I’ve had my real estate portfolio for 9-years and I have some big lessons to share!
Updated Annually – Last Update June 2021 – 9 years now!
Over the past 9-years, I’ve invested $350,000 of cash into my real estate portfolio experiment to learn some lessons 1st hand.
Originally, these lessons were for me but lucky for you I’m going to share everything!
- How my real estate income has changed over the years
- Income and expenses from different types of homes
- How long it takes for a rental home to turn profitable
- How to brace yourself for the bumps.
- The things I’ve learned along the way.
Shortcuts for this article:
- Why did I do this expensive real estate portfolio experiment?
- Big 3 Lessons
- An overview of my portfolio
- Growth Property
- Low Income Properties (<$800 rent)
- Middle of the Road Properties ($1000 rent)
- Expensive Property (>$400,000 purchase price)
- Effects of Appreciation
For a quick recap: Investment in rental properties is a good path to financial independence for a bunch of reasons. Here are three big ones:
- Mortgages are basically money magic.
- Rental expenses are plannable
- Growth – home value and rent income grow over time.
My $350,000 Experiment
I’m a scientist at heart and I have to experiment to live.
I even experiment with the money that I depend on to live. I can’t help myself.
So over the past 8-years, I have been testing different kinds of rental houses to see what works best for retirement.
I purposefully bought different kinds of houses and documented their results. WHY!?
It was supposed to be just for my future investments…but…
For you, this is amazing since you can learn from my experiment without spending your own $350,000.
Why did I run an experiment instead of just going all-in on type of house?
I thought it was going to take longer to save up to early retirement. Meaning a 5-10 year experiment would be worth it. I was wrong and I had enough money to retirement after 5-years…
So the only way to make my experiment worthwhile was to tell others about it.
Below you will see real numbers from the different kinds of houses I bought and what you can expect from the investment types.
The good AND the bad: 3 Big Lessons
I won’t hide any ugliness but I reduced the data to make the plots manageable. Not everything is beautiful in real estate but you have to know the ups and the downs before you take the plunge. Why? Because if you want out of the real estate game, it’s expensive. There are all sorts of fees everywhere in the world.
With each house, I will point out examples of the 3 big lessons you should learn before you get into real estate:
- Income will bounce around a lot if you don’t have many houses.
- Your first year or two of owning a house is horrible.
- Different types of houses match different goals.
Quickly before I even get started:
I like real estate for a bunch of reasons.
- It’s timeless and always a good investment
- Mortgages are amazing
- Leverage can really skyrocket investment returns
- You can match a mortgage to a house to make ANY house profitable
I feel so strongly about it I made a graphic to really drive it home.
Overview: My real estate portfolio
I’ll start with a high-level summary of the results over the years:
Important note: These values aren’t what you would see on my taxes, nor does it include my primary house. These are my actual cash flows + principle payments, because that’s real money!
- 2012 – Bought my first rental house in all cash.
- I watched this house for a few years to decide if rentals were good.
- 2015 – I decided rentals were indeed awesome.
- Bought two $40,000 houses via a mortgage on my first house.
- And a $60,000 duplex to close out the year.
- 2017 – Went bigger
- Two more $60,000 homes.
- Heavy leverage into an expensive house ($530,000)
- 2018 – Purged a bad house
- Sold one $40,000 house that wasn’t doing so well
- 2019 – Consolidation
- Almost paid off 2 small mortgages
- Raised rent + renovations causing 2 tenants to leave*
- 2 large optional expenses*
- *I was torn about these optional expenses. I made too much money in 2019 and could handle the fees. Now, rent is way up in 2020.
- 2020 – Covid
- I was planning to leverage everything to buy an apartment this year…but covid messed that up.
- My income was mostly unaffected. My biggest house was in an area where covid obliterated housing demand so I reduced rent and made some renos.
- My cheapest house had a giant plumbing repair, resulting in ~$0 out.
- 2021 – Leverage and Expand??
- I can’t get the blanket loan I want with Covid economics raging (the loan is too weird and banks all pass me by).
- Housing prices are sky high and I’m selling “Medium rental #1”. There are too many big upcoming expenses for me to justify keeping it for the money I can get (x2 purchase price)
- My expensive home in a very covid affected city is still on a big rent discount. Oh well. Someday it will end.
- Income wasn’t great but holy appreciation! It clocked in at over $200K this year on my rentals alone.
After many years, this has left me with about $45,000 of cash flow and about $1M of “asset”
Before I even talk about the individual houses, I’ll point out a trend you’ll see:
Year 1 – You will lose Money
In my breakdowns below, the first and second year of owning a house I almost always lose money. Learn to live with it.
Maybe you’ll get lucky, but here are the reasons:
- The house probably comes untenanted.
- People cover up issues to sell houses. You’ll find something in the first 2 years.
- You’ll accept a house with known repairs to get a good price.
Of course, even though I consider it a given. I try to mitigate it:
- Every house is inspected
- I push hard to get any issues fixed by the previous owners before buying
All-in-all, the first year is a crap-shoot, but it’s not that bad if you’re prepared for it.
Year 2 – Won’t be a bumper year
Year 2 is usually when the bugs are almost worked out.
Things aren’t up to their full potential, but you’re close.
Twice, I had to replace a furnace that was ‘old but perfectly fine’ when inspected.
Just don’t expect year 2 to be perfection.
Then it’s smooth sailing…except for the occasional surprise repair – but you can afford them as long as you plan for them.
I’ll break down the income and expenses for each of my houses below so that you get an idea of how they money ramps up over the years (and what a surprise expense looks like.)
Real Estate Portfolio Pt.1: High Immigration City
My first rental home! This really takes me back to the good old days.
I was saving up for a place to live and I decided to blow all the money on a rental house and start my real estate portfolio.
It was a great decision. Would do again 10/10 times.
- $60,000 purchase. $260,000 current price.
- All-cash purchase
- Good price because of the whole 2009 US housing fiasco.
- A city with a high population immigration
The 1st year I lost some money due to repairs, 2nd year was mediocre. The furnace and plumbing turned out to be kind of screwy. Year 3 everything had settled in.
The area is on the up and up due to job growth so I have had no vacancy ever.
I haven’t raised the rent fast enough to match the market but my tenants have been great to me so I was being slow on purpose.
Overall, investing in a great city led me to:
- Zero vacancy
- Medium cash flow
- Compared to rent I could charge for a $60,000 house elsewhere.
- Rent rising every year
- Amazing for the long term
- Huge property appreciation (doubled every 4 years)
- Also nice long term
- Pricing rising too high to buy more houses after a few years.
- Very annoying. Buy more houses at once.
Plan for Surprise Repairs
The only sad thing since getting the house all settled was a hefty surprise repair.
The furnace/AC completely broke down in 2017 and urgently needed a $6000 replacement unit. I only get about $6000 of profit in a given year from this place so I made almost no money that entire year.
Actually that expense showed up the only time I had ever depleted my maintenance fund (to buy another house). That was the worst timing possible…so that was bad.
My lessons learned from this house:
- Rentals are great
- Growing cities are investments for your future but…
- …if cash flow isn’t large your income can be volatile from repairs.
- Large urgent expenses can come out of nowhere and at the worst times.
- Be prepared, always have money ready.
Real estate portfolio Pt.2: Low Income Housing
End of 2015, I took out a mortgage on my first all-cash house and bought two cheap low-income houses with that money.
Overall, it wasn’t great and I wouldn’t recommend buying super cheap houses (these were ~40K$ each and rented for <$800/mo) unless you read this:
I wrote an article about making low-income housing work because it’s not straightforward.
I wanted to test out cheap housing since house prices nationwide had gone way up and these houses looked really good on paper.
The areas these were in weren’t as nice as my first place which led to issues in the end.
Cheapo house #2 had a lot of issues with tenant turnover so I ended up selling it off in 2018. Repetitive turnover based fees made the house useless and it’s common for low-income housing.
It’s why I generally recommend against low-income housing now.
That whole year was a loser since I had to do some repairs before I could sell it. It’s my biggest failure to date since I just broke even with the sale.
Cheapo house #1 was as good as on paper. $5000 cash each year from a $40,000 house is pretty amazing. A 50% success rate is too hit and miss for me so if this tenant ever moves out. I’ll sell this house too.
The lessons from these houses:
- Don’t go too cheap.
- Tenant turnover can kill you: Read this.
- Higher turnover increases the workload
Real Estate Portfolio Pt.3: Middle Class
I shifted my real estate portfolio purchases up to avoid high turnover. I call it middle class or medium price points (renting around $1000-$1200/mo, which at the time was $60,000-$80,000).
Neighborhoods were nice enough I would live in them, but not so nice that I would be happy about it.
My goal was to maximize monthly cash flow without the pain of high turnover. All-in-all, going middle of the road has been a good and netted me about 11%/yr average returns (8% cash + 3% appreciation).
Medium rental #1 is a duplex. The sale price on it was pretty good ($50,000) but everything was on its last legs or broken. So I knew I had a few years of big repairs coming (old roof, old furnace, leaky windows, old AC, carpet, paint).
Even with all that I have still always turned a profit** which was what I was hoping for! Eventually, I will run out of things to need replacing…someday 🙂
**2019 was a loss but that was by choice so I don’t really count it. I renovated to increase rent and get ahead of expenses, which actually led to me selling it in 2021 for $120K
- Middle-class homes turn profits even when issues come up.
- Duplex maintenance/repairs are expensive!
More Middle Class
Medium rental #2 has been as planned, (ignoring year 1 and 2). Not really much to say here. It’s also always been profitable. Success!
- 2018 – The AC broke down and was replaced but life went on.
- 2019 – Whacked the tenants in 2019 to keep up with utilities. But they were professionals who got into shape.
- Replaced the siding/roof after 3 separate storms that had costs below my deductible 🙁
Oh well, the roof and siding were old. I knew it was coming someday.
- Replaced the siding/roof after 3 separate storms that had costs below my deductible 🙁
House #3 had a horrendous first year.
Basically I couldn’t rent it for what I wanted to. Then after it being vacant for too long I caved in and rented it out for a pretty low amount.
It’s ok. I’ve been raising the rent and now it’s up to $14,000/yr as of Mar 2020 at the cost of some repairs in 2019.
Lessons learned from these houses:
- Even if you do find a good place it doesn’t always work out quickly.
- Real estate is a long term game.
- Year 1 and 2 can suck.
- Middle price houses “always” turn a profit.
- My duplex is more profitable but repairs are double price!
Real estate portfolio Pt.4: Expensive!
In 2017 I did what I previously thought was unthinkable.
I bought a pricey single-family rental house ($410,000) in a nice area.
I always wanted to avoid this because I was experimenting for cash flow and expensive rentals are about appreciation and mortgage principal payments.
What changed my mind? I discovered as mortgages got bigger they got better. I got this house on a 15% downpayment with an amazing rate, and that made it REALLY profitable!
Overall, I have enjoyed the pricy house experience even though it generates around $0 of real cash flow after repair budgeting.
Why would I like something that sounds useless?
Simple! I get to jack up the rent every year!
Makes life worse now. Amazing later.
Maybe rent increases sound evil but I plan to live off these houses for the next 60 years, so consistent increases will yield a lot of money eventually.
- An expensive house isn’t an investment for right now.
- It’s an investment for 5-10 years from now.
- Technically making a lot of money from it on principal payments
- That’s bad for taxes!
I want to really stress that it’s an investment in your future. Right now it hurts!
- Zero extra cash (after repair budgets)
- Large possible repair/vacancy liabilities
- Must report more income on my taxes
As far as the taxman is concerned I made an extra $14,000 this year (in principle payments). As a Canadian with a decent income, I now owe $6000 of tax for that.
But, if I have no excess cash from this house, I have to find that tax payment elsewhere. Thus causing me a negative cash flow! AHHHH! Taxes!!
High-rent low-cashflow houses can really mess up your tax situation. These houses make my life worse in the short term and if you have too many you could get in trouble.
Lesson learned from this expensive house:
- Expensive houses are a burden which makes your life worse now.
- The house can become a boon later on.
- I technically make A LOT of money.
- Watch out for principal based tax repercussions.
What about Appreciation?
I’ve only talked about the cash flow that has come out of my real estate portfolio.
Houses appreciate too! For some people, this is the main reason that they buy houses. For me, it’s a nice little bonus.
I don’t really go out of my way for appreciation since it’s hard to live on appreciation but on paper, it’s a huge return!
Check out what happens when I roll appreciation into my results:
After spending $325,000 I have ended up with about $740,000 of real estate portfolio ‘money’ not counting my primary residence and should hit $1,00,000 in 2021.
Sources of Appreciation
$300,000 of that net return is property appreciation plus principal payments.
Leaving around $100,000 from rental income over the years. It’s hard to live off of non-cash but it’s hard to ignore an extra $300,000.
So where did all that appreciation collect from:
The important lesson here is not just to understand that appreciation is huge but also to understand how to create it:
- $410,000 house in a nice part of a growing city appreciated very quickly.
- $40,000 places in a bad part of a bad town barely changed value.
- $60,000 properties in a decent but not amazing area rose a little.
- $60,000 house in an OK part of a growing city rose at medium speed.
The trend: Appreciation moves with the area’s desirability and city’s growth.
Lessons learned from appreciation:
- Buy a house in an area that will appreciate
- Nice neighborhood
- Growing city
- Get a huge bonus someday
If I were to do it all over again
I would definitely avoid low end housing, blech!
Middle income housing is fine.
In the long term, housing in growing cities is just so amazing. I think I would have put *a bit* more money into growing cities since I have such a long horizon (my entire life). Then I would have depended on my day job income a bit more to cover big bills (there would be some VERY bad months for sure).
Just a bit though, because houses with little cash flow and big mortgage payments can get VERY scary. Having a baseline of cashflowing houses is great to keep all the bills paid.
In conclusion: the experiment went well!
My real estate portfolio was a big benefit for me and very educational.
Are rental properties magical? No, but if you have a couple of years and the spare cash to work out the kinks it can transform into a great way to live in retirement.
Do I think my path was the ideal way to get into real estate? Hell no! But from this, you can learn from my years.
I want to know your thoughts. What do you think is the sweet spot for portfolio building? Leave me a comment.
See you on the FIRE escape!
TL;DR – Real Estate Portfolio
- My 8 year $325,000 experiment tested different types of rentals.
- Low-income rentals were problematic.
- Expensive rentals yield a lot but are painful in the short term.
- Middle-class is just right for cash-flow.
- Don’t expect to make money in the first year and be prepared for big expenses.
- Property appreciation adds up a lot even though it’s hard to live off of.