please don’t forget to smash the like button as a root has helped me out and to read the subscribe as well.
You don’t miss out on any other real estate investing videos. It was all that out of the way. Let’s go ahead and jump right into it. So in order to answer the question that you’ve asked all come here for, and that is his real estate, a good investment. We need to identify what is a good investment. And after a bunch of research and careful consideration, I think it boils down to these three things.
Oh, and I almost forgot to mention those of you who make it all the way to the end of this video. I have a Harriet. Very special surprise for you. Something that almost every single real estate investor needs to know. So don’t miss out on it now back to the three things that make up a good investment for anyone.
Number one, being the most obvious. Does it match your money goals? Now, if you ask any random person on the street, what a good return on their investment is, you’re probably going to get a different number every single time. And so of course it depends on the individual. So establishing what you think to be a good return on investment.
Is going to help decide whether or not real estate investing is good after all. Now, due to the insane leverage that you can do with, with real estate, it’s not common for people to get upwards of 20 to 30% return on investment by either their first or second year in a rental property, depending on how creative they are with how they finance it.
Now that is quite astronomical and almost unbelievable in comparison to let’s say the stock market, which we can expect an average rate of return of maybe 8%. Now money is just one factor of a good investment, because even though I’m pretty sure all of us invest to grow our wealth and increase our net worth, there were two other things to consider, and these are almost exclusive to real estate investing, which brings us to number two on determining if an investment is there’s good in that is your risk tolerance.
Because it’s quite well known with higher rates of return comes higher risk levels. So even though you might be able to expect larger than normal returns from real estate in comparison to the stock market, does that mean it’s inherently more risky? Well, not necessarily. You see similar to stocks, not every rental property or commercial property are equal in the risk levels, similar to how not every company.
That’s publicly traded is a good investment or inherently nonrisky or incredibly risky. It all depends on the individual asset and the numbers behind it. The bed, the balance sheets and your own individual calculation. Now not, not even to mention that the housing market is known to also be one of the most stable markets out there, just because, you know, every person needs a place to live.
So, and I don’t feel like that need is going to is going to end anytime soon. But some things to avoid with real estate might be. Some more speculative investments like land, for example, maybe like a C class neighborhood or you predicting that in a decade or so that, that city is just going to boom with popularity or maybe like a big businesses set to open up sometime soon.
And you’re predicting, let’s say 2000 jobs to open up. And so you quickly invest in the city. So understanding your own personal risk tolerance and what your wealth building goals are. Maybe as a younger individual being more aggressive. And someone may be in their forties or fifties being more conservative.
That too is going to make up whether or not it’s a good investment, which brings us to topic number three, which is, does real estate meets your time, time investment goals. And this one kind of has a double meaning because when, I mean time investment goals, I not only mean how much this time it would take maybe out of any given day to maintain said assets, but also is this line of investing scalable.
In meet your timeframes for your wealth building. Let’s say you’re trying to become a millionaire by the age of 30. How quickly are you going to be able to acquire these rental properties to meet that goal? Because unlike stocks this time, this is a lot more time consuming. Especially if you use things like house hacking and you plan on owner occupying the rental property to secure it, a better mortgage, which I talk about in one of my other videos, which you can check out here, but you might even hear from people who always complain.
Oh, man, you don’t want to get into real estate. You don’t want to get into rental properties because you’re going to get that call at 1:00 AM because someone’s toilet broke. And though that might very well be the case point during your portfolio building journey. I don’t think it should be a reason to completely stay away from real estate and entirely, but understand that is more time consuming than let’s say just it and then growth investing, which can almost be completely passive if you want it to be.
So take a look at your schedule to see if you can fit this time. Commitment in there. As well as what your timeline is for building your wealth is a rapid pace of collecting rental properties going to work, or do you need something quicker or slower understanding that is almost as important as understanding the first two steps, your return on investment goals and your risk tolerance.
Okay, let’s go ahead and take a look at it. An amazing example of this in practice. And I want to hear from you guys in the comments section, if you think this is considered a good investment, so here we have a property, I have. I have the same information on the left side and the right side. The only thing difference here is that the left side is if I were to owner occupy the property, meaning they lived in one of the units, AKA house hacking while I rented out the other, the right side of being, if I purchased the property as an investor and therefore both units kept the tenants that were there when I purchased it.
So keep in mind here. Now, this is a duplex. It’s $122,000. You can see the purchase price here. It was an accepted offer. $8,000 lower than what they had listed it for. It was preapproved for a loan to put 15% down. So the down payment would be 18, $1,300. Amount of finance would equal $103,000 around there somewhere.
Interest rates. It was hovering around 4% and I estimated that the cost repairs to make ready would be somewhere around $3,000. The length of the mortgage would be 30 years now on the left side, you’ll see that unit a, the larger unit was renting we’re about $750. Whereas a unit B the smaller unit, which rented for about $640 is where I would have liked calculating a vacancy rates.
We get a net rental income of $712. I even have a column here for expenses stuff is now we have it labeled here is property management fees, but I meant to say PMI. So private mortgage insurance was around $16. There’s even a maintenance reserve. They have in place, property taxes, insurance, you name it.
And then I have my total expenses. And then finally I have my net operating income here on the left side. You can see it comes through a negative cashflow of $103, which investment aside, this might still be a great opportunity for someone to almost live entirely for free. This is just another good example of house hacking, which I have a video on right here.
Where with almost the same amount of money you would use to go buy a single family property, you and said he could have bought a duplex in almost live for free in your first year. But all of that aside, I have the investment analysis here at the bottom. My total cash in would be around $21,300 that including the down payment and the cost of repairs, I’m assuming an appreciation of 3% with the rent appreciation of around 3.1%.
But the important information I have here labeled at the bottom, we can see the investment, my mortgage pay down over the course of that. First year would be 1500 appreciation would be around 3,600 annual cashflow of negative 1,200. And I have two totals here, one without one with, and without appreciation, just to calculate what it would be like if for some reason, the market crapped all over that year.
And I didn’t get anything. We have an ROI of 18.7, 7%. Meaning that I made almost exactly $4,000 on a $21,000 investment. I got to live in the property almost completely free. It was negative, a hundred dollars cashflow, and I got to take it sweet. I got to take advantage of that sweet tax benefits, mortgage pay down and appreciation.
So even with the lack of cashflow, I was still able to capitalize on those three other things. Now quickly, you can take a look at the other side of the chart here, whereas if I bought it as an investment, You could see by net rental income right here is a lot higher than it is on the left here because I’m no longer taking up a unit.
And instead two people live here. Expenses are a little bit higher. And here we have net cashflow sitting around $450 a month, not too shabby in the first. So similar total cash is around the same 21,000 appreciation and wrench appreciation are exactly the same. But this time, the big difference here is my annual cashflow sitting at around 5,400 in the first year.
Meaning with appreciation and cashflow and mortgage paydown. I have a total ROI of $10,000. $10,800, meaning a 50% ROI, meaning I could essentially double my money every two years, which I personally think is absolutely insane. And this is all thanks to leverage. I could have put even less money down made slightly less returned, but maybe this time it would be somewhere around 60%.
So comment down below if you thought owner occupying it, which is this left column would be considered a good investment, or if you’d prefer the investor purchase. Where you would have received a 50% ROI. If you think either of these would be a good investment. I want to hear your thoughts now. I’m not gonna lie.
It was kinda kind of a trick question because I know those numbers look absolutely amazing. In comparison to other investments you could have made, like those ROIs were incredible. But what did I just talk about before I went into that spreadsheet? There’s more than just your money goals that go into determining a good investment.
Let’s talk about risk here. Notice how I, I used a lot of leverage in both of these deals. Not again, putting down 20%, I was putting down 15% and even mentioned how I could have put even less down. This is putting me at risk to a lot of debt. And though it is great wealth building debt. If let’s say I didn’t have any sort of cash reserves or security.
Or consistent income if something bad in my life had happened, whether it be some kind of accident, I take a massive hit to my income that could put a huge damper on this deal. And it could put me in a very tough financial spot, but because of understood my risk levels that I was willing to take, and that I did have a security net and I didn’t feel like I was stretching myself too thin.
I was able to take advantage. Of something you can’t do in any other investment. If I took that same 15% down, which equated to around $21,000, and I put that into the stock, the market at an 8% return, that would be less than half of the return I got in the owner, occupied spreadsheet. Why not only kind of an 18% return, but I got to live somewhere for practically free.
I was only negative 100 cashflow. And don’t even get me started on if I put that $21,000 into the deal as an investor and made a 50% return that’s because I’m able to take advantage of mortgage, pay down, thanks to the tenants, living here and appreciation, not just my sole investment at the beginning, the 21,000, but a 3% appreciation rate on the value of the home, which is somewhere around $130,000.
You can see the difference there. So the question is, would you rather have all of those benefits and a 3% appreciation on $130,000, or would you stick that 21,000 into the market and get an 8% return? It seems like a no brainer, doesn’t it? And I’m sorry, sorry to do this to you again, but that also, so it was kind of a trick question because the third factor I mentioned earlier in this video was whether or not this real estate, Matt, my time investment goals.
Not only do I have time in my schedule to manage the property, find new tenants, clean the property when they move out, make any sort of minor fixes when they break it things. But also how quickly could I go out and do the same thing again? Would I be able to do it in six months? Could I do it in a year?
Could I do it in five years? I mean, what’s the point of investing in real estate. If you can only buy a property once a decade. But by me, understanding my time goals and thanks to some great investing tips on Nardelli from meet Kevin, but also my local real estate investor syndrome. I know more creative ways that allow me to purchase properties for $0 million of my own money moving around forward, which I have a video explaining a little event right here, but if you’re like me, And do you understand your risk tolerance?
You understand what return on investment you’re looking for. And most importantly, you know, your timeframe and what you have available in your schedule real estate can be an insane way to build your wealth. Same time eliminating the biggest thing expense most people have in their lives, which is mortgage or rent.
So at this point, you might already have your answer is real estate a good investment or is real estate worth it? Well opinion. Yes, but not for everyone. And at the same time. Yeah. Not every real estate investment. Every property is different. It’s important that you crunch those numbers and you’re able to answer those three investment questions.
I meant. That I went over in the beginning of this video. And before I go over to the surprise, I want to share with you the end of the video, including a massive giveaway, I’m gonna take it the next 60 seconds or so to break down the pros and cons of real estate. Because it almost goes beyond just the investment itself with real estate investing, unless you plan on using it property management company, there are people involved in problems involved that you are going to have to take care of.
So all the pros I mentioned before, basically in the first half of this video, being that it can be a great way to live for free and make a bunch of money. It also comes with this caveats. Such as repairs, late night, phone calls, disgusting tenants, evictions, you name it. And I’m not trying to scare you away from getting into real estate, but if you value the investment.
And what it can do for building your net worth. It makes these cons and real estate small in comparison. So if you made it this far into the video, I can’t thank you enough. You’re absolutely awesome. I hope you learned something valuable in this video. Don’t forget to comment below any of your answers to my questions about the video.
And as I said, I promise you guys in awesome surprise at the end and a huge giveaway. And that is exactly what I’m doing right now. To thank you guys for sticking around and watching my videos and sharing your support. I’m going to be giving away $500 in the coming weeks. You see here on my channel, not only do I want to teach you guys how to build wealth, but I also want to be able to give away as much as I possibly can.
So almost every dollar that I I make from YouTube ad sense, I gave it right back to you guys. And all I ask in return to get yourself entered into this giveaway. Is to share this video on Facebook and don’t forget to add my Facebook page. That way I’ll get notified when you share it, it takes less than 10 seconds.
And you just got to hit the arrow below this video. Make sure you’re signed into your Facebook account and you’re all set to go. I wish you guys the best of luck comment down below. If you have any questions, I’m always here to answer them. You are totally awesome. And I will see you next time.
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