Money, and lots of it.

volvoclearinghouse wrote:

dculberson wrote: I looked at buying rental houses and you still only get 5% - 10% after paying maintenance, taxes, etc. You're better off with an index fund; same return, lower risk, and WAY less work.

After 30 years, assuming a VERY conservative real estate appreciation, you've got a $400,000 property you can sell, retire into and sell your other home, etc. My guess is that the house would actually be worth more like 500-600k after 30 years, but of course it's subject to a lot of variables.

I agree with a lot of what you said, but remember that much of the non-metro areas in the middle of the country have real-estate that appreciates slower than inflation. A house can be a money-losing investment there even if everything goes great. Ask a guy with a home expected to appreciate 1% in the next year

The general rules I like to reference for buying a rental property are the 1-2% rule (you should be able to charge 1-2% of the property value in rent every month. And the 50% rule - 50% of the money taken in will go to maintenance. Mortgage and profit will need to come from the remaining 50%

OK, folks, thanks for all of the responses. I've made my recommendations to the person in question and you've all helped shape that. Now to get my ass in gear and actually figure out how to get some cash for myself.

volvoclearinghouse wrote:

dculberson wrote: I looked at buying rental houses and you still only get 5% - 10% after paying maintenance, taxes, etc. You're better off with an index fund; same return, lower risk, and WAY less work.

The deal with real estate is that a) you can get a loan to finance what would otherwise be something you couldn't buy with cash, and b) it can be a major tax advantage. Let's say you have 40k in cash. That would let you buy a $200,000 property, assuming 10% down and some closing costs, etc. Mortgage, taxes, insurance, etc might be $1500 per month, and rent would also probably be $1500/ month, so it's essentially a wash. But over 30 years, someone else is making mortgage payments for you. Plus, that mortgage interest is tax deductible, as is the depreciation on the property, as is every single cent you spend on maintenance, travel, etc related to it. After 30 years, assuming a VERY conservative real estate appreciation, you've got a $400,000 property you can sell, retire into and sell your other home, etc. My guess is that the house would actually be worth more like 500-600k after 30 years, but of course it's subject to a lot of variables. Even 40k into 400k in 30 years isn't a terrible return (7 to 8%, about what you mentioned above), even ignoring the tax savings- which are not insignificant. But yeah, it takes a bit more effort than simply watching the stock market ticker every day. Though I am skeptical of anyone getting that kind of return on "normal" investments. The stock market is, at best, like betting on horses. At least with real estate, like my grandfather always said, "They aren't making any more of it."

Trust me, I make my living owning commercial real estate and leasing it out and have done the math over and over again on residential and it doesn't make as much money as people think. Even people that are in it big time can be mistaken about their returns. Throwing out numbers makes it sound good but put them all in a spreadsheet with realistic losses for repairs, vacancy, etc, and the picture changes a lot. In the end you're lucky to be making 5% to 10% and a stock market index fund will return that over the same time period. And that assumes you buy the right real estate and charge the right rent and get the right tenants.

A stock market index fund is not "betting on horses" any more than real estate is. Both have reliable returns over long periods of time. A stock market crash can give you heartburn for a while but it won't call you at 3am on a Saturday telling you the toilet plugged up and is filling the house with E36 M3ty water.

The stock market won't let you write off the depreciation on a shiny new F350, though...

;-D