By Dr. Margaret Curtis, WCI Columnist
For years, my husband and I have been real estate curious. We liked real estate investing for all the usual reasons: the tax benefits, the possibility of more passive income, the investment diversification. I’ve written about how we were accidental landlords, and in 2023, we bought the office building that houses my husband’s practice. We have REITS in our portfolio, although these really behave more like stocks than like real estate, and we have none of the tax benefits of direct real estate ownership. Until this year, we had never owned an actual residential investment property—meaning a property that we bought with the sole intent of renting out.
In April 2025, we finally found a property that actually met all our criteria. In June, we closed, and now we are official landlords. I’m going to describe how we learned about real estate and how we analyzed this property, but first, I’m going to discuss all the ways we don’t invest in real estate.
How We Don't Invest in Real Estate
Remotely
Buying property using an agent in another city or across the country, maybe even sight unseen, is a much-touted way to get into investing. The REI websites, podcasts, and discussion forums hype this up with headlines like, “Don’t miss out on the next top cash-flowing markets!” I don’t believe this kind of real estate hype any more than I believe “this stock is the next big thing!” because 1) if it’s really that great, people in the know are busy investing and not writing about it; 2) no one really knows for sure; and 3) I need to really know and understand a market (or a company) before I invest.
Real estate is local and sometimes hyper-local. Two blocks can be the difference between a profitable investment and a money pit. Where I live (Vermont) is not generally favored by big-time investors because prices are high compared to the Midwest and the South. But I know the state and the neighborhoods. I also have a local lawyer, a lender, and a guy who can repair anything. His name is Kyle. I’m sure there are Kyles in Ohio. I just don’t know how to find them.
Passively
There is even more hype about passive real estate investing. You can put money into funds or syndications that build, flip, or rent apartment buildings, houses, mobile home parks, or short-term rentals in any part of the US or the world. These funds generally promise big returns with little risk and less effort.
I don’t trust these either. Private real estate funds have little regulation. If the fund's “sponsor” (the general partner, or the person running the show) doesn’t know what they are doing or gets caught by a change in market conditions, you may get a capital call asking for more money. Or you may just lose your whole investment.
I have looked into a handful of these, and some of the fund sponsors have only been doing this for a few years and have never weathered a downturn. Also, they are all in different parts of the country (see above).
If you are starting to think I am fundamentally untrusting and curmudgeonly, you are right.
In Short-Term Rentals
STRs are wildly popular because they can be very profitable, even if the early days of sky-high returns are probably a thing of the past as markets get saturated and regulated. You can also get the tax advantages of ownership of a STR with fewer hours than you can with long-term rentals (100 hours of participation annually instead of 750). The downside of STRs is that you are basically running a hospitality business or paying someone else to run it for you. I don’t want to run a hospitality business. Again, the hotspots for these rentals are generally in the South and West. (Why would you not want to visit Vermont? You can ski, eat ice cream, and have a picnic with golden retriever puppies.)
For Appreciation Only
In expensive real estate markets, it can be very hard to find rental properties that actually produce income. In other words, the rental income doesn’t cover the mortgage and taxes. People who want to invest can go one of two routes: buy in other markets or stay local and hope the property appreciates enough to sell at a profit in the long term.
This strategy doesn’t appeal to me for two reasons. First, I don’t want a cash drain. Second, I’m not convinced that any market will continue to go up forever. I have benefited from real estate appreciation in my own family’s properties, but I don’t want to count on it. Hope is not an investment strategy. So, I only considered properties that would cash-flow from the start.
You may take an entirely different approach. You may be highly proficient in running short-term rentals in another state, and more power to you. None of these appealed to us, and so we arrived at our own criteria.
More information here:
How to Start Investing in Real Estate
Do’s and Don’ts for Docs: Real Estate by the Decade
How We Wanted to Invest in Real Estate
Between 2 and 4 Units
Anything over four units is considered a commercial property, and it would need a commercial mortgage. These typically have a five-year fixed rate and then a balloon payment, at which point the owner can either pay off the loan or refinance. There’s nothing wrong with this strategy, but for my first foray into REI, I wanted something more familiar. Staying at four units max kept us in residential loan territory. As it turned out, we got a 20-year commercial loan because the terms were better than residential mortgages at that time (thanks, local lender Jason), but the teaching point still stands.
Minimal Renovation (If Any) Needed
Buying a fixer-upper is a legit strategy, but I don’t have the bandwidth. I'm too busy frolicking with golden retriever puppies, which is what we do up here in Vermont.
Cash-Flowing
This is the part that makes people like me the most nervous. How do you know if a property will make money each month? There are the 1% or 2% rules, but these are just a starting place. You can buy access to a rental calculator that will take local rents into account, or you can do what I did and use a free online spreadsheet. You use the current rents (if there are tenants in place) or a local average. If you are not sure what local averages are, do an online search or just check out similar rentals in the area. This is where buying local makes things easy. We wanted at least a 7% cap rate (for explanation of cap rates, see below).
More information here:
How the IRS Treats You as a Real Estate Investor
The 60+ Worst Mistakes You Can Make in Real Estate Investing
Our Hunt for Real Estate Properties
Once we settled on our criteria, we started looking for properties—right around the time interest rates went up and created a seller’s market. In hindsight, I’m glad that none of the dozens of properties I looked at over the past five years panned out, because during that time, I got a great education. I read blogs and websites, listened to podcasts, and perused listings (you could also take WCI’s real estate course). I set up a couple of searches on realtor.com and now get daily emails with new listings. Most of these I skipped, some I looked at, and maybe 10% I actually ran the numbers on. Out of all of these, I went and looked at fewer than 10 properties. This is considered normal in the real estate investing world, if my podcasts are to be believed. There is even a name for this: the “deal funnel,” which just means that you should start by looking at a lot of properties to end up with just one.
When we finally found a property that worked, we moved quickly and confidently. I still had some serious agita the night before closing, but that’s just me. Here’s how the numbers looked.
You’ll notice that the residents pay all their own utilities. This helps the bottom line a lot.
The spreadsheet then spit out these metrics.
Capitalization Rate: 8%
Capitalization rate (or cap rate) is the equivalent of yield in stock investing. Cap rate is the Net Operating Income (income minus expenses, but not mortgage payment and interest) divided by the purchase price. This can be multiplied by 100 to give a percentage. The cap rate is the return you would get if you paid all cash for a property (no mortgage). This is a standard measure of profitability, because every investor will have different financing. This is nice to know, but since most of us buy property using a mortgage or other leverage, we need to factor financing in our calculations. That brings us to . . .
Cash on Cash: 4.34%
Cash-on-cash return (COC) is annual cash flow (income minus expenses, this time including mortgage payment and interest) divided by the cash you paid (down payment + initial expenses). COC accounts for financing in both the mortgage payment (higher payment + interest = lower COC) and the down payment (lower down payment = higher COC).
Cash Flow: $5,964 Per Year
This is just how much you pocket at the end of the year.
Return on Equity: 26.64%
Return on Equity (ROE) is the total return of the property (cash flow + tax reduction + debt reduction + appreciation) divided by the equity you have put in (down payment + capital improvements). This accounts for both actual profit (in the form of cash flow and reduced taxes) and paper gains (paydown of debt and appreciation), which you don’t realize until you sell. If you are buying for appreciation rather than cash flow, this is the key metric.
You might look at these numbers and think that this seems like a lot of effort for 4% return on your cash outlay, per year. And you would not be wrong exactly, but this is where the other metrics, like cap rate and return on equity, come into play. Stock market investing is a lot easier. That’s why investing in real estate is optional. It’s also slow. The power of real estate investing is in the growth over time, both in rents and in one’s investment portfolio. There are also economies of scale that kick in when you have more than one property.
That’s how, on June 18, we became actual real estate investors by buying a cute duplex in a sleepy cul-de-sac. On June 20, one of our tenants was arrested by federal agents in a massive drug and firearms raid. We added another local lawyer (Marc) to the team. Watch for updates in my next column (coming in December): How We Became Actual Landlords.
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Would you rather be a direct real estate investor or utilize more passive activities like syndications or funds? Have you bought a property for the sole purpose of renting it out? What was your experience? How did you make the numbers work?
This column is excellent. Really makes me think about how putting in work in publicly traded stocks probably doesn’t add to just buying a Vanguard etf. But that “putting in the work” for local real estate investors can generate gains over REITs etc. , especially when taxes are factoring in.
Thank you for sharing your investments in this area.
“The power of real estate investing is in the growth over time.”
Stocks and other investments also grow over time (exponentially).
Thank you for reading! Early days still and we don’t have the full tax benefit (neither my husband or I qualify for Real Estate Professional Status) but hopefully over time we will find it a good investment and diversification strategy.
And yes, Trugs, anything that accrues compound interest will grow exponentially. Stocks are a lot less work, as this post should make clear.
Less than $6,000 per year can be quickly eaten up by HVAC, roof, etc. You’re basically working for the mortgage company.
if the total was $6000 annually in perpetuity I would say this is a poor investment. But rents go up while mortgage payments stay the same and eventually go to zero , properties generally accrue in value – it’s a lever that keeps getting longer.
That’s where the 10% capex cost comes in. If you are saving proper for capex (which 10% is on the higher end) then the HVAC and roof do NOT come out of the $6000 and growing cash flow. Only way it eats into the cashflow is if there isn’t proper planning of capex and savings. I actually keep my real estate fund in MMFs to get higher interest too.
good advice about the MMF – right now I have the account at a local bank but when it has accumulated enough cash I will transfer some to a higher-interest-bearing account.
and you are also right about the capex figure. I tried to run very conservative numbers so we wouldn’t find ourselves unexpectedly in the red.
what a cliffhanger. looking forward to the rest of the story.
i’m glad you figured out all the pearls you dropped in this article without the pain of experience (unlike me). i can tell you this is all spot on.
Thank you for reading! And watch this space for updates, including what we learn through the pain of experience.
Probably a super dumb comment but could you actually spell out out the math for the cap rate, cpc and roe with your numbers from this purchase? Seeing an example with all the numbers plugged in helps me understand if I’m on track with how others are making calculations like this. Thank you!
Not a dumb comment at all.
First some intial calculations:
Our total monthly rent for both units is $5100, so the annual gross income is $61,200
Annual operating expenses (taxes, insurance, maintenance, utilities) are $16335
Net Operating Income (NOI) is income minus expenses so 44865
Annual mortgage payment is $38901
Initial equity is how much you had to put in at the outset: downpayment + taxes, fees etc + any improvements you had to pay for. $137420
Now you can calculate the metrics:
Cash flow: Net Operating Income-Mortgage payment (principle + interest) = $5964
Cash on cash: Cash Flow/initial equity = 5964/137420 = 4.34%
Return on equity: ( this is a little less objective in that it assumes a certain rate of appreciation, in this case 2% or $11000 per year) Cash flow + appreciation + tax benefit + debt reduction/total equity = (5964+11000+11286)/137420=20.5%
Hope that is helpful. I have a super-detailed spreadsheet that is no longer available online, unfortunately, but you can build you own or find something similar online. I found one by googling “rental property calculator”. Look around until you find one that has the level of detail you are looking for.
Thank you so much! Super helpful. Appreciate that you took the time to spell it out!
Congrats on your first rental. I remember when I first dipped my toe in the REI world. Definitely a slow process and sometimes opaque (can’t look at daily value of a property like you can your stocks) but it does build up over time (hopefully 3% rent appreciation and 3% value appreciation per year). One thing I rarely see mentioned is that you’re getting appreciation on the full value of the property even though you only put in a much smaller down payment which you don’t get in stocks. In 10 years you’ll be so happy you did this…unless you keep having tenants getting arrested. Ha.
Thank you for the encouraging words!
I have instituted a “two felony arrests and we are out of the rental business” rule. We are halfway there.
Margaret, I thought this article was terrific. Nicely done. And thank you for sharing your experience.
Like you, I’ve been in the “interested in real-estate” phase for the past five+ years. It’s encouraging to see someone finally dive in. I’ve been turned off by the housing market since COVID… but I’ll have to give it some more consideration.
Was realtor.com a helpful resource? My biggest challenge has been actually finding properties that cash flow… that meet a reasonable criteria for a good investment.
Thank you!
I found realtor.com helpful to get a sense of what is out there and to practice running numbers. Over the past five or so years there has really been nothing on the MLS that made worked (overpriced for what it could rent for), although in the past six months or so as the market has softened there have been a few that have come through that might work. I haven’t done a detailed analysis because I’ve been busy getting this first rental up and going.
We bought this property without a realtor, from someone we met – oddly enough – when he was surveying the parking lot behind my husband’s office. I have also heard of properties for sale through real estate investors that were looking to downsize but never went any further because they were all bigger than we were looking for (large apartment buildings).
There are “investor agents” who may be able to find off-market properties in the market where you are looking, although I can’t personally attest to that.