What are my investment options in real estate?

Question

In a nutshell, I'm about to graduate from college at 21 with a great degree and have a job lined up that pays just short of six figures. Things are looking good.

But I don't want to be a software developer for life. In fact, I don't want to be a software developer for any longer than I have to. It's cool and all, but it's not that cool.

With a salary of that magnitude at my age, even after taxes I'm going to have an obscene amount of money available to me. I don't know what to do with it, but I know I want to start investing as soon as possible to turn the money into long-term assets that will let me escape the 40 hour week in less than 20 years.

What are my options here? I'm considering investing in duplexes and multi-family units, and I'm guessing I'll let part of the rent pay off the mortgage while I direct the other rent into buying more property. But while this seems smart initially, I'm not sure where it's going in the long-term. As my rental income increases and my salary increases, more and more money will be available, but if I keep up that pattern all I'll have in 15 years is more apartments than I have time or interest in managing.

What else can I do? What options are there for diversifying assets in a reliable way that won't turn me into nothing more than a semi-professional property manager?

Answer 1

Your post seems to read as if you want to invest only in real estate rental properties as a start because they will be a reliable investment guaranteed to generate profits that you will be plowing back into buying even more rental properties, but you are willing to consider (possibly in later years) other forms of investment (in real estate) that will not require active participation in the management of the rental properties.

While many participants here do own rental real estate and even manage it entirely, for most people, that is only a small part of their investment portfolio, and I suspect that hardly any will recommend real estate as the only investment the way you seem to want to do.

Also, you might want to look more closely at the realities of rental real estate operations before jumping in. Things are not necessarily as rosy as they appear to you now. Not all your units will be rented all the time, and the rental income might not always be enough to cover the mortgage payments and the property taxes and the insurance payments and the repairs and maintenance and ... Depreciation of the property is another matter that you might not have thought about.

That being said, you can invest in real estate through real estate investment trusts (REITs) or through limited partnerships where you have only a passive role. There are even mutual funds that invest in REITs or in REIT indexes.

Answer 2

I compared investing in real estate a few years ago to investing in stocks that paid double digit dividends (hard to find, however, managing and maintaining real estate is just as hard). After discussing with many in the real estate world, I counted the average and learned that most averaged about 6 - 8% on real estate after taxes. This does not include anything else like Dilip mentions (maintenance, insurance, etc). For those who want to avoid that route, you can buy some companies that invest in real estate or REIT funds like Dilip mentions. However, they are also susceptible to the problems mentioned above this.

In terms of other investment opportunities like stocks or funds, think about businesses that will always be around and will always be needed. We won't outgrow our need for real estate, but we won't outgrow our need for food or tangible goods either. You can diversify into these companies along with real estate or buy a general mutual fund.

Finally, one of your best investments is your career field - software. Do some extra work on the side and see if you can get an adviser position at a start-up (it's actually not that hard and it will help you build your skill set) or create a site which generates passive revenue (again, not that hard). One software engineer told me a few years ago that the stock market is a relic of the past and the new passive income would be generated by businesses that had tools which did all the work through automation (think of a smart phone application that you build once, yet continues to generate revenue). This was right before the crash, and after it, everyone talked about another "lost decade." While it does require extra work initially, like all things software related, you'll be discovering tools in programming that you can use again and again in other applications - meaning your first one may be the most difficult.

All it takes in this case is one really good idea ...

Answer 3

Real estate investment is a proven creator of wealth. Check into the history of the rich and you will find real estate investment.

Starting your investment in multi-family is a great idea. It is a good way to gain experience in real estate while exponentially increasing cash flow. If you turn the properties over to a reputable property management company, your cash flow will be a little less but so will your headaches. (Expect to pay 8 - 10% of gross income.) You could start investing now by looking into discounted real estate such as foreclosures, tax sales, short sales etc while the market is still depressed. This way your return on investment should be higher.

From there you could expand into land development (i.e. subdivision) or commercial investments. Commercial properties with triple net leases can be a great low-stress investment opportunity (but they take more cash upfront).

Attending some local real estate investment classes would be a great idea for starters.