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Real estate is an investment to have for fun because there are many different variations of investing in real estate, depending on your goals and desired level of complexity. In particular:
Investing in real estate can be as involved or passive as you want it to be, and it diversifies your portfolio either way. Real estate can lead to larger returns on investment, but it can also offer you a creative new investment strategy that teaches you about a new industry as you invest.
While this is a “deep dive,” it only hits the general points to show the range that exists within real estate investing. Entire articles and books exist on each of the topics below, and you should read them if you are interested in real estate investing at any level. We go through some (but not all!) types of real estate investing to display the varying levels of passivity and investment size.
Baby Steps: Mutual Funds and/or Index Funds
A mutual fund is a collection of investments. Mutual funds work by harnessing the combined purchasing power of all the investors in the fund. You can track the net asset value of a mutual fund just like you track the share price for stocks, and mutual funds (like stocks) also pay dividends and may involve minimum investment thresholds and administrative expenses. Mutual funds typically have a designated purpose: For example, a particular mutual fund might track the overall performance of the stock market, or invest in social-justice-minded companies, companies located on the West Coast, or real estate.
An index measures a particular segment of the market, or perhaps even the market as a whole. The Dow Jones Industrial Average, the most well-known index, measures thirty of the largest publicly traded companies in the United States. The NASDAQ measures the performance of primarily tech stocks. The Standard & Poor’s 500 Index (or “S&P 500”) measures the 500 large companies in the United States. There are myriad indexes based on company size, investment strategy, and segments of the market such as finance, health care, energy, and real estate.
The most passive way to invest in real estate is to invest in a real estate index fund, which is a mutual fund designed to mimic the performance of a particular real estate-focused index by holding similar investments in similar proportions. Investing in a mutual fund focused on real estate allows you to put money into the real estate market without having to worry about any of the details. It will feel the same as investing in a target retirement fund or market index fund, but a piece of your investments will track real estate growth.
Diversify Your Portfolio with Passive Real Estate Investment
To invest more directly in real estate without buying a property or worrying about any transactions associated with a property, invest passively using a real estate investing platform like Fundrise.* Fundrise offers real estate investment to individuals who have lower net worths than traditional real estate investors and/or do not have the time to dedicate to the real estate process due to other work and obligations. It does this by crowdsourcing real estate investments to make them more accessible.
Using Fundrise or a similar platform, you invest any amount of money you prefer of at least $10 in the platform. You can choose your preferences for how long you plan to invest your money and your risk tolerance in order to develop a portfolio where you hold shares in different asset classes of varying risk levels. Within those asset classes, you actually hold tiny pieces of specific properties. For example, you may own 1/10,000 of a new apartment complex in Tampa or a housing development in Nashville.
A huge perk of Fundrise in particular is the amount of information the platform provides about steps in the process of specific assets in which you have a stake. Investors receive updates telling them about the stages of development of different properties and teaches investors about various asset classes. Investors do not have to read these updates: Anyone can just passively invest. However, Fundrise understands that its platform is often used by individuals who hope to participate in less passive real estate investments when they have more time or money. If you want to get into the real estate game without committing significant time or money, start here.
Real Estate to Reduce Your Housing Cost: House-Hacking
House-hacking is one of the most incredible wealth-building tools, and if you are reading this before you are 25 years old, married, and/or have children, I cannot recommend house-hacking enough. If I could go back in time and introduce one concept to my 22-year-old self it would be house-hacking. If I had house-hacked right after college, purchasing one of the 76% of Las Vegas homes that had a list price under $200,000 while having my roommates help pay down the mortgage before eventually renting it out, my net worth would undoubtedly be $1 million higher with the rental income collected and the appreciation that occurred in the Las Vegas market over the past ten years. I would be at my FI Number already if I had house-hacked! House-hacking started Scott Trench’s wealth journey, and it is why he is financially independent at age 32. Everyone’s situation is different, but if you are young, house-hack now.
Here is how to house-hack: If you are a first-time homebuyer, you only need a 3% down payment on a home. Put that down payment down on a duplex, triplex, or even just a home with five bedrooms, and you can rent out the other rooms or units to other individuals. If you can share between enough people, you may actually have the rental income from your roommates or neighbors cover your mortgage entirely, eliminating your housing cost.
Here is an example from Logan, Utah since one of my favorite low 20-somethings lives there: A 3 bedroom/2 bathroom home is for sale for $120,000. A 3% down payment would come out to just $3,600. Even if she needs to save an additional 5% to cover closing costs and incidental expenses, she can buy that house for less than $10k.
The mortgage will be around $1,400/month. Rooms for rent in Logan, Utah range from $400-$800/month, likely depending on the size and quality of the room. If she can rent out two of the rooms for $467/month and live in the other one, her “rent” is also $467 and she owns a house, building wealth and equity with her roommates’ rents. If she rents out the master bedroom with a private bath for $750/month, the nice sunny second room for $650, and stays in the smallest room, she can live rent-free. She can also get more creative by having more roommates, or turning a den into another bedroom.
Some folks will question the ethics of this model since your roommates are paying rent, but you are not. How is that fair? While you are not paying rent, you are assuming the risk. Your credit score is on the line if that mortgage payment is not met, it is your job to fill a vacancy, and you are responsible for all repairs out-of-pocket. You are also the one coming up with the creative solutions to share the home and setting the financial ground rules: That is a lot of planning and should be compensated! That may sound intimidating, but you will be able to cover those pop-up expenses with all the rental income you have not been paying.
Making Money From Your Primary Home
There are options if you read about house-hacking and thought, Wow, I wish I learned that before XYZ happened. While not as lucrative as house-hacking, renting out any space for any amount of time can partially offset your housing cost and/or build wealth. Renting out a room or a finished basement long-term can put a nice dent in your housing cost to make you feel wealthy immediately. This is especially lucrative if you live in a place that has a mother-in-law suite, apartment over the garage, or a room with a separate entrance. The more private the space, the more money you can make from it.
Even if you cannot rent out a room all the time because you live in a 2 bedroom/2 bathroom condo like us, renting out the room that is your office/guest room on VRBO or Vacasa on weekends when nobody is visiting can bring in a lot of money. The standards for spaciousness are lower if you live in a city, so even having a Murphy bed in a living room can secure you occasional guests if you live near tourism centers or entertainment hotspots. If any sort of event center is near you or a quick trip on a common mode of public transportation, advertise it when events are happening to make money off of your location.
The calculations for how to rent your space vary depending on where you live. For those in rural or suburban areas, you have more space for long-term rentals that generate consistent low to medium income over time. For urban areas, you have less space and may not be able to sacrifice it daily, but you can rent out a single room in your home for $500/night when you are a 10-minute walk to the World Series.
If renting as a whole feels off for you, there is still another option if you can only afford one property but are unwilling to house-hack: the live-in flip. You have probably heard of folks who flip houses, or buy houses, renovate them, then sell them for a higher price quickly to earn money. A live-in flip is a variation where you buy a home as your primary residence, live in it for two years (because otherwise it is mortgage fraud, and mortgage fraud is bad!), renovate a room at a time while living in the other spaces, then sell it for a much higher price than you purchased it. Particularly if you are handy or skilled in an area like construction or electric, this may be a great project for you to improve your net worth with your skills and even broaden your knowledge along the way. Additionally, you can exclude much (and potentially all!) of your gain from taxes by living in the home as your primary residence for at least two years. To learn more about flipping homes, read The Book on Flipping Houses by J. Scott, or check out his book The Book on Estimating Rehab Costs to make sure your live-in flip plans will be profitable.
Making Money from a Vacation Home
Taking the next step in real estate involves buying a second piece of property other than your primary home. This can be purely a business venture where you rent the place out to long-term renters, or you can pick a vacation destination you enjoy so you can spend a week/month/duration there each year. The vacation home approach is often a more appealing option for folks that do not want to expand their real estate portfolio but can see the enjoyment of a property that provides an extra income stream and a place for the family reunion.
Before purchasing a property just because it is pretty and by the beach (I understand the appeal, more than you know), run the numbers. Realistically calculate how much rental income you can expect and conduct some market research of similar properties. Pay careful attention to seasonal rates, and be honest about when you would visit your property: If you plan to occupy your beach property on the 4th of July, that is fine, but recognize you will be taking one of the most lucrative weeks out of your earnings.
Additionally, you need to decide how you will manage the property. If you live nearby, you may want to manage it yourself, but understand the time and middle-of-the-night calls that come with managing a property. If you are purchasing a vacation property that is not where you live, research the cost of property management companies or find a local property manager who fits your needs. You also need to consider a number of recurring costs including insurance, property taxes, listing fees for website listings, and cleaning fees after each guest.
Beyond these recurring costs, you should calculate and plan to set aside a monthly CapEx (capital expenditure) amount. The washer will stop working at some point—you just do not know when. This account covers all the maintenance and repair fees that occur over time by breaking down larger fees into small monthly payments over time, according to the expected lifetime of the items you will need to replace. Some example items included in a CapEx calculation are:
At Phippen Tax & Financial Services, we offer comprehensive market analyses to estimate costs associated with a particular rental property and can provide all numbers to you to make an informed decision before buying a property. Alternatively, if you want to read more about CapEx and find a wonderful worksheet for calculating CapEx, read The Millionaire Real Estate Investor by Gary Keller. If you just want one property, our analysis may be enough, but if you want to create an empire (more on that later), we recommend reading the book.
Retiring Early with Real Estate
Individuals can expedite their path to achieving FIRE (financial independence, retire early) through real estate investment in multiple ways. The most obvious way is probably to use money from real estate, invest it in the market like you would any other money, and let that money grow into the principal that will fund your lifestyle in early retirement through a method like the live-in flip.
The more aggressive your investment strategy, the more you can expedite your returns. For example, you can take your time with a live-in flip and take two years or use the BRRRR (“buy, rehab, rent, refinance, repeat”: If you are interested in the BRRRR strategy, read the book before trying this on a home!) method to purchase a double-digit number of properties within a year. Returns go up when you accept more risk and spend more time on real estate.
As your mortgages are paid off, you can also choose to live off of the income you receive from your rental properties. When this income reaches a point that it can fund your lifestyle, that can be your FIRE income rather than the returns on money invested in the market. Your principal is effectively your properties, and your income received from rents are the returns.
Becoming Wealthy With Real Estate
To take real estate investment further, just keep investing. Research the BiggerPockets forums to find what strategies appeal to you the most and fit your lifestyle. If you decide you love real estate, use it as a tool to build wealth, as outlined in The Millionaire Real Estate Investor by Gary Keller. While we regularly help clients with real estate investment decisions through market analyses, we do not have a multi-million dollar real estate business, so do your research to set goals for yourself if you want to take real estate investing further.
You can invest in real estate passively with $10, or you can own thousands of doors that provide millions of dollars a year in passive income. Most of us will choose to participate in real estate investing somewhere in the middle. No matter what you choose, real estate is an investment that can diversify your portfolio and increase your wealth while learning and having fun.
*If you plan to invest in Fundrise, please let me know, because I can refer you and get a bonus of $50 in shares, and you will get bonus shares too!
About the Financial Accounts Series: The Financial Accounts Series is a four-part series discussing financial accounts that can improve the health of your finances. The Phippen Tax & Financial Services team will provide a deep dive on each of the accounts listed in Part 4, Accounts to Have for Fun, before releasing the bonus edition, Accounts Your Kids Need. If you missed Part 1, Accounts You Need First, Part 2, Accounts You Need Next, or Part 3, Accounts You Want, start there! If you would like to seek additional guidance about your personal finances or the specific organization and composition of your financial accounts, please contact Patrick Phippen or complete a new client form if you have not worked with Patrick in the past.
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