Reader Case: Real Estate Regret

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Today’s case study came with an irresistible subject line, and before you all start accusing me of making that headline up for the clicks, it was the reader who came up with it, so shaddup.

CASE STUDY – Real Estate Regret


Hello FIRECracker and Wanderer,

I binge read your entire blog! I am also an East Asian female who used to work in IT. And it’s really great reading about you guys! Finally I feel represented in the FIRE space!

I’ve been pursuing Financial Independence since 2015, but I only started reading your blog 1 month ago, since I am based in the US.

I am 30 years old and live in Boston, MA, USA. I work as a real estate agent and work 7 months of the year and travel for 5 months of the year. I only live in Boston during the spring and summer, and travel to warmer, cheaper, places during Boston winter.

My parents did not push me to buy properties, I did it on my own because I work in the field. But buying properties make my parents proud so I keep doing it. My parents are very intelligent and I knew that I could never surpass them career-wise, so I turned to real estate, because they know nothing about real estate and I thought I could forge my own path. Also, I HATED working in IT, I eventually got depression and mild back pain from sitting in front of the desk for 8 hours a day.

I enjoy fixing houses and dealing with tenants, but after reading your blog, I’m starting to regret making my real estate decisions.

I was wondering if I should sell my property OR keep my property and refinance it.

I have a long-term boyfriend, but I did not put his income or expenses here. He likes to work, his family is well-off, and he’s not interested in FIRE, and I’m fine with that. We keep our expenses separate. I do not want to have children.

Net Annual Income:

$25,000 a year (net) from working 7 months a year

I like my job, and I can work the other 5 months of the year if I need to. I can also travel and work online if I need to.

Monthly expenses:

$1500/month (I pay $830/month in rent)



1. Investment Condo #1 – bought for $290,000 in 2016.

Down payment + all expenses was $70,000)

Now worth $380,000 (after deducting all fees).

mortgage: $219,000

3.725% interest rate 30 year fixed

(I am refinancing to 2.75% interest – 30 year fixed interest rate this month, not sure if I should go through with it)

$375 HOA Condo fees

Tenants pay me $24,000/year. I increase rent by 2% per year + increase in condo fees.

$4800/year cash flow after deducting everything including possible maintenance costs, tax, mortgage, Condo fee, etc

$5400/year pay down equity – (tenants pay down my mortgage)

$5700/year in equity (Assuming a low appreciation of 1.5% per year)

I’m thinking of selling the condo now, but the condo is in a good location and my tenants are great (also the Boston market appreciates a lot per year – usually much more than 1.5%)

I do think the condo will keep appreciating despite the Coronavirus because it is located 5 minutes walk from 3 subway stations

The proceeds of the sale of this condo will not be taxed, because of the US tax code.


2. Investment Condo #2 – Condo bought in 2020 for $370,000. I don’t want to sell this, but if I have to, it can probably sell for $380,000 after deducting transaction fees.

($90,000 total cost including down payment + bank and lawyer fees + renovation costs + misc costs)

Condo is a 15 minutes walk to Harvard University, and I thought it would appreciate due to the location. The condo interior was originally very shabby but I hired contractors to renovate. There are no exterior issues.

$283 HOA Condo fees

rented for $2150/month ($25,800/year).

3.5% interest rate

$4800/year cash flow after deducting everything including possible maintenance costs, tax, mortgage, Condo fee, etc

$5400/year pay down equity

$5700/year in equity (Assuming an appreciation of 1.5% per year)


3. $30,000 in Vanguard Total Stock Market Index Fund (retirement account)

4. $5,000 in Cash

5. I have no debt other than 2 mortgages


My question is:

1. Should I sell Condo #1 and invest the proceeds?

2. Or Should I refinance Condo #1 and have the mortgage lower by $100? (This costs $3500 added to the mortgage)

Thank you,

OK so today is a little different, in that RealEstateRegret’s not asking me to do a FIRE analysis. Instead, she’s asking me to go over her real estate holdings and what to do (if anything) about them.

Now, it may not surprise you to know that we are not the most enthusiastic real estate investors in the planet. In fact, it’s important to note that we have owned precisely ZERO properties directly. And the reason for that is that we believe, after a careful examining of the facts and, more importantly, the math, we believe that for the vast majority of amateur real estate investors, owning a property directly makes no sense. Instead, we choose to own real estate in the same way that we own stocks: by indexing it. We use a broad-based Real Estate Investment Trust index ETF called XRE, which owns a wide swath of both residential and commercial real estate, collects the rents, and distributes it back to its shareholders (me). Right now, XRE is paying around 5.5% yield, which is pretty sweet considering I don’t have to swing a hammer or (shudder) interact with tenants.

So when we look at RealEstateRegret’s properties, we’re going to be comparing them to that benchmark. Can it beat a simple REIT? If yes, then great! Stick with it! But if not, then why are you doing all this work managing your property if the money could perform better in a REIT with zero effort?

Get it? Got it? Great!


The thing about real estate investing is that it’s not that simple to determine how well a property is performing. Unlike an ETF, where you can just calculate its yield by taking its annual dividend and divide the stock price. Properties are a little more complicated.

After years of travelling and speaking to many highly successful real estate investors, I’ve come to realize that there are 2 key metrics potential landlords look at when they consider buying a building.

The first is ROI, or return on investment. Return on investment takes the after-expenses net cash flow and divides it by how much you actually paid for the property. This metric is a bit of work to calculate because you have to know ALL the monthly expenses that would be incurred, including property taxes, maintenance, and of course, your mortgage.

So say a property costs $200k and you can rent it out for $1500 a month. You’d figure you could just take one number and divide it by the other, right? Not so fast. You have to take into account the mortgage, and therefore how much of your own money you actually put in.

So lets say you put in 20%, or $40k. The resulting mortgage, assuming a 30 year term @ 3.5%, costs $720 a month. Add in maintenance, property taxes, land transfer taxes, maintenance, and the monthly cost becomes about $1000 a month. So that means that after expenses, your net cash flow is $1500 (rent) – $1000 (expenses) = $500 a month. But you’ve only put in $40k to earn this income, so your ROI would be $500 x 12 / $40000 = 15%.  This would be considered a pretty attractive investment property to buy. Most real estate investors wouldn’t touch a property if they can’t get at least 10% ROI from it.

And secondly, we have ROE, or return on equity. Return on equity is calculated similarly to ROI, in that it takes the net cash flow of a property and divides it by the equity you own in that house. The big difference is that while ROI is determined at the time you buy the property, ROE changes as your equity in the house changes over time. The two biggest factors that effect ROE are your mortgage getting paid down (which increases your equity), or the house appreciating in value (which also increases your equity). Interestingly, an increasing equity in your house combined with a flat rental income actually has a negative effect on your ROE.

Let’s take that $200k house from the previous example. Using the numbers above we’ve calculated the ROI to be 15%. But fast forward a few years, and let’s say the mortgage being paid by the tenant increases your equity in the house by $20k. Simultaneously, the house appreciates in value by $40k to $240k. So that means your new equity in the house is now $40k (your down payment) + $20k (mortgage payments) + $40k (house appreciation) = $100k. If your rent hasn’t changed, that means your ROE is now $500 x 12 / $100000 = 6%.

Bizzarely, this hypothetical house is now performing worse than when you first bought it. This is because now, you have far more of your money tied up in this house than you did before, and yet you’re only earning the same amount of rent.

How Professional Real Estate Investors Manage Their Properties

Usually when I refer to “real estate math” on this site it’s in a derogatory way, and that’s because the vast majority of people investing in real estate don’t know how to run the math on an investment property. But over time, I’ve met and gotten to know professional real estate investors who manage dozens or hundreds of properties, and have made multi-millions on those deals, and I now realize that there is real estate math that helps you make good decisions. The thing is, those decisions can be wildly counter-intuitive.

ROI, which is the initial return on investments after expenses, is what they use as a guide when negotiating the terms of their mortgage, what contractors to use for maintenance, etc. It also guides them in calculating a price they are willing to pay for a property. The name of the game here is to keep your expenses and your purchase price as low as possible so you can bag a double-digit ROI.

And ROE, which is your return on equity over time, is what they use to determine when to remove equity from the property. That’s right, remove equity. Because if your property appreciated by $100k, yet you’re earning the same rent from it, it makes no sense to leave that equity in there. So rather than gradually pay off the mortgage, they will take out an interest-only HELOC, loan the money out to themselves, thereby reducing their equity on the property, and then take that loan and go invest in another property, or the stock market, or whatever.

This part is very counter-intuitive to a lot of people. Nearly all personal finance literature states that you should pay down your loans as quickly as possible. But for professional landlords, it actually makes sense to be permanently in debt. They see too much equity sitting inside a property as “dead money” since it’s not earning them any additional income. By loaning it out to themselves and reinvesting it in another property, they take that “dead money” and turn it into “live money”.

Investment Condo #1

So now that we understand the metrics professional landlords use to evaluate their properties, let’s see how our reader’s properties stack up.

Investment Condo #1 was purchased in 2016 for $290,000. Her tenants pay her gross rent of $24,000 a year.

Now let’s calculate her ROI. After expenses including mortgage, HOA, and taxes, she nets just $4800 a year cash flow. But she initially put down $70,000 to purchase this place. So that makes her ROI $4800 / $70,000 = 6.9%. That’s not actually too great, but it does beat a REIT paying 5.5%.

Next, let’s figure out her ROE. The condo has appreciated in price nicely to $380,000. She also indicates her remaining mortgage balance is $219,000. That means her equity stuck in the condo is $380,000 – $219,000 = $161,000. So that makes her ROE $4800 / $161,000 = 3%. Dang. That’s now much worse than a REIT.

Property #2

Investment Condo #2 was purchased this year for $370,000. She is currently renting it out for $25,800 a year before expenses.

Let’s calculate her ROI. After expenses, she is again netting $4800 a year from her tenants. But because of the renovations she had to do to fix up her property when she bought it, she ended up putting in $90,000. So that makes her ROI $4800 / $90,000 = 5.3%. A little under a REIT.

And finally, her ROE. Because she bought her condo this year this number isn’t going to be all that different from her ROI, but she notes that should could likely sell it for $10,000 more than she purchased it for, probably from the value she added to it while renovating. So her ROE would be $4800 / ($90,000 + $10,000) = 4.8%. Again, still under a REIT.

What Should RealEstateRegret Do?

So what does this tell us?

Investment condo #1 had an OK initial ROI, but capital appreciation and the mortgage being paid down has eroded her ROE to only 3%. You can make more passively with a REIT.

So as counter-intuitive as this is, not only should she refinance her mortgage to a lower interest rate (if she can), but she should take out an interest-only HELOC and get her equity out of the condo. Lenders in the US will allow you to have a maximum LTV (loan-to-value) ratio of 80%, so if she can get her equity in the condo down to 20% of it’s current value by HELOCing it out, that would bring her equity down from $161,000 to $72,000, and that would bring her ROE back up to 6.7%. 

As for investment condo #2, I’m not too excited about it. I think she purchased it at a price that was a little too high, yet after expenses she’s only making as much as condo #1. As a result both ROI and ROE are below the returns on a REIT. So normally, the logical conclusion would be to sell it. Only she just bought it this year, and I know transaction costs would likely leave her at a loss. So what can she do?

The ROE number in this condo isn’t the problem, her ROI is too low. Her ROI on Condo #1 was 6.9%, so if we want Condo #2 to perform at the same ROI as Condo #1, we need to get her net cash flow up to $90,000 x 6.9% = $6210 a year, either by increasing the rent or reducing your operating expenses. If she can’t figure out a way to do that, then it doesn’t make sense to keep owning this one.


I think if this analysis shows us anything, it’s actually really difficult to make money being a landlord. Not only do you have to be good with finding and keeping tenants, you have to be handy and able to fix things yourself (or know someone who is), and you have to understand how to use and keep debt properly.

Right now, RealEstateRegret is making a total of $4800 + $4800 = $9600 a year from her rental income net of expenses. But  $161,000 (equity in condo #1) + $100,000 (equity in condo #2) = $261,000 in equity is being used to make this happen. Unless she sells, increases rent, or HELOCs that money back out, it’s stuck. That means right now she’s making $9600 / $261,000 = 3.7% on her money. 

By contrast, FIRECracker and I own a combined total of $50,000 in XRE. That fund pays me about $2700 a year. That’s a return of $2700 / $50,000 = 5.4%. And I don’t have to do anything.

So that’s my analysis. What do you think RealEstateRegret should do? Let’s hear it in the comments below!

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67 thoughts on “Reader Case: Real Estate Regret”

  1. I’m curious about the statement she made: The proceeds of the sale of this condo (#1) will not be taxed, because of the US tax code.
    Huh? Investment property IS taxed unless she intends to do a 1031 exchange to delay this. Can we get more clarification on that?

    1. Technically, you’re right about that. An investment property should be taxed.

      Reading between the lines of the post, the reader may have moved in with her boyfriend and this may have been her condo (Condo #1), prior to that. Perhaps she started renting it out afterward.

      She’s probably expecting to meet that IRS Section 121 exclusion based on primary residence sales. Since it was bought in 2016, perhaps she hits that 2 out of 5-year requirement.

      Call it a guess, though.

  2. I wonder if there’s an error in your calc. For example, condo #1 says 4800 cash flow after “all”. Does this include deduction of the 5400 principal payment? If you add that back, the cash flow and yield is great…

    1. Is a principal payment considered cashflow? Strange. Last time I checked, It’s still money out of someone’s pocket unless they decide to refinance the money back out of the house.

      So no. It’s not cashflow. Equity takeout (if that’s even a possibility)? Sure. Cashflow? Absolutely not.

    2. Principal payment is not cash flow. Cash flow is cash in your hand. Principal payment requires an additional step of either selling the property or HELOC-ing it out to turn it into cash.

      1. Wanderer this is right but the expected/actual appreciation on the property should be factored in to the ROE and ROI as residual value at the exit of the investment. You can’t continually take out the equity, and future equity not at all. Principal payments contribute to the residual value, which has it’s own appreciation over time. Appreciation tends to follow inflation, but this depends a lot on the market.

        I am not a real estate investor because I don’t like something so illiquid, and I much prefer the simple, 4-fund Vanguard approach outlined by JL Collins. It seems like some people do very well with it though and like an higher scope of control over the investment.

        I also do not own REITs I’ve owned a few in the past and didn’t do well with them. With the huge shifts in retail space I’m not comfortable with the uncertainty.

  3. Thanks for re-convincing me that real-estate is not as simple as most people say by showing how those-who-really-understand do their analysis via the detail calculations above. An eye-opening read.

    1. I agree.

      Also, keeping ROE high strikes me as easy to do when the house market is going well (in fairness, most of the time) but something that would be very difficult to do in a downturn. You would probably have to sell down a lot of other investments to get enough equity in the property for a bank to continue lending to you (and when house prices fall suddenly, you usually find the other investments do too). Rebalancing a portfolio that requires banks strikes me as very stressful, risky and complicated. I would be constantly on edge at the possibility that a uniform drop in the house market would leave me near optionless! If all house prices have dropped 15-20% and you only had 20% equity in each, what do you do? Have you lost everything? The problem is the same whether there is a portfolio of three properties or thirty (unless I am missing something or there is an insurance policy you can take out for this).

      I wish these landlords well but don’t think I have the gall to compete with them!

  4. Sure, if she takes out a Heloc on condo#1, it will make her ROE look better. The real question, though, is how much will she pay for the Heloc. If it is 4% (Heloc rates are higher than mortgages) for example, she will need to deduct that cost from whatever she invests in. A REIT paying 5.4% – 4% would yield 1.4%. She will also gain/lose money depending on how the REIT changed in value when she decides to sell it. Of course, the Heloc money could be invested in anything, maybe something better than a REIT, that allows her to diversify from her large concentration in real estate.

    1. HELOCs are also loans that are callable by the lender at any time…could be a poo sandwich situation if the loan is called and the underlying investments are underwater and have to be liquidated at a loss.

    2. Correct. The interest payments on the HELOC would need to be added back to the expenses column in order to calculate the new ROE value. The interest should be deductible, but as another reader astutely noted it would also be theoretically callable. These are the risks real estate investors have to live with.

  5. Thanks for confirming what I already believed: that it’s tough to make money in real estate. We did pretty well over the last 5 years, largely due to luck, through a combination of Airbnb and flipping bank repossessions, but both are definitely not passive income, they take work!

    We have currently offloading our portfolio and won’t be buying any more!

    1. Your active income like real estate better outpace passive income. RE varies wildly by area, and which strategies you employ. I sure wouldn’t stick with it for 5% as an active investment. But there ways to make 20%- or more. I’ve certainly done well. But it isn’t passive. I target ROE of 25% in year 1 and don’t drop below 15% in the first 5 years. My flipping cash makes 20%-25% per flip, typically twice a year. for someone like me with modest income those numbers are necessary to accelerate retirement.

  6. Great analysis FIRECracker and Wanderer – clear, clean, concise and to-the-point as always. I learned a bit more about “dead money” from reading this post!

    Other points to consider are:
    1) Liquidity – real estate is way less liquid than opening my brokerage account and hitting the “sell” button!

    2) PITA factor: dealing with tenants, rental applications, issues and (heaven forbid) evictions is a major source of PITA factor and also takes time.

    3) Time value: The ROI calculations don’t take into account time invested as well, which could be used in other ways to earn real estate commissions in the case of this specific case-study subject (I was going to say case-study victim, but I resisted the urge). Time is money, as they say.

    If I were her, I would sell and follow ETF/REIT investing strategies from both you and the venerable JL Collins, relax and enjoy the journey to FI!


    P.S. My son still likes Waterloo Comp Eng after completing 2B!

  7. You should have included the equity increase in the annual return (mortgage pay down + appreciation). That draws a completely different picture.

    1. Sigh. You missed my point completely.

      Professional real estate investors don’t count equity increases as part of their return, because that requires you to either sell or HELOC it out to crystallize it.

      Only amateurs use equity to justify their purchases.

      1. I usually love reading from you, but when it comes to real estate you’re so far out of your competence zone that it’s almost painful to read.

        The fact is, comparing the cash flow of the condos to the cash flow of the cash flow of the REIT while forgetting about the equity is about as dishonest as saying that stocks are bad compared to preferred because their dividend is lower.

        You need to sell, HELOC or refinance to access real estate equity. So what? that might be an issue once retired, but during the accumulation phase that’s the mother of non-issues.

        What’s your point that I missed exactly? You’re saying “REIT is better because 5.4% vs 3.7% + other reasons”. The other reasons stand, but the 3.7% is bonkers, so RealEstateRegret can’t make an informed decision based on your post.

        But as you say, let’s “math shit up”. Fully simulate 5 years of ownership of both condo, then sell, and see how much money she ends up with. Vs 5 years of REIT ownership with the same initial investment.
        With her numbers, direct ownership comes far ahead, despite the lower cash flow.

        “Only amateurs use equity to justify their purchases.”
        Some amateurs delude themselves into thinking that the 10% growth of the Canadian housing market is here to stay to justify their purchases.
        That’s not the case here, RealEstateRegret did a reasonable assessment of future growth, and the numbers makes a compelling case to keep the condos if she can deal with the annoyances of being a landlord.

        1. Excellent points. Factoring in annual appreciation equal to inflation rate in a mature neighborhood isn’t foolproof, but it’s a reasonable assumption. RealEstateRegret might be better served keeping both properties if even modest appreciation were included.

  8. Dear Real estate regret: As much as I enjoy FireCracker’s enthusiasm for personal finance, tread carefully here. As the other comments already hinted at, there are more aspects to consider to your situation and the analysis is dangerously incomplete. Do yourself a favor and talk with a certified financial planner whom you pay by the hour so that he’s acting as a fiduciary. (Yes, it’ll cost you a few hundred bucks, but you stand to lose thousands by acting on incomplete advice.) Good luck.

    1. Dear FiProf,

      Your critique of MilRev’s take would be more compelling were you to take the trouble to highlight any specific shortcomings you see in the analysis. I for one would welcome your thoughts.

      1. They did not account for the 5400 towards the principal mortgage payment nor the 5700 of increase in value. Think about it. How long would it take for her to achieve financial independence making 25,000 a year. Real estate is her best option. The condos she has are increasing her net worth by 2650$ each month. This was not mentioned in the analysis.

          1. Please tell me how you accounted for it. I understand what cash flow is. But the readers question isn’t which investment produces the most cash flow. The question is would she be better off in her pursuit of financial independence if she keeps her condo or sells it. From what I can see your response did not take into account what she is paying down in her mortgage or increase in property value. I don’t know any real estate investor who doesn’t factor those things in their investment.

    2. I completely agree with this comment! Love Firecracker but as a successful property investor myself, the calculations here are not complete and provide a one sided point of view, selling on wrong advice could be very costly.

      1. I think the disconnect between you and me is that there are different styles of real estate investors: Passive (REIT), landlords (buy-and-hold-forever), and flippers (buy-and-sell). RealEstateRegret is a landlord, so that’s the perspective I did her analysis from.

      1. Fortunately that includes me. From real estate. In 4 years. While making 52k w-2. It isn’t passive- but not REIT can touch a competent investor in a decent market.

        Stick to your core competency, and it isn’t real estate.

  9. Real Estate is long term, so without crunching the math, both time lines are too short to judge. And its no different than stocks, except for the fact that Real Estate is highly leveraged. Real Estate, and hence REITs average about 6%, over a 20 year period, and so do Stocks. But 2 things come to mind that don’t make sense.

    1. why do you rent, when you own condo ?
    2. You have too much investment in one asset class… not good.

    When I first purchased in 2012, the first 3 years were at a loss… but that turned around in the next 5, and now I am ahead. But it was just luck, not skill, its what markets do over the long term.

    Thank you for the math, its a bit over my head, so will take some time to study.

  10. I’m sure this post took some extra research, since your organic knowledge is about stock investment. Solid analysis, I learned a lot.

    I’d worry a little about debt risk in her situation as well. Her annual income and cash reserves don’t give her very much breathing room to deal with vacancies and other renter issues, especially if she were to use advanced strategies like interest only HELOCs to extend into more properties.

    One nice thing about REITs is that they dont require a monthly payment. They may underperform, but theyll never force you to declare bankruptcy.

    1. I agree with Mr. Campfire. At a minimum, readers should be aware that with additional leverage comes additional risk should the owner–for whatever reason–not be able to make payments on the loans during a crisis.

      1. Permanent leverage seems to be required for professional real estate investors, so that’s something they’ll have to get comfy with. Keeping a sufficient cash reserve to offset bad tenants, foreclosures, etc. is a must, but as they say, “with great debt comes great responsibility.”

  11. As a professional real estate investor, I’d like to point out how the Wanderer is not giving this reader a fair analysis. I’d also like to point out that Boston Fire devotee is asking the wrong person for advice.

    As the Wanderer points out, he is not a real estate investor! Don’t take this the wrong way Wanderer. You are crushing it with your expertise in your niche.

    That being said, here is my two cents: Actually, this advice is not worth two cents since it’s free.

    One, what is your goal with the real estate? It sounds like you are more focused on freedom than being a slave to a job. Being a real estate agent who only works 7 months out of the year, I like how you spend the other 5 months in warmer climates. This sounds like a wonderful life to me.

    Two, you mention you like dealing with tenants and fixing your houses. Why would you regret owning a business that you enjoy?

    Three, let’s take a hard look at how you make money with real estate. 90% of people have no clue how real estate actually makes you money. So, don’t feel bad.

    Direct real estate is considered the IDEAL investment. This is simply an acronym for:

    1. Income after all expenses
    2. Depreciation
    3. Equity build up from tenants paying your mortgage
    4. Appreciation
    5. Leverage.

    Let’s take a look at all 5 of these benefits for Boston Fire.

    Income after all expenses is $9,600. This is a solid return for a high cost of living area.

    Deprecation benefit. Let’s keep things simple and assume we are only factoring in the purchase price and no renovations. We will also take out 10% of the price for land since you can’t depreciate land. Depreciation basis is $603,000. Tax code allows your to write off this investment over 27.5 years (it’s longer for commercial properties). Annual tax savings is $21,927. In other words.

    Boston fire can write off $21,927 from her tax return for simply owning 2 condos. This is huge! It’s like contributing the same amount to a 401k.

    Equity build up by tenants is $11,100. This will increase each and every year as more and more principal is applied to the mortgage. If you do nothing over 30 years, your tenants will pay off $500,000. Not a bad forced savings plan.

    Appreciation is what I consider icing on the cake. Historically, appreciation has averaged 3-4% nationally. Let’s assume the low 1.5% growth rate. On a $670,000 investment, that’s $10,050.

    Leverage. Boston fire controls $670,000 in assets with only $160,000 down. Plus, the bank will happily take on the risk and loan you the money at a pathetic interest rate between 2.75% to 3.5%.

    Tell you what all of you index investors, I want you to go the the bank and ask your banker to loan you $670,000 to invest in Vanguard Index funds with only 24% down. Make sure you tell them you only want to pay 3.5% over 30 years. Ok? Let me know how that goes.

    Time to add up all the benefits:

    Income $9,600
    Depreciation tax write off $21,927
    Equity build up as tenants pay off your debt $11,100
    Appreciation (very conservative) $10,050

    Total annual cash return on investment $52,677.

    Return on investment 32.9%.

    Can you see why buy and hold real estate investors become millionaires in ten years or less?

    My advice, if you like real estate and make money from real estate, why not 5x it? Find another deal and use the equity from property #1 as your down payment. Just make sure it’s a solid deal.

    You don’t have to hit a home run, but you want to at least hit a double. Consider a duplex or a triplex for more cash flow. It will require more management, but offers a solid return on your time invested.

    Over ten years, you could replace all of your real estate agent income and travel for 12 months out of the year.

    Hope this helps Boston Fire!

    1. Thanks for your reply! I love this blog and have learned so much reading it. However, I always felt it makes sense to diversify my portfolio and therefore to add real estate to it as well. Before the coronavirus, the loan rates in Europe were ridiculously low. I managed to get a rate of 1,21% for a 20-year loan with a 20% down payment. Currently, I don’t make a lot of money since I the rent I receive pays of my monthly down payments, but my thinking was always that basically my tenants are paying off my property for the next 20 years. After 20 years I’ll own the property, which by that time will have increased in value and my rent will be indexed as well. I guess after reading your reply I was not wrong in assuming so..

    2. Yikes, there’s more red flags than China in that comment.

      Depreciation is not cash. Equity build-up, and appreciation is NOT cash. If you’re a buy-and-hold real estate investor, you’re going to need to HELOC it out to benefit from it. That’s the point I was making in this reader case.

      1. Actually, depreciation is cash. It lowers your tax bill. Just like a 401k/IRA contribution. If you add in deprecation plus cash flow, this alone improves her cash on cash return more than your analysis. I realized you hate real estate, but this is simply the cold hard facts.

    3. This guy knows way more than Wanderer. I agree with him all the way.
      I too used to sell Real Estate and now own several investment properties and stock and Reits. I’m retired also and would not sell my properties.

  12. Definitely think you should keep both Condos. You are not a big time real estate investor making dozens or 100’s of real estate transactions so you cannot use the math that they use. You have a low income(from a banks point of view) and you may also be considered self employed, Which makes it difficult to qualify for mortgages so tread carefully because you may not qualify for a mortgage again.
    4800 cash flow, 5400 towards principal and 5700 increase in value is a great return on investment. I absolutely disagree that small time real estate investors need to worry about ROE. You are in the accumulation phase of your FI journey, and since your income is low, real estate investing is the best way for you to FIRE. The principal you pay down on your mortgages and the increase in value should be considered. 4800+5400+5700=15,900/12=1325 on each property per month! You increase your net worth by 2650$Per month! If you sold both and invested in REITS you would increase your net worth by 783$ Per month. You invested in a great area, and enjoy real estate investing. Stay the course.

  13. You are young and want your freedom now rather than later. You are afraid of commitment or your long term boyfriend is afraid of commitment. Maybe he wants kids. FI is nice but I think you need to figure out this thing called LIFE before you start thinking about FI. Once you do everything could fall into place.

  14. What is the difference between a HELOC and a cash out refinance? Graham Stephen talks about cash out refinances to pull equity from one place, then turns around and yses that for his down payment on the next property.

  15. Great analysis. Another super simple way of looking at it: currently making $9,600 and not passive with all the oversight. If you instead sold and dumped that $261,000 equity in a broad based index fund and assume 7% growth – using the 4% “rule” you’d be able to withdraw $10,440. Much more passive, more diversified, and more money.

  16. Hi RealEstate Regret,
    I am like you, I was into rental properties buying them cheap, doing them up and renting them. Than when I read this blog I sold everything and put money into shares for about 3 years. while the returns were good I found I missed real estate. So I took half of my money out and invested in rental properties again. So I get best of both worlds. I am 36 now and may sell my properties when I feel I cant do it anymore and invest 100% in ETFs.

  17. I think the usual (Google-able) term for the first calculation in the real-estate space is “cash-on-cash return”. You can get from the second calculation to the industry-standard “cap rate” if you backed out the borrowing and folded in the costs of preparing for the first renter.

    I think RER’s better served by reading Paula Pant’s excellent write-ups on these calculations, and why she ignores cash-on-cash-return in favor of cap-rate. She also shows calculations from her own properties.

    My answers to RER’s questions are identical: “What are you trying to achieve?” Without knowing *why* she asks, what she wants, no advice will be helpful. Might as well sing “Oh Canada” in response, since that’d be just as insightful and useful. 😉

  18. If I missed these points in previous comments, I apologize. I didn’t see anyone talk about the possibility that more colleges go on-line, reducing demand for properties near colleges. If I thought rents were going to go down or stay flat for a while, that would impact my decision.

    While I like and own real estate, very similar to hers (3 condos), I’m worried about changes to laws regarding tenant/landlord relationships, rent controls and the like. I’m hearing from some property managers that being a landlord is getting harder with more legislation, lawsuits, and the recession going on now.

    I’m considering getting out of at least one of my units, but I have not considered a REIT as a desirable investment option right now, as a lot of small and medium sized businesses are going out of business, so I expect a lot of commercial vacancy.

    Thank you for the analysis. You brought up several points I have not considered yet in my decision.

  19. I want to know where she is getting a mortgage for an investment property for less than 3%. The low rates you see posted everywhere are for primary residences. Or are the posted rates artificially low with loan origination fees hidden in the paperwork? I think perhaps the op did hold the first condo as a principal residence in the past, it might be wise to also look at the opportunity cost of giving up that tax savings if she holds it much longer.

  20. Best to stick to stock market investing. Your bias against and lack of experience with RE shows in every RE analysis.

    If you only take advice from millionaires, maybe consult some who have made money with RE. I am a multi-millionaire as a result of RE investing (and we have stock market and business investments as well), but I’m also an internet anonymous stranger. I think the links to Paula Pant should assist and you do need to account for both equity paydown and appreciation earned with leveraged funds, which is far beyond what you’ll get with cash investments in the market. What matters is not cash flow, but overall ROI adding to net worth until you are in a position to rely on cash flow to replace income.
    The OP still needs to work for her cash flow from income so she needs to build net worth and her RE will do this faster than cashing out and investing in the market will.

  21. Really interested to see the calculation on someone who bought a condo in 2013 in Toronto vs taking the downpayment and putting into the REIT you mentioned. My 650,000 condo doubled in value and I collect a similar yield. Not sure I’d be better off if I just bought this ETF. Looks down over that period.

  22. Firstly, I love the blog and well done for your FIRE success.

    I have a different take on the real estate. I own an investment property in a town where home values historically double every 10 years and the area wasn’t exposed to the property crash of 2008.

    I’m a big fan of index fund investing but I see the advantage of property rentals IF you can find a great property manager which I have been lucky enough to do.

    Over time, yes the property ROI may not be the best (I paid retail for mine) but, the appreciation is more secure than stocks. Even the bond funds prices dropped a lot during the March 2020 correction.

    Also, you can leverage property to whatever degree you feel comfortable. I ‘m ok with 20-30% debt on rentals.

    REIT’s can be pretty volatile and also if the markets correct in retirement years, that can be emotionally draining.

    I think a combination of both rental real estate, peer to peer lending, index funds and a small punt on cryptocurrency is optimal.

  23. The analysis by Wanderer seems to be biased against real estate (probably not intentionally) and doesn’t include all the various ways real estate can be beneficial such as depreciation lowering your taxes and appreciation building you equity over time. Other folks have done a good job of pointing those out. But, there are a couple other issues that need to be considered.

    Don’t forget about large repairs that WILL need to be done if you keep the real estate long enough. New roof, HVAC, etc is a matter of time. Also remember that you could have vacancies or bad tenants that don’t pay or tear up the property. Many investors have a certain % they assume for both vacancies and repairs.

    It seems like the properties you own are likely to be a quicker way to build your net worth than selling and investing in stocks. They are also a bigger headache and more likely to cause you to go bankrupt. If you lose your job, tenants quit paying and you need a major repair all around the same time do you have the cash reserves to keep going?

  24. I think this site is a bit biased and/or generalizes real estate a bit too much to objectively analyze this, but there is also a bit of truth to what is said.

    Since I personally don’t invest in real estate solely for long-term appreciation, I would sell and reinvest in a market where the median sale price is much lower ($150-200k instead of $600k+). If I had $70k tied into a property, I would expect a higher ROI on the cashflow. Many modern real estate investors seek a 20%+ ROI in annual positive cashflow (after all expenses, vacancy reserves, repair reserves, capex reserves, maintenance reserves, etc being paid for by the rental income).

    I’m getting 24% ROI on my first property alone which I overpaid for back when I didn’t even know what I was doing. It is neither unrealistic nor uncommon for a real estate investor to seek an *infinite* return by forcing appreciation and then cash-out refinancing to get 100%+ of their invested funds back out while sacrificing some of the cashflow. This is almost as common of a strategy nowadays as flipping houses.

    All real estate investments, markets, strategies, goals, and investors are not the same.. just like not all stock strategies are the same.

  25. Commercial real estate transactions differ significantly from residential sales due to their complexity and unique considerations. Before diving into the selling process, it’s crucial to have a clear Industrial Property understanding of your objectives and expectations. Whether you aim to cash out on investments, relocate your business, or downsize your portfolio, defining your goals will shape your selling approach.

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