3280: [Part 2] Why You Should Invest in Real Estate by ESI on Financial Independence Investing Plans

Summary

Optimal Finance Daily – Episode 3280: [Part 2] Why You Should Invest in Real Estate by ESI of esimoney.com

Host: Diania Merriam
Guest/Source: ESI (esimoney.com)

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Episode Overview

This episode, hosted by Diania Merriam, features Part 2 of ESI’s comprehensive guide on why real estate investing can be a powerful vehicle for achieving financial independence and early retirement. Drawing from ESI's personal journey and practical investment strategies, the episode outlines both the financial and lifestyle advantages of rental property ownership. Diania supplements the discussion with her own insights and lessons from other real estate professionals, emphasizing the importance of focusing on cash flow over appreciation.

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Key Discussion Points and Insights

[00:46] ESI’s Real Estate Investment Background

• ESI purchased three multifamily properties (14 total units) post-2008 housing collapse, using all cash—allowing him to negotiate lower prices and close deals faster.
• Renovated units as leases turned over, resulting in rent increases.
• Delegated property management to professionals shortly after acquiring his second property, drastically reducing his time commitment.
• Returns: Approximately 10% net annual return, with properties appreciating 45% since purchase (“It's probably much higher now.”).
• Real estate initially accounted for 70% of his retirement income, now around 40% as he diversified further.
• Regret: “The worst thing I did: didn't buy enough. … If I had relaxed a bit to just 9%, I would have had twice the number of places and currently be making a fortune. Update: I'm still kicking myself for this one.” [02:01]

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[02:38] 7 Advantages of Investing in Real Estate

1. Great Returns

   • “How would you like to make 10% on your money plus appreciation? It can be done.” [02:43]
   • Even in today’s market, deals can deliver 7% returns.

2. Strong Income Source for Retirement

   • Real estate’s higher returns mean less money invested and fewer years to retirement.
   • Comparing a traditional 4% safe withdrawal rate on savings vs real estate’s 10% returns:
     “A million dollars at 4% withdrawal ... or $400,000 at a 10% return ... Both earn you the same, but one is going to take over twice as long to reach.” [03:20]

3. Affordability

   • Bought his portfolio “in a mid-sized Midwest town ... for a bit under $600,000 for 14 total units and produce $60,000 or so of income a year.” [03:45]
   • Real estate investing doesn’t require millions in pricey urban markets.

4. Low-Effort, High-Reward Business

   • “I spend about two to three hours max a month ... If we figured my hourly earnings over the life of my properties, it's probably astronomical." [04:09]

5. Minimized Headaches with Professional Management

   • Property managers handle the day-to-day issues for 8% of rents:
     “They allow me total freedom and almost no time commitment. ... There’s no way I could own my places and live half a country away without them.” [04:37]

6. Creative and Entrepreneurial Satisfaction

   • Enjoyed remodeling units, increasing both personal fulfillment and rental income.
   • “You get to make financial decisions and then design a living space based on your vision. ... It was a fun process.” [05:15]

7. Upfront Time Investment is Enjoyable for the Right Person

   • Finding and analyzing properties takes time, but:
     “I like looking at various homes ... imagining what they can become and reviewing the possible financials. … if you do, it's a blast.” [05:48]

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[06:08] Key Advice: Find a Real Estate Mentor and Self-Educate

• Mentors provide invaluable guidance:
  “When I finally found mine, I knew I was ready to buy."
• Recommended Books:
  • How to Invest in Real Estate
  • Building Wealth One House at a Time
  • The Book on Rental Property Investing
  • The ABCs of Real Estate Investing
• “Since we're dealing with big ticket investments, even one insight … could make you thousands of dollars better off than you would have been without it.” [06:45]

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[07:01] ESI’s Closing Thoughts

• Real estate isn’t for everyone, but it's a strong option for those seeking:
  • Good returns
  • Enjoyment in running a mini business
• Markets matter: Prices in some hot cities are too high to earn decent returns, unless “you bank on appreciation, which I don't.”
• Considering potential vacation rental investments, but still an undeveloped idea.

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Host’s Commentary: Diania Merriam on Appreciation vs. Cash Flow

[09:22] Cash Flow Is Key, Not Appreciation

• Diania highlights a caution from Rich Carey (Rich on Money): “Real estate investors need to focus on cash flow and only buy properties that fit the 1% rule ... the property's monthly rent must be equal to or no less than 1% of the purchase price."
• In high-cost markets, investors often justify poor cash flow by “banking on appreciation,” but appreciation typically only matches inflation in the long run.
• Example:
  • Rich bought a house for $280k, it was worth $400k two years later—big jump.
  • Sold it 13 years later for the same $400k, netting only 2.6% annually—while S&P 500 returned 118%.
• “This is another reason why ... your primary residence is not an investment. A property is an investment when it's an income producing asset.” [10:37]
• Memorable Moment: Diania’s summary reinforces: Focus on investments that produce income, not just potential value gains.

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Notable Quotes

• “The worst thing I did: didn’t buy enough. … If I had relaxed a bit … I would have had twice the number of places and currently be making a fortune.”
  — ESI, [02:01]
• “You don’t need to spend $2 million in New York City to get the income you need.”
  — ESI, [03:49]
• “If we figured my hourly earnings over the life of my properties, it's probably astronomical.”
  — ESI, [04:12]
• “There's no way I could own my places and live half a country away without them.” (on property managers)
  — ESI, [04:55]
• “A property is an investment when it’s an income producing asset.”
  — Diania Merriam, [10:37]

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Timestamps of Important Segments

• [00:46] ESI’s background and entry into real estate
• [02:38] List of 7 advantages of real estate investing
• [06:08] Finding a mentor and critical resources
• [07:01] Cautions and closing thoughts from ESI
• [09:22] Diania’s reflection on appreciation vs. cash flow, with Rich Carey’s example

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Episode Wrap-up

This episode offers an authentic look at the practical benefits and considerations of real estate investing for financial independence. ESI’s experience underscores the power of rental property income (especially with leveraged management), while Diania’s thoughtful commentary emphasizes realistic investment expectations. The focus remains clear: successful real estate investment should prioritize reliable cash flow over speculative appreciation.

Whether you’re a seasoned investor or considering your first property, this episode provides actionable advice and warnings, all rooted in real-life experience.

Transcript

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[ESI (Real Estate Investor and Host)]

This is optimal Finance Daily. Why you should invest in Real Estate Part 2 by ESI of esimoney.com how real estate allowed me to retire at 52 before we get into why I like real estate, let's take a quick look at my background for perspective. I bought my three places, 14 total units, shortly after the housing collapse. I paid with cash. This allowed me to negotiate lower prices plus beat out other potential buyers who needed to get financing. I hired a contractor and as units came up for renewal, we remodeled them, making them much nicer. As a result of the investment in the units, we raised rents. Shortly after I bought my second place, I turned day to day operations over to a professional manager. I net approximately 10% a year and my places have appreciated 45% to boot. Update the 45% number was an estimate from a couple of years ago. It's probably much higher now. I now live 1,000 miles away from the properties. I spend about two hours a month managing them, simply looking over monthly income and expense reports and they account for 70% of my retirement income. Since ESI money and some of my other investments like private real estate lending, have been doing so well, my rental units make up maybe 40% of my retirement income. Still very good of course. And it's not like these have lost their earning power. Their percentages have decreased only because I've created extra sources of income. The worst thing I did didn't buy enough. I had a firm 10% return guideline. If I had relaxed a bit to just 9%, I would have had twice the number of places and currently be making a fortune. Update I'm still kicking myself for this one. Why you should invest in real estate let's get to the nitty gritty now. Here's my List of Advantages of Investing in real estate number one great returns. How would you like to make 10% on your money plus appreciation? It can be done. There's a list on my website of the financial results as well as details on the appreciation my places have had since I bought them. Yes, it's true that I purchased near the bottom of the housing collapse, which helps with appreciation, but I'm looking at deals these days which still get me a 7% return. 2. Good source of Income Near Retirement if you want to retire, you're going to have to either live off earnings from your savings, withdraw from savings or find some other source of income. With the first two, you're limited to 4% at most, which which means you're going to have to save a boatload of money. This means you'll probably have to work longer. Since real estate has higher returns, the amount you need to invest is lower so there are fewer years until retirement. So which sounds more appealing to you? A million dollars at 4% withdrawal. So 40 grand a year or $400,000 at a 10% return which is also 40 grand a year. Both earn you the same amount, but one is going to take over twice as long to reach. Number three. Don't have to spend a fortune. I bought my places in a mid sized Midwest town. They cost me a bit under $600,000 for 14 total units and produce $60,000 or so of income a year. You don't need to spend $2 million in New York City to get the income you need. Number four Pretty good business with low hours. Let's say you owned a business that made 60 grand per year. How many hours do you think you'd have to work a week? It would be a ton. As I said, I spend about two to three hours max a month on my real estate investments. If we figured my hourly earnings over the life of my properties, it's probably astronomical. Number five Headaches can be minimized. This is the key that gets past Barbara's objections. Use professional real estate managers. I got mine shortly after I bought my second property and they have been awesome. Yes, they cost 8% of my rents, but they allow me total freedom and almost no time commitment. They also handle all those pesky early morning emergency calls and deal with bad tenants. It's money well spent. There's no way I could own my places and live half a country away without them. Number six It's a creative outlet for someone who likes business and being creative. Real estate is awesome. You get to make financial decisions and then design a living space based on your vision. With my places, we bought units that needed a bit of TLC, invested 10 grand in each and went to work. They turned out stunning. Rents increased a couple hundred dollars a month per unit too. It was a fun process and number seven does require upfront time, but it's fun. The largest time investment for me was actually finding the right places, but this is enjoyable too. I like looking at various homes and apartment units, imagining what they can become and reviewing the possible financials. If you don't enjoy this sort of thing, it can be a hassle, but if you do, it's a blast. I'd be remiss if I didn't offer one piece of advice that could make all of this go much smoother. Find a Real estate mentor When I finally found mine, I knew I was ready to buy. His advice and guidance through the process was invaluable. In addition to finding a real estate mentor, I would suggest you do a bit of your own self education along the way. I wish I had. If nothing else, it gives you additional perspectives and information. Since we're dealing with big ticket investments, even one insight finding or fact could make you thousands of dollars better off than you would have been without it. Here are the books I think are the ones to give you a solid real estate how to invest in real Estate, Building Wealth, One House at a Time, the book on Rental property Investing, and the ABCs of Real Estate investing. Summary As I said in my comment in the original post, real estate investing isn't for everyone. So if the points previously mentioned turn you off, that's fine. There are other ways to grow your net worth and retire early. But if you want or need a solid source of income with good returns and you enjoy running your own mini business, real estate investing just may be for you. Update if the markets I'm interested in cool off a bit, I'll be investing even more in real estate in the future. Both Grand Rapids, where my current places are, and Colorado Springs, where I live now, are too hot for my liking, and prices make earning a decent return difficult unless you bank on appreciation, which I don't. I might also invest in a condo or home in a vacation location, using it part of the year and putting it on home away the rest of the time. But that's only a relatively undeveloped idea at this point. You just listened to part two of the post titled why you should invest in real estate by esi of esimoney.com.

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[ESI (Real Estate Investor and Host)]

Appreciation of real estate was mentioned as an advantage in this article, but I'm glad ESI also mentioned that he isn't banking on it. While I'm personally not a real estate investor, I had the pleasure of recently seeing Rich Carey from Rich on Money speak at Campfi about this very topic. Rich owns 30 rental units and I was really surprised at what he had to say about appreciation. He was making the point that real estate investors need to focus on cash flow and only buy properties that fit the 1% rule, which basically states that the property's monthly rent must be equal to or no less than 1% of the purchase price. Many people who invest in high cost of living areas where properties that follow the 1% rule are nearly impossible to find will often say they're banking on appreciation of the property over the long run. The trouble is that over the long run, appreciation on real estate typically just keeps up with inflation, but you may have periods where you see big jumps. So, for example, Rich bought a house in 2003 for 280 grand, and two years later the house was worth 400 grand. That's a 42% increase in value, which is awesome, and this is what you hear all the time when people talk about their homes appreciating. However, when he sold that house in 2016, it sold for 400 grand, meaning that it didn't appreciate any further over 13 years, and the real appreciation was 2.6 per year for the time that he owned it. To put that in perspective, over that same time period, money invested in the S&P 500 index would have returned 118%. This is another reason why many people in the personal finance space will point out that your primary residence is not an investment. A property is an investment when it's an income producing asset. And it becomes an income producing asset when you focus on cash flow, on rental properties, not appreciation. That's a wrap for another Friday show. Have a great start to your weekend and I'll be back tomorrow where your optimal life awaits.