Let me share with you my best real estate investment ever made. I have been investing in real estate since 2003 to diversify my wealth. Given I worked in Equities at a large investment bank, ever bonus I got was used to diversify away from stocks and into real estate.
Real estate is my favorite investment class to build wealth for the average person. Everybody needs shelter. Everybody understands that property can generate rental income. And it's not difficult to understand the costs associated with owning real estate e.g. mortgage, property tax, HOA where applicable, maintenance, etc.
Over time, thanks to inflation, population growth, employment growth, and positive demographic trends, real estate tends to appreciate up and to the right. The key is to buy a property where the fundamentals make sense and hold for as long as possible.
In 30 years, you can be the old man or woman telling your children how cheap your real estate property way back when.
The Best Real Estate Investment Ever Made Was Also The Easiest
When I was 26 in 2003, I put down $116,000 for a $580,000 2/2 condo in Pacific Heights, San Francisco that is now worth about $1,300,000 today i.e. 11.2X.
The rate of return isn’t particularly outstanding (5.8% annual return on the value of the property), given the long time period. What is outstanding is how EASY it was to make this money.
There weren’t massively volatile swings as we’ve seen in the stock market time and time again. It was smooth sailing with sticky rents that stayed flat during bad times, and ticked up every couple years during good times.
All I did was live in the property for two years, enjoy life, and rent it out for the next 13+ years. Interest rates kept on declining during my time of ownership, my tenants paid down a couple hundred thousand dollars in principal for us, and now it’s a cash cow that we plan to keep for my retirement.
Check out this graph that shows my property’s value versus the mortgage when I paid it off in 2015. The key to great wealth is growing that gap, and real estate is one of the easiest ways to do so!
The property also acts like a life hedge for my son, who is not even two years old. In 20-25 years, the cost of living in San Francisco, CA will be higher. If he so happens to want to move to San Francisco for work, he can have a subsidized placed to live. He could probably generate several thousand dollars a month in rental income by renting out the room too. Once shelter is taken care of, launching in life becomes much easier.
The Older You Get The Easier You Want
I used to have another SF rental, a single family house that I bought in 2005 for $1,525,000 with $315,000 down. But I sold it in 2017 for $2,740,000 and walked away with $1,800,000 because it was NOT EASY to manage this property.
Although we lived in the house for almost 10 years, the remaining several years of ownership were a real pain. As a single family landlord, I was responsible for everything. As a condo landlord, I had my HOA fix the roof, paint the sides, take care of garage theft, and maintain the common areas etc.
But I found a solution to easy. I reinvested $550,000 of the proceeds in real estate crowdfunding in lower cost areas of the country with 4X – 6X higher net rental yields. My cap rate for my SF property was a lousy 2.4% versus 10% – 15% I’m earning from a diversified portfolio of 18 different multifamily and commercial properties around the country, which I gladly DON’T have to manage.
Plus, I felt like San Francisco real estate simply got too expensive. Can you believe someone paid 30X annual gross rent for my house that sits on a busy street next to the busiest street in all of San Francisco, a 3-lane road on each side dubbed highway 101? That's nuts to me.
Here's the SF median sales price appreciation chart that shows a great run since 2012.
As you get older and wealthier in life, your desire for simplicity grows. Technology and innovation have made life easier, so I’ve decided to take full advantage of the demographic trend of moving away from expensive coastal cities. The arbitrage opportunities in real estate are real.
Invest On The Best Platforms
With real estate crowdfunding, you don’t need to risk $100,000 or more to invest in commercial real estate. Instead, you can invest for much lower amounts such as $5,000 and be better diversified. The best real estate crowdfunding platforms today are:
1) Fundrise, founded in 2012 and available for accredited investors and non-accredited investors. I’ve worked with Fundrise since the beginning, and they’ve consistently impressed me with their innovation. They are pioneers of the eREIT product. For most people, investing in a diversified eREIT is the way to go. To get long real estate, you need to invest in real estate beyond your primary residence. Fundrise makes real estate investing easy and less volatile.
2) CrowdStreet is a way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Both of these platforms are the oldest and largest real estate crowdfunding platforms today. They have the best marketplaces and the strongest underwriting of deals. Investors should carefully consider their own investment objectives when assessing the gamut of real estate opportunities that are available.
The best real estate investment you'll ever make is one that you buy wisely today. Thanks to inflation and the limited supply of land, real estate will help you grow your wealth tremendously over time.
About the Author:
Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has a total of $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.