I’ve never really hidden the fact that I’m not terribly big on real estate investing.  The recent bubble / collapse simply firmed my decision that real estate was not for me.  Besides my primary residence, of course.

However I’m beginning to open my mind to the possibility now.  For years, smart investors have been doing quite well for themselves by investing in real estate.  Sure, you read about the “crash and burn” type stories lately.  A 1 BR 700 square foot dilapidated house in San Francisco isn’t worth $700k?  Really?  But for the most part, real estate investors seem to come out ahead in the long run, as long as they don’t get foolish and greedy.

Cash flow – it’s your friend

When you buy a house and rent it out ( becoming a landlord ), your first goal should be to generate a positive cashflow.  What is cashflow?  Basically, the difference between your mortgage payment and the rent your tenant pays.  If your mortgage ( principal, interest, taxes, and insurance ) are $1,000 , and you charge $1000 per month for rent, then your monthly cashflow is $100.  That’s a positive number, and certainly a good thing.

Cashflow doesn’t make you rich

The key to making money in real estate isn’t the cashflow.  Really a positive cashflow just keeps you out of the poorhouse while your property is busy appreciating.  Ahh, appreciation.  If it weren’t for this, then real estate would be the worst investment ever.  But even at a modest 4% per year appreciation in the value of your house, you can make quite a bundle.  Just as a quick example, a $200,000 home would gain $8,000 in value the first year.  The second year it would actually gain $8,320 – it compounds. 

Leverage can be powerful

If you manage to put down, say, $40k on your purchase to avoid PMI, take a look at this.  Say you spend your $100 per month cashflow on regular maintenance and repairs – so it’s a wash.  Your net worth grows by $8000 in that first year though, solely due to appreciation.  That’s $8k on a $40k investment, or 20% in a single year.  If you’re feeling frisky you can get by with less money down, and possibly generate some insane percentage returns.  You will have to get around PMI though, probably with an ugly 80/20 loan of some sort.

Reward does not come without risk

Cashflow, equity growth, leverage, huge returns – what’s not to like?  Well, lots.  For one, you have to make sure your property can generate enough in rent to cover your mortgage at the very least.  If you’re buying an older house, there will be repairs and maintenance to pay for.  Finding tenants can be difficult, and finding good tenants can be harder.  Playing landlord isn’t something I’ve done yet, but it doesn’t sound terribly fun. 

There is always the chance that your property won’t appreciate as fast as you were hoping.  It can even decrease in value – something we’ve seen in some areas across the country recently. 

I’m still on the edge

After considering the positives and negatives, I am still in doubt as to whether I’ll buy an investment property.  I want to increase my net worth long term, and I think that real estate has a lot of potential to help me diversify in that.  However, the risks are big, and they are very real.  I also don’t like the idea of going $200k more in debt than I am now, while I’m busy trying to pay off my other debts.  Time is also a factor, as I don’t really have much to spare.  Currently I’m working on the world’s largest spreadsheet to help me decide if real estate makes sense for me financially.  I would only consider buying a local property, so I can keep an eye on it.  If rents in my area don’t support a mortgage, then the idea is out for now.

So anyway, that’s enough from me.  Have you ever bought / sold an investment property?  Would you do it again?   Any tips?