Rental properties seem worse than traditional investments

110 Replies

As an excited newbie, I have very little experience in real estate investing so at a meeting with my financial planner I asked about house hacking as a busy professional and he stated it would be a bad idea.  This took me down from cloud 9 real estate guru excitement.  It made me really face the fact that maybe a fiduciary fee-only financial planner with 30 years of experience has some wisdom. So I thought a lot, listened to tons of BP podcasts, read forum posts, analyzed several deals, and thought of worst case and best case scenarios.  It seems that for someone who doesn't want to work an additional job that real estate investing is a bad idea and here is why... 

I think that in order to be a successful real estate investor you have to take it on as at least a part-time job putting in 10-20 hours a week to maintain an informational advantage and run the day to day of the business.  It is absolutely a business and is not hands off like other investments hence the higher returns.  We cannot predict life or the market and when you factor in time invested and the risk of the entire cash flow of a property being wiped out overnight with the wrong tenant or just a bad year for the property, it makes it much less attractive.  Some would say stocks are risky as well but if you look at things like index funds over 20 to 30 years; a 7-10% annual return for sitting on your couch certainly has me second guessing how much I would like to pour into real estate investing.

In conclusion it seems that real esate investing is a great way to become financially free if you want to quit your day job with a lot of leg work (aka a second career), or a great idea for someone who is business savy already and has the capital to start an additional business.  For a busy medical professional like myself, I am certainly having second thoughts about going "all in."  The gurus and those who are successful certainly have done it but there are many more that have failed, or over the long run have not beat traditional hands off investments and spent a significant amount of time doing so.  If anyone has studies on the success rates of the average buy and hold investor I am curious.  

PS:  I still plan on trying to find a househack as a short term means to reduce my living expenses.  I am interested in real estate investing as a means to portfolio diversification.  It's all about the deal!  Thoughts and comments are appreciated!

No offense to you, but most doctors are terrible at business.

This is why savvy people approach them to utilize their money and put together big deals.

You should definitely take into account that, due to his profession, he might be biased.

My whole career has been in equities, but as of right now I don't own any.

@Jeremy Hua couldn't agree with you more.  There is a big demand in the medical profession for doctors with MBA or undergraduate business degrees not that a degree means anything for what it's worth. 

@Rob Drum Jr. I'm sure he's biased to what he knows but the small company they have manages 500 million dollars in assets.  He's looked into REITs as a way of diversification but has not pulled the trigger on them.

My dad is a financial advisor and still invests real estate. I'll first list his cons:

1. Real Estate is not liquid- It's just not even close to the liquidity of stocks. The other concern is that with one phone call (ideally), you can double your investment in a single stock or pull all of your funds from said stock.

2. Free time- You buy a stock and can go on vacation and turn your phone off more or less. Obviously it is wise to keep an eye on things, but you're not getting 2 am calls about rain in the apartment.

The reasons why he likes it:

1. Level of complexity- For as convoluted as real estate can be, it doesn't require hours or study and commitment the way stocks do. I view real estate as somewhat similar to looking at a single sector in stocks like pharmaceuticals or tech.

2. There are lots of failures- However, if you can develop a system and get it right, you will eliminate your competition. Most people don't like to rent to young millennials. That is my bread and butter. They are so excited to be renting a nice place. Typically they work long hours. They do like to have a good time, but not to the point that it puts their jobs/careers at risk. 

3. Dividends- The dividends you can earn from real estate are leaps and bounds better than stocks. In the 5-7 years that we have owned the majority of our properties, they have produced a 10% ROI and appreciated by 75-150%. We plan on refinancing the loans on these properties, collecting the cash and purchasing more properties.

Does this take time to figure out? Absolutely. However, I can tell you just by my few years of experience and my interactions here on BP, I have learned to be an amazing property manager and have great relationships with 95% of my tenants. Are there crummy tenants out there? Sure, but it's your job to not let them have access to your property. Don't get me wrong, it can be really tough when you've been vacant for 30 days and you're looking at another mortgage payment, but it's so much better to work with someone of quality than not. You can do so with this link: Avoiding bad tenants. Be wise and don't learn the same hard lessons that everyone else has learned. If you can do that, you're bound to be successful

To add to @Kristina Heimstaedt 's excellent post: 1. Real estate allows you to legally leverage less capital for greater investments. 2. Real estate (buy and hold) provides cash flow, appreciation, and (for leveraged properties) principal pay down simultaneously. 3. Real estate can be virtually similar to stock returns if you want to turn everything to property management, with lower returns and less hassle. 4. Once a property is rehabbed and occupied, the time commitment is almost nothing. I have houses that I have spent less than 2 hours on all year. Bottom line is it doesn't have to be an either/or proposition. Index funds are great, and rental property is great. If I went to a planner and he told me real estate was a terrible idea, I would find another planner because the guy is clueless. I would also see what his net worth was and where he had all of his money parked.

@Kristina Heimstaedt Thanks for the detailed reply! I certainly see the possibilities of a property that both appreciates and cash flows.  I think that many successful buy and hold investors were or are still property managers at some point.  It is a job for sure.  I think it's great for the hands on investor.  I just think it takes a lots more work to beat a traditional investment than one would think after attending a guru course, or listening to all the success stories on the BP podcast. 

Being a successful active stock trader is incredibly complex.  No comparison. Funny thing is most index funds or passive funds in stocks have beat active managers.  

I think any investment where the investor does not want to do any of the leg work and trusts his financial future to another individual, is a high risk plan. Does not matter if it is real estate, stock market, chicken farming or goat herding. One minute your couple of chickens and goats are multiplying, the next minute they are all swimming in curry. All because your expert planner was really a cook, lol.

Thanks @JD Martin !   The numbers look great on a successful rental property.  I have done the numbers out and it can be really impressive.  I think that it is all about execution.  If it truly was hands off and easy there wouldn't be any investor owned rental properties for a reasonable price.  There still are many deals from investors who have tried to be hands off and failed. In my mind someone with average market knowledge can't be hands off and succeed.  It takes an incredible time investment.  Was that 2 hour deal an early deal or had you built a system over years with tons of leg work and learning?  It's a business at the end of the day and a profession if you want to be a millionaire doing it and stick around.  Sure there are exceptions to it and I hope they fall my way! 

@Daren H.  Thanks for the comment!  I love this debate.  What if your a cook investing in real estate?  You can invest in an index fund with 300-500 Fortune 500 companies that have enormous assets and experience in business.   Some of those companies have been around for 100+ years.  Alternatively you can buy 2 rental properties for the same investment you have saved up and no index funds.  Which is riskier? One side your money is with someone else and the other is an investment in yourself.  The answer to which is riskier... in my newbie opinion it is the cook who has very little time to devote to real estate and very little diversification. 

I don't think your too far off on your thought process.. landlording is not for everyone.. and it can have its ups and downs. but I agree with you to be successful you need to be engaged.. you disengage and your going to end up in trouble.

there are a lot of ways to make money in real estate that does not involve managing tenants or rentals.  although at the base element most real estate revolves around someone buying it from you or renting it from you.

however their are niches.. but there is no free lunch.. if you want the ease and passiveness of a mutual fund the only thing I have really seen that equals that is buying dirt in the path of progress ( some of the biggest fortunes are made there) and buying young to middle age timber in great growing and forest products land like the northwest.. were Timber land bought right can make you a boat load of money with zero involvement in the property.. ( up until you hire the logger to log the timber)..

Thanks @Jay Hinrichs !  The land in the path of progress is a very exciting idea to me.  I have a family friend that has cattle on a piece of property that is rapidly appreciating.  Great investment by him.  I will keep looking for deals and learning as much as I can.  It seems like the more I learn is making me want to be more conservative with my numbers up front.  Rentals seem to be on the higher risk and more involved, yet higher return side of real estate investing.  

Hey Juan. The real estate investing marketplace is huge and most of the investing that is discussed on BP and in books is only a small fraction of it (SFRs and plexes). Most real estate is purchased by professionals (developers, syndicators, REITS, insurance companies, pension funds, turnkey) using other people's money (passive investors). Many business owners and busy professionals (like yourself) make their money in their business and profession and then park their money in passive real estate. I'd recommend looking into NNN properties and syndications.

On a side note, many BP members and podcasts guests are value add investors and the returns are not comparable to a straight up buy and hold strategy or the stock market.  It's comparing apples to oranges.

@Mike Dymski Thank you for the response! The apples to oranges definitely makes sense. I am faced with where to park my money someday (Student loan debt). I am not looking to quit my day job like many others out there. Looking at the time commitment to stay ahead of the game has me second guessing any small rental property purchases. Syndications and investing with REITs certainly has caught my eye. If a amazing deal comes along I will certainly pull the trigger but the more I learn the more conservative my outlook.

Originally posted by @Mike Dymski :

Hey Juan. The real estate investing marketplace is huge and most of the investing that is discussed on BP and in books is only a small fraction of it (SFRs and plexes). Most real estate is purchased by professionals (developers, syndicators, REITS, insurance companies, pension funds, turnkey) using other people's money (passive investors). Many business owners and busy professionals (like yourself) make their money in their business and profession and then park their money in passive real estate. I'd recommend looking into NNN properties and syndications.

On a side note, many BP members and podcasts guests are value add investors and the returns are not comparable to a straight up buy and hold strategy or the stock market.  It's comparing apples to oranges.

 EXACTLY   only thing I would add is that a sponsor for a syndication is as important or more important than the deal.. a very experienced sponsor can keep an OK deal on track.. a Poor sponsor can muck up the best of deals... so one must be uber careful who they decide to park their funds with..

Personally I prefer investing in real estate over stocks because I have more control. I can also leverage my investments as opposed to the market. The other fact I didn't hear your FP mention was the tax benefits for real estate. If you don't want to be hands on and you are looking at buy and hold, certainly hire a property management company. As @Mike Dymski mentioned, there are also many ways to be a passive investor via REITs, crowdfunding etc. Bottom line, there are pros and cons and there are so many different ways to invest in RE. Do your DD and do what's right for you.

@Keith Weigand Thanks for the detailed post!  We did not talk about the tax benefits but certainly is perk.  It seems like a large number of investors are in rental properties and I was interested for all of the above.  When I broke it down though it can be a lot of work and hassle with or without property management.  I am exploring all avenues for sure.  My FP did bring my excitement level down though haha!

@Juan Rango More people should appreciate what you have come to realize- that those of us who "own" rental properties (not syndicates or lenders) do not collect passive income. We work for it and while each year it becomes easier it can be demanding.

With that being said- don't let the fear of a bad tenant scare you off, just hedge against it. There are several ways- from strict vetting to investing in 3+ unit properties so no one tenant throws you off.

I am a W-2 professional and I do not benefit from many of the tax breaks that others on here benefit from because I am under the AMT- sure I can reduce my taxable income from the properties but I can't utilize a loss to offset my overall income. I imagine from a financial planners point of view this may not look good. (Sure down the line I can utilize these losses as carry forwards)

But one thing we do benefit from is having a cushion of from our jobs. Personally, having tenants I cannot imagine living with them on a house hack- that is your call. I would find it to be an absolute nightmare. But that is not to say that you can't do it.

Also- consider that this might not be the time for you to do this. We all have our timing for these things and it may be that you will be in a better position to take on a 4 unit 5 years from now and you will gladly pay a management company to run it for you.

But please believe this- It is a whole hell of a lot of fun more than it is a bother. And each time you are able to give yourself a raise by cutting expenses or rehabbing and or raising rents is very rewarding.

Great point @Jay Hinrichs !  I'm certainly going to do my due dilligence no matter what the avenue of investment. 

Why would you take advice from an individual who doesn’t invest in real estate? You don’t go to the doctor and ask them to diagnose a sore tooth, so why ask a non investor their opinion? Hope that’s not to harsh. Also unless your financial planner has a solid bottom line in his on finances, I would take what he says with a grain of salt.

Great perspective @Patrick M. !  These responses are excellent information. Great to be apart of BP with so many different perspectives.  

As others have mentioned, there are many different flavors of real estate investments.  But the most obvious advantage to me on real estate vs. stocks is that tenants aren't going to fund my stock portfolio, but they will pay off my mortgages - eventually leaving free and clear, cashflowing assets which over which I retain control.

As a high-income earning professional, you are also limited on what types of tax-advantaged investments you can participate in. As you are well aware, you get absolutely hammered on capital gains taxes on non-qualified mutual fund accounts (and stocks when you sell). Depreciation is the non-sexy part of REI, but it can be a game changer for people in high income tax brackets.

@Nick Mauldin certainly took that into account but sometimes the best perspectives come from someone on the outside looking in.  I ran it by him because he not an investor in real estate so he can give an unbiased opinion because he has not had successes or failures in real estate. 

@Juan Rango one of the most frustrating times for my wife and I were when we hunted for a rental and we kept bidding on duplexes. We were consistently out bid on them by cash heavy retirees and investors. Our mentor would always say "It happens for a reason."! every time I heard it! I wanted that duplex or triplex!

One year later a 5 unit fell into our lap and if I go back over the numbers we would have been bleeding on those duplexes or tri's. The 5 cashed great and gets better with each vacancy!

It all happens for a reason

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