[jsonmez]

So, I thought I'd type up a bit of more detailed explanation of my story and why I think real estate is a great investment for software developers, since my previous comment was a little lacked.

I bought my first house when I was 19.

It's a little two bedroom shack in Boise, Idaho, which I bought in 1999 for $68,000.

I still have that little shack. Today it's worth about $135,000 and the tenants I had in it essentially paid the mortgage on it and I own it free and clear.

I've actually got 26 total rental units and I generate about $10k a month of almost completely passive income off of them, net.

I made a ton of mistakes along the way, but I learned quite a bit--which I'm happy to share.

Over the years, I tried to buy one property every year.

At first I could only afford small properties and would put 10% down, so I was a bit leveraged.

But, eventually I was able to afford bigger properties and put more money down.

I always bought properties using 30 fixed loans and that ended up working out well.

I watched in horror as many of the other investors I knew--who were really speculators--went under, during the big housing crash.

I actually thrived during this time, picking up properties for cheap.

All the time I was working as a software developer, I had this goal of retiring early.

I kept saving as much as I could and investing real estate... little by little.

Like I said, I made mistakes, but learned from them and got smarter as I got more experienced.

Eventually, I had built up enough cash flow to actually "retire." This happened a few years ago.

Why is real estate such a good investment?

Well, I think there are two main factors: leverage and hedging against inflation.

Leverage is extremely powerful.

A bank will lend you a large amount of money, sometimes 90% or more, for you to invest--if you buy real estate.

This isn't the case with other investments.

So, you can buy a house for $100k, put $10k of your own money into it and if it goes up 10%, and is worth $110k, you make 100% return on your $10k.

That's insane. I don't know other investments where that is possible with such low risk--if you mitigate the risk properly.

Now, I don't depend on appreciation--and you can't count on it--but, you don't even need it.

Just the cash flow alone can get you excellent returns on your money. Again, with little risk and huge upsides.

Hedging against inflation is also a beautiful part of real estate investment.

Most other investments are hurt by inflation, real estate isn't.

In fact, if you owe money on a mortgage and inflation hits, you actually owe less.

Home values go up with inflation, as do rents.

I know it's a bit difficult to believe--I probably wouldn't if I hadn't done it myself--but, I have done it and I did escape the rat race.

Anyway, if you'd like to know more, let me know and I'll post the link to my YouTube videos and the video course (that is in beta) that I am releasing on specifically real estate investment for software developers.

[FabHK]

Counterpoints:

a) leverage cuts you both ways. Great when the market goes up, terrible when it goes down (particularly with a Loan-to-Value ratio of 90%).

a') futures or broker margin trading give you leverage in other markets, too. Doesn't mean it's prudent.

b) much harder to diversify, because of the big chunks (you can buy shares for 5k, but not a house. You can sprinkle 100k into different equity/debt markets in different countries, but not into many houses in different countries).

c) massive transaction costs. Round trip can be 10% or more.

d) much less liquidity. If shit hits the fan, you can sell shares and have cash at hand in a few days. Try that with a house.

f) again, regarding diversification: you could get bad tenants that trash the place and/or don't pay rent. If you own a large number of properties, it's a quantity you can average over and deal with. If not, it's a gamble.

g) rates are pretty much as low as they can go (though, to be fair, everyone's been saying that for some 7+ years now...) but seriously, they'll have to come up. That would put pressure on real estate prices. (Of course, you can avoid liquidity issues with fixed rate mortgages, that's prudent, as long as rents hold up).

h) inflation has not really been an issue for several decades. It is prudent to keep it in mind, though, but clearly real estate is not the only real asset.

i) Lastly, there might be something of "picking up pennies in front of a steamroller" to it. I have no doubt that what you are saying is accurate - but you might have been lucky, and avoided a massive downside. And clearly, it is not a feasible strategy for everyone to own 26 properties and rent them out (because someone actually has to live in them and pay rent...)

[jsonmez]

a) leverage cuts you both ways. Great when the market goes up, terrible when it goes down (particularly with a Loan-to-Value ratio of 90%).

Not exactly. Only if you sell. My strategy is to buy and hold--pretty much forever.

I get to get the leverage benefit and flip something if there is an opportunity and if not it's still a great cash flow deal to hold onto.

I also get to have depreciation which I never pay back.

I get what you are saying, but when you invest in real estate properly--not speculate--it's about cashflow, not appreciation.

Appreciation is a bonus you sometimes get but don't rely on.

Over a long period of time--say 20-30 years--you'll get appreciation in almost all cases, but never count on it for the short term.

a') futures or broker margin trading give you leverage in other markets, too. Doesn't mean it's prudent.

Yes. Different kind of leverage though.

Risk in real estate is essentially capped. It's like having a hedge in options or futures trading.

BTW, I've done both. I've traded all kinds of complex spreads. Real estate is much better--trust me.

b) much harder to diversify, because of the big chunks (you can buy shares for 5k, but not a house. You can sprinkle 100k into different equity/debt markets in different countries, but not into many houses in different countries).

Yes, but also less critical if you are talking about cash flow and in it for the long haul.

I am diversified over 26 rental property units in two spots in the country.

Yes, really bad things could happen, but it's very unlikely.

There will always be some risk.

c) massive transaction costs. Round trip can be 10% or more.

Yes. Definitely.

That is why buy and hold. Flippers get stuck holding the bag.

Really good point though. People need to understand this when investing in real estate.

d) much less liquidity. If shit hits the fan, you can sell shares and have cash at hand in a few days. Try that with a house.

Yes, another great point.

You need to have cash reserves if you invest in real estate. Don't lose all your liquidity and get in a squeeze.

I keep plenty of cash on hand or in a more liquid investment for emergencies.

Great point.

f) again, regarding diversification: you could get bad tenants that trash the place and/or don't pay rent. If you own a large number of properties, it's a quantity you can average over and deal with. If not, it's a gamble.

True again, but this can be highly mitigated with skill and volume.

I've been holding properties for about 18 years. I have not had more than $4k of damage done at once. And there are remedies.

Mostly this is a non-issue.

Don't buy expensive interiors. Buy middle-end and mitigate possible damage.

Another really good point though.

g) rates are pretty much as low as they can go (though, to be fair, everyone's been saying that for some 7+ years now...) but seriously, they'll have to come up. That would put pressure on real estate prices. (Of course, you can avoid liquidity issues with fixed rate mortgages, that's prudent, as long as rents hold up).

Yes and no. Could actually go lower. I don't think it will.

Most likely they will go up.

Never in history been a better time to buy in my opinion.

Don't know if we'll see rates this low ever again.

Again, I don't care about prices. I care about cashflow.

h) inflation has not really been an issue for several decades. It is prudent to keep it in mind, though, but clearly real estate is not the only real asset.

True, but when rates go up. It will be.

And when it does if you get caught with your pants down, it hurts really, really bad.

i) Lastly, there might be something of "picking up pennies in front of a steamroller" to it. I have no doubt that what you are saying is accurate - but you might have been lucky, and avoided a massive downside. And clearly, it is not a feasible strategy for everyone to own 26 properties and rent them out (because someone actually has to live in them and pay rent...)

Not everyone can do it, not everyone will.

But there is a huge opportunity here.

I've survived the good and bad. Solid strategy will give good results with minimal risk.

Most real estate investors don't have solid strategy.

Thanks for bringing these things up.

[FabHK]

Sensible answers, thanks. With those caveats in place, what you say makes a lot of sense. Particularly like the focus on buy-and-hold and investment, as opposed to flipping and speculation.

A few more things come to mind:

1) cash reserves - need enough to cover emergencies and periods where you don't receive rent, for one reason or the other, particularly of you happen to be underwater.

2) demographic changes can still screw things up. As an extreme example, take villages in eastern Germany or Spain - both prices and rents have been falling.

3) however, if approached carefully, this sounds good - maybe too good. There is no free lunch! So, what's the catch? Normally, if you have this good an opportunity, you have either hidden risks or restricted access. Do most people not get the initial money (or cojones) together to pull the trigger?

[jsonmez]

Great question. I like how you think.

The catch in, IMO, is that you need the right knowledge to pull it off. It's not as easy as it looks and it does take some cojones--like you said.

Most people say, "sounds like a good idea" and never do anything.

There are very few people who will teach you how to do it without ripping you off and selling you some scam.

Honestly, that is why I put my course together.

Yes, it's $500. But if you actually follow the advice, it's dirt cheap and I'm not selling you a bunch of get rich quick BS, like most real estate "scammy" stuff.

Here is the link if you are interested: https://simpleprogrammer.com/products/simple-real-estate/

[lutorm]

You also need to be able to afford a down payment and still have a reasonable cash reserve. That there pretty much puts the majority of the population out of play.

[jsonmez]

Yes, it puts a large number of people out of play--but not software developers.

That's why I recommend it to them.

You can find deals for $100k where you put down $10-$20k. Which is a lot of money, yes, but I know it's possible, because I saved that much in a year as a SW dev.

And then you can have cash reserves of $5k or so (which could be 401k or something else.)

Even a Heloc could be a cash reserve if needed.

There are ways to make it work.

[lutorm]

This sounds interesting, but does managing and keeping up 26 rental units really count as "passive income"? It sounds kind of like a nightmare to me, unless you've completely outsourced that part to a property maintenance company. I guess the question is: how much time, or alternatively, what fraction of the income, goes to running it?

[jsonmez]

Completely outsource. I answer maybe 2-3 emails a month and say "approve."

I kid you not.

[pimlottc]

So it sounds like you pay someone to manage your properties? How were you able to find a good trustworthy people? What does it do to your profits?

Also, how do you deal with major expenses, like if a furnace needs to be replaced, or roof damage? Do you maintain a rainy day fund for this? What kind of average expenses do you see for your properties over time?

[jsonmez]

Yes. Vetting a good property management company is difficult. I've fired more than a few.

But, now I have good managers in place.

Typically, you can expect 10% of rents for management fee--well worth paying.

You should factor this in when considering a property.

For major expenses, I have some reserves and I figure a 10-20% buffer again off of the rent of the property.

This covers the average expenses over time.

[douche]

I think I read one of your articles discussing this before I bought my home, and it helped convince me to pull the trigger. I was renting one unit in a duplex, when my landlord put the building on the market. After some months, the price he was asking came down into the range where I could make a play for it, and I did. With a software developer's income, I had no trouble getting approved for a mortgage, and was able to take advantage of FHA incentives to get a low interest, low down-payment loan that I scraped together a down payment for by tightening my belt for a few months. Best decision I ever made.

Since it is a duplex, I've been able to rent out the other unit, and the rent on a big, 2BR apartment in this market is enough that it more than pays the mortgage, leaving me to just pay the property taxes.

[jsonmez]

BTW, would love to hear more about your success. Email me at [e-mail] if you get a chance and I'll be happy to give you some free advice in exchange for hearing more of your story.

[jsonmez]

Awesome! Glad I could help. Well done on taking action. Most people never do. Congrats man. Really happy for you.

[jsonmez]

For those of you serious about this and have questions. I offer some officehours: officehours.io/people/jsonmez

Glad to help if I can--for free.

[riboflava]

Have you looked into commercial real estate at all? One of the factors that scares me off from residential real estate is that one bad tenant can really screw me over, especially as I'm just getting started. It intuitively seems like if you can get a business to pay rent on a property instead you're less likely to have a disaster situation...

[jsonmez]

I have two commercial units.

Usually the biggest headache, because you can't find property management to manage it and it's much more difficult to get leased then residential.

I think some people make commercial work, but it's a different ballgame and less reliable, IMO.

[walshemj]

Investing in REIT's gets round some of the problems TR Property has done me very well I brought at the bottom of the last property crisis

[20years]

Congrats! This is awesome. I would be interested in hearing more about where you got financing (traditional bank/mortgage lender or other) and what locations you purchased your properties in.

[jsonmez]

Mostly traditional bank / mortgage through conventional loans.

A few commercial loans.

And my locations are Boise, Idaho and Kansas City, Missouri.

Reason is because of cap rates.

[thro1237]

Do you live nearby? How often do you visit the properties?

[jsonmez]

I live out of state. Never visit them myself. Best this way. I used to live near by some of them and it becomes emotional instead of business.

[dmux]

How would you go about doing something like this in a booming housing market like the Boston area?

[jsonmez]

I wouldn't do that at all. Instead invest in a more steady market.

A good investment is one that has good return, regardless of market conditions.

"Investing" in a boom market is speculation.

You'll pay too much.

Look for good rent vs price situations where you can cashflow.

Midwest markets are good like Kansas City.

[tonyedgecombe]

Perhaps you could invest some time in learning how paragraphs work now.