How to Actually Make Money in Real Estate

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  • For a $300,000 home, you would pay an extra $200,777 in total interest over 30 years in a 30-year mortgage at 4.5% interest
  • People do not make money from their first home unless they rent it out or pay more than 20% down
  • $8,970 agent fee (3%) and $6,000 closing cost should be considered by a seller when selling a house
  • Without renting out your first home, you can expect to pay $151,176 for ownership expenses in just 10 years. 
 

Why Most People Do Not Make Money with Their First Home Purchase

Families have been buying houses to protect wealth for centuries. For parents, the best thing you can do is to leave a home for your children. You give them a place to live, a place to earn additional income through renting, and a place to protect family wealth. However, real estate investing is far more complicated if you want to make money with it. You will be surprised at how hard it is to “make” money. We will look at a specific example in this article.

A Median Sacramento California Home Increased from $126,000 in 2009 to $327,000 in 2019

We will examine how much money we would make if we bought a house in one of the best housing markets today, after the 2008 housing bubble. From the end of the real estate market crash to now, the median house in Los Angeles increased 110% from $337,000 to $709,000. But the median housing price increased by 160% in Sacramento, California. The median home price increased from $126,000 in 2009 to $327,200 in 2019. Interestingly, in 2018, Sacramento is the city with the most net inflow of people according to Redfin data. The top 3 cities with the most inflow and outflow in 2018 are listed below:

 

 

Cities with the Most Net Outflow of People:

San Francisco, CA: 28,143

New York, NY: 23,214

Los Angeles, CA: 14,129

 

Cities with the Most Net Inflow of People:

Sacramento, CA: 7,029

Atlanta, GA: 5,466

Phoenix, AZ: 5,258

 

We Would Make $139,030 If We Sold the House Today, but Lose Money Overall

I found a real house in Sacramento California and calculated how much money we would make if we purchased it on December 16, 2008, right after the housing bubble. You can see the information for the actual house here. We would buy the house for $145,000 and sell it for the current listed price today of $299,000. We would pay $8,970 in agent fees (3%). And we would also pay about $6,000 in closing cost. We end up making $139,030 in total cash from this sale!

Do not forget to include both an agent fee of 3% and an average closing cost of $6,000 when you sell a house. Most people do not think about this when selling a house.

 

 

You Would Lose $12,146 if You Put Only a 20% Down Payment on the House

We lost $12,146 if we sold the house for $299,000. Why? When we only put a 20% down payment on our home and live in that house ( not renting it out), we would spend $151,176.89 for interest, taxes, home insurance, HOA fee, and utility over 10 years. However, if we did rent it out, we would make $107,853 at a rate of $1,000 each month!    

 

As you can see, we financially end up in the same place if we bought a house after the housing bubble and sold the house in 2019. The issue is most people do not think about how much money is spent maintaining a house. Your first house is not a real estate investment! Your second house might be a profitable investment if you rent it out and pay more than 20% down payment. Interest payments for a $300,000 add up to an extra $250,000 after 30 years at 4.5% interest! If you do not, believe me, you can calculate it yourself here. You can see our calculations for our actual gains below: 

 

You Would Make $176,794 If You Bought a House Without Debt 

You can make a lot more money from real estate by paying more than 20% down payment for the house. What would happen if we bought a house with a mortgage? If we did this correctly, we can expect to make $56,794 or $5,670 per year just from the final sale. If we also include renting it out and assume $1,000 per month earned from rent for 120 months (10 years), you can expect $120,000 more in the equation. In total, we would take home $176,794.


Real estate is a great way to protect wealth but not a good investment unless you have the cash or can rent it out. In summary, the point here is do not buy your first house thinking it is a good investment if you can’t afford to pay more than 20% down payment or do not want another tenant in there with you or your family. 

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