My Pro's and Con's of real estate investing

[Starsky]

I am glad it has worked out so well for all the landlords here. Just my own very-personal preference, I'd rather stick a sharp stick in my eye than be a landlord.

It's like taxes - You can do it yourself and it's painful, as expected; or you can find the right professional to do it for you and it's pain-free. You spend a little for the privilege, but it's well worth it, IMO. (...and I can sleep at night. I love not having to worry to death about the markets!)

 

[Onward]

Rental real estate slowed my progress to FIRE by 2-3 years, at least. Landlording also aged me prematurely by probably 5 years, so that's a total of 8 years of retirement that your favorite investment cost me.

I've found most people who rave about real-estate's returns conveniently forget to factor in the many expenses along the way. Add in the cost of your time, and you're left with a lot less than you may think.

In general, I think real estate, as an investment, is for people who are better with their hands than with their minds, while securities are for people who are better with their minds than with their hands.

I guess I'm in the latter camp.

Have a nice day.

 

[CaliKid]

Rental real estate slowed my progress to FIRE by 2-3 years, at least. Landlording also aged me prematurely by probably 5 years, so that's a total of 8 years of retirement that your favorite investment cost me.

I've found most people who rave about real-estate's returns conveniently forget to factor in the many expenses along the way. Add in the cost of your time, and you're left with a lot less than you may think.

In general, I think real estate, as an investment, is for people who are better with their hands than with their minds, while securities are for people who are better with their minds than with their hands.

I guess I'm in the latter camp.

Have a nice day.

I totally agree that real estate investors (myself included) do not factor our time in. Luckily, for me, I enjoy it so it's all good. However, for some people, who self manage their properties, it's really a part-time job. You are very right.

 

[BreathFree]

Rental real estate slowed

In general, I think real estate, as an investment, is for people who are better with their hands than with their minds, while securities are for people who are better with their minds than with their hands.

Have a nice day.

That wasn't insulting at all. LOL!!!

My favorite argument against rentals is the 3 am call you get concerning a toilet emergency of some sort. That has never happened to me. I have never had a call outside normal business hours in ten years. If someone did call, I would tell them to secure the water and i would call a plumber in the morning. Most issues are just a maintenance repairman phone call away, not a life ending emergency.

 

[pj.mask]

I'm currently going through a landlord 'experience'. I don't get all worked up over it because I don't need the money to survive and I expect I can recover it eventually. I plan to unload the rental in a few years (been about 3.5 years now).

Definitely can be higher return on investment but more stress. I agree with an earlier poster that as net worth rises rentals loose their luster. I fell into having a house when rent prices were high so it just sort of happened. Income of probably 100k + appreciation and tax advantage over <4 years for investment of $150k.

 

[RenoJay]

The number one pro for rentals for me was lack of sequence of return risk during withdrawal.



I have rentals because the withdraws are higher with no sequence of return risk. I pull out 8% a year and do not reduce my principal. If you are going to make a comparison I would hazard a bet stocks would be more advantageous during accumulation when no withdrawls are being made from either investment, but it seems rentals would win out during withdraw due to sequence of return risk.



I am invested in stocks and bonds as well, so I'm not suggesting one is better than the other. They are just different and diversification allows me to sleep at night.

This is a great point. (Although your principal may in fact go down if house value declines...but it wouldn't affect your ability to withdraw.) I've moved toward hard money lending because, similar to your example, I get regular payments in the 8% range without fluctuation in principal but also without the headaches of property ownership.

 

[Elbata]

Soon to inherit home in CA. Wife wants to sell it.

Here's why I'd like to keep it:
1. $3500/mo rent
2. We live nearby. Can both manage it, plus I'm a very handy guy. AC, Appliance repair, Garage Door and Plumbing--No problem.
3. CA's Prop 13 continues, and would have very low property tax.
4. Also motivated because of stock market prices at this time.

 

[Luck_Club]

Rental real estate slowed my progress to FIRE by 2-3 years, at least. Landlording also aged me prematurely by probably 5 years, so that's a total of 8 years of retirement that your favorite investment cost me.

I've found most people who rave about real-estate's returns conveniently forget to factor in the many expenses along the way. Add in the cost of your time, and you're left with a lot less than you may think.

In general, I think real estate, as an investment, is for people who are better with their hands than with their minds, while securities are for people who are better with their minds than with their hands.

I guess I'm in the latter camp.

Have a nice day.

Speaking for all the landlords hear, I'm quite insulted being labeled feeble minded, because I'm a landlord.

Analyzing a profit, loss and dividend yield of a company is child's play compared to analyzing a property to buy, repair and rent. Now if by being good with your mind you are referring to being able to read how the books are cooked, and management is lying to the investors, then you are smarter than me and my hats off to you.

I agree those that need to call an electrician to screw in a light bulb shouldn't be landlords. ** You need thick skin and the ability to say no. No I won't rent to you because you don't pay your bills and have a poor work ethic. No I won't pay you $100 an hour to paint my place, when most 17 year old's can do that job, with two hours training.

Name 1 other available to the masses investment where you can yield 20-30% with only marginal downside risk (not going to zero) from day one!

**side story here. I was doing a rehab near a acquaintance who was a lawyer. I needed a crescent wrench, so I asked him if I could borrow one. he said I don't have many tools, but sure come over. I got their and he had a 2 screw drivers a pair of pliers and a hammer. He was wicked smart, but not to handy.

 

[Another Reader]

"In general, I think real estate, as an investment, is for people who are better with their hands than with their minds, while securities are for people who are better with their minds than with their hands."

You clearly have been talking to the wrong people.

Anyone can buy a total market stock fund on a regular basis and likely have a reasonable retirement if they start early. If they are diligent and lucky, they may accumulate $1-$2MM. It takes brains to to get to a net worth in the high seven figures without making executive compensation. Smart use of leverage and the skill to recognize opportunities in real estate when they appear can accomplish that.

 

[kcowan]

Rental real estate slowed my progress to FIRE by 2-3 years, at least. Landlording also aged me prematurely by probably 5 years, so that's a total of 8 years of retirement that your favorite investment cost me.

I've found most people who rave about real-estate's returns conveniently forget to factor in the many expenses along the way. Add in the cost of your time, and you're left with a lot less than you may think.

In general, I think real estate, as an investment, is for people who are better with their hands than with their minds, while securities are for people who are better with their minds than with their hands.

I guess I'm in the latter camp.

Have a nice day.

I'm glad it's working for you. Some people are just smart about real estate and land-lording. I consider it a gift. My "smarts" lie in other directions.

Being small-time landlords worked fairly well for us for a few short years in the late 80's and early 90's. After that, we had nothing but one headache after another, and a lot of expenses - much more than yours. We ditched the properties. Many hard lessons learned, that we could have done without.

We have our real estate exposure in $180k of an RE investment trust. Our equity has more than doubled in ten years but I can get out of it for $10!

In the early days, I made a lot of money on our principal residences by buying low and investing sweat. Company moves financed the acquisition and disposition costs. I think it makes sense for handy people who like to see their investments. But I have moved on for 20 years and have no regrets. I even outsource painting!

 

[Starsky]

I think it's important to note that investing in a single rental home is not really the same as being a totally committed real estate investor. The expenses and time are not leverage-able the same way as with multiple properties. With multiples, you can negotiate much lower fees for outside management (and avoid 'landlording' completely).

Having one or two homes is a side hustle; three homes it starts to be a business; over five homes, it's serious monthly income.

And I have lots of time to manage my 'securities'. For me, a hammer is just for breaking things.

 

[Scuba]

This is a great point. (Although your principal may in fact go down if house value declines...but it wouldn't affect your ability to withdraw.) I've moved toward hard money lending because, similar to your example, I get regular payments in the 8% range without fluctuation in principal but also without the headaches of property ownership.

+1
Hard money lending is a great way to diversify without having the headaches of owning rental properties.

If I were "handy," I'd be more open to owning rentals. However I think most of my profits would be spent on hiring a property manager and repairs & maintenance as I'd want to outsource all of that.

 

[Scuba]

Soon to inherit home in CA. Wife wants to sell it.

Here's why I'd like to keep it:
1. $3500/mo rent
2. We live nearby. Can both manage it, plus I'm a very handy guy. AC, Appliance repair, Garage Door and Plumbing--No problem.
3. CA's Prop 13 continues, and would have very low property tax.
4. Also motivated because of stock market prices at this time.

Since you're handy, I'd keep it for sure. Prop 13 and potential appreciation are good arguments in favor of keeping.

 

[Amethyst]

I think the "midnight toilet call" as an argument against landlording is like the "what if your neighbor decides to paint his house purple"argument often heard when making the case for HOA's. Hardly ever happens, but plays on people's deepest fears and dislikes (of toilets or purple houses). Heck, unless there's only one loo in the unit, a non-flushing toilet isn't even an emergency. Not like a plumbing leak, which we have had happen, or a washing machine disaster, ditto.

That wasn't insulting at all. LOL!!!

My favorite argument against rentals is the 3 am call you get concerning a toilet emergency of some sort. That has never happened to me. I have never had a call outside normal business hours in ten years. If someone did call, I would tell them to secure the water and i would call a plumber in the morning. Most issues are just a maintenance repairman phone call away, not a life ending emergency.

 

[kgtest]

So for me the Pro's outweigh my Con's by a wide margin, I have a great property manager and spend very little time tending to them, I've managed to keep my repairs down because I bought the newest units my money would buy, all late 90's early 2000

working both sides of the fence, its my opinion fear prevents most from investing into real estate, and similarly fear prevents a lot from picking there own investments in the markets.

Calculated risks, are much better than just risks. Sure there are risks in income properties, but they have all most certainly been mitigated before you came along.

Now if your cons list said "3 evictions in 6 months" or "1/2 my units were vacant all last year" or "I just had a 1million judgement against my income property" I would say you sir have realized what most fear, but usually do not experience in real estate. We just don't really typically see those issues consistently appear and therefore work seems like less work.

My one unit I own is so self sufficient, I moved to a remote island, a year later moved back and hadn't had to do anything in that time span. Not too many jobs can be "bought" where you don't actually have to bust your butt. My tenant moved on my when I was on the island, and I simply leveraged my rental agreement in my favor to the point they found a replacement tenant for me and I didn't even have to do that. They even passed along my bank account # so the new tenant knew exactly where to deposit my rent money on the first of the month...haven't missed a beat in 3 years now.

Consistency is probably another reason folks prefer working for the man, and don't risk income property loss.

I wouldn't recommend quitting your day job if you have a pretty good gig. Income property and working full time can totally be achieved as I have, I call this double-dippin.

 

[38Chevy454]

I have had some rental properties on the past, a 4-plex in a not-so-great neighborhood and a SFH in good area. The not-so-great was a great cash producer, the SFH cost money each month before appreciation factored in. In general I am done with any landlord investments. It has to be treated as a side part-time work, if you do the work yourself. I would rather just invest in stocks and other investments and not deal with rental issues.

 

[Onward]

BTW, I was mostly kidding about the "hands vs minds" thing.

I own both securities and and a couple of rental houses, but I prefer the securities because I feel they make me more free.

I'm also the least-handy guy on Earth (my fault), and I loathe dealing with contractors and property mgrs.

 

[pj.mask]

To really get into rentals you have to own a few and then you either bring in management or diy - depends on how much your time is valued. Our rental property brings in good money but net is about 5% of income. Especially with Harvey going on - you really see the exposure risk of being concentrated in real estate. To me, I have a good paying day job and wouldn't want to manage 10-20 rentals (bought at the bottom of the market) to cover my/our retirement. And the cash to cover that type of purchase would put me past my retirement goal.

 

[brucethebroker]

This is a great point. (Although your principal may in fact go down if house value declines...but it wouldn't affect your ability to withdraw.)

+1
I remember driving buy a rental in '09, and thinking, "well, the value may have dipped, but the rents have not!".

Unlike the company that cuts the dividend, we have never had to cut the rents on any property over a 30 year period. And they increase each time we have a turnover in renters.

 

[brucethebroker]

"driving BY a rental.." not buy.
Too little coffee.........not enough proof reading.

 

[pjigar]

"Double dipping" (with a full-time job) is the only reason I started investing in real estate. And I am so glad I did. It has been 4-5 years of positive landloarding experience.

Pros:
* Inflation-adjusted tax-sheltered cashflow. This one is huge for me since I will depend on this cash flow for a decade before I can tape in to traditional retirement assets.
* Low on-paper income due to deductions and depreciations. This one is important for me to qualify for ACA subsidies.
* Inflation protected asset with residual value.
* High cash-on-cash rate of return if bought the property at the right price from 1st day.
* Mostly passive income stream.
* Most tenants has been easy to deal with due to proper screening. I can't stress enough on the importance of screening.

Cons:
* I spend about 4-5 days a year managing each house but most work comes in burst when new tenant moves-in so "burst of work" is a con.
* Emergencies needs to handled in timely manner. Plumbing and AC (due to old units). I am thinking about adding a clause in the lease that says if plumbing blocks week after you move in then it is your fault and you must get it repaired! I think Robbi has that rule with his tenants.
* Illiquid investment.
* Huge tax event upon sale. I have thought about selling one house where RoR has been diminishing but the price is skyrocketing but can't pull the trigger due to tax consequences! I might end up doing 1031 exchange.

 

[Senator]

To really get into rentals you have to own a few and then you either bring in management or diy - depends on how much your time is valued. Our rental property brings in good money but net is about 5% of income. Especially with Harvey going on - you really see the exposure risk of being concentrated in real estate. To me, I have a good paying day job and wouldn't want to manage 10-20 rentals (bought at the bottom of the market) to cover my/our retirement. And the cash to cover that type of purchase would put me past my retirement goal.

I have 25 renters. ~$340K in gross rents. Purchase price was ~1.8M, but I only had to have maybe 20% of that down, across several years.

I am not sure where you can get a $150K+ retirement income and only have ~$360K invested.

 

[JoeWras]

The Raleigh-Durham, NC area - I'm in CA.

(This may sound crazy, but I've never met a single tenant, or ever been inside most of our properties. Doesn't get more pain-free than that.)

But sometimes pain for your neighbors.

Our problem houses here in RDU area neighborhood are rentals.

 

[Carpediem]

I have 25 renters. ~$340K in gross rents. Purchase price was ~1.8M, but I only had to have maybe 20% of that down, across several years.

I am not sure where you can get a $150K+ retirement income and only have ~$360K invested.

Very impressive! How the heck do you find someone willing to finance those properties? We'd love to pull the trigger on a few more.

 

[pj.mask]

I have 25 renters. ~$340K in gross rents. Purchase price was ~1.8M, but I only had to have maybe 20% of that down, across several years.



I am not sure where you can get a $150K+ retirement income and only have ~$360K invested.

Well I'm not sure where you can buy a house for 70k - not anywhere around me. Much less a house sub 150k that you wouldn't have to rehab with significant upfront cost. Also, seems crazy someone would rent a house for 18% of the purchase price per year. I can't get the math to work.

Unless you're saying you bought them a long time ago and that is the non-inflation adjusted amount? How does that compare to money put in the stock market because that's what people here seem to be evaluating: rental vs stocks.

You absolutely don't have 'only $360k invested' and to get your returns you take on significant risk likely very localized to a specific town.

The fair rent to buy calculation would put $1.8million worth of property to bring in $70k/yr but you are saying you take in 5x the fair value?! That sounds like a very specific market and if true you got a great deal - one that 99%+ other people can't achieve.

On the other hand, 340k/yr rent income = around $9million in fair market house property value so yes, that would be more than enough for me to retire.

(This is all based on NYTimes default calculator but the case still stand if numbers were adjusted by a factor of 2)