Building Wealth with Residential Real Estate Investing

“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth”

- Theodore Roosevelt

I have been investing since 1996, but I relied solely on stock market investing for more than a decade. Residential real estate investing provides an opportunity to diversify my portfolio and it does so in a more tangible and understandable way to me than stock market investing.

My original plan for building wealth was nothing complicated or fancy, it was based on the common advice you read everywhere: asset allocation, diversification and dollar cost averaging. This basically means on a monthly basis put a certain percentage of your income (up to 20% for me at one time) in a portfolio of mutual funds that is distributed between stocks and bonds. My stocks were then diversified between large cap, small cap and overseas investments and my bond mix was composed of treasury and corporate bonds.

Just like so many other investors I have been up and down with the market. My first big downturn was first in 2000 with the subsequent recovery in 2003 and now of course the major downturn of 2008 and 2009. Although I have built a great deal of wealth with my stock investment strategy, sometime in 2006 I realized that our investments in the stock market alone were not going to be enough to reach our goals for building wealth.

So what can a guy with a full time job and a family to take care of can do to build his wealth?...I asked myself.

Why I Chose Residential Real Estate Investing

I decided to research what it was going to take to create real estate wealth. It’s no secret that real estate investing can be a source of wealth but there is so much information and misinformation about it that I needed to find out some facts for myself to make up my mind. Some of the conclusions I reached:

Real Estate is tangible, I can understand it, see it and I have a big influence on it. Unlike my stock and bond investments I can take actions and make decisions that will have a big impact on whether or not my real estate investment is profitable or not.

Can be started as a side business. Like I said, my main source of income is a full time job. Residential real estate investing can be done in the afternoons and weekends. Don’t fool yourself, it is a business and not a hobby so it will require time and effort but it is absolutely doable as a side business.

Tax shelter. I already have my 2009 tax returns to prove this. I can take deductions from my real estate investments against my income from my job therefore leaving a smaller amount of income for the government to tax. This alone resulted in a $6000 tax refund this year!

Low risk. Yeah, that’s right, low risk. I have gotten pummeled in the stock market in 2000 and again in 2008 and I attribute that to somebody else managing my investments over which I have no control or full knowledge. What I love about real estate is that I am in charge of analysis, financing, operations and marketing and I understand and have learned slowly how to do all of those. Therefore the more I learn and understand those the lower my risk is.

Diversification. Because I have no intention of eliminating my investments in the stock market, residential real estate investing provides exposure to a completely different market in a different way. That way my assets will not be concentrated 100% in one sector.

Potential. Monthly income from a rental, rehabbing and flipping, appreciation. There are many, many ways to make money in real estate. Since my goal is building wealth I have tailored my approach for this but it is good to know that I don’t have to be tied to one strategy.

Considering the current turmoil in the real estate market (2009) many would think that this might not be a good time for residential real estate investing. I certainly consider that but also know that in every market there are good opportunities and I believe this one is no different.

Because of this I cautiously tailor my approach to first find out what is working in this market and how I can align my strategy with the current reality. It is this versatility in this type of investing that makes me like it so much. Being conservative and always looking to the future is a formula I believe in and keep applying as I continue to move forward…which I intend to keep moving forward even in this market.

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