I like real estate investing since real estate has a very strong tendency to appreciate over time, can be leveraged, and even has tax advantages. For an initial investment (so long as you intend to live somewhere for 3 years) buying a home can hardly be beaten. One caveat - as a rule of thumb the rent you can get monthly if you were a landlord ought to be about 1/100th the total cost of the house. Another way to look at it is, if you bought the house and were using it as a rental, could you get close to a neutral cash flow? Places like San Francisco fail these tests miserably. I'd be wary of markets like that. They're more likely to be housing bubbles as well.
Let's get to the basics.
Suppose you buy a $100K house for 10% down and the house increases in value by 5%. What was your profit from appreciation? Since the house is now worth $5K more and you had only $10K invested you made 50%!!! Furthermore, you have payed off at least a little of your loan, you've been able to deduct the interest on the loan from your taxes and you're even allowed to deduct depreciation on the house. What's more, you've had the fun of owning your own place, planting some trees and flowers, fixing it up the way you like it. It's one of life's little joys. For all those reasons, buying a home is a pretty incredible deal.
I can't emphasize enough that you should always look for real estate that is likely to appreciate.
How do you do that? Avoid things like condos out in the suburbs. Look for things that can't be duplicated - locations that can't be duplicated. Look for areas where there has been steady appreciation in prices. Anything next to any water is good, be it ocean, lake or stream, people love to be near water - so will you. Utah is good. Anywhere boomers will want to retire is good. Any town that has just instituted very rigorous zoning is VERY good.
Here's another strategy - one that I've used. I'd buy a home (as an owner occupied house interest rates are low, as are down payments). I'd live in it for 2 years, rent it out then take a leisurely trip around the world. When I got home I'd have a rental with a cashflow that was paying the mortgage on the first house. But now I'd be in need of a home again. I'd purchase a second one, repeat the entire process, leave for another extended trip etc. Now I'd have 2 rentals.
I repeated this 4 times. By this time inflation had begun to help me. All the mortgages were the same, (Never buy a variable one) but the houses had gone up in value, as had the rents. If rent prices appreciate at 5%/yr for 14 years, rents will double (it doesn't take 20 years - don't forget the power of compounding). You no longer have a neutral cash flow, you have a strongly positive cash flow. You might want to refinance a house or two that has increased in value (hopefully) and has been partially payed off by your monthly payments to the bank and get money out of the houses for other investments.
All this works only if : A. You buy houses suitable as either rentals or homes B. You keep them rented. C. You have someone reliable to collect rent, take care of maintenance etc. (agencies that specialize in this sort of thing tend to be pricey- just get some individual who's reliable) D. You buy houses that increase in value. E. Inflation continues (worldwide and throughout history deflation has been quite rare).
Some landlords do all their own repairs, yardwork, plumbing, etc. You make more money that way, but it's not my style. If the tenants tell me the toilet is broken I believe them and call a plumber. When old renters are moving out I pay them $100 to show the house to all prospective new renters. When someone telephones me to say that they like the place and want to sign a lease, I ask them to come by, put down their damage deposit and sign a lease.
I've got a standard 20 page lease that I've never read completely through. I have them sign it but then tell them, "Just pay the rent, be friendly and don't wreck things - everything else we can work out." That tends to work out just fine.
Finally, when you're ready to sell your houses, you can do it without any capital gains taxes if you live in each succeeding house for 2 years before selling it. No capital gains on selling your home.
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