Even though I deal with trading stocks and bonds a lot more often than real estate, the latter is by far my preferred investment.  It’s nearly impossible to be a successful stock picker but there’s some real skill that goes into being a savvy real estate investor .

A lot of these folks have their reasons for buying properties: flipping, rental income, and so forth. However, coming from a financial background, I like real estate for another reason: risk-free capital appreciation.

Real estate is the only investment where you can put down a fraction of the asset’s value yet you still receive 100% of the returns.  In typical investments like equities, you buy 10 shares for a total of $1,000 and if the stock goes up 10%, you’ve made $100.  But that’s not the case with real estate.

My Real Life Example

I put down 20% or $56,000 on my first property three years ago and since then my property has appreciated by about 25%.  In a normal investment world, a 25% return on your money in 3 years is pretty awesome, that’s just over 8% a year.  But in the magical real estate world, 25% appreciation can mean a whole lot more depending on what your down payment was.

Since my property went up from $280k to $350k and my initial investment was only $56,000, I saw a 125% return in just 3 years.  If you thought 8% was a decent return, how does a 42% annual return sound?

Risk and Return Related

In the investment world, risk and return are always related.  If someone told you today that they could guarantee you a 5% return on your money, you would know that they are full of it.  If there was such an investment, the market would respond and you would see risk free products like CD’s and bonds adjust upwards accordingly.

So when I look at a real estate down payment from an investment point of view, if I put more money down then I should be rewarded for that increased investment.  Since I’m now risking more of my money, there should be a higher return.  But as we saw from my earlier example, that’s definitely not the case.

There’s an inverse relationship between your return and the amount you’ve invested.  Your return would actually go down the more money you have invested and it would go up the less you’ve invested.  This is one of the main reasons why I prefer a lower down payment.  There’s obviously risk to to this strategy since the property could go underwater more easily, but I think it’s worth it.

Ultimately, there are a lot of good reasons to invest in real estate.  There’s going to be some volatility here and there just like with any investment medium. However, any time you can make money without risking your own money that is a good investment in my book. And to me, thats the best reason to invest in real estate .

Whats your reason for investing in real estate? Why did you get started and what kind of success (or failure) have you experienced? Let me know in the comments below!

About Harry Campbell

Harry is the founder of yourPFpro.com. a site dedicated to educating people beyond a basic knowledge in personal finance. He graduated from UC San Diego with a BS in Aerospace Engineering and his investment experience includes stocks, real estate and managing rentals. He believes that “the key to personal financial happiness is finding a balance between saving, working and spending on the things you enjoy.”

Comments

yourPFpro says

Yea youre right but Id rather have 125% growth than 8% cash on cash return Both are nice though I will admit.

yourPFpro says