Real Estate: My Favorite Investment Asset Class To Build Wealth

Small apartments

Can you spot the tiny rental?

Real estate is all about asymmetric risk and reward. When the government gives you subsidies in the form of mortgage interest tax deductions and bails out overextended homeowners over and over again, you’d be silly not to invest in real estate! When you can invest lots of other people’s money and not have to split the proceeds if you make a killing, that’s a wonderful thing!

There’s a reason why every rich person you know owns multiple properties. There’s a reason why enormous fortunes have been made through real estate as well. How can Donald Trump still be a billionaire after declaring bankruptcy? Asymmetric risk and reward!

It’s no wonder property owners were once called lords, or now more colloquially, landlords. The wealthy own assets, while the not-so-wealthy lease assets. After 30 years of paying $2,000 a month in rent, your return on $720,000 is negative 100%. At least through a mortgage you’ve got an asset which you can live in rent free or pass on to your children once paid off. You might not make money as the downturn has certainly shown, but at least you have a chance.

When it comes to making money, if there is no risk, there is very little reward. After a lifetime of working, not owning might be one of the biggest risks of all!


In early 2003, I put down 20% on a $580,000 condo with a mortgage payment of roughly $2,400 a month at 5.75%. I had just turned 26 and was nervous but adamant I didn’t want to pay more than $2,000 a month on rent. The $464,000 mortgage payment was split $500 to principal and $1,900 to interest. Rent for a comparable property at the time was $2,000 a month, so things were essentially a wash if you include property taxes and deductions.

Fast forward ten years later, the mortgage rate is now 3.375% thanks to several refinances on a loan of $285,000 (from $464,000). I’ve painlessly paid down $180,000 (39% of entire loan) in principal through my PMI loan and the occasional ad hoc principal payments. The mortgage is now just $1,300 with $500 of it going towards principal. Meanwhile, I’m renting the place out for $3,400 a month!

Mortgage interest not only dropped from $1,900 to $800 (-58%) during this time, rent went up from $2,000 to $3,400 (+70%). There are several reasons for this phenomena: 1) Supply is tight in San Francisco due to building restrictions on our 7 mile by 7 mile city, 2) Demand continues to rise due to an increase in jobs from new startups, 3) The economic crisis caused bonds to rise and yields to fall, and 4) The Federal Reserve continues to conduct very loose monetary policy. If you’ve ever deliberated between good location and higher prices or bad location and lower prices, consider the former.

The final positive is that my neighbor just sold his property for $780,00 last month, which is a 35% total return on the initial purchase price of $580,000. The cash on cash return on the $116,000 downpayment is a nice 172% ($200,000 / $116,000)! In other words, I got to live in my property for two years rent free, have someone else pay down about $60,000 in principal for me, and have an asset worth $200,000 more.

If I had no mortgage, the net operating income (NOI) is around $2,500 a month or $30,000 a year. You need $1,000,000 in the bank at 3% to generate $30,000 a year in this low interest rate environment. Not bad for an asset originally purchased for $580,000 don’t you think?

Rental Price Growth History

Note: The blue line is now around $3,200 in 2015 (off the charts, literally).


* Hedge against inflation. You only hate inflation if you don’t have an asset that is inflating. If you own an oil field, a private university, and organic farm, a gold mine, or a rental property, you are loving inflation! Inflation is increasing the prices of your goods hopefully faster than the input costs and the costs to operate your asset. You think rents and prices are expensive now, but I promise you they’ll look cheap 10 years from now.

* A money making play on inflation. Forget about protecting yourself against inflation. Owning real estate is a play on making money with inflation. If there so happens to be hyperinflation, your cash is devaluing rapidly as your real assets start surging in nominal value. Economic tightness will return sooner or later, causing another surge in property and rental prices.

* Generational wealth transfer. You can pass on property from generation to generation, conceivably making their lives a little bit better. Think about all the college graduates nowadays who are complaining they will never be able to afford a home like their parents due to exorbitant prices. Now think how much worse it will be for their children. If your parents happen to just give you one of their properties, life becomes much less stressful as you don’t need to pay rent anymore! You don’t have to study as hard to succeed either. You can pursue un-lucrative fields such as music, dance, and other fine arts if you so choose because those are your dreams.

* Little effort to build wealth. The most effort comes from researching the property you want to buy and finding the right tenants to pay your mortgage. Once you’ve run various scenario analysis and screened your applicants, you can basically set it and forget it. My average tenant turnover is 2.5 years. I host two open houses for 1.5 hours each, spend another two hours reviewing applicants, and another hour coordinating the move in and that’s it. Meanwhile, to turn $116,000 into $500,000 through equity investing is no easy feat, neither is saving another $384,000 over 7-8 years. The whole idea is to invest in assets that work for you, and not the other way around.

* Tax-free profits. The first $250,000 in profits for singles and $500,000 for couples is tax free if you live in your property for the last two years before sale! If you so happen to be in the top income tax bracket, this is absolutely music to your ears! In order to bank $250,000 in after-tax profits as a top income tax bracket earner, you’ve got to make around $450,000 in gross profits. This special feature alone makes me want to buy property over and over again.

* Serves a utility function. Unlike cash, which serves no utility function, property addresses a fundamental human need, shelter. If our financial system goes to hell, at least you will have a tangible asset you can actually utilize. The only thing I can do with cash is make paper airplanes and perhaps start a fire.

* Almost dummy proof. There were a lot of people who didn’t understand the terms of their loans (neg am, balloon payments etc) or who borrowed way more than four times their income with no savings buffer. Good thing for you, you’re no dummy because you’re reading this article and other articles about real estate investing. Once you run the realistic cost and revenue numbers based on data provided by the seller and comparable properties, you have a base case assumption. If you are achieving a rental yield of 7% and can borrow at just 3.5% after a downturn, your month should be salivating for such a 3.5% immediate spread with principal appreciation potential.

* Measurable wealth. I know that after I finish paying off my rental property mortgage, my initial downpayment of $116,000 will be worth somewhere around $600,000-$1,000,000, depending on market conditions. When you invest in private equity, or even public equity, you are taking a massive leap off faith that management and other exogenous variables don’t crush your returns. You pretty much know what you’re going to get in real estate if you follow the course.

* Priceless feeling. There’s something nobody really tells you when you finally purchase your own home. Perhaps because that something is unquantifiable. Even though you likely won’t own the house outright in the beginning, it feels wonderful not to pay someone else’s mortgage anymore. It’s an amazing feeling to be the king or queen of your own castle where you can do what you please. So long as you pay your mortgage, nobody will ever be able to kick you out. You grow roots and finally gain conviction to launch your life.

Mortgage Rate Historical Chart


During the two years of living in my now rental property, I saved aggressively in order to put down 20% on my next home. It had a year and a half of appreciation glory before the housing bubble collapsed. But now, the fever is back as my neighbor three doors down sold for 21% over asking after being on the market for just 11 days. The final sales price is 56% above what I purchased my house for seven and a half years ago. If I were to take a realistic comparison to account for the size differential, recent remodel, and quieter location on the block, I’d estimate his sales price values my house 20% higher than my purchase price. If you’ve seen the typical row houses in San Francisco, you know they are all quite similar.

Since purchase, I’ve cut my primary mortgage interest payments from initially 5% down to 2.625% by refinancing as often as possible (thank you BenGenie). Meanwhile, rent for my type of home has increased by about 25%. All this happened during the biggest economic collapse of our lifetimes! It’s not hard to continue living, paying the bills, refinancing, and focusing my efforts on building alternative income streams. Again, owning property is pretty dummy proof if you can hang on. Just make sure you run the numbers, create a realistic worst cast scenario, then run them again. Now I can’t wait for the relative calm over the next 10 years.

I didn’t buy my house with the primary hopes of creating more wealth. I bought my house because I didn’t want to live in an apartment anymore. I wanted my own deck, backyard, and freedom to turn up the home theatre system as loud as I wanted. At the age of 28, I wanted to start living a better life after slaving away in the office for the past six years. If I wanted to make more money through real estate, I would have bought a multi-unit building instead. Life can’t all be about making money. Funny how we like to justify our purchases.

Despite economic Armageddon, real estate is still my favorite asset class. For those who are under water, don’t give up hope because everything eventually comes back. Very few other assets require so little work and allow for so much outside funding to create so much value over time. Renting has its benefits, namely flexibility. But renting itself does not build any wealth. If you are considering investing your money that’s sitting in low yielding accounts, consider investing in real estate. It may be a tough slog the first two years, but in ten years, you’ll probably wish you had bought more!


* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. Interest rates are back down to ALL-TIME lows in 2015 due to tremendous volatility and uncertainty in the markets. The Fed is signaling interest rate hikes by 2016 due to inflationary pressures now. When banks compete, you win.

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Photo: Tiny home in Amsterdam, 2015.



Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. says

    Sam, I love what you have to say here and am meeting with an agent to look at a few properties and negotiate on them tomorrow during lunch. I think the one (incorrect) limiting belief that still surfaces for me is that real estate is tying up my money, but it’s only a limiting belief that I simply have to conquer and it’s lesser than the value I see in real estate.

    The only investment that is better is your own business if it indeed takes off and serves many people with value, such as a website (with its low cost) – but the challenge there is making it profitable enough.

    • says

      Right on Jeremy! The biggest savings you can have is through the initial negotiations. Be aggressive, and care the least.

      I used the tie up of $116,000 in this property to motivate me to work harder and find new sources of revenue. Buying the property also gave me renewed vigor at work, b/c at the time, I was wondering “what’s the point of working so hard” when I’m not spending my money on anything.

      Buying the property allowed me to not only live in a better place after my 1 bedroom rental, but also build wealth over time and give me more purpose to work.

      It’s not easy building your own business, but it will never happen if you don’t try.

      • Thom says

        Just a question, What type of job did you have at 26 (0r 20) for that matter to be able to “Save” $116,000 by that age AND, “save aggressively” while paying such a high mortgage payment for 2 years. For someone who only makes 60,000 per year, saving 116,000 seems impossible, even with a mortgage of only 1700.00 (including everything). Most of the statements you make in your article seem true but I guess you have to have money to make money. Are there any suggestions for a lesser paid individual to try to follow in your footsteps?

    • Nightvid Cole says

      If the market is efficient, owning your own business should give you roughly the same result as working for a W-2 income and investing the difference in passive mutual funds.

      Money put into a small business really should be thought of as venture capital – and published rates of return for venture capital funds aren’t all that great considering the large risk being taken on.

  2. says

    I am in the midst of my property story. But it’s not going as well as yours. We bought in March 2010, and prices have slowly declined . I’m probably underwater, or close to zero. Zillow isn’t a good measure as they have a bunch of wrong info, that I corrected, but they didn’t adjust their valuation. Anyway, we are refinancing to 3.25% next month (hoping is closes on time), but we do plan on being here for another 7-10 years.

    Here’s my plan; Pay down to 78% LTV and kick PMI ot the curb (save $325 a month, OUCH!). Assuming the house goes up slowly over the next 7-10 years (we hope), we can then move and rent it out for more than the PITI amount, further reducing our principal. Positive cashflow would be nice, but not necessary. I hope to have that residence paid off by the time I’m 40, and my next house by age 45 or so. Then look into other rental opportunites.

    Very vague plan, but that what I’m shooting for. I do agree with all of your reasons above that real estate is still a great investment, and am hoping to play the game myself to build wealth over the years.

    • says

      Perhaps instead of a next house at age 45, or 40… consider rental property instead and be happy with the house you live in?

      Think about our grandparents and how they lived/owned their houses for decades and built enormous wealth!

      • says

        I completely agree Sam, it’s just that we may have so many kiddos we need to get more rooms. Although, we cuold add on to the house….but then we wouldn’t fit into our neighborhood, our house would be too big for where we’re at to fetch a good sales price.

        If we don’t outgrow, I’m definitely thinking about staying here forever…

  3. elai says

    You bought your house a few years after the tech bubble pop in 2004, a year into the RE bubble when it started picking up steam in 2003. Would you think it’s a smart idea to buy a house in your area with it heating up like it is now again? What do you think will happen to your rental income if the tech bubble popped again?

    • says

      Tech bubble popped in 2000 March FYI. Check the Nasdaq.

      Rent prices are like gas prices at the pump. They are very sticky on the way down. Instead of landlords lowering rent, they just don’t increase the rent.

      With rents going gangbusters again, property prices have not fully caught up yet, but they are. I absolutely would buy rental property now.

      Good thing about huge bubbles is that a similar bubble’s probability decreases as some of us learn our lessons.

      • Jerry says

        He does have a point though, if you check the charts, 2003 is a very fortunate time to buy.
        Right at the start of upswing after the tech bubble burst / 9-11 effects. House prices have not returned to such a price level since: (Purchase-only House Price Index of the last 12 years-

        Not to knock that you got a great investment out of it and have managed it well since, but there is an element of luck to the performance of your purchase. (Good time to purchase, decline in mortgage rates since, boom in rental properties needed in SF in the last few years).

        • says

          Jerry, in 2003, people were scared to buy. There was the bird flu virus, a war, and remmenants of a burst tech bubble. I bought b/c I didn’t want to rent for over $2,000 a month.

          Things looked expensive then just like things may look expensive now to the timid.

          I am pretty positive in 10 years, prices today will look cheap.

          Excuses are made every day not to buy. Every time I think things can’t go higher, they do after a while. It’s the power of inflation. $5 gas baby!

        • Dan says

          I agree with the other posters; you are very lucky and smart to buy at the time. Everything fell right after your purchase to make it a great investment. If you waited just 2 years afterward, you would barely break even or even at loss. Or buying right now; it’s tough to say whether it’s a good investment.

          Since I’m playing devils advocate here; if you had invested 10k into apple stock in 2003 when everyone was scared of tech, you would have generated over 600k from each 10k you invested! So you take the down payment you had ~115000 invested in Apple and you would have $6 million and that’s through the biggest decline we had since the great depression and including Apple’s 40% drop from 2012!

          Investing in real estate or stocks both takes quite a bit of luck and patience but I like the outlook from stocks for longish term, ie. 30 years. I know because I have a rental and the first year, I paid ~20k for repairs. New roof, maintenance, AC, etc.

          • says

            That would have been nice with Apple. I know I wouldn’t have had the guts to invest $120,000 in the stock, but $10,000-$30,000 absolutely.

            Anybody who bought in 2009-2012 will probably be alright 10 years from now too. RE fills so much utility besides a monetary return.i just hate the commissions.

          • says

            This is a very incomplete analysis of real estate vs. stock investments. Apple was the stock of the decade — literally, that’s what it was called. It outpaced everything. To make a point that by putting a heap load of cash on just one stock, the lottery winner of stocks and the greatest gainer over the decade, is unrealistic and unbalanced. That’s 20 / 20 hindsight. This is in no way a fair comparison of real-world real estate vs. stocks. The exact opposite case could be made if one invested in Enron pre-November of 2001, and trust me, a lot of people did and lost everything.

            Let’s go with averages, which is much more responsible. If one invests in a well performing mutual fund, then one might expect around an 8% to 12% yearly return on investment. If you got lucky and invested in a handful of individual stocks, and several did quite well, then a good ROI would be around 14 – 17%. This is already not typical, year over year, but near exceptional.

            Investment property, on the other hand, according to the Wall Street Journal’s Complete Real Estate Guidebook, typically offers around 40 – 45% ROI, due to the combination of 1) property appreciation, 2) principle paydown, 3) positive cash flow, and 4) investment property tax breaks (i.e. the power of tax deferrals, etc.). I own 3 rentals and a homestead myself, and I can tell you that these high ROI numbers are consistent with my experience. Like the book says, when you hold on over time, through the ups and downs and keeping the properties occupied, the investor should always do very well and these numbers will usually play out.

            So, typically, as the book says, one can expect 3 to 5 times better in real estate than stocks and/or mutual funds.

            A common strategy is to have a mix. Get as much rental property as you can, while investing in (and maxing out if possible) your 401K or IRA, and also some individual investments. Another strategy for the more aggressive investor is to refinance your properties, assuming they have increased in value which they typically will over time, and take as much cash out, to use for more investments or stocks (which uses as much of the bank’s money to make you money). This is called wealth cycle investing and it can work wonders, though not for the faint of heart.


            • Thomas says


              This is a reply from an amateur investor. I literally know nothing about investing – in anything. I CAN, however, tell you that I have lost my butt a few times in the market by trying to pick the winner or even a winning mutual fund. The stock market may be a good place for savvy investors but a horrible place for uneducated investors like myself.

              I can without a doubt say that even without any knowledge of the industry, and without any specific instruction from anyone other than my Realtor, I have made a boatload of cash in real estate. Down payment, monthly payment (which is less than rent right now), and taxes insurance etc. I have seen my investment shoot through the roof over the past 2 years. I have literally made almost 100,000 dollars in 2 years.

              I lost 40,000 in the stock market. In my opinion, as an amateur, is… if an amateur can do it and make this much money, why not.

              It’s better than the stock market here savvy investors prey on the uneducated ones. Market Movers take and those who don’t know too much get taken from.

              Again, this is my opinion, but my bank account likes my opinion.


  4. Ryan says

    Great article, Sam! I also agree that real estate is an amazing asset class. I think the toughest thing for me would be coming up with the 20% down payment for the rental property. Would you recommend withdrawing from ROTH IRA (contributions only) to fund the down payment? The Roth IRA is just a side thing for me, as my 401k is my primary retirement account. Let me know what you think.

  5. says

    Well THIS was timely and appropriate! I have real estate on the BRAIN. Not obsessed yet, but seriously considering purchasing, although I’m violating one of your primary rules and letting my parents help with the down payment.

    • says

      No rule against Bank Of Mom And Dad paying the downpayment. In fact, this is becoming more common place for younger folks nowadays given the price of property, and the wealth accumulated by our parents.

      I can’t tell you how many times I see parents attend open houses with their child here in SF. It used to be competing Mano y Mano. Then it became a competition between two working couples. Now it’s a competition against Multi generational balance sheets!

        • says

          Actually, it’s the opposite. We had to obtain a “gift letter” indicating that we would NOT be paying them back, because then it would be considered debt, and would change our debt-to-credit ratio, thereby disqualifying us.

  6. says

    Ok Sam I need help on this one. So if you are going to buy a home right now would you buy one that you are going to live in or one you would be trying to rent later on?

    My wife and I are looking at purchasing a home one is in a great location with a price that puts us about at max. Another is in an ok location but the payment would be low as heck and we could invest in other things. I am a little confused on this as even though I know interest rates are low the thought of paying so much interest is just well crazy.

    Say we buy a home for $350k @ 3.5% for a 30 year mortgage we would end up paying over $200k in interest alone.

    • Jonathan says

      Thomas – I won’t recommend one house vs. the other, but I’d encourage you to re-examine your thinking on all the interest you’d be paying. Paying $200k in interest over 30 years does NOT make your $350k house really cost $550k. The time value of money is an incredibly important and evidently overlooked factor, especially when you’re dealing with such a long period. First of all, if you had $350k to pay for the house today, you’d be throwing away all the investment opportunity that $350k of cash brings all to save 3.5% interest. Second of all, inflation over 30 years will gradually eat away at the actual value of the money you’re paying to your mortgage (including the interest), while your property gains value to keep up. In other words, in today’s dollars you may only pay $100k (pretend number) in interest. I know this kind of thing may seem like voodoo economics, but it is truly and honestly CHEAPER for even a mildly disciplined individual (financially speaking) to get a 30-year mortgage at these rock bottom rates than to try to avoid paying mortgage interest by paying cash upfront (or prepaying the mortgage).

      • says

        Thanks Jonathan! Still not sure though. Not like we would be paying cash so either way there will be monthly payments. We just thought that with a lower monthly payment we could invest the savings into other things.

  7. says

    I think the average investor is way to scared to jump back in. I think those that are more educated can see that there is real opportunity. Everyone else will soon to follow but it hasn’t happened quite yet. One of the biggest obstacles is still the high unemployment rate. People are still scared about losing their job and not being able to find anything else.

  8. Rob says

    Ouch this is way below your usual standard! First off too simple, you got lucky, bought in a good area at a time when prices were low, but lighting doesn’t usually strike twice. My sister in law did the same as you and for simular reasons, except thier place turned out to be a total nightmare (triplex) first off cash flow negative, secondly the moment it closed the inspector showed up with a long and expensive list of grandfathered repairs, then a nightmare tenant, took 3 months and thousands of dollars to evict, and I could on and on. They’re hoping to have it paid off by the they retire in 10 years. Both have said they wish they had followed my advice and done a bit more research.

    A mornings worth of research would have showed them that being a landlord in Ontario Canada is the fast way to bankruptcy, like the one lady who got a professional tenant, 10’s of thousands in dollars in lost rent before they were finally evicted.

    This doesn’t mean your wrong, I know a few people who have done well but mostly because they got lucky and bought when prices were low and were smart.

    Typos are purely Steve Job’s fault (iPad is a pain to type on:) )

    • Rob says

      Note: while my comment sounds like sour grapes it’s not meant to be only that Real Estate is the most emotional of all assets, and the numbers have to make sense.

      BTW my nephew bought his place his with help from his Dad and rented out all the rooms and more than covered his mortgage. It was also a fixer upper and he (no longer) a contractor was able to do a lot of his own work

    • says

      If saving, investing, running the numbers, taking a risk, refinancing my mortgage, and finding good tenants is ‘getting lucky’, then I’ll take it!

      I’d much rather be lucky than good.

      Just wait until you read more lucky stories here in the future!

      • Zach says

        Sam, you had $116k to spend on a downpayment at age 26. You were lucky before you even bought the property. Either your family paid for that or you got an extraordinarily high paying job from a young age. Very few people have that sort of money at that age. Lots of very smart, hard-working people will not be able to make such a downpayment at that age.

        I also think it is quite deceptive for you to write an article which talks about *only* the positives of investing in a rental place with not even a single sentence paid to the negatives and everything that could go wrong.

        • says


          You are right. I am lucky to get a well paying job which allowed me to save more than 50% of my after tax income for four years before I purchased. It’s all luck.

          Every investment has risks. And the clear risk to real estate is over leveraging and having to sell in a bad market.

          How much do you save a year, amount and percentage? Did you go to a good school and do well to out yourself in a position to land a good job?



          • Rob says

            hey Sam

            quick update but since posting this comment we went on to buy two more properties:)

            very happy with extra income, and planning on increasing the rent next year

    • Jonathan says

      Sam may have gotten lucky in this instance, but the principles of wealth building through real estate that he discusses are sound. The second time around he’ll obviously put more thought into making a wise investment based on what he’s learned. Sounds like your sister-in-law didn’t do her research (cash flow negative from the start? a long list of needed improvements that weren’t disclosed in advance? didn’t screen tenants well?). Anyway, I don’t mean to bash your SIL, but those are all amateur mistakes (and yes, I realize those things can and do happen to pros too, once in a while. But it’s clear they are all issues that a little more upfront care could have avoided).

    • TheValuator says

      So, basically, you’re sister-in-law didn’t do her due diligence, and then proceeded to be surprised when things didn’t work out? Shocker.

  9. says

    I love real estate too! It helped me achieve financial freedom, but I chose to invest in income property. If you don’t mind moving every few years, residential real estate can be a goldmine. The $250/500K tax exclusion has no limits.

  10. fishmonger says

    This article accentuates all the positives of owning investment property with none of the negatives (there are too many to list). I bought a multi-family in 2009, and am just now having positive cash flow. I learned a lot of lessons the hard way, but isn’t that the way most lessons are learned?!

    The number one piece of advice I can give to newbies is to understand the most important rule in investing in real estate: you make money buying houses, not selling them. I can’t overstate this enough. There is only so much you can do with a property you dramatically overpay for

  11. says

    Real estate is definitely an interesting asset class right now. The way you can leverage it is exceptional. If you’re underwater (and presuming you don’t walk away like Trump) you can’t get margin called like you can with equities. Well, not if you have a fixed rate loan with a long-term amortization. The bank can’t call your loan, and it has no incentive to do so.

    This would be substantially harder to duplicate in other areas. Where I live, you would have to buy probably 10 duplexes to match the capital you have in one rental unit. That’s 19 more people to deal with, and 9 more loans to get.

    Which leads me to another point: there’s a limit at which real estate really loses its appeal. At 10 loans outstanding your next unit has to be a commercial loan, or you have to get portfolio financing. Portfolio financing or commercial loans, you’re going to face much higher rates, and at best you’re going to get 5-7 years fixed rates (at a premium to traditional residential loans) with 20 year amortization. Hello depressed returns and cash flows.

    Seeing as the limit on real estate is the number of properties, it makes much more sense to buy in the highest priced areas you can to stay under that limit, assuming cap rates are equal.

    These reasons are the reasons why I think people shun away from real estate investing in relatively mid- to low-cost areas. I can’t say for high-cost areas, since the system favors investors in high-cost areas – especially if you assume investors in high-cost areas have greater W-2 income and thus a higher marginal tax rate for depreciation benefits, another important part of the system that I left out above.

    TL;DR: “All real estate is local.”

    • Jonathan says

      You make a good point about it taking a lot more properties (and thus tenants) in a cheaper market to match Sam’s one property in San Francisco. However, that also opens a lot of doors. First of all, most people don’t have $116,000 for a down payment. Second, when Sam loses his single tenant, he loses ALL of his cash flow. If he gets one bad tenant who trashes the place and he has to evict, it’s going to cost him a heck of a lot. Third, it’s a lot harder to save up to buy more places to build a portfolio, whereas with cheap properties it’s relatively easy to pay off one mortgage in order to free one up under the Fannie/Freddie limits. Fourth, cashing out requires cashing ALL out, whereas if you have 10 cheaper places you can sell one or two as cash needs (or better investments) arise.

      In my experience, it seems that real estate investing is actually MORE common/popular in low-to-mid-cost areas. Plus there are a lot more low-to-mid-cost areas than high-priced areas around the country.

        • Jonathan says

          We only started in 2010, so I can’t comment for myself on 10 years. We’ve bought 3 ~$100k SFHs in the past 2 years, all of which are currently rented with their first tenants (no turnover yet). They’ve all been cash flow positive from day 1, values have been relatively constant or perhaps even dropped small amounts (irrelevant in our opinion). While we know we’ll have harder days than anything we’ve experienced so far, we also know that these properties will be successful long-term investments based on the fundamentals and the purchase prices.

          We had some coaching early on from friends and relatives who have invested (and continue to invest) in many forms of real estate for 3 decades with very good success, and continue to consult with them when faced with difficult decisions.

        • James says

          It may be worth having a mix of cheaper rental properties and some that are in popular areas such as San Francisco. Can I ask which part of the country you are in, Jonathan?

          I currently have 4 homes that were bought on hard money, fixed up (10-25k repairs), refinanced, and rented out. Each took about 20k on average (ranging from 12k – 28k) of my capital to acquire and they all cashflow about $350/mo BEFORE maintenance and vacancy. You can see I can get about 5-6 homes here in Texas with a capital amount of 116k. However, you do run into the problem of running into a loan limit. Yes you can pay off mortgages but I would rather spend my capital acquiring new properties and keeping them financed (8-15% return on capital) rather than paying down mortages (only 4-5% return depending on interest rate).

          There are advantages and disadvantages for cheap rentals and expensive rentals. Yes, if Sam only had one rental in SF and lost his tenant, he would lose all of his cash flow. However, because it’s a popular and expensive area, he will have no problem finding another tenant within a few days. In Texas, I can have multiple properties on the MLS for over a month. Cheap rentals are more stable and predictable, but they will never have the potential to appreciate in value by 200k+ like homes on the coasts. I like to think of it as similar to growth stocks (high capital gains) vs. dividend stocks (stable, income producing). It’s good to have both, the only problem is you can only be in one place at one time! Luckily I have a lady friend in SF who may help scope out the market over there…

        • Jonathan says

          James – Southern California. I agree, a nice mix of higher- and lower-priced properties would be nice. Incidentally there is still the potential for $200k returns…these houses sold for $250-$300k brand new 6 or 7 years ago. While we’re not counting on the values shooting back up to those levels anytime soon, it could happen.

      • says

        I can’t disagree with you on compounding advantages, or tenant diversification. If you begin to pay off mortgages, though, you’re deleveraging quite quickly.

        Say I match Sam’s other condo (I’m guessing he owns 2). Now I have 20 duplexes, 10 of which are financed, 10 of which I own 100% of. Best case scenario is that I have 40 people to deal with who live in homes in which I own 60% of the equity. Sam, on the other hand, has 38 fewer people to deal with, more potential for capital appreciation, one-third as much equity tied up, and better tenants to choose from all in exchange for slightly lower annual EBITDA.

        In very low-cost places, it starts blending into paying for a job. You could go out and buy a liquor store for $500k, run it yourself, and probably earn 50%+ on your actual equity investment. You just couldn’t do it two or three times. The $2M liquor store with a 40% annual return on equity looks a lot better.

        If time and financing are the limiting factors, it just seems to make sense that high-cost real estate is a much better place to be than low cost real estate. This is just my own perspective and personal viewpoint, though – and as you know I have no experience in real estate to report. This is just what I see from an outside perspective looking in.

      • says

        The vacancy rate for my rental over the past 8 years has been 0 days. In other words, no vacancy. Tenants have paid for a full month and have moved out before the month is over twice. They give me a 30-60 day heads up, and I put up an ad on CL for two open houses while they are still there.

        When you buy in a good location, the demand is always very strong. I highly suggest people go for location, and quality over less desirable locations.

        Think being at the top of the pyramid where the base of demand gets wider and wider.

        • says

          As you know I too dabble at the low end of the market. My goal is to have a minimum of 10 units, preferably all in multi-unit properties. I’m actually in the process of looking at property #3 right now. I am purchasing at a rate of 1 property per year because of everyrthing that you mentioned, plus the benefits of having such a low entry point due to lower priced homes.

          This is how I plan on retiring early. My homes are typically cash flow positive from day one with a total payback period of 3-4 years. After that the homes are mine, free and clear. Except for one nightmare tenant, it hasn’t been bad.

          I also agree that you make your money when you purchase the homes. One bad deal can cripple the financial prospects of the property.

          • says

            Sounds like a great plan! Just know that banks are very stringent on giving out mortgages if you decide to quit your job as you mentioned. Hence, either buy all you can before you quit or continue paying cash.

            Why don’t you think more people don’t do what you do?

  12. says

    We own two rental homes and I love them for all of the reasons you listed! I understand them and how I am making money from them. I can feel them, see them, walk around in them. To me, they are more “real” than my other investments.

    We have had some shenanigans with nightmare tenants before….but overall, its worth it!

    • says

      Good stuff Holly!

      Tenants can be a pain, hence it’s worth screening aggressively first. It’s why we put our new hires through 15+ interviewers.

      Need to screen out bad apples to save pain later on.

      • says

        And even when you screen people well, stuff still can happen! I wrote a story about owning rental property that will be published at Get Rich Slowly TOMORROW. Make sure to check it out. I anticipate people being really, really mean to me =)

  13. says

    Sam, you’ve got to do another piece on how you screen people to rent here in San Francisco – follow up on that Google Engineer vs. Doctor piece!

    I’ve got some funny stories about properties further South, including Palo Alto, which has a similar rental dynamic (RE Agents to rent, background checks, credit checks, resumes….)

  14. Mrs. Pop @ Planting Our Pennies says

    A little late to the party, but I’m a bit confused on some of your math… while I’m not questioning that long term this has been a good win for you – you said:
    “The $464,000 mortgage payment was split $500 to principal and $1,900 to interest. Rent for the property at the time was $2,000 a month, so things were essentially a wash if you include property taxes and deductions.”

    If rent was $2000, principal $500, interest $1900, how exactly did taxes and deductions make it “a wash”? Our understanding is that 1 – there is no mortgage interest deduction for rental properties. 2 – RE taxes are only deductions in as much as they can be counted as an an expense against the net rent.

    Unless you’re leaving out huge refundable tax credits (or maybe I’m still half asleep) how was this a wash in the first year?

  15. says

    And don’t forget about location, location, location. Good thing you live in San Fran, eh? I think cities like San Fran and New York are more resilient than other cities nationwide.

    • says

      True, but deals are much fewer and far between to be had. It’s almost always a given that what you buy in these cities will seem expensive now.

      If I lived in Vegas or Miami, what a field day I would be having! So much opportunity!

    • says

      Owning rental properties in NYC is a NIGHTMARE. The landlord-tenant statutes are extremely tenant friendly. The lady who owned the house next to me lost her home because tenants were allowed to live there rent free for over 6 months. The city would not evict them until I kept calling the health department about their uncut lawn and PILES or garbage bags.

  16. says

    I think one of the biggest reasons real estate is such a strong wealth-building tool is leverage. You can deploy 5:1 leverage on your money, and as long as the property is cash-flow positive, you’re in great shape. You can do that deal all day (or until your funding source runs dry).

    • says

      I agree with the leveraging. The market will fluctuate over the short term but the value should rise over the long term. Even if you are underwater now, in 10 years, it should come back. I love real estate investing too and most of my after tax investment is in rental properties. I’m looking forward to you stock investing post.

  17. says

    I am itching to get into the rental world. That is probably going to be my next purchase after we sell our current home and buy our next main residence. I would keep the current home as it is a townhouse and PERFECT for renting but the rules prevent me from doing so.

    I go back and forth on getting a partner – Sam do you have any experience with that?

  18. Mike Hunt says


    This sounds great.

    Do you have earthquake insurance? If not are you concerned about this potential natural disaster?


    • says

      Yep, have EQ insurance. Even though it’s been 30 years since a major earthquake, you never know!

      Do you know how many people were killed in the loma prieta EQ vs the number killed by hurricanes out easy or tsunamis? It’s a peculiar stat.

  19. Bobbo says

    You fail to speak about the hardest part of being a landlord – namely tenant selection and management. Its been my experience that a great many people look good on paper, but are slow or no payers, or fail to take good care of the property once they become a tenant. Even checking credit and references is imprecise; many prior landlords just want them out and will give a good ref.

    It is often said that location, location, location are the top determinants of real estate value. Don’t forget that 3 factors affecting the success of being a landlord are tenants, tenants, and tenants.

    All in all, I agree real estate is a fantastic asset class, but I’ll stick with REITs!

      • Bobbo says

        Ok, I get it. There’s enough demand for your properties that you’re able
        to treat the tenant screening process as if it were a job interview. In fact, I
        think you screen tenants more than many employers screen their applicants.
        That works only in a sellers market for high end rental real estate, which it
        sounds like you have.

        You don’t get exceptional returns from REITs, its a lower return proposition
        with correspondingly lower risk. I guess that’s where I feel comfortable sitting
        on the so-called “efficient frontier” of real estate investing, sounds like what
        you’re doing works for you, but beware the black swan of one bad tenant,
        one expensive repair, etc. that could trash your strategy’s returns.

  20. says

    I love this strategy Sam and I have been working on this myself. I have my own condo, which I live in, and I have been saving up for a second down payment. When I move, I plan to keep my place and rent it out. I have a low monthly payment and it is a high rent neighborhood, so I can easily make $500-$700 per month in profit once I move out.

  21. says

    I think real estate only works well if you take out a loan at a decent interest rate and have time to let your renters pay your mortgage off for you.

    Hubby doesn’t like loans and if I take one out, he pretty much automatically gets put on the hook to pay it off if I kick the bucket. I’m 63 and don’t have time to wait for the income or appreciation. Taxes and maintenance and marketing all take time and money on a property – and then there is also the added liability.

    You present a strong case and a lot of people have made money with real estate. Other’s have lost it…..

    • says

      Marie, you make a great point about age. Given we have finite lives, RE investing works better for those who have the time, energy, and patience. Therefore, one can make an argument that building a real estate portfolio is best before that age of 45.

      I don’t want to be going into debt in my 50’s and beyond either!

  22. says

    I agree that real estate is the fastest way to build wealth overtime. However, I feel that too many people promote the benefits of real estate and don’t promote the negatives that one can encounter. How does one deal with a property that is vacant? Or a tenant that doesn’t pay and destroys the property?

    • says

      I guess I’ve seen too many people bash real estate over
      The past 5 years due to the downturn. Funny how we see things differently yeah?

      I have another post in the queue about getting rid of an unlawful tenant you might enjoy. Stay tuned.

  23. says

    I am already getting exciting about real estate investing. I am buying into a real estate limited partnership as well as making plans for my first home to be a two-family home. Not only are they more house for less money, but they also provide me with a way to build equity with paying a lower portion of the mortgage.

    Have you thought about pulling out some of your equity in your condo since it is renting for so high? You could use the equity to buy another property (down payment at least) and rent it out as well. Then, you have two properties increasing in value at the SF rate. what do you think?

    • says

      I’ve thought about it, but don’t want to borrow to borrow more money. Although things are recovering now, I like to start new purchases with money I’ve earned NOT from previous property. This way, it keeps me motivated to focus on other income streams, and keeps me disciplined from blowing myself up by stretching too thin.

      I love property for the reasons mentioned in this book. However, right now, I’m dedicating my time to online endeavors now b/c now is my window. I don’t know if readers other than bloggers will care, but I may write about online income in the future.

  24. says

    I have an offer out on my third property right now. I have 15 year financing already locked up but now I just changed my mind and will go with the 30 year fixed mortgage. In fact, if I use Quicken Loans I’ll be sure to use the link in your post. ;-) #bloggerlove.

  25. says

    Real estate can be a great investment if you’re fully ready for it. One of my friends got in too soon. She wasn’t settled financially or career-wise and had to relocate for work less than a year after buying a condo. She wanted to sell before she moved but couldn’t get it done and it’s been stressful for her.

  26. Anthony says

    Great article Sam. I am a big fan of investing in real estate also. I live in the SF Bay Area as well and I work in the real estate industry. One issue I had with your posting is I didn’t see any mentioning of your HOA fees. I have worked on many condos in SF and I know a typical HOA fee will range from $400-$700/mo. while some of the higher priced condos can have HOA fees that exceed $1,000/mo. I am wondering how this affected your overall returns. For many of us starting out in real estate investing and landlording, condos may seem to be an easier way to start off since the mortgages are typically lower than a single family or multi-family residence. But the HOA fee’s for condo investing must be addressed before moving forward.

    If you did already address this in your article please forgive me as I was reading it on my phone. But I didn’t notice any mentioning of your HOA fees and how it affected your returns. Thanks!

    • says

      My HOA is lower than $400. I didn’t want to get bogged down in the mathematics of it, but at the time of purchase, my HOA was $230. So $230 + $1,900 interest + $500 monthly property tax = $2,630 compared to rent of $2,000. Take 70% of $2,630 to get my cost of ownership of around $1,840 + the amount of interest forgone from the downpayment.

      This is why I say it’s essentially a wash compared to $2,000 a month in rent when I first bought.

      • Anthony says

        Thanks for the comment Sam. An HOA of $230 is really good for SF. I am not sure which district/neighborhood you bought in but I haven’t seen HOA’s that low in awhile. My cousins bought condo/lofts in the SOMA area around the same time you purchased and their HOA’s were both over $400 and it continued to rise and it became a major complaint by them.

  27. says

    I agree that owning real estate is a surefire way to wealth. However, it also depends on where you end up owning these properties. SF is a great place, but east cost is still reeling from the real estate bubble.

    In fact, I believe that you can do better by investing in Atlanta and its suburbs now as prices have gone way down.

  28. Tara says

    I was thinking of investing in REITs rather than having the headaches of being a landlord. Any thoughts about REITS as a good/bad investing choice?

  29. Brenda says

    “make paper airplanes and perhaps start a fire.” LOL!!!!

    A sense of humor from a financial samurai. No wonder I love your site!!! :)

  30. Button333 says

    Few questions for you Sam. We bought a property in NyC in 2007, put 20 percent down at 6.25. But refinance rates in nyc are so high (approx 7k) that we only refinanced once to 4.625….so we pay 2200$/mth. We have about 340k left on our mortgage and could rent this place out for 3400 or so, but not sure it’s worth it after paying taxes on the rental income. We have talked about paying off a chunk of the mortgage with our savings that are sitting in the bank but that will only lower our mortgage by a few hundred dollars. It seems it would be more beneficial to put that money towards another down payment. If you had say 50k to “spend” would you put it towards your mortgage? Or maybe invest in another property (but def not in nyc as 50k won’t get you far here)? I feel like we are sitting on this money and should be doing something with it! Any help is welcome.

  31. ap999 says

    Is there any one who is investing in real estate properties who don’t live in the particular state? or working out of the USA? Or just working 60-80 hours a week and still make time to deal with they’re properties through management companies? Interested to know because I spend 80-90% of the year out side of the US. And I am trying to figure out is there away I can get a property and feel safe if I have a property management company handle most of the work of finding tenants, deal with maintenance issues and anything else that might arise while I am away…

  32. Benny says

    I tend to shy away from real estate during a boom like this since prices are high due to loose ecenomic policy. Economic tightness would lower prices and leave you with an underwater mortgage. It’s better to buy when prices are lower and mortgage rates are higher then refinance when rates go down.

  33. Pawan says

    Hey Sam,

    Is it better to rent in the south bay area than to buy? At this time the prices for condos in mountain view, Santa clara and sunnyvale are already pretty high so it makes it difficult to buy. do you think it is still a good time to invest in real estate? what if you rented out the property right off the bat? would that still be valuable?



  34. Rob says

    Hey FS

    Not sure if you check comments on old posts or not but been spending some time over at a RE forum and I keep hearing that monthly rents should be at least 1% (of the purchase price) or yields of 12%.

    it strikes me as crazy but loads of people use that as a basis for searching


    • says

      Hi Rob,

      Congrats on getting more rental property. The formulas for a great rental purchase differ among cities for sure. If you can get a 12% yield, I’d be buying all day long. But those properties are generally cheaper, and in more difficult neighborhoods. No free lunch!

  35. Nightvid Cole says

    The problem is you are assuming everything goes well and ignoring the downside risk. What happens if, for example, we have another real estate crash, or the neighborhood becomes less desirable and rents become more modest or stagnate, or what happens if you get a nightmare tenant?

    Your entire argument essentially hinges on assuming that both rents and prices will rise faster than inflation forever (and in case you got the memo, it was the exact assumption you are making that crashed our economy 7 years ago!)

    • says

      There are no guarantees in life, except for renting, which guarantees you a 100% negative return every single month. Oh, and taxes and death too.

      Are you a renter or homeowner? If you are a renter, I strongly encourage you to find some place where you would like to settle down and buy. Inflation is just too difficult a force to overcome over the long term.

      • Nightvid Cole says

        Rent vs. ownership is apples to oranges. Either you compare ownership to renting and investing the difference (in which case neither is a -100% return), or you compare renting to net present user cost of ownership (in which case both are a -100% return).

        I have no reason to take advice based on this type of flawed argumentation.

    • says

      Hi Highvid Cole,
      My experience is that those who potty mouth real estate investing are people who don’t own real estate and they are just justifying the status quo in their lives, or they bought and had to sell early on a downturn, and were either unable or unwiling to hold on to the property to allow appreciation, principal pay down, and tax advantages to work for you.

      There is a plethora of data out there available that supports that investment properties are typically a great investment, returning a yearly ROI of 35 – 45 %, as long as you hold on for the long term. And home ownership is great, too, as long as you are not biting off more than you can chew and is within the realm of what one would be paying for rents.


  36. Jim says

    These posts are very interesting! I currently own an auto sales business in upstate New York where cash is king. I use my own money to reinvest into buying and selling vehicles. I’m currently paying 1000 a month in rent and I’m located off the beaten path (terrible location). I want to own a commercial property! I just came across an opportunity to purchase a building listed for 125k- after speaking with the motivated seller he would take $100k and hold financing at 5.5 percent interest with 10k down. I’m hoping to have him hold the note for 10 years and have it paid off. My monthly payment based on 10 years would be 950 per month+ taxes ins and common area maint. If I paid off in 5 years it would be $1500 nnn. I will also have to invest approx 30k into fixing up the property but will considerably raise the property value. I’m wondering if I’m foolish to not going conventional financing for a 20 yr term. Banks will most likely require 20 percent down etc. Do you have any recommendations?

      • Jim says

        Do you think I’d be better off going conventional? Hear me out for one second…the list price on the building is 120 and I’ve negotiated him down to 100 and having him hold the note for 10 years at 5% interest. He will be making around 20,000 in interest over that 10 year period. I’m basically giving him full asking price for 0% interest- that’s the way I’m looking at it. Also Instead of coming up with 20 to 25% down on a conventional mortgage I will essentially be come up with nothing down applying the opm principle. However the building is in need of repairs and could cost approximately 30,000. So instead of giving the bank 20 to 25% I can reinvest it into the building. The payments would be $1000 a month +500 for taxes and cam. This would be my first commercial property purchase so please feel free to make any suggestions

  37. donna says

    Question. I live in a very large home on the waterfront (bluff) in anchorege, ak. Our kids are grown and i was going to sell it but then i thought to make it into s triplex and we would stay in our part. Only id probably need about 200k to get the 2 other high end units with incredible views ready to rent out st 3k/month. I still owe 590k. Who would loan me the money? Banks dont seem to want too! But if i was buying the place i could get the money. In a 203b loan or construction loan….they wont loan anything to me now i already own it. This would be a fantastic opportunity make money and pay this off in 15 yrs! or less if we put even more money in per month!

  38. Jeremy says

    While I appreciate real estate vs. stock investment arguments since I enjoy both sides of the argument, your story isn’t a very realistic example. You bought low in San Francisco, and that turned out to be a booming real estate market. It’s far from the norm – look at the flip-side and see how many people are under water on their homes. You basically *got lucky*. The market could’ve tanked and you’d be paying $2,400/mo + property taxes + maintenance + depreciation whereas you could’ve just paid $2,000/mo for a place to live/rent and come out far ahead of where you are now. I think it’s an unfortunate example to use because I’m reading the comments on here and all of these people seem to think it’s completely feasible to buy a place for 580k, rent it for 3.4k/mo, and then sell it for 30% more later on. There’s a reason why every major city is absolutely saturated with foreclosed rental properties, and it’s not because the profits on them are booming.

    What you’re saying is akin to me talking about my stock experiences – I purchased into Tesla when it was ~$40/share and sold it when it was a bit over $210/share. Is that a good example for why stocks are better than real estate? Not really, just happened to be a fortuitous experience for me. Overall I’ve averaged about 12% yearly returns in the stock market, so nowhere near my Tesla experience, but fairly good for a completely passive approach to investing. I’m very interested in trying out some real estate investing, but I’m not hedging my bets on whatever market i invest in to turn out like san fran did.

    • says

      You’re right. I got lucky with my decision to buy real estate in 2003 and in 2005. I wonder if I will be lucky again with my more recent 2014 Golden Gate Heights house purchase 10 years from now.

      So far, the comps have been trading OK. Take a look at this post on Buying Real Estate For Lifestyle. Comps went from around $715/sqft to $1,000/sqft, but I think it’s probably an anomaly.

      I guess the question I’ve got to think about is: when I was saving money pre 2003 and taking the risk of buying then whether I was feeling lucky, or I was taking risk.

      What is your current real estate and stock composition and history so I can gain perspective about you?

  39. Kevin says

    I believe strongly in real estate as an investment towards real estate the negative correlation with bonds and equities is attractive additionally the inefficiencies in the real estate market allow for value plays not available elsewhere. I wonder what your thoughts are on allocation…. would it be irresponsible to allocate 50% of a retirement portfolio dedicated to real estate maybe 15% to direct investment and the remaining to REITS and limited partnerships to allow for some diversification. I would love to hear your thoughts on the matter.

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