Real estate has created more millionaires than any other asset class. But it's not passive, not simple, and not for everyone.
Why Real Estate?
| Benefit | How It Works |
|---|---|
| Cash flow | Rent exceeds expenses = monthly income |
| Appreciation | Property values tend to rise over time |
| Leverage | Use bank's money to control larger assets |
| Tax benefits | Depreciation, deductions, 1031 exchanges |
| hedge | Rents and values rise with inflation |
Ways to Invest in Real Estate
Direct Ownership
Single-family rentals:
- Buy house, rent it out
- Easier to manage, lower barrier
- Less
Multi-family (2-4 units):
- Live in one, rent others ("house hacking")
- Better cash flow per dollar invested
- Still qualifies for residential financing
Small apartments (5+ units):
- Commercial financing required
- Economies of scale
- Professional management makes sense
Indirect Ownership
REITs (Real Estate Investment Trusts):
- Buy like a stock
- Instant diversification
- No management hassle
- Less control, lower returns typically
Real estate crowdfunding:
- Platforms like Fundrise, Crowdstreet
- Lower minimums than direct ownership
- Illiquid, newer industry
The Numbers That Matter
Cash-on-Cash Return
Annual cash flow ÷ Cash invested
Example:
- Purchase price: $200,000
- (20%): $40,000
- : $5,000
- Total cash in: $45,000
- Annual cash flow: $4,500
- Cash-on-cash return: 10%
Cap Rate
Net operating income ÷ Property value
Used to compare properties. Higher = better return (usually).
1% Rule (Quick Screen)
Monthly rent should be at least 1% of purchase price.
- $200,000 house should rent for $2,000+/month
Watch Out
The 1% rule is a quick filter, not a guarantee. Many good markets don't hit 1%.
House Hacking: The Beginner Strategy
Live in a multi-family property while renting out other units.
Example:
- Buy a duplex for $300,000
- Live in one unit
- Rent the other for $1,500/month
- Your is $2,000/month
- Net housing cost: $500/month
You've reduced your living expenses while building equity in a rental property.
The Reality Check
Avoid This
Real estate is NOT:
- Passive (properties need management)
- Guaranteed to appreciate
- Free of risk
- Simple
- A quick path to wealth
What you need:
- Time or money for property management
- Cash reserves for repairs and vacancies
- Stomach for tenant issues
- Willingness to learn landlording
- Local market knowledge
Getting Started
- Learn first - Read books, listen to podcasts, analyze deals
- Build cash reserves - You need down payment + 6 months of expenses for the property
- Get pre-approved - Know what you can afford
- Analyze many deals - Most won't work; that's normal
- Start small - First property teaches the most
REITs: The Easy Button
If direct ownership isn't for you, REITs offer exposure without hassle:
| REIT Type | What They Own |
|---|---|
| Residential | Apartments |
| Retail | Shopping centers |
| Office | Office buildings |
| Industrial | Warehouses |
| Healthcare | Hospitals, senior living |
Buy through ETFs like VNQ or SCHH for diversification.
Quick Win
Before buying property, analyze 10 deals using real numbers. If you can't find the time or interest, REITs might be a better fit.