What Are the Best Real Estate Investments? How to Find the Ideal Place to Put Your Money

by | BiggerPockets.com

What are the best real estate investments out there? Now, this is a big topic, and there’s no way to cover it in just one article, even though I feel I have the credentials to do it (credentials = lots of gains and lots of losses).

You see, I have a podcast, and on this show we interview successful investors, entrepreneurs, and executives who have made some big mistakes along the way. And I think we could all admit that it could have been any of us in their shoes.

I know that I’ve made my share of mistakes, like the time I built a waterfront investment home that I should have made a quick $80k on—but I lost $40k instead. (That scroungy little guy swore he was a drywall expert!)

Or the doublewide in the DC suburb that I took in trade for a home I flipped. It was in the path of progress when I bought it. But two very bad tenants later, it was in the path of a semi-truck that came to haul it away.

Or the beautiful Hyatt hotel I built with a partner in a hot city that was just blowing up. It blew up alright, but not in the way we expected.

All seriousness aside, I’ve made a few mistakes in real estate. But I’ve made a whole lot more money than I’ve lost. And I’ve had a lot of fun on this journey.

I’ve been involved in many aspects of residential and commercial real estate. I’ve done the debt side and the equity side. I’ve been both an investor and a syndicator. I’ve bought to flip and bought to hold. I’ve held some that I tried to flip (sadly). I’ve developed and held commercial—and sold some off as well.

I’ve organized this article around a series of questions and answers that will help us figure out “what are the best real estate investments.” Many overlap. I’ll pepper in examples of how you can get involved and what could go wrong (and right) along the way. And finally, I will tell you where I landed on the question of “what are the best real estate investments” after my long journey through real estate investing.

If you’re considering an investment in real estate, you’re reading the right article. If you’re already a pro, this may bore you. (You may want to skip to the end to read my opinion and consider starting a debate with me. I’d enjoy that.)

How to Invest in Real Estate While Working a Full-Time Job

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What Are the Best Real Estate Investments? Start with Why

Simon Sinek has a great book (and a great TED Talk) called Start with Why. What is your “why”? What are your goals in real estate investing? Please think about this more than I did when figuring out what are the best real estate investments for you. I started out doing it for fun (and because my handy friend needed a job).

Here are some “why”s, some potential goals, for your real estate investing career.

  • Are you tired of the instability of the stock market and want to invest in something more stable and predictable?
  • Are you looking to build a passive income stream to eventually replace your current income?
  • Are you just looking for long-term appreciation?
  • Are you trying to create a full time income right now?
  • Are you doing this for fun and the challenge? Do you like Chip and Joanna Gaines, and do you want to replicate their success?

Like I said before, this topic is too exhaustive to cover in one article, but I will attempt to share some brief thoughts on each of the questions I raised above here. These questions will help you answer the question of “what are the best real estate investments.”

Potential Goal #1: You’re tired of the uncertainty of the market, and you want to invest in something real.

Check out this graphic showing the Sharpe ratios for various asset classes. The Sharpe ratio shows the return vs. risk of various asset classes.

This alone made me want to invest in commercial real estate, specifically multifamily. But check out how income from multifamily fared during the recent recession:

But you may wonder, as I did, how rents performed over the prior decades. Here is a similar graph over 50+ years:

Getting out of the stock market is a great goal, one I accomplished decades ago. But if this is your goal, you will still need a place to invest.

Potential Goal #2: You’re trying to build a passive income stream to eventually replace your current income.

If this is your situation, I would focus on buy and hold properties—properties that generate nice cash flow (more revenue than expenses) each and every month.

You can do this through the accumulation of single family homes, small multifamily, or commercial (large) multifamily assets. And one benefit is that your return per asset should grow every year as your tenants pay down your debt and you improve the property and increase rents.

If you choose this option, you can accomplish it by finding properties and investing directly, and there are many BiggerPockets resources to help you do this.

Or you could co-invest with firms like Memphis Invest or Morris Invest, allowing them to do the heavy lifting and share in the profits. They acquire and manage assets with your funds, allowing you to stay passive but still get the wonderful advantages of direct ownership of buy and hold single family homes.

Or you can invest with a real estate sponsor/syndicator that will allow you to fractionally own a share of a larger property they find and manage. This can provide great income, appreciation, and tax advantages. That is the business I am in, so I know a lot of other BiggerPockets syndicators like Reed Goosens, Michael Blank, John Cohen, Jake and Gino, Jonathan Twombly, Jered Sturm, and more.

Potential Goal #3: You’re seeking appreciation. You are generally not targeting cash flow.

This can sometimes be accomplished by investing in raw land, but that usually comes with significant risk. If you do choose land, you may want to find land that includes a valuable asset like mineral rights, cell tower rights, or timber. And land that is sub-dividable. All risky business. I have invested in land with all three of these characteristics.

The leased oil and gas land was never drilled on. A total loss.

The cell tower was never built. So I put a trailer on that land and have rented it out for 13 years. Disappointing but still cash flowing. And the land is still appreciating.

And I recently invested with my 23-year old son, Jonathon, who brilliantly acquired a 95-acre parcel for $84,000, then sold some of the timber rights to a logger for $95,000 two months later. And he still has the land. Now that’s a smart investment.

One time I bought an expensive five-acre waterfront tract. I waited two years and was able to subdivide it for a 60% profit. Not bad. Still very risky.

Related: 12 Reasons Why Rental Properties Are the Best Investment

If you have significant funds to invest, you may be able to craft a return with a sponsor/syndicator to achieve this longer-term appreciation goal, pushing returns into the form of appreciation instead of income.

There are investments that achieve both, including many commercial assets like apartments, retail, office, or industrial. So if your answer to “what are the best real estate investments” involves appreciation, you can usually achieve some income along the way.

Potential Goal #4: You’re creating a full-time income right now.

If you are an accredited investor with a lot of money to invest, say a million or more, you have many options with sponsor/syndicators or by investing directly. The world is your oyster.

But if you’re like most beginning investors, you need to create an income through the sweat of your brow. You need to generate income this year.

If that’s you, you will probably want to enter the world of house flipping—acquiring homes below their retail value, adding value, then reselling them quickly. I’ve done over 50 home flips, and I could give you no end of advice.

  • Be very careful of location.
  • Don’t fall in love with the house.
  • Be extra careful of your budget and plan for cost overruns.
  • Stage each and every home with a top home stager.

BiggerPockets is full of resources to help you along. One great book for this strategy and many others is by Brandon Turner: The Book on Investing in Real Estate with No (and Low) Money Down.

Potential Goal #5: Fun and challenge. You want to imitate Chip and Joanna.

There’s much I could say here, but here are a few brief thoughts:

  • Treat this like a business, and apply the same rules you would otherwise.
  • Don’t fall in love with a home just because you like it. (This caused one of my few house flip losses.)
  • Buy low. Sell high. (Yes, you can call me Einstein Junior.) Seriously, it’s easy for beginners to mess this one up.
  • Factor in every possible contingency and cost overrun, including closing costs, real estate agent commissions, holding costs, and a $3,100 sewer line that has to be dug up and replaced. (Yes, that happened to me on my last flip.)

Whatever your goal, you will need to determine the amount of risk you are comfortable with. This will be a function of your own propensities, your available cash and time, and much more.

use-debt

What’s Your Risk Tolerance?

In a previous article, I wrote about the importance of understanding the difference between investing and speculating. It’s important to know the difference and to act accordingly. This will impact your answer to “what is the best real estate investment” for your particular situation.

  • Do you feel lucky? (“Well do ya–punk?”) Do you want to roll the dice and shoot for a multiple-hundred percent ROI? (I’ve done it, and I will tell you how below.)
  • Are you safety-oriented? Do you want to insure your principal at all costs, even if it means a modest return?
  • Are you willing to take a moderate risk to get a nice return?

Risk Orientation #1: Speculate in real estate.

It’s OK to speculate, as long as you’re clear on the fact that this is not the same as investing. Investing protects the principal and has the opportunity for return. Speculating hopes for a higher return but is willing to risk the principal in the process.

If this is your angle, there are many approaches you can take, mostly in the realm of real estate development. Subdivisions and many types of ground-up commercial development are examples of this.

Developers are among the wealthiest people in the world. Former developers are among the brokest (that’s a new word) as well. (Does your town still have half-developed subdivisions that broke ground before the Great Recession?)

Risk Orientation #2: Protect your principal at all costs.

At the other extreme, you may want to avoid all risk at all costs. Of course there is no way to completely avoid risk, but real estate provides many avenues to guard your assets.

Most angel investors and tech investors and even stock market investors don’t enjoy the safety that real estate investors enjoy. The Sharpe Ratio (above) documents this. And one of my friends who blew through $71 million of investor dollars in the dot com meltdown agrees. (He invests with me in real estate now.)

If you are trying to avoid risk, this will impact your answer to “what are the best real estate investments.” You can choose direct investments in single family homes, small multifamily, commercial multifamily, and more. And you can invest directly or through a sponsor/syndicator. I would argue that investing through an experienced operator typically provides a safer situation, as they have been there and done that multiple times. Screen them carefully.

Risk Orientation #3: Take on moderate risk for a reasonable return.

Regardless of what are the best real estate investments, one thing I love about real estate is the diversity of options that exist for investors. Most investors in this category would be willing to sustain the risk of little or no gain (on the low end) for the chance of a nicer return (if all goes as planned).

In the single family flip world, this may translate to a $15,000 to $30,000 profit or more per home. I have a friend in LA, BiggerPockets contributor Will Barnard, who is able to get returns of $100,000 or more per home for him and his investors. But these homes are quite pricey.

For single family buy and holds, you may clear $200 to $500 in cash flow or more per month. But after years of having others pay down your mortgage, you may have an asset worth two to three (or more) times what you paid, as well as cash flow several times higher without that pesky mortgage payment. Cash-on-cash return in this world can be estimated at 10 to 20% annually. But total return in the end should be higher. Note that there is cash flow risk due to maintenance, damage, vacancy and more. Small multifamily should have similar returns and risks.

Commercial investing through a syndication model usually provides a lower risk than single units. A vacancy or two in a 200-unit apartment doesn’t impact cash flow as much as a vacancy in one single family home or duplex. And there is usually less maintenance per unit. On-site management can catch problems that a single family manager may miss.

Syndicators that I know typically offer their investors returns along the lines of 5% to 12% annual cash-on-cash, and total annual returns (including principal pay down and appreciation) in the 13% to 22% range. Investors with syndicators have to share return with the syndicator, and the syndicator pays a property manager to alleviate risk and provide efficiencies that small owner-operators can’t achieve.

Though the returns in single family can be higher, the hassles and risks are usually higher as well—often much higher. Ask one of the many people who have abandoned their plan to build up a self-managed single family home portfolio, which brings me to my next major issue on the quest to answer, “What are the best real estate investments?”

build-relationships

The Best Real Estate Investment: Are You Looking for Active or Passive?

Many BiggerPockets Forums and posts have considered this question. Kansas City property manager Sean Tarpenning wrote an article about it last year. Ask yourself:

  • Do you want to get your hands dirty? Do you want to oversee or even undertake your project yourself?
  • Are you looking for mailbox money? Do you want to trust an operator, write a check, and then receive a stream of checks for years to come?
  • Do you want to be semi-passive? This may equate to a lot of due diligence on your part up front, then trusting asset and property managers to handle things from there.

Active/Passive Position #1: Active Investing

Many BiggerPockets readers want to jump in at this level. And this can be a great option to learn the business, grow from mistakes, and be prepared to manage more and larger projects. My partners let me paint a closet once, and I can tell you there’s nothing like getting your hands dirty.

Seriously, there’s a joy and satisfaction in finding that unique claw foot tub at Black Dog Salvage (that is in my area) or painting the perfect accent wall to offset your new countertops. And while there’s certainly the risk of making mistakes, there’s more profit to be gained by cutting out the middleman, little question about it.

But as I said earlier, you’ll pay for this option with increased sweat, toil, risk, and extended hours. Like I often say, entrepreneurs are flexible and free! We can work any 80 hours per week that we choose. (You may start out this way, but real estate provides more opportunities for freedom and flexibility than any profession I know.)

Many people start out active, but then migrate more and more toward the other end of the scale…

Active/Passive Position #2: Passive Investing

There are at least two ways to get here. As stated earlier, one way is to do the hard work of active management until you can afford to passively manage your investments. Hiring out repairs, maintenance, and property management is a great goal for many direct investors.

Another way to passively invest is to start from one of these two points: either by investing with a sponsor/syndicator, an active partner, or another vehicle like a REIT (real estate investment trust). I did virtually all of my flip homes and waterfront lots with an active partner who took care of the on-the-ground work. Now, as a syndicator, I offer this opportunity to other investors.

Related: Why Apartments Are the Single Best Way to Escape the Rat Race Within 3-5 Years

I can’t prove it, but I would guess passive investors last longer and are ultimately more profitable than those who actively manage all of their holdings over the long-term. And I would guess they have a better quality of life and aren’t as tempted to do bodily harm to their tenants and contractors. I’m just sayin’.

Active/Passive Position #2: Semi-Passive Investing

I hope this isn’t like semi-boneless ham. Because I’ve never figured that out. Does it have a bone—or doesn’t it?

In their journey toward becoming a sponsor/syndicator, many investors who have the funds to invest passively choose to get involved, to learn the business, to build their resume. Syndicators sometimes put them to work with due diligence—checking comps, helping inspect properties, bird-dogging off-market deals.

This can be helpful for the syndicator and investor. The syndicator gets another set of eyes on the project. And the investor gets a firsthand look at where he or she is investing their hard-earned funds.

Questions to Help You Answer “What Are the Best Real Estate Investments?”

Ask yourself:

  • How important are tax benefits?
  • Are you investing your own “regular” money or IRA funds?
  • Will your investment desire change over time? Some investors want to be passive now, but get involved when they retire or pass certain hurdles.
  • Do you insist on investing locally? Do you want to see/hear/smell/touch it, or are you OK investing across the country?
  • How much control do you feel the need to exert over your investment portfolio? Do you want to be in the driver’s seat, or do you trust someone who is focused on this everyday?
  • Do you have a preference for commercial or residential real estate?
  • What is the airspeed velocity of an unladen migratory swallow? Wait—that was part of another article. Sorry.

real-estate-investing-easy

So, What ARE the Best Real Estate Investments?

Still wondering, “What are the best real estate investments?” I’m glad you asked. First let me admit that I’m really biased. I co-founded and lead a multifamily syndication firm.

But I remind you that I have experienced many years with all types of real estate and other investments in multiple sectors and a variety of U.S. states. So I didn’t reach this conclusion lightly.

I’ve seen investors make a lot of profit. I’ve seen others get burned out and quit. I know a few that lost millions in the recession. I know some who made money during those years.

I have charts and graphs and demographics and studies that spurred my thinking. Even though it’s important to answer “what are the best real estate investments for me,” real estate in general is a great investment. There are many other great asset classes I didn’t cover. I know some who love storage units. Others kill it with mobile homes and mobile home parks. Dave Van Horn is allowing investors to profitably participate in buying notes.

And investors in other sectors have charts and graphs to back up their opinions as well. I’m sure of that.

So, what are the best real estate investments? Here is my proposed recipe for the perfect investment:

Passively invest in stabilized value-add commercial multifamily properties, through a trustworthy sponsor/syndicator, contracting with a professional property management firm, in a large and growing market.

If this option was somehow ripped away from me tomorrow, I would not despair. There are many other great real estate investments, and I would happily revert to another or try something new.

But the Forbes 400 list doesn’t lie. Most of the wealthiest people in the world made or sustain much of their wealth through real estate. So that’s where I’m investing the rest of my time, my talent, and my treasures on this earth.

So what about you? In your mind, what are the best real estate investments? And why?

About Author

Paul Moore

Paul is author of The Perfect Investment - Create Enduring Wealth from the Historic Shift to Multifamily Housing, leads Wellings Capital , a multifamily investment firm, and hosts the How to Lose Money podcast. Paul was 2-time Finalist for MI Entrepreneur of the Year, has flipped 60 homes and 30 waterfront lots, developed a subdivision, and appeared on HGTV. Paul's firm invests heavily to fight human trafficking and rescue its victims.

42 Comments

  1. JL Hut

    Another great one. Keep them coming. Real Estate will alway teach us something each year either about real estate or ourselves. So many ways to do it, we can never stop learning. That is what I like about it the most, how about you?

  2. Will Barnard

    Great article Paul. I too have made many mistakes along the way and in the name of spreading education, will admit one here. From 2011 to about 2015, I was looking at large multifamily units to acquire and was very close to closing on 3 in 2015. I made the mistake of allowing my fear of what I thought was overpaying to stop me on a couple of them, the others I found out were not good deals and backed out accordingly. Nobody has a crystal fall and I certainly did not expect the massive appreciation this asset class has shown over the last 5 years, but point is, while overpaying is never a great idea, paying a bit more to obtain an opportunity to complete value adds and increase profits and value if the asset is always a good idea. Combine this with ways and means to mitigate downside risk, there is no question in my mind that not purchasing those units was a mistake on my part (soon to be rectified this year.

    • Paul Moore

      Will.
      Thanks for sharing that. Great points. Sometimes it is smart to pay a little extra. Sometimes not (like in over-heated markets). I believe this will be your comeback year in multifamily. We are in the process of acquiring that 190-unit asset in Tennessee I told you about recently. I don’t think the market is overheated there.

  3. According to two of your charts, rent increases far outpace renters’ income increases. While it may be true that rental income did better than wage income in the aftermath of the recession, the real message of your charts is that rent outpacing income is not healthy or sustainable. Rent increases that ignore the income that pays for those increases means that landlords eventually render their tenants cost-burdened. Already, half of cost-burdened renters pay more than 50% of their income to rent.

    • Paul Moore

      Katie,
      Great point, and really insightful. I agree that some renters can’t continue to sustain these increases. That is one of the factors we analyze when looking at assets, and one of the reasons we focus on under-performing Class B apartments in growing markets. Where there is quite a lot of room to grow rents and stay at or below the 1/3rd of income level.

      I really take your points to heart, however, and thank you for the comments.

      • NA Colbe

        Another problematic part of the Cost-Burdened Tenant Syndrome caused by factors within the structure of Capitalism is the FICO CREDIT SCORING system being used against the ‘Have Nots’ to keep them in a preferred economic position as deemed by the ‘The Haves’ in the upper-income social-circles of the world populace.

    • Sonia Spangenberg

      A great point for newbies to take to heart when evaluating leads. It’s an additional market cycle factor that newbies might tend to overlook. Paul’s response is a smart consideration in this situation. That’s the voice of experience.

    • NA Colbe

      ” ‘Cost-burdened Renter’s’ ”
      Well, dear Katie, truly love the appropriate terminology! You are correct in that + in theory. Yet, this is the market condition spurred on by several factors:

      #1) Tenants incessant demands for more ‘modernized’ units being #1. This always equates to INCREASED COST to build/install. So not happy: Stop Whining for more expensive units (i.e., now it’s ‘open-floor plans’ being cried for which equal costly rehabbing which equal higher rent to recover outlay to invest back into necessary expenses (maintenance, utilities, debts, etc.

      #2) Increased Supplies & Material Costs in Builders Industry all affected by Economic upturns/downturns Worldwide. Even HGTV’s pro, Jonathan of Property Brothers show had to point that out to an endearing couple during their condo rehab. And elder couples’ response was wise (not childish): That if you want something then be prepared to be mature and able to pay the cost; otherwise sulk like a toddler. Yes, “OUCH” I said. “Guess, ROI trumps TENANT DESIRES!”

      #3) Recall more women joining the workforce, ‘Climbing Corporate Ladder’s’, not electing to be home spurring on ‘LatchKey Kids Syndrome’…..IN TURN….more babies & kids being less disciplined/less educated on civility, ethics, manners, interpersonal skills. Well all those kids became ‘TENANTS FROM HELL’ which equated to FAR HIGHER REHAB COSTS! And that equates to INCREASED RENT to next tenant! So BAD tenants = Increased Rents & Temporarily Less ROI. ?

      Non-Paying Tenants = Increasing Eviction Costs + Costly Indefinite Vacancies + Higher Rehab Costs + increased personal Wear & Tear Expenses on equipment replacement costs to healthcare costs + R.E. Agency commissions (if utilized).

      ? ALL ADDS UP TO INCREASED RENT in order to achieve a sheer amount of ROI (not ‘get-rich-quick’ amount of return, but a measly sheer/decent amount.

      Not complaining/whining mind you. Being an adult means you know what you’RE contracting into and you’RE prepared to pay the cost (and not to be the BOSS OF dear wives, but to be a mere participant in THE GAME simply called: CAPITALISM _ _ An imbalanced & inequitable system PERPETUATED BY ALL mankind.

      END OF #3).

      Again, such market conditions occurred since the mid-1980’s but stopped and again picked up a feverish speed by mid-1990’s. By late ’90s/early 2000’s the steamship was rolling out crushing every tenant worldwide that was not prepared for the DEVASTATING ONSLAUGHT of extremely higher rents.

      ?? So who to fault for ‘Cost-Burdened Tenants’……hum, guess it’s GREEDY CAPITALIST’S steadily increasing industry prices. The rest of us are just pinions, mere peasants each trying to toil and sell our wares.
      Same as the peasants of England in 18th Century Mr. Doolittles’ film, My Fair Lady.

      AHHH, what is solution?

      #1) FOREMOST???Employer’s increase jobs & pay! Cease the senseless feud between politics & business that only hurts ‘Have Not’ Citizens.

      #2) FOREMOST ? Remove chains???! STOP PENALIZING CITIZENS INCOMES SO HEAVILY. Also, legislate more financial institutions dole out more business funding loans inclusive of business speculation funding. And more homeownership funding to those crucified in last housing boom as well as first-time buyers and American Indian Affiliates and Military Veteran Families.
      Give banks a viable incentive to offer such to the nation’s citizens!
      But I digress!
      My Sincere Apology if anyone takes any offense but that’s how I see it. Best Regards to You.

      • “Cost-burdened” is not my term. It is an industry term for tenants who are paying more than 30% of their income for rent. It has gotten so bad that 50% of cost burdened tenants are paying more than half their income for rent. This situation happens when landlords charge rent without regard to the incomes that are supposed to pay the rent. So in my town, landlords say it is perfectly normal that it should require two incomes to qualify for even a studio.

        Even if a tenant is not cost-burdened upon move-in, it is well-known that wages have been static. Nevertheless landlords raise rents anyway, and render their tenants cost-burdened. In my town, since all the landlords want so-called market rent, tenants have nowhere to go.

        In my town, renters are whining or demanding anything but a decent, timely-maintained home to live in. Meanwhile in my town, the builders are building so-called “workforce housing” that the workforce cannot afford.

        • Will Barnard

          Katie, you made a comment here that appears to blame the landlords for the reason that tenants pay 50% of their income to rent. How is that the fault of the Landlord? From another perspective, how about the tenant find a place in or around that area with a lease that is closer to the 33% range? Seems to e that the tenant arevin charge of what they pay, not the landlords.

        • Most landlords require that a tenant’s wage be at least three times the rent. It is not that tenants start out cost-burdened. However, wages have been stagnant for decades. Landlords who raise rent without taking into consideration the wages that pay that rent will definitely render their tenants cost-burdened at some point.

          I am so glad in your market there is both a choice of areas and a high enough vacancy rate to keep rents reasonable. In my town population 90,000, the whole town is one area. The next area is 40 miles away.

  4. Jessica T.

    I like how you broke down the different investment approaches and mindsets of would be investors out there. Although I had a mind for what I needed to do, this article drove it all home. Thanks for taking the time to write it!

  5. Sonia Spangenberg

    Paul, I loved this article. This is a great classic to be saved and re-read periodically. I think the big picture is important especially when one is first starting in investing. As a recent newbie, I tended to get caught up in the details of how to do this and getting started where I could afford to, without looking at the end goal and big picture. I did this despite all the articles about finding your why. ; – ) I think personal experience really helps one see the value of the various articles one reads. It’s part of the growth process. Some of us tend to learn more by doing, mistakes and all. You really bring it home. Thanks for sharing your journey. I’m sure many with benefit.

  6. Paul Hurtubise

    Paul,
    Awesome, thank you for sharing your insight. Sharpe ratio? I had never heard of that … looked it up. Brilliant.

    “a measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment.”

    So the higher the better. I did notice one thing on this graph that is puzzling me though … “Retail” is 1.17 but looks like it is .67, and “Office” is .67 but looks like 1.17. Am I misreading the chart?
    And is this real estate, or business sector classes. I assumed you are talking about real estate, but then at the bottom I see Dow Jones, Nasdaq, and S&P?

    Thank you again, you really got me thinking, I already have a couple of multi-units.
    Best,
    Paul

  7. chris schu

    I noticed your Sharpe Ratio chart terminated at 2007.

    “Real estate: Alternative no more” put out by J.P. Morgan Asset Management in July 2012 revealed the following on page 3:

    Annualized Total Return Comparison (1977-2012)
    S&P 11.4
    Private real estate 9.1
    U.S. bonds 8.2

    Annualized Volatility Since 1977
    S&P 500 16.4%
    Private real estate 8.1%
    U.S. bonds 6.8%

    Source:
    NCREIF, Barclays Capital, Standard & Poor’s, J.P. Morgan
    Asset Management.

    Of course, one must find datat to fill the 2012-2016 gap which may improve RE numbers. Then again, Wall Street has had some wonderful sectors too.

    In the “Conclusion” section of “Real estate: Alternative no more”:

    “It is not surprising that increasingly investors are coming to
    the realization that real estate is no longer an ‘alternative’; it is
    now an essential consideration for any investor looking for
    solutions to the challenges posed by a portfolio invested solely
    in the Big Two Traditionals—stocks and bonds.”

  8. chris schu

    Concerning “gotcha” expenses, you mentioned the following:

    “That scroungy little guy swore he was a drywall expert!)”

    …and…

    “Factor in every possible contingency and cost overrun, including closing costs, real estate agent commissions, holding costs, and a $3,100 sewer line that has to be dug up and replaced. (Yes, that happened to me on my last flip.)”

    One of your fellow BP authors mentioned that for EVERY property beyond a certain age they always pay for a “sewer scope.” I feel your pain about the drywall “expert” as we all have had contractors verbally inflate their skill only to come up short during execution.

    I remember neglected rental a friend of mine was anxious to acquire. In doing so he rushed the inspection – overlooking the furance. When I first saw the unit after he closed on the property, I noticed the heat exchanger was extremely rusted. He ended up having to drop funds for a new unit. Big $$$$. In addition, the roof had to be replaced versus simple patch work and code did NOT allow for another layer. All prior shingles had to come off.

    Oh, and then there was that property with decaying wood siding. The investor decided to rip off the wood and go with the underlying tile. Turns out a large section of said tile was cracked or otherwise sliding out of place. That tile contained asbestos and the budget did not account for the expense of adding all new siding plus labor to cover up the tile. BIG scheduling issues and delays ensued.

    The devil is in the details.

    When venturing into the world of real estate investment, lack of due diligence will sting you more often than not.

    • About six months ago I made an offer on a rental property. The offer was accepted but the home inspection and pest inspection turned up about $200,000 worth of damage. The seller refused to negotiate. I backed out. The seller eventually sold the property to a local big landlord who is currently renting the house WITHOUT doing any of the work except about $12,000 of minimal pest repair mandated by law.

      There is a reason why the numbers work for that big landlord, but not for me.

  9. Mano Chidambaram

    Love this article. This was exactly the question I posed last week on BP. I am quite new to this, but based on extensive research on these various options, I kind of came to the same conclusion as above & have started going down that path. Appreciate if you could share more data & charts that you mentioned above. Thanks

  10. Bart H.

    Great article. As a newbie in the real estate arena, this article gives me some options as to which route I need to take. Since I’m more analytical and prefer not to get my hands dirty, I’m more inclined to go the passive route.

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