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Read This Before Buying Your First Home!


Read This Before Buying Your First HomeCongratulations to all the new college graduates! You’ve got the world ahead of you, so go out and conquer it. Actually, it’s probably pretty stressful right now because starting a new phase of life is a huge endeavor. I was very nervous when I graduated and moved to Oregon to start a new career. It was an exciting time, and there were so many changes. It took about 4 years before I got comfortable with my new life and suddenly I felt like I could do anything. I was getting promoted in my well paying career and my expenses were low. We lived in the cool part of downtown and were in a stable relationship. Everything was looking up. Ahh… I miss being 26. I felt like anything was possible. That was when we bought a home…

We just got married and I thought we needed a house to build a family. Our income was solid so we could buy a brand new house in the suburbs near my old office. All my coworkers were buying houses and everyone said it was a good investment. This was in the late 90s and everyone was feeling rich from the dot com boom.

Our house was too big

There was a little hitch, though. We decided to delay having kids because we enjoyed being a DINK couple so much. The 2,000 sq ft house turned out to be way too big for the two of us. We rarely had visitors and the 2 extra bedrooms weren’t used much. It was a nice house, but we decided to move back downtown after 7 years because it’d be closer to Mrs. RB40’s new job. We turned our old house into a rental and that’s how we got started in real estate investment. What I didn’t know at 26 was that buying a home isn’t a very good long term investment unless you’re extremely lucky.

The secret to building wealth is buying assets and avoiding liabilities. From that point of view, our home was a big liability. We had to pay a ton of money every month to live there. Homeowners have to pay the mortgage, repair and maintenance, property taxes, insurance, utilities, yard work, furnishing, and of course, fun toys to fill the empty space. People tend to collect stuff and the more space they have, the more they’ll buy. That’s a lot of money going out of your pocket every month. Sure, the house may appreciate, but would the appreciation be enough to surpass all the expenses plus inflation? It’s not a sure thing unless you got very lucky or you’re willing to do put some serious DIY work into a fixer upper. We all need a place to live and a house is great in that regard, but it’s not a good investment. It took me a long time to learn and I wish I knew this when I was younger.

Arnold’s first million

Recently, I listened to Tim Ferriss’ podcast – his interview with Arnold Schwarzenegger. It was a great episode and I encourage you to check it out if you haven’t heard it yet. Did you know Arnold was a millionaire before he was a successful actor? I’m a big fan of his old action flicks and I never knew that. I thought he got rich from his acting career. How did he get rich before he was famous? It wasn’t through his bodybuilding career because there wasn’t much money in it back then. Well, the answer is – real estate.

Arnold was a serial entrepreneur and started many small businesses when he was young. He and Franco Columbu started a bricklaying business in LA to finance their bodybuilding careers. Arnold also had a fitness mail order business, workshops, and seminars. These small businesses enabled him to save up enough to buy a house. However, Joe Weider (his mentor) advised Arnold to invest in real estate instead.

Arnold borrowed $10,000 from Joe Weider and invested $28,000 of his hard earned savings in a 6 plex in Santa Monica. He lived in one unit and rented out the rest. Two years later, he sold it for a $146,000 profit and rolled the money into a bigger apartment building. Rinse and repeat and a few years later, Arnold became a millionaire before he was Conan the Barbarian. That’s a great story.

Hindsight is 20-20

Arnold was smart, but he was very lucky to live in a location and period of unprecedented real estate growth. It would be more difficult to make that kind of money so quickly now, but I think it is still a better way to invest than buying a home. In 1999, I lived in the downtown area and should have looked at multi-family housing more closely. I could have purchased a good size 4-plex in an awesome part of town for around $400,000 back then and it would be worth well over a million dollars today. That would have been a huge profit on the $80,000 down payment (20%.) Also, the rental income would have helped pay the housing expenses and kept increasing over the years. Oh man, that would have been an awesome investment early on.

Unfortunately, I was a conformist back then and I figured my stable engineering career would last 40+ years. Why become a landlord when it’s easier to just keep working in a job I loved. Oh boy, was I wrong about that one or what? In any case, it maybe a little later, but I became a believer in real estate investing. We turned our first home into a rental and acquired a 4-plex soon after. A few years ago, we did a 1031 exchange and turned those properties into a duplex nearby because these would be easier to manage. Currently, we have 3 rental units and they are a significant part of our net worth at 25%. In contrast, our home (condo) is worth only about 5% of our net worth. That’s the estimated price minus mortgage.


The big problem now is that all our real estate holdings are in Portland, Oregon. The housing market has been red hot for several years now, but I doubt it can hold up over the long haul. The local economy just isn’t strong enough. This isn’t San Francisco or Seattle where Fortune 500 companies are dime a dozen. We only have a few big employers here and Nike is going to lay off a bunch of people soon!

The creative and tourism sectors are doing great, but most of those jobs don’t pay all that well. Housing is getting too expensive for a lot of people in Portland. That’s why I’m trying to diversify by investing with RealtyShares. They are a real estate crowdfunding company and I could invest in other US regions. Currently, I have a small stake in a commercial property in Arizona and I’m looking to invest more. Check RealtyShares out if you’re interested in diversifying your real estate investment. We also plan to sell our home before we take a year off from early retirement to travel around the world in 2021. That will pare down our Portland investment a bit.

Disclosure: We may receive a referral fee if you sign up with RealtyShares through the link above.

What would you do?

I wish I had been more financially savvy and purchased a multiplex instead of a house when I was 26, but that’s in the past. I’ll just have to pass on this lesson to the future generations and hope they make better decisions. Real estate is a proven way to build wealth and the earlier you start, the better off you’ll be. So my advice is to consider a multiplex when you’re looking to buy your first home. You can live in one unit and let the tenants pay the mortgage for you like Arnold did. Or you could buy a fixer upper and put in some sweat equity like Ms. Montana. Just don’t buy a dream home as soon as the bank approves a huge mortgage for you. It’s not a good investment. I’ll break down the numbers in another post.

Real Estate Crowdfunding

It can be tough to find a good real estate investment locally, especially if you live in expensive coastal cities. Fortunately, there is a new way to invest now. Real estate crowdfunding sites enable investors to pool their money and invest in bigger projects. Check out my experience with RealtyShares. Now, you can invest in real estate even if you don’t want to be a landlord. Sign up with  Realty Shares and see if they have any project you’d like to invest in.

Did you know that Arnold was a millionaire before he was a famous actor? He was very driven and got started in real estate at the right time. What about you? Were you a savvy real estate investor or were you like the rest of us who passed up that opportunity?


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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 84 comments… add one }
  • Ernie Zelinski June 19, 2017, 1:16 am

    As I have said before, “If you want to make big money in real estate and the stock market, just pay big attention to what I am doing — and do the opposite.” For the record, back in the 1970’s I purchased three different houses and all three turned out to be bad investments for me. I purchased these houses because I got caught up in the “do it because everyone else is doing it” syndrome. What a big mistake! It took me quite some time to realize that what the masses are doing is not the thing for me to do if I want to achieve true success and prosperity in my life.

    No, I am not “a savvy real estate investor.” Far from it. Sure, I wish I would have purchased a house in Vancouver (my second home) ten or fifteen years ago or even a condo five years ago.

    I agree with you when you say, “We all need a place to live and a house is great in that regard, but it’s not a good investment.” In this regard, I purchased my half-duplex in 2007 after having rented it for 27 years. I would still be renting it if my landlord hadn’t decided to sell it, but that’s another story. The big advantage of owning my half-duplex is that no one can throw me out of it like a rented unit.

    There is no doubt that real estate can be a great way to built wealth. But it is not for everyone. Truth be known, one can forget about real estate altogether as I have done. I don’t consider my half-duplex as an investment or even as an asset. It is just a consumer item to me as one of the several $500 jackets that I have purchased. Actually, the half-duplex is worse. This month I am spending around $3,000 to upgrade the sidewalks on my property.

    In short, there are other more creative ways to build wealth than investing in real estate. I have worked far less than half of my adult life. And when I have worked, I have worked fewer than four hours a day. Yet by the end of this year, if everything goes well, I expect to have $1 million in my Retirement Account (an Untouchable) and $500,000 in my Prosperity Account (a Touchable). Keep in mind that nowadays I only work one or two hours a day and my half-duplex is not included in my record of personal financial assets.

    • retirebyforty June 19, 2017, 8:40 am

      It sounds like you did pretty well with your current half-duplex. Maybe you got luckier with age? 🙂
      Thanks for sharing your experience. It took me a long time to realize being a conformist wasn’t the right path for me. It works for a lot of people, but not everyone.
      Real estate is a great way to invest, though. A lot of people got wealthy through real estate.

      • Counting Quarters June 21, 2017, 11:39 am

        My curiosity is in the location of rental properties. My fiance and I are looking to rent out our current home when we leave which would earn us approx. $200 in cash every month (plus the equity on the mortgage payment). It is in a unique area that is very popular right now and just from that our home has appreciated about $45,000 in the last year.

        We have looked into duplexes and quadplexes but cannot seem to find them in what most would consider desirable areas therefore the rent is so little. What do you focus on when looking at rental properties?

  • Budget on a Stick June 19, 2017, 1:26 am

    Holy wow I didn’t know that about the Arnold! (Downloading episode now)

    Real estate is definitely on the to do list for me. Right now we are focusing on increasing our savings rate so when we do decide to pick up a place we can have a sizeable down payment or just cash flow it.

    • retirebyforty June 19, 2017, 8:41 am

      It’s a pretty fascinating story. Arnold is a driven guy. Good luck with real estate. I think it’s great that you’re going to try it out. If it doesn’t work, you can just sell and move on.

    • I like your idea.

      Saving first would make it easier on me when I’m looking to get a mortgage for a house.

      Of course, there’s the option of renting but paying for a place every month that I will never own seems ridiculous to me.

      I would rather pay those monthly payments on a mortgage because when I finish paying that off I would own my house.

  • Mustard Seed Money June 19, 2017, 3:38 am

    I was familiar with Arnold’s story in real estate but had no idea that he also had a brick laying business. Sounds like he was definitely a hustler.

    When I was younger I bought a house and then rented it out while living there. It helped pay off the mortgage in record time and allowed us to live the lifestyle that we live today.

    • retirebyforty June 19, 2017, 8:42 am

      Yeap, there weren’t much money in bodybuilding back then. You couldn’t even support yourself when you were a champion. Kind of like boxing in the old days. We rented out the room in our old house occasionally too. It helped with the bill, but I didn’t like sharing our space. A 4-plex would have been a much smarter decision.

  • The Tepid Tamale June 19, 2017, 3:57 am

    First, I am a big Arnold fan, and I never heard that about him! There’s my trivia for the day, thanks Joe! Second, thanks for this post! I think people really need to hear that a house is not an investment. It may be the best choice over renting, and then again, renting may be the best choice. You have to evaluate your situation. I have started throwing together a spreadsheet that helps evaluate the ‘investment’ potential of a house. In light of the Arnold theme, I could say: ‘I’ll be back’ later with the spreadsheet :). With 5 kids, and in my geographical area, it’s looks buying a home is a better choice than renting. But, it’s far from an investment. So, thanks for posting!

    • retirebyforty June 19, 2017, 8:43 am

      I like owning a house better than renting too. Both aren’t investment, though. You just need a place to live.

  • Mrs. Adventure Rich June 19, 2017, 3:58 am

    I’m another “wait, what’s this story about Arnold?!?” person here, but I can’t wait to learn more!

    We are currently looking to expand into real estate. It seems like a somewhat scary world, but hopefully we find the right property soon!

    • retirebyforty June 19, 2017, 8:44 am

      Good luck with your real estate investing. Just jump in and see if it will work out. What’s the worse that can happen? 🙂

  • Nicoleandmaggie June 19, 2017, 4:27 am

    My father dabbled in real estate. It was a huge hassle and I don’t think it really panned out. Like most investments sometimes it works and sometimes it doesn’t. It seems like folks are forgetting about the Great Recession and how many people foreclosed.

    For most people starting out, maxing out retirement savings in a low cost broad based index fund or ETF is a better use of cash because of tax advantages and diversification.

    • retirebyforty June 19, 2017, 8:45 am

      Sorry it didn’t work out for your dad. I think it is still worth a try, though. Real estate paid off big for a lot of people. If you’re lucky, you could become financial independence very quickly. Great recession was good for the investors who were gutsy enough to buy at the bottom, right?

      • Angela June 19, 2017, 9:42 am

        Paid off for us – bought our home (in the Seattle area) for $281k in summer 2011, and it’s now worth over $500k. While I expect the market to soften soon, I don’t think we’ll ever get back to those numbers – especially with the same low interest rates. That being said, we were 23 when we bought, so we didn’t have the option to invest more than that. Would have loved to buy more then!

        • retirebyforty June 19, 2017, 9:17 pm

          Seattle area is pretty crazy. You guys have a lot more good jobs, though. Portland is a lot smaller and I really doubt the real estate price will hold up. It’s going up too fast.

  • Matt @ Optimize Your Life June 19, 2017, 4:53 am

    My wife and I have yet to buy a place. We plan to at some point, but after reading finance blogs for a few years it seems like everyone regrets jumping in too soon. We also live in an area where it doesn’t make sense to buy a place to rent out. The housing market is so expensive that mortgage payments are higher than what you could get in rent each month. We have enough money in savings and investments that we’d be ready to buy in the event of a decline or crash, but we’re not in any rush.

    Thanks for sharing your experience.

    • retirebyforty June 19, 2017, 8:47 am

      If your local market is too expensive, then renting might be the right choice. I don’t think we’ll see a big crash in a long time, though. Our local market probably will slowdown a bit next year. Oregon lags California about a year.

  • Lazy Man and Money June 19, 2017, 4:57 am

    I didn’t realize that Arnold make money from real estate. I wouldn’t have been surprised if Pumping Iron or something related to bodybuilding (not necessarily movies) made him his first million.

    As you say though, he got very lucky. When I first blogged about Bitcoin they were about $3. Now they are worth $2500. I wasn’t smart or lucky enough to invest $2000 to make an easy million.

    My theory is that there’s always some opportunity out there. I don’t know if it is any more difficult to realize it now than it was for Arnold. What do you think?

    I think it’s definitely wiser to buy the investment (real estate investing) than the product (house to live in). Another great example is buying stock in Apple vs. buying an iPod in 2004.

    • retirebyforty June 19, 2017, 8:50 am

      Bodybuilding just didn’t pay much back then. I doubt he made much money from Pumping Iron. I couldn’t find any financial info on that, but it’s a documentary so I assume nobody made much from that project. It was a great vehicle for Arnold, though.
      Real estate is as close to a sure thing as it can get. He was in the right place at the right time. California in the 70s is the land of opportunity. Lots of people got rich.

  • The Green Swan June 19, 2017, 5:07 am

    I considered buying a house shortly after I graduated. I wasn’t even married yet, so thankfully I decided against that quickly. Even after marriage, the big reason we never bought was to preserve mobility. We wanted to move with our jobs and explore the country as we did so.

    Then, when we finally did want to settle down and have a family, we chose to buy. House hacking wouldn’t have been a bad idea by buying a condo or multi-plex, living in part and renting the others out, but that would have probably been too much work and hassle for us as we started a family and focused on careers.

    But oh well, hindsight is 20-20 like you say!

    • retirebyforty June 19, 2017, 8:51 am

      I thought it would be too much hassle to be a landlord too. Who’d want to be a landlord, hold a full time job, and have little kids. Lots of people made it work, though.

  • Freedom 40 Plan June 19, 2017, 5:48 am

    I also listened to the same podcast with Arnold and loved it. Say what you will about him – Arnold has a fascinating life story. I’d like to think I am a savy real estate investor, but that’s really just not the case. I bought my first condo in 2007, right before things got really bad. I paid $320k and 10 years later it is valued around $310k. After living there a few years my wife and I needed something a bit bigger so we bought a townhouse in January of 2010 when everyone was scared and the RE market was down. We’ve made out much better there. Currently up about 12% (Of course, we would have done much better in the market I suppose…) We’ve been renting the condo out since we moved and it basically breaks even at this point. I think over the very long run it will pay off, but only time will tell…

    • retirebyforty June 19, 2017, 8:53 am

      I just reserved his biography – Total Recall. His life is really fascinating. Arnold is very driven and he is an inspiration. Yes, he isn’t an angle, but still should be a good read. Our condo is valued just about the same as when we purchased it too… I averaged down when the market crashed, though. Our other properties are doing well. Good job buying when RE was cheap.

  • Mrs. Picky Pincher June 19, 2017, 5:59 am

    While I do think just a regular ol’ house was the right choice for us, I do wonder how better off our finances would be if we’d gone with a duplex and rented out the other half. We really value quiet and privacy, though, so I think a duplex would have driven us insane lol.

    • retirebyforty June 19, 2017, 9:00 am

      Everyone has to make their own choice. 🙂

  • Ms. Frugal Asian Finance June 19, 2017, 6:18 am

    Thank you for the great insight! Mr. FAF and I have also thought a lot about rental property. I know it’s a ton of work and possibly headaches, but we still want to give it a try before giving up on the idea entirely.

    If you buy a big house that has a basement and some extra rooms, you can also get some roommates/tenants. It’s not ideal, but getting the mortgage covered is great!

    • retirebyforty June 19, 2017, 9:01 am

      Definitely try it out. I could pay off big if you make it work. What’s the worse that can happen? If it doesn’t work out, then just sell and move on. Good luck!

  • [email protected] June 19, 2017, 7:00 am

    Cool story about Arnold…I didn’t know that about him. I always wanted to buy real estate but living in NYC made it nearly impossible. After reading finance blogs, many often argue that renting makes more sense than buying if you live in a high cost area such as NYC. True as that may be, the appreciation that goes on here is undeniable. Maybe it’s speculative but I’ve known people who have made a lot of money investing and/or house hacking in up and coming areas which see a lot of appreciation. Sure, the real estate market could crash but even back in 2007, while there was a correction, I think the nicer parts of NYC came through okay if you were able to hold on. I bought a house in the Midwest 2 years back and was planning to add more but even in that area, it’s getting very competitive.

    • retirebyforty June 19, 2017, 9:02 am

      I imagine NYC would be really tough. The timing is just wrong in some area. SF and NY are already too expensive for many people. Not sure if Portland can get there, but as a landlord, I hope so…

  • saveinvestbecomefree June 19, 2017, 7:16 am

    Another Arnold fan here…..is this saying something about the FIRE community? But I hadn’t heard this before. Thanks for sharing that tidbit. I’m on my third house. Luckily I always purchased well below what the banks would allow and that’s a key reason I paid off our mortgage by age 40!

    Over the years I’ve learned and experienced more about how your primary residence is a terrible investment despite the fact that many people considering it a better investment than businesses (i.e. stocks)! When people calculate their housing gains, they seem to forget all the big costs of maintenance and improvements, not to mention taxes, mortgage interest and inflation. Something that looks like a really good return often drops to a minimal return or even loss if you honestly account for all the real money it cost to own your home over the years. This is why I’m a stock market investor for my future and consider my home as a low return, inflation-protected bond with a high expense ratio.

    • retirebyforty June 19, 2017, 9:11 am

      His story is really interesting. Check out the podcast and his book – Total Recall. Nice job with paying off your house. That’s a huge load off your back.
      You’re right about calculating the gain. Home owner pay so much every month and they forget to include that. Housing is such a huge part of the monthly expense.

  • SMM June 19, 2017, 7:25 am

    I would have done a fixer upper if i had to do it again. Buy the ugliest house in a nice area. Plus I would do projects slowly and not all at once. This way I would be able to save and prioritize on areas that are the most crucial to fix up and also find alternative ways to improve the home (e.g., refinish floors instead of installing new ones). I need to stop watching HGTV. 🙂

    • retirebyforty June 19, 2017, 9:12 am

      HGTV is a lot of fun. We don’t have it, though. 🙂
      I really should have purchased a 4-plex. It’s too bad I didn’t even consider it when I was young. I’ll make sure my kid knows about this by the time he’s an adult.

  • Dividend Growth Investor June 19, 2017, 7:45 am

    Yep, I did know vaguely that he bought rental real estate. But I didn’t know the specifics on numbers etc.

    We just bought a house last month, because in my part of the country the Price to Annual Rent is low at 10 – 12 times rent. It is more work than renting, but you also have more control over things that matter.

    As far as real estate, I think that assembling your REIT portfolio or buying a REIT fund will likely do the trick for diversification purposes ( if you ever sell your rentals). I need to do more research on those crowdREIT platforms. Do you have a review on your site of RealtyShares I could check out?

    • retirebyforty June 19, 2017, 9:13 am

      I like REIT too. It’s a good way to diversify, but you can’t get leverage like real estate investing. I don’t have a review of RealtyShares yet. They have a lot of rules. I need to write one and submit it for approval…

  • Dads Dollars Debts June 19, 2017, 7:52 am

    I have read Arnold’s autobiography and was surprised that real estate was where he made his first million. It made me realize how smart this guy was and how much he hustled to achieve his goals.

    We should have kept our first house as a rental as it has appreciated 100%. Still we didn’t. Now, much like you, we live in a 3000 sq foot house when a 2000 one would work just fine (we have 1 kid and parents that visit). It is quite depressing to see the money flow out of the bank every month.

    As far as real estate investing, I have always been cautious. I imagine the liability is not worth the potential gain. That being said, there are plenty of people I know who have made a lot of money with real estate, so maybe I should revisit. For now I will be leaning towards paying off school debt and saving for an investment down the road.

    • retirebyforty June 19, 2017, 9:14 am

      I knew he was a very driven guy, but didn’t now about the specific. I just put his book on my reserve list and I’m looking forward to reading it.
      Hindsight is 20/20. 🙂

  • Dividend Diplomats June 19, 2017, 8:05 am

    Did not know that about Arnold. I’ll download that podcast later and listen to the full story. We actually just bought our first house and finding the right amount of space for our future family was at the heart of the discussion. We wanted enough that we could grow into but not enough where we wouldn’t use a huge chunk of our house for the next ten years. Honestly, it was not an easy balance. In the end, we settled on one that was about 1,800 square feet with an attic that we can turn into a master suite one day down the road if needed.

    Like you, I wish I had purchased a started home in my early 20s. Instead of renting out of college, I should have bought a small house and had a few friends live with me to cover the mortgage payment. Hindsight is 20/20 as you said, but if I had to do it all over again, that would definitely have been the approach I would have taken.

    Thanks for sharing your story.


    • retirebyforty June 19, 2017, 9:16 am

      That episode is really good. You can skip the parts that you aren’t interested in, but I listed to the whole show since I’m a fan.
      Congratulations on your first house. That’s a big step. 1800 sq ft sounds good.

      • Dividend Diplomats June 20, 2017, 6:39 pm

        Oh no, I’ll be listening to the whole thing. How could you not listen to the interview with the Terminator!

  • Mrs. Groovy June 19, 2017, 8:27 am

    You know we lucked out big-time with the sale of our first primary home, our NY condo. We’ll be lucky if we break even on the sale of our current home after all fees are deduted.
    I don’t suppose you can do a 1031 exchange into a REIT? I doubt that fits the rules. But does it allow for convering to partial ownership in commercial RE? I’d be interested in trailer parks or storage facilities, but only a fraction.

    • retirebyforty June 19, 2017, 9:17 am

      I doubt you can exchange in to an REIT. Maybe straight into commercial real estate. You’d need to check with a tax guy. Fractional ownership sounds even more complicated. Good luck! 🙂

  • Mr. Tako June 19, 2017, 8:39 am

    When I was in college, I used to rent an apartment from a guy — Let’s call him John . John inherited a multiplex from his mother. He owned 8 units and lived in one of them. His main ‘job’ was taking care of that multiplex. Instead of making it big like in real estate like Arnold, he still lives there in that multiplex.

    In a way, I guess it was great for him. He maintained the asset and he never had to work at a real job. He never grew any wealthier either, just kinda maintained his situation in life because he didn’t live in one of the ‘lucky’ areas of the world. That’s real estate for you.

    For every Arnold out there, there’s also a John.

    • retirebyforty June 19, 2017, 9:08 pm

      Thanks for sharing. I’m actually in John’s camp. We’re comfortable financially and life is good. Arnold is really driven and comfortable isn’t good enough for him. It’s all about the internal drive and a lot of luck. I’m sure John could have sold his 8 units apartment and leverage the money into a bigger apartment. He’s just not ambitious enough to do so or maybe he’s risk averse.

  • Revanche @ A Gai Shan Life June 19, 2017, 8:48 am

    I knew he had made his money before making it in Hollywood but I didn’t know how! I wonder what motivated his speculation in real estate – did he have a mentor or an example before him, or was he just quite savvy?

    I didn’t get into real estate until a few years ago and now we own our own home as well as a rental property. I’m looking for more investing opportunities but like you, I don’t want to be overly invested in one area, so I’m going to add a physical property plus REITs to our portfolio for balance over the next few years.

  • Financial Coach Brad June 19, 2017, 8:54 am

    I’ve owned a few rental properties over the years and they just haven’t worked out well for me. I can look back and see the reasons, but honestly I just don’t think I’m cut out for it. I’d rather invest in a fund or something than be a direct landlord.

    Real estate investing has made a lot of people wealthy though. It’s definitely something to at least consider as part of a diversified portfolio.

    • retirebyforty June 19, 2017, 9:10 pm

      I think that’s okay too. At least you tried and found that it’s not for you. A lot of people aren’t even willing to try.

  • Dan June 19, 2017, 9:02 am

    I am super glad you wrote this article. Because I am having that debate right now whether to buy a multi or a single family (I also happen to be 26).

    Part of the debate is whether I should just try to have fun now because it has been difficult to find an obvious deal. Many of the multis I’ve looked at are either extremely high priced, competing with new construction or very low quality. There is also the problem of buying a property that is decent to high ROI but is low dollar amount of profit. If I’m buying a property 20% down and the down payment is 30k and I’m only going to make 5-6k on average after all expenses it’s somewhat harder to justify because slight slip ups in tenant choice or problems with the units could mean real problems for me. Also in my area there is likely not going to be any meaningful appreciation in price of the property.

    So yeah I’ve been getting kind of bummed out in terms of my searches not really leading to any good deals but I’ll just have to keep searching.

    Thanks for your incredibly well timed article.

    • Darren June 19, 2017, 2:26 pm

      I’ll bet you’re having a hard time finding a good “investment!” We all realize that the US stock market and the housing market are high and expect a down-turn sometime sooner than later. You might find more opportunities just by waiting, right? I bought my current home in 2015 almost out of necessity and my previous home, which is now a rental, in 2008. They definitely weren’t investments, and I sure wish I could have gotten them when the markets were lower. It kind of gives you a cushion. Good luck on your search!

    • retirebyforty June 19, 2017, 9:13 pm

      It really depends on your area. In NW Portland, there are many nice 4-plexes. In Hillsboro near Intel, the 4-plexes were all in cheap areas. You just have to use your best judgement. I’d say keep looking for both multiunits and SFH. You never know what you’re going to find. You can also go with a SFH and then rent it out when you move. We did that and it turned out okay.

  • Grant @ Life Prep Couple June 19, 2017, 9:33 am

    Yeah I knew about the Arnold story. That is why he is such a bad ass and has been so successful at everything he has sat out to do.

    I definitely agree with not buying too big. Most of my friends were buying up 2000+ sq ft homes and we bought 1350. There are so many benefits of having a smaller home in terms of time and money. Don’t try to buy a “forever home” at 26.

    We are hoping to turn our house into a rental soon and move to a cheaper area. We will see when that happens as right now we just keep talking.

    • retirebyforty June 19, 2017, 9:15 pm

      I completely agree. We changed quite a bit since we were 26. Our ideal home looks a lot different now.

  • freebird June 19, 2017, 10:11 am

    Nope, I had no idea, like you I thought his big break was in acting. I imagine it was buying rentals at both the right time and in the right place. These days I’m not sure you’re better off buying rentals in silicon valley, true incomes are high there but house values seem even higher, so I wonder whether you can get better cap rates in places like midwest college towns or near military bases?

    No, I passed on the real estate opportunity. My surplus went into stocks which also had a nice run in those days. Between the two I think I heard real estate can get similar returns but you have to use leverage, and to me that’s a non-starter. My rent just went up, still looking to buy a place to live in, but nothing on offer at the exact location I’m interested in. It’s just for me, though, I don’t expect to ever get involved in landlording. BTW mREITs still hanging tough with >10% payouts over the past few years.

  • Al June 19, 2017, 10:33 am

    Sorry Joe but you are completly wrong about real estate. Real estste like any other investment requires a strategy based on the market you live in. For example if you live in the east or west coast, buying a house or property is an excellent move to create long term wealth.

    As a matter of fact, real estate has created more millionaires than any other investment vehicle.

    Rationalizing costs of living like insurance and taxes as a reason is not does not pass the logic test. There is a reason Warren Buffet says that if he had to start today, he would just buy a bunch of single family homes. Think Mr. Buffet is right.

    Were did you go wrong? Lets start with assests and liabilities then address markets.

    Real estate follows the same economic rules of any business. Suppy and demand.
    Currently the number of new homes been built in the last 6 months is in a decline. Followed that with dropping interest rates and you can easily see that demand exceeds suppy and support higher real estste prices. Its a good time to buy.

    If an asset is worth 100K and you buy it with 10% or 20% down, your ROI is based on 100K not 20K. So your liability diminishes with time while your assets grow. That is two ways to increase your value. Paying yourself as you pay down the mortgage and increase in property value as time passes and there are ways to accelerate this such as one extra payment a year. Historical data shows that real estste investment overtime has had double digit returns while other assets such as the S&P 500 have not.

    Now let talk about east and west coast markets versus the Midwest. West and East coast real estate markets have and do better than the rest of the country. Basically they are more desirable places to live. Higher demand.

    Midwest requires a different strategy. If you own a house there, the market appreciation is not going be there. So you have to buy with that in mind. Instead of buying a 2000 Sq ft. house, you would look for a 1000 or 1200 Sq.ft more suitable to the market and your needs for example so less money down and payments as you pointed out. Nevertheless, the rental market in these areas is extremely strong and with less cost eaiser to buy so you can become a homeonwer quicker and be in the game.

    Agree with your points about buying less in your first home. We bought based on 80% of one income when we had two incomes while our friends bought based on their max they could pay.

    Living in 80% of what you make is a prescription for success and a disciplined life.

    Hope all is well and remember. There are two ways to learn. One is by your own experiences and mistskes. The other one is by observation and association. The latter has been the most fruitful and eye opening.

    Mrs. Al and I are always having conversations about, do you realized that person did this or that? Did you noticed this or that? We have always been willing to learn and that is why read your blog. We have learned from you and hope you will learn from us.

    Find someone successful in your market and find out their story and how they did it. Its not luck. Its strategy, hard work, and the right thought process.

    Thank you for your blog.

    • Joe June 20, 2017, 7:17 am

      Agree with your premise, but not with your comment on Buffett. He said to buy single family homes in 2012 at the lows of housing prices. We are far, far from that point. There are no value prices on the east and west coast.

      However, real estate is a massive pillar of wealth. I have no idea why a lot of financial bloggers knock it as a wealth builder. Like you said, more millionaires have been created from real estate than any other asset class. I love it as an asset class.

      • Al June 20, 2017, 12:25 pm

        Not trying to change your mind but here is what Buffett said about real estste just months ago…not as good as 2012 but still time to buy now….


        In my view, with the market soaring supported by earninngs and growth data, there are not a lot of places to put in your monies even at a 2% GDP. Real estate is the way to go for long term wealth.

        Personally, just asked one of my kids to partner with me on their first house over the next 12 months.

        • retirebyforty June 21, 2017, 8:48 am

          Thanks for the link and good luck with the house search.
          I brought up insurance and property tax just to show that housing isn’t a great investment. It’s way better than renting, but still not a good long term investment. Buying the right size house is a good way to build equity, but probably won’t gain that much unless you live in a lucky location like CA.

          • Al June 21, 2017, 11:51 am

            Thanks. We are going to have the opportunity to test my axion about real estste as my sin lives in Texas. Different market, values, cost, growth.

            Remimder: When you do your numbers that insurance and property taxes are deductible for rentals and property tax is deductible for home ownership.
            Also consider the benefit value of living in a property. Renting is not free and have a cost in present and future value.

            Something I learned in this blog, perhaps when we look at a property we would look for a multiple unit instead of a single family home.

            Single family homes tend to grow in value faster. Highly taxed states like California and Oregon tend to do better. Nevertheless, we will adjust to the market.

  • Time Hedge June 19, 2017, 10:35 am

    Great post and I couldn’t agree more. Housing you live in should be looked at as a consumable item. It costs money each month in maintenance as you outlined and property taxes, it does not throw off dividend income. I badly wanted to buy a home until I realized this.

    Now if you buy a home to rent out then it can be a profitable venture, but I would rather just buy REITS.

  • Adam and Jane June 19, 2017, 11:11 am

    Definitely agreed with what you said. Our starter home is less that 1,000 sq ft and after 25 years we still live in the same house. We never upgraded as our salary increased.

    You need a special mentality to be a landlord and I don’t have it and dont’t want it. Agree with you that it can build wealth if you buy in a good location. My parents first 2 homes cost about 65K each and they are now worth over 1 million each. Both houses were paid by tenants but they have to deal with over 40 years of tenants and maintenance issues. Being a landlord is not for us since I used to help my father with some repairs. Now, my bother deals with the tenants and all the maintance issues. I am handy and I maintain our house but I can’t imagine dealing with my parent’s 5 rental units.

    My parents also had two vacation homes that lost 100K combined so I learned to NOT buy a vacation home unless I am willing to lose money in the worst case. I would love to buy a 2 BR condo in Hawaii but wifey said NO and to just rent when I retire in a bit over 2 years.

    Our parents were immigrants. They were entrepreneurs and they did not have 401Ks. These days with a 401K that is invested wisely can provide a nice retirement. People who dont want to be a landlord can invest in REITs, stocks to produce dividends, munis bonds, etc so there is no need to get your hands dirty. Our muni bonds will generate 87K tax free this year without doing any work and our expenses will be around 55K. Granted we had to do blunt forced savings to build up our muni bond portfolio instead of leveraging our money to buy a rental unit to have the tenants pay the mortgage. Knowing this, I still choose passive income via muni bonds instead of investing in realte estate for a stress free life.


    • retirebyforty June 20, 2017, 9:31 am

      I think the landlord mentality can be learn. Nobody wants to be a landlord when they’re young. That’s the best time to start, though. You can see if you can deal with tenants or not. Well, in your case, you learn from your parents.
      I agree with vacation home. Unless you’re rich, it’s easier to just rent.

  • Dave in Sunny FL June 19, 2017, 11:20 am

    I couldn’t locate details on how realty shares works, but I’m skeptical. Do you get $100k of value for $20k investment? And get to write off the interest expense on your taxes? And protect your investment with a property insurance policy that you’ve reviewed and approved? And benefit from the inflation of rents? And deduct every bit of expense you have maintaining the property? And have the freedom to increase the value of the property by investing more to improve it? And enjoy 100% of the appreciation of the property, even if your equity share is much lower at the time of sale? To me, it is like the difference between a bond and a bond fund, which is to say, VERY different. One is a known quantity; the other jumps with the whims of the market. Buying and owning property(ies) that you select is very different from “jumping on” to a REIT. A REIT (and maybe realty shares) may represent some exposure to the general trend of the real estate market, but it ain’t real estate. Thanks.

    • Joe June 20, 2017, 5:51 am

      Totally agree with this comment. Also, you get so many tax benefits with real estate. You can’t 1031 exchange RealtyShares. You can’t time a sale with your tax situation with RealtyShares. You can’t decide to hold on to your investment during a financial crisis with RealtyShares. You can’t pass on your real estate to heirs tax free with RealtyShares. You can’t decide to move in to your RealtyShares investment and in two years get $500k of gains tax free. With physical real estate, you can deduct all the depreciation expense, saving a large amount of taxes. It’s all in the numbers. Don’t buy a cash flow negative property.

      • retirebyforty June 20, 2017, 9:43 am

        REIT and RealtyShares are just a lot easier than owning your own rentals. However, I agree that there are many benefits to owning rentals. That’s why we have a lot more invested in our rentals than REIT or RealtyShares.
        Resetting the baseline for rentals is a great benefit. I’ll have to think about that one more.

  • Friendly Russian June 19, 2017, 12:08 pm

    Reading a lot of PF blogs I noticed one thing. Usually, people regret buying a house in couple of scenarios:

    1. They bought too big house
    2. They were too broke to buy a house

    But there’re also people who bought an average house for a good money and they are happy with this step.

    And I still don’t get argument “you have to pay for maintenance, insurance taxes and so on”. When you have rentals you have to do the same. And if rent covers all these expense and you have a profit, that means having rentals is better than renting. Especially on a long term scale.

    I don’t know, still trying to figure out this logic.

    • retirebyforty June 20, 2017, 9:33 am

      Our old house was smaller than most of my friends’ houses. It just was a bit too big for 2 of us. 1,000 sq ft worked out a lot better for 2 people.
      The argument about paying for maintenance and so on is just me saying that a house is not a good investment. Personally, I think renting is even worse. They are both bad investments…

  • Tim Kim @ Tub of Cash June 19, 2017, 2:12 pm

    Fan of Arnold here because I was big on bodybuilding in college =) He was always a hustler. And yeah, most people make fun of his accent and think that he just got lucky marrying into the Kennedy household and lucked out from his movies. But fact of the matter is, he immigrated here and straight up hustled. Even with a language barrier. Which is a big deal. Much props to the guy. He’s really smart too. And as a former bodybuilding enthusiast, I think a lot of people underestimate how much dedication and discipline goes into perfecting one’s physique. I used to eat 8 meals a day and measure all of my macro nutrients, in order to get it down to a science. Not a lot of people have the discipline that a guy like Arnold has. Thanks for sharing!

    • retirebyforty June 20, 2017, 9:35 am

      Arnold had the drive and he was lucky too. He’s probably one of the most successful immigrant in this age. Well, the most famous anyway. I’m looking forward to reading his book.

  • Felipe June 19, 2017, 2:32 pm

    My best real estate deals have been ones people thought I was out of my mind to do. Boards on the windows, dodgy hoods. But I loved them, lived in them, and flipped them after living there a few years. Not much risk since it was also my residence. Those were my first homes – a fun time in my life. But that was the 90’s. At today’s prices I find it harder to think of taking the risk with the big dollars at play. As with most investments, going against the grain pays off but also takes a large amount of luck and the guts to do what no one tells you to do. My worst real estate is the one condo in Denver everyone thought was a sure thing. It took me 13 years for the value to just get up to what I paid in 2001 before the tech bust.
    For rental income, I think of rental property as diversification to securities, which evaporate into thin air in a few minutes in a market meltdown. Rents may go down, but people always need a place to live. If I’m not too tight on cash flow and can ride negative cash flow for a few years, I like having the diversification and hedge against inflation I don’t feel I get with a securities-only portfolio. When a company goes bankrupt, I only have the paper stock certificate. When real estate values plummet, at least I have the real estate. Nice topic.

    • retirebyforty June 20, 2017, 9:37 am

      That’s how I think about rentals too. They are more work, but much more stable than stocks.
      Great job with your real estate deals when you were young. We also had some wins and losses.

  • Darren June 19, 2017, 2:53 pm

    That Tim Ferriss episode was an Arnold classic! 😉 Arnold was the “good guy” when he and Franco would pretend to argue back and forth in German, because he was offering their European style masonry services at such a discount!

    These days, buying an investment property is easier said than done, especially when we’re looking for one that we intend to live in. Our significant others have to be on board too!

    My wife and I became “accidental landlords” when the military reassigned us elsewhere. We just rented out our homes. We weren’t savvy. Our homes weren’t too big or overpriced. They were located near their military installations so that they could easily be rented out. I retired from the military a few years ago and think that I’ll eventually sell my home and properties (total of three) and down-size eventually. It’s nice to have renters paying your mortgage (one is paid off), but being a landlord is definitely not a comfortable lifestyle for me.

    • retirebyforty June 20, 2017, 9:39 am

      Great job with your investments! We’ll liquidate eventually as well. I’m fine being a landlord right now, but I don’t want to do it when I’m older. Unless I can find a great property manager…

  • Master Duke June 19, 2017, 6:08 pm

    As a recent college grad, it really helps me solidify the decision I made after moving to a new location not to buy a house yet. Before doing so, I will definitely look to the pros and cons, the hidden cost, and make a rational decision with my future wife.

    Thanks for the tips on real estate investing – very insightful.

    • retirebyforty June 20, 2017, 9:39 am

      Waiting a bit is a great idea in this market condition. Housing is pretty expensive in many cities now. Good luck!

  • Ms. Montana June 19, 2017, 7:18 pm

    Thanks for the shout out! I wish I would have been a little savvier and more investment minded. My sights were really just set on owning our first home. If we had gone 4 plex, I shudder to think how much cash flow we would have! But we ended up with a paid off house and 2 nice rentals. Maybe next time. =)

    • retirebyforty June 20, 2017, 9:40 am

      I think you did great with your rentals. Much better than I did… 🙂

  • Your First Million June 20, 2017, 11:04 am

    I have always been a big time supporter of buying a small multifamily property as your first home. It is such a no brainer….

    Banks will even allow you to use an FHA 3.5% down, 30-year fixed rate mortgage to buy a 2-4 unit property that you are going to live in. Take advantage of this when you can… because in the future when you go to invest in more of these multifamily properties you will be needing 20-25% down.

    Buy a duplex, triplex, or 4-plex… live in one of the units and rent the others out. Even with a duplex, the rent from the other side could potentially be enough to pay for your entire mortgage payment each month (depending on which market you live in). With a triplex or 4-plex, you may actually have enough rent coming in that it will cover the mortgage payment and there will still be some positive cash flow left over.

    This is definitely a winning strategy when you are starting out!

  • Finances with Purpose June 21, 2017, 2:17 am

    This is a great encouragement for our current plans: consider buying a multi-plex or a setup of that sort. (And buy less!) Sadly, the real estate market in places we’ve lived has been pumped full of investors who are competing stiffly for such properties. But hopefully we can find something good if we are patient and keep searching.

    • retirebyforty June 21, 2017, 8:41 am

      Good luck on your search. It might be tough in that environment. A fixer upper or a starter home would be a good option too. You can rent it out later.

  • Sam @ Financial Samurai June 21, 2017, 8:05 am

    I shoulda bought a duplex or a four-plex in 2005 instead of my single family house for higher returns. BUT, I would have had 2-4 kitchens, 2-4X more bathrooms, 1-3 more sets of tenants to management, and my quality of life would have been much worse.

    Instead, we enjoyed living in an awesome house in a great area for 10 years. Can’t get those years back. To be able to live in a SFH in SF from ages 28-37 is rare.

    But now I’m selling the house, and I think the returns are actually similar! I did the math and looked around. So I sacrificed rental income by living larger all those years, but the windfall is the same.


    • retirebyforty June 21, 2017, 8:30 am

      Some markets are strange. The 4-plexes here are cheaper by square foot. Most people just don’t want to deal with being a landlord.
      Our duplex has been pretty good. It hasn’t been much more expensive than our SFH rental. We’ve been very lucky with tenants also.

  • bhaskomy June 23, 2017, 1:55 am

    Hi Joe
    Can you please do an article on what considerations to take when investing in a mutiplex?

    • retirebyforty June 23, 2017, 8:53 am

      Hi, I’m with Arnold on this one. Just do it and deal with problems as they come up. If you think about it too much, you will talk yourself out of it. If it didn’t work out, you can sell the place and recoup most of your investment. Here is an excerpt.

      “How can you stand the pressure? You have the responsibility of renting out the other five units. You have to collect the rent. What if something goes wrong?” Problems were all he could see. It could be terrible. Tenants would make noise. What if somebody came home drunk? What if somebody slipped, and I got sued? “You know what America is like with the lawsuits!” and blah, blah, blah.

      I caught myself listening. “Artie, you almost scared me just now.” I laughed. “Don’t tell me any more of this information. I like to always wander in like a puppy. I walk into a problem and then figure out what the problem really is. Don’t tell me ahead of time.” Often it’s easier to make a decision when you don’t know as much because then you can’t overthink. If you know too much, it can freeze you. The whole deal looks like a minefield.”

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