A former equities trader who now invests in real estate full-time and cash flows $45,000 per month explains why 'the risk-reward is much more attractive on real estate than stocks' (2024)

"I'm very familiar with the equities market," the 34-year-old investor told Insider. "And I'm supremely confident that real estate is much better from a risk-reward standpoint than stocks. You can make a lot more money with a lot less risk."

Berkley made good money while working in finance: His starting salary at his first job was $65,000, and he ended his career earning $625,000, he said. Even so, the bulk of his $7 million net worth is due to his property investments, he noted: "The money that I made came almost exclusively from real estate."

And he's only doubled down on the investment, he added: More than 80% of his current net worth is invested in real estate.

Buying property had been on Berkley's radar before he started a career in finance, he recalled. But he couldn't always afford to buy.

Having graduated with over $100,000 worth of student loans, getting out of debt was his primary focus after college. In his first year working, he put half of his take-home pay towards his loans.

He made a sizable dent in his balance, but changed his strategy after realizing his money could be used more efficiently elsewhere.

"I thought, 'Wait a second. I have debt locked in at 4%. Why am I trying to save 4% when I can go make 10% or 20% or 30% by investing?'" said Berkley. He switched to paying the minimum amount on his loans and set aside the extra cash to invest in real estate.

Berkley bought his first property, a $466,000 two-bed, two-bath condo in the North Dorchester neighborhood of Boston, in April 2013. He financed it with an FHA loan and 3.5% down payment, and lived in it for a month before work required him to move to NYC. At that point, he rented both bedrooms and started collecting rental income, but not enough to cover all of his housing expenses.

A year later, he sold the condo for $70,000 more than he bought it for and used the profit to buy a multi-family property in Worcester, Massachusetts, where he continued buying multi-families for the next five years.

In 2019, Berkley started selling off his Worcester rentals to buy medical buildings, which he preferred over residential because, "I was able to get stronger cash flow with a lot less volatility," he explained. "These medical tenants are signing five- to 10-year leases and doctors don't go out of business. Their revenue stream is as good as government credit. They're always going to be able to pay the rent."

Currently, he's more interested in acquiring retail buildings.

As of January 2022, Berkley owns eight properties on his own, including four medical condos, a medical building, and three single-family residences: one in Massachusetts, where his family resides, one in North Carolina, where his family is moving in February 2023, and one in Vermont, which he considers a secondary residence.

Plus, he manages two funds that invest in commercial real estate, both of which he owns a piece of.

Between his various revenue streams — rental income from the properties he owns and dividend payments from his own fund — Berkley cash flows $45,000 a month, according to documents verified by Insider.

"I have enough money that I don't have to work another day for the rest of my life," he said. "I don't spend my net worth. I don't spend the money in the bank. I only spend the cash flow."

If you want to build long-term wealth, Berkley believes that real estate investing is a much more efficient way of doing so than stock market investing.

"The S&P 500 index has gone up, on average, 11-12% per year for the last 100 years," he explained. "With real estate, you can blow those returns away because there are four ways you can make money."

1. Value add

This is when you take a property that has room for improvement and add value to it through upgrades. It requires time, money, and some creativity, but the idea is that you can rent or sell the property for more than you originally could, and recoup the money you invested in the rehab.

The first multi-family property Berkley bought in Worcester was a brand-new build.

"I got this great, brand new building, but I paid top dollar for it. I had some cash flow, but there was no upside. I couldn't create value for it," he explained. "I realized that I could make more money if I bought a dilapidated building, paid to fix it up, and then rented it out."

Moving forward, he started buying older buildings, renovating them, and renting them out, which increased his cash flow.

This strategy isn't for everyone — some successful investors refuse to buy anything but new builds — but it's one that Berkley has used to boost his return on investment.

2. Cash flow

If you're buying an investment property and renting it out, you have the opportunity to generate cash flow, which is your rental income minus all of your expenses.

Ideally, you have positive cash flow, meaning you have more money coming in than going out. The very first property Berkley bought was the opposite of that.

"I was bleeding about $1,000 a month on it," he said, referring to the North Dorchester condo. "That's what taught me the importance of strong cash flow. That's how you weather a recession. That's how you don't go bankrupt."

Since making that early mistake, "the number one thing that I care about when looking at any property is free cash flow yield," he added.

When evaluating deals to understand if they might cash flow well, he follows the "1% rule," which says that the monthly rent should be at least 1% of the purchase price. For example, if you buy a $300,000 property, you want to be able to rent it out for at least $3,000 a month.

"If you follow that rule, you'll cash flow and make a decent return," he said.

3. Debt pay down

Every time you make a mortgage payment, you're building equity in the home. With each payment, you own a bit more stake in the property until you own the asset all-out.

The great thing about having tenants paying rent is that they are the ones paying down a main chunk (ideally, the entire chunk) of your loan.

4. Levered appreciation

Of all four ways to build wealth through real estate investing, "this is the biggest one," said Berkley.

If your property goes up in value, that's called appreciation and that's a form of making money. The great thing about real estate is that you can borrow a lot of money (from a mortgage lender) to buy the asset, but you don't have to share any of the appreciation; you're getting levered appreciation.

Berkley gives the example of two different home buyers who are planning on buying a $1 million home, and both have $1 million to spend. Person A wants to buy in all cash, while Person B wants to put 10% down and borrow the other 90%. That means Person A is paying $1 million upfront and borrowing $0, while Person B is paying $100,000 upfront and borrowing $900,000.

If the house goes up 10% in value, it's now worth $1.1 million, meaning Person A has made a 10% return (they put in $1 million and now have $1.1 million). Person B also made $100,000, but since they only put $100,000 down, they made a 100% return.

Person A can only afford to buy one, $1 million home, but Person B can buy 10, $1 million homes and control $10 million worth of property. If those homes all go up 10%, Person B makes $1 million, while Person A has only made $100,000.

"That's the power of using other people's money and that's how you really get rich," said Berkley. "The bank doesn't require you to share the profit with them, so that's why I always try to lever up as much as possible. But you have to make sure that you have significant cash flow to cover your debt payments, otherwise you get in trouble."

A big misconception is that all debt is bad, he noted: "It's bad if you use it on your credit card. But it's not bad in real estate, as long as you have cash flow."