No wealth is complete without investments in some real estate, and it's such an age-old method of investing that it requires no introduction from me. In this post, I will be going over my unconventional real estate investing strategy that has given me successful results.
My Investing Philosophy Applied To Real Estate
If you haven't read my investing philosophy, please take the time to do so. The most important thing for me in real estate is to prioritise the monthly rental profits rather than the property's capital gains. This is very much the opposite of the conventional approach to investing in real estate. These are the steps that helped me achieve this when I just got started with a smaller budget:
- I needed to deposit 50% of the house price for the mortgage so that my monthly mortgage payment would become small. By making the monthly mortgage payments small, the monthly rental income will easily offset them and net me a decent size of monthly profits. This meant that the expensive properties in the big cities like London, UK were out of the question. My budget was around £50k, so if I excluded £10k for paying fees and taxes, £40k was what I could afford to put down for the mortgage deposit. In other words, I could only afford to buy properties priced less than £80k.
- I looked for a much smaller city with a track record of a growing population and steady real estate price increase.
- I wanted the ongoing maintenance of the property to be as low as possible, even if it costs me some monthly fees. For this reason, I ended up looking for only the flats (apartments) rather than terraced houses—the newer the building, the better.
- Real estate is location, location and location. I had to make sure that there were various amenities and places for work within the properties' proximity.
Pros / Cons of Real Estate
- The best part of real estate is that you can borrow a ton of money at a dirt-cheap interest rate to buy the property. The lenders are willing to offer such low-interest rates because they feel much safer with the property registered as collateral that they can take from you if things go south. Any investment with borrowed money results in leveraging effect that amplifies your returns.
- The real estate market rarely experiences a downturn, and it seems to only go up.
- Buying relatively new buildings and renting them out to the right tenants result in minimal ongoing management work. It pretty much becomes a passive income.
- The biggest downside to real estate properties is that they are not fungible or liquid. Meaning they are not readily convertible to cash. Suppose I wanted to re-balance all of my investments because I don't want to be biased towards any specific type of investment; that's not possible with houses. For example, if the house prices are appreciated significantly, I want to take some of those profits and move them to my Beta layer, but that's not possible. I can't chop off 30% of a house and only sell that portion to someone else.
- Although it rarely happens, if there arise any problems with the house, it's often costly and such a headache to take care of. I hate my investments forcing me to do work I don't enjoy doing.
My real estate investing strategy is the extreme opposite of the conventional strategies, which is to value the monthly cash income more than the capital gains of the properties. This doesn't mean I am being reckless and only looking for cheap places. There are many factors to still consider when you are considering investing in real estate: mortgage types offered by the lenders, all the costs involved in maintaining the properties, tax implications in your country, etc. If the investment doesn't result in a decent monthly income yield, I skip that opportunity.
Real estate was a great way to diversify my investments from just owning the stocks. However, the recent bubble-like price appreciation across all of my properties has made my portfolio completely unbalanced. Most people will see this as an opportunity to invest more into real estate and try to become rich fast. But I have been around the block long enough to realise that these are the times when you have to be cautious and reduce your exposure. I have seen many people who lost a fortune being too greedy in the real estate market.