[PT’s note: This comprehensive article was contributed by Eric Bowlin from IdealREI.com. I first heard Eric on this Bigger Pockets episode. He lives here in Texas with me now and we regularly get together for lunch and talk real estate and business. Here’s Eric….]
It’s remarkable to see how real estate investing can create so much wealth. You see it everywhere–TV, the web, or your friend who randomly decided to flip a house, it seems like everyone is making money in real estate.
The real strength of real estate investment is in rental income, not market appreciation. Because real estate can be expensive, you may think that real estate investing is out of reach. But there are several ways that you can get involved in real estate with as little as $500.
Table of Contents
- Rent Out Your Home
- Do a Live-In Flip
- Buy a Turnkey Rental Property
- Partner with Other Investors
- Invest Through Crowdfunding
Most Investors Use a Shallow Analysis of Real Estate
But before we get into each method in detail, allow me to quickly go over the power of real estate investing. There are plenty of misconceptions.
First, you cannot simply compare house prices to stocks since appreciation is only 1 of 5 ways real estate generates wealth. Here’s an article from Lifestyles Unlimited about that.
Most investing sites will do some quick analysis and show you a graph like the one I made above. I’ve normalized real house prices and stocks to 100 in the year 1970 and also adjusted for inflation.
When you compare the two with this sort of shallow analysis, clearly stocks outperform real estate by a lot. Stocks nearly triple in value. Homes went up only 40 percent.
The Strength of Real Estate is Rent, not Appreciation.
Just as a silly example, let’s say you purchase a terrible rental property and it earns only a 4% return on the value each year (after all expenses, vacancy, etc). I personally would never invest in this deal, but it’s a good working example with easily attainable numbers.
Now, we need to adjust the charts to account for rental income.
The best way to compare is to add the total rental profit back into the price. It’s just like adjusting a stock price for collected dividends.
Taking a Second Look
Now, look at the following chart of cumulative rents + house values versus stocks.
Starting at the same point, once you add even a measly 4% return from rents each year, real estate outperforms stocks over the period.
To be clear, changing the time frame can easily change the…