I've been an investor in one form or another since I built my first house by hand in 1952, and I've been a landlord since 1958. In all that time, overall, single family detached houses have been the best performer for a number of reasons. They're easy to find and to finance. They require far less know-how for the neophyte. They can often be bought with seller-financing. They are easy to manage and if chosen carefully, can be made to produce positive cash flow from the day #1.
Where many people go wrong is in 'specializing' in one particular technique or another to the exclusion of all others. Landlords don't like to sell. Dealers don't like long term investments. Those who fix up houses for resale don't like management. Those who invest in mortgage notes don't want to own real estate. More money can be made when you're willing to broaden your perspective and pursue profits wherever the hunt takes you. Diversity also increases financial security.
Buying and selling, fixing-up and speculating can generate quick cash flows; but their great flaw is that they require your almost daily active participation. When you can't work, your cash flow dries up. The result is that each day off or vacation that you take; and each illness or injury costs the loss of income that you might have generated, plus the expenses you incur while not working.
It shouldn't take a rocket scientist to foresee that one day you'll be too old or too infirm to actively compete in the market, and without a source of passive income, you could rapidly find yourself between a hard place and a rock financially; probably just about the time Social Security collapses. Somewhere along the line, you've got to start building a passive income stream. This may not be as difficult as you would imagine.
I've got a friend who has worked out a scheme that combines both the long term growth potential of houses with his short term life-style needs. Each year he sets out to buy 10 houses. His goal is to sell 5 to recover his invested cash and enough profit to support his life-style, and to keep 5 as long term income investments to ultimately support his retirement. Obviously, he'd like to keep the best houses and sell the worst, but he lets the market make the decision for him. He sells the houses that will sell first to keep his cash flow coming in. He rents the others, improving them over time to make them better houses, or selling them as the opportunity arises.
The houses he sells rapidly are taxed as 'inventory' at ordinary earned income tax rates. On the other hand, the houses that he retains as rental income investments can be exchanged tax free to up-grade his investment portfolio until he decides to cash them out. At that point, they'll be taxed at favorable long term capital gains rates. Recently, he began to cull the worst houses, using sale profits to pay off mortgages to free and clear his better houses. His debt-free portfolio not only increases his financial security and cash flow, but makes it easier to manage better properties with better tenants.
As a retiree, with rental income from just 10 free and clear houses, he has wound up with a net worth near $1,000,000 and a gross after tax income from net rents of about $5,000 per month. I know, I know. A lot of you readers are going to point out that he could sell the houses, invest in almost anything, and get a higher percentage yield on his investment, even from a REIT. But that misses an essential point. First of all, his house portfolio represents property that he controls. All those other high-yielding investments would be little more than promises made by corporate-America. If that big stock market crash ever comes, or a recession, or the big computer crash of year 2000, a lot of people have, and will, rue the day that they exchanged property for promises.
