Should you Invest in Real Estate?

Is real estate a good investment? Should you actually invest in it? Can you make a lot of money with it? Let's dig in.

Eight years ago, I bought a property in Northern Virginia, and I paid $50,000 as a down payment and some repairs before the renters moved in. I rented the property out for eight years. There was some negative cash flow some months, some positive, but that fifty thousand dollars became a profit of around $214,000 at the end of eight years when I sold the property earlier this year. Pretty good profit, right? Even more than that, but there's more.

There were a few more expenses. The cash flow was negative in certain months. Now, that added up to be more than $16,000 expense over eight years. Also, repairs before selling cost us $25,000, and there were some months when we just couldn't rent the property; it was vacant. That was another $20,000 loss. So now, my profit is $153,000 once I adjusted for all that, much less than $214,000.

But this is still a 15%-18% return over the last eight years, which is better than S&P 500, which gave about 12% over those eight years.

But there's more. My 50% business partner in this deal was my best friend from college, who is actually a very good realtor, and he knows the Northern Virginia Market inside out. He helped me in multiple ways. One, he was able to get us a loan of 90% to the value of the property back in 2014 when we bought it, which means we only paid a 10% down payment.

Also, when the property was bought and when it was sold, he only charged one% in commissions when he could have charged 2.5%. So that saved us money. This friend saved us $35,000. How? He did not charge us what is called a property manager fee, which is about 7% of rental income. That would have added up to $15,000 over eight years. He didn't charge us that. He charged us a lower commission; that saved us about $10,000. Also, he was able to fund some of the repairs from his own part because he had earned some money as a commission, so he actually felt obliged to do that. That saved us another $10,000. Now, if you add all that up, our net profit from that property was $118,000 on an initial investment of $50,000. That's still a decent 11.5%, still slightly higher or maybe even with S&P 500, but nothing out of the ballpark.

But here's one more thing that no other real estate investor will tell you: there is a value for the time that you invest in actually managing the property, finding the renters, finding refinancing, all of that. I call it the time value of money or the opportunity cost of investing in real estate. Now, because I have this friend who was also a 50% business partner in this deal, he spent all this time, but he said it costs about 30 to 40 hours a year to manage a property. Now, that 30 to 40 hours, if you multiply it by $100 an hour as your opportunity cost, if you multiply 40 hours by $100 an hour over eight years, that's $32,000 of extra investment you have put into the property. Now, once you adjust for that, the net profit for this property was only $86,000, which is about 7%. It's not great; it's less than S&P 500. Also, think about it this way: real estate is actually a fixed asset.

You can't sell it tomorrow and take the money, so your money sits in the asset for a long time. There is a cost to that. I put that cost as 2%. So, if you adjust for that, our returns on this entire deal were about 5% per year, which is not great. So, the key to successful real estate investing is to find a partner who will be with you and who will look after your benefit and investment returns as much as they are.

Otherwise, you are much better investing in low-cost index funds and also in S&P 500 because real estate investing actually yields four to 5% a year. If you still want to invest in real estate and you want to work with this realtor, who is also a friend of mine but he's a mentor on our platform Xillion, log in to Xillion today and create an account. You get to work with wonderful people like my friend, who can help you make money through real estate if you choose to do so.

If you want to go solo, use our Real Estate Investment tool to find out if your investment makes sense or not.