Real estate is one of the most secure revenue streams you'll have during retirement and an amazing addition to your portfolio.
Many try but few ever have enough real estate to retire with.
To understand why, we need to under how most people become investors. I've been compiling comments from the hundreds of emails I get, and the top 3 types of new investors are:
- Accidental Landlord - moved into a new house and turned the old one into a rental, or inherited a house from a deceased relative.
- Bought (or plan to buy) a duplex or triplex as a mortgage helper, but can't seem to get property #2.
- Want to buy a house to rent out but can't seem to find a good deal to get started with.
There's one big similarity between all 3...
You are looking for a home to buy and rent out, not an investment property.
Here's the secret - most homes do not make good investment property.
Houses Aren't Good Rental Properties
The chart above shows the long term rent vs price ratio. The higher the line is, the more prices are compared to rents. The lower the line is, the cheaper price is compared to rent meaning you earn more money.
Over the last two decades, you can see that houses are more expensive as compared to rents, meaning most houses do not generate enough cash to even cover the mortgage and basic maintenance.
You're probably wondering - if that's true, then how can they still be a good investment?
It's a fair question and it comes down the basic fact of real estate - it's a local market.
While the chart above is a national average, we see a very different story when we dive into different metro areas.
For example Seattle has a rent to price ratio of 0.2% (well below the break event point of 1%), LA has a ratio of 0.2% and Boston has a ratio of 0.3% (see a pattern here?)
On the other hand, Cleveland Ohio has a ratio of 1.01%.
Real Estate Isn't Profitable, Except Where It IS Profitable
As I just explained above, in most of the major metros, real estate does not earn you a monthly income. But, in other areas it does.
This makes sense though. Most of the major metro areas on the West Coast and North East have great, high paying jobs, safe neighborhoods and good schools. It attracts a lot of people who can afford great homes.
But, as investors, we don't want to buy great homes. We want to be rental property and renters can't afford great homes.
They want great apartments.
These big cities tend to have great luxury apartments, but it's nearly impossible to cover your monthly costs with that type of property in those metros.
Other cities tend to attract a blue collar workforce that tend to prefer apartments over expensive homes.
...and that's the issue! You are probably looking near where you live and work, and as I have shown above, it's nearly impossible to build a cashflowing rental portfolio in those areas.
On the other hand, other cities have great potential, but are often located too far away.
That's why you're struggling to replicate your success if you are an accidental landlord.
Or why you can't seem to find another duplex or triplex that makes sense.
And why you can't get started if you're brand new.
You're looking for property like a homeowner looks for a home. Investors are looking for property that makes sense as an investment.
They are fundamentally two different things.
Live Where You Want to Live, Invest Where You Make Money
The solution is to forget about geographic proximity to where you live.
The fact is, you can buy and manage property anywhere in the United States with your smartphone. Geographic proximity is an outdated concept.
That's why it's important to live wherever you want to live and focus on investing where it makes sense.
If the numbers work for you in Cleveland, you don't need to live there to buy! Keep living and working in your high-cost area (if you like it) and invest your money in the market you think offers the best risk adjusted returns.
Like one of my clients. Rich was able to buy rental property in his favorite US market, while living across the planet in South Korea.
There are tons of stories like his, but the point is - if he can buy and manage property from 12,000+ miles away, you can definitely do it a short drive or flight away.
Once you are no longer stuck looking within a few miles of your city, then it doesn't matter if you invest in Idaho or Georgia, it's all the same.
Since it doesn't matter where, you can choose the best markets with the best returns.
There's obviously a lot to learn before investing, but it doesn't matter what you learn if you don't choose the right market to invest in.
Now, I've boiled it all down into 5 simple steps. They are simple, but that doesn't make them easy.
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