Quote from @K S.:
Advice from my own experience to the casual buyer with their own 9-5 job. Success is low because everyone listens to these books that say you just need to
1) Buy a house with near zero down
2) Cashflow.
This is not true especially at 8% rates. You need at least 50% down in states like CA, Austin or Tampa just to break even. These books don't tell you that they're investing in the ghetto and need to collect rent with a shotgun just to cash flow. Even if it appreciates and you sell, you're paying 10% off the top in fees, then another 28% federal and 13.3% state tax rate if you're in Cali. You can 1031 exchange but you're never realizing those gains and you can't draw from it in retirement unless you do a reverse mortgage which is reserved for elderly retirees that won't outlive their equity. Additionally, the casual buyer buying debt will not cash flow for 30 years and even then it may not cashflow because a turd doesn't get better with time because any rent appreciation is negated by the aging house maintenance and property taxes such as Texas or HOA fees like some condos which saw HOA fees go up faster than rents even 10 years later.
If you're not being biased, you will realize that only a small percentage of people will have enough properties paid off by retirement age to actually retire on its passive income alone and even then, you're constantly managing these properties, selling old troubled ones for new ones possibly taking on new higher rate mortgages in the process. Even 10 properties is a headache trying to streamline everything and reduce risk. A tree in a storm almost crushed my tenants cars and could have killed someone and taxes are a pain at the end of the year trying to find my deleted bookmarks and what the HOA changed their management company to or mortgage that was sold off without telling me thus nearly destroying my credit.
Put it this way, If the average person started in real estate 20 years ago, those properties may have tripled in value, but the S&P 500 has gone up like 1000%. I did the math and the S&P would have put me in retirement much faster with zero hasle. Just something to think about. The exception here is a huge salary that can afford the down payments that will allow them to at least break even which only the top 5% of the population has and if you're lucky, know the area and nothing changes over the decades.
What I always recommend is this, buy your own house to live if you're married and having kids, then later, buy just 1 low maintenance investment condo that you can eventually sell after retirement for play money and projects. My fathers house tripled and is paid off but he can't just rent it or sell it because he wouldn't have anywhere to live so the equity is forever unrealized and might as well be fake. You're much better off maxing out a401k employer matching + Roth ira for 20 years and retire early. My father started late, in his 50s and just over 10 years later has grown to around half a million. Imagine starting in your 20s instead of struggling to pay for that mortgage that will keep you in debt for 30 years.
I mean this is a good question. Is the juice worth the squeeze. I suspect a lot of people find the answer is no. I'm a new investor looking for my first property. I run the numbers and I'm looking at probably $0 to slightly negative cash flow initially accounting for capital expenses and vacancy rates at 200/month and 25/month (10% rent and 1.25% rent). At 3% rent and house appreciation, the returns are still pretty good probably 15% or so (thanks leverage). On the other hand, microsoft and google have return on equity in the 15-20% over the past 6 years (that's as far back as I looked). It's hard to imagine that real estate should be the primary investment vehicle and rather a diversification tool considering it's very hands on and my time is at premium. While, there is still significant upside on the properties with larger appreciation (I'm buying in the same place I live and the price has gone up about 50% in the 5 years I have lived here) and refinancing into lower rates, there is also pretty large downsides with problem tenants, problem governments and unexpected repairs.
I have one friend whose brother did it for a while got up to 17 properties and then called quits and sold them all because the time commitment and stress wasn't worth it (even if the returns were there). I have two other neighbors who do this pretty successfully full time, one is semiretired with a stay-at-home wife and 3 kids under 5, the other is still petal to the metal and runs a construction/rental company with 19 employees. I'm really only looking because I luckily managed to leverage the pandemic to make Denver wages while living in Rochester, NY so I have 20-30k a year I don't want to spend on lifestyle, and my retirement age is primarily determined by rate of return rather than savings rate. So, it's a good time to take risks.
I suspect the reason people don't make it are three fold.
1.) They find the work of managing the investment properties to be too stressful and time consuming compared to the returns.
2.) Bad luck--my in laws lost a lot of money in real estate due to expenses being much, much higher than expected (cheap houses and cheaper tenants) and investing right before the 2008 crash. As I mentioned earlier, I am going to need some luck to do better than investing in MSFT or GOOG. If things go awry (market rents go down, job loss, a busted furnace and/or roof early on), I could easily end up with negative returns on the first investment which would probably stop me from buying more.
3.) Insufficient cash flow from other sources to cover emergencies and buy a sufficient number of properties. I think people plan on everything go right on the first property and go near all in on the first property to get started. Where I am investing the single family homes are about 200,000. By the time you have a 20% down payment, closing and escrow costs and a 10k emergency fund per property, each property requires you to come up with 70k in cash. That's a lot of money and if you are buying slower than every other year you won't "make it" (which is probably 10-15 houses paid off or equivalent equity with mortgages).
