Are rentals really a smart choice?

Question

On several other re forums this has been a topic of great debate. There's several "gurus" who claim investing in rentals in dumb. Feedback on this please. Why or why not invest in rentals. Aren't they a great replacement for 9 to 5 income?

Account Closed · Answer

Buying and holding land and buildings is basically the only real estate investment opportunity. (REITs are stock market, not real estate investments)

The other ways to make money with real estate are not investments, they are jobs.

Now, I don't think there is anything wrong with fix and flip, or wholesaling, or any other way to work with real estate, but they are all jobs. As soon as you stop working, the money stops.

I've made a lot of money with bare land, but it does not provide any income. Rentals, either residential or commercial, are the way to go as a combination of income and the generation of long term wealth.

Rich Weese · Answer

The 4 benefits of owning real estate have been enumerated here by many previuos posters. Here is my reason for investing in them for nearly FORTY years. Show me any other investment where you have these 2 characteristics, and you'll get me excited. 1. Some schmuck (lender) will loan you the majority of funds to purchase.
2. Some other schmuck (tenant) will make my payments and eventually I'll own free and clear property worth X dollars.

I use the word schmuck lovingly! Along the way, I get tax benefits, cash flow and appreciation. Rich

Mark N.A · Answer

There are two factors the gurus hide and novice investors misunderstand:

1)  REI is a cash-intensive business and you really need it to participate.  Opinions vary on how to generate that cash (around here flippers and wholesalers starve).

2)  REI is a rather simple business and not some magic panacea to cool cash flow.  But 'simple' in no way means 'easy'.

There are many hundreds of ways for a hard-working entrepreneur to go into business for him or herself.  But aside from the mandatory hard work, the type of business must match up to the individual's personality.  What makes one person good at selling hand-made jewelry on ebay is no guarantee of success in the rental biz.  The one thing I believe most succesful posters here on BP share is a 'passion' for the entire process.

Your mileage may vary, but in the meantime may all the gurus please move on to the 'next big thing' and quit polluting the waters.

Steve L. · Answer

All good responses...

If you are just starting out and have little or no money and want to go into real estate full-time rentals will NOT pay your bills short-term.

The short-term return that can be made rehabbing and selling or wholesaling is much better.  But as your wealth grows you will experience diminishing returns and substantial tax bills.

We have adopted a hybrid strategy so we can do both (short-term profits go into long-term down payments).

On the other hand, if you are fine working a 9-5 for 5ish years, I think the buying 1-3 rentals a year is a great strategy.

Bryan Hancock · Answer

That is the best piece of advice I have ever received...I wish I remember who that guy was so that I could go shake his hand now.

Bryan Hancock · Answer

I could literally write a whole book on this topic, but I will try to keep it short and sweet if possible.

Gurus have their own agenda.  The main agenda is generally to try to push overpriced subscriptions or literature to newbies that don't know any better.  It is similar to the news media pushing doom and gloom on TV.  Is it the truth?  Who the hell cares...it is what SELLS and that is how their hook is baited.

Rentals absolutely make sense.  What could possibly be a better investment than something that spits off a little cash flow while SOMEONE ELSE pays off the asset long term?  THAT is the key to long-term wealth generation.  Constantly buying and selling is A JOB that has to be constantly fed with my time to work properly.

There are 4 profits centers implicit to long-term holds:

1.  Cash flow => Normally $100/door/month

2.  Amortization of loan => Generally happens slowly and increases in the later years of the loan.  Short amortization loans have high constants and generally make your property cash flow negative at normal LTVs because they are competing with longer-term amortization product in the same market

3.  Tax benefits => We paid less than 5% real tax last year...IMO this is one of the most important aspects of RE investing that is generally discounted heavily by those that don't understand investing.  1031 exchanges with a  stepped-up basis can transfer vast quantities of wealth between generations

4.  APPRECIATION => I have this capitalized because it is the main driver of gains over the long term and it is very misunderstood IMO.  Dollars are drastically cheaper in the later years of holding property so the fixed PI portion of a mortgage are small as compared to the new value of the dollar.  Land scarcity drives appreciation and this is generally the largest component of returns for SFRs.  I explore this in my BP article here:

Article

Gurus and those that have an agenda don't push buy-and-hold for the following reasons IMO:

1.  It is not "sexy" to spit off eye-popping numbers to sell useless crap

2.  it requires cash reserves and business savvy, which drastically limits their pool of subscribers

3.  It doesn't appeal to instant gratification, so it doesn't fit with the "cash wash all over me" mentality of their subscribers

4.  In general, there is not way for this form of investing to NOT be hard work, which is not what people want to hear

Also...SFRs have horribly bad capitalization rates because you have to compete with owner-occupant bidders.  This makes it a lot harder to cash flow these investments and they are where most new investors start.  Consequently, the gurus THINK they are a waste of time because they are idiots that haven't held for the long term.

I could go on and on...MOST Gurus are idiots.  The investors I consider to be the most successful have all made money and prospered long-term by buying some property and never selling.  It isn't the only way to make money, but it is the key to build long-term wealth IMO.

Account Closed · Answer

I've been investing in rental properties for 15 years.  My wife about 30 years.  We have seen some very nice appreciation over the years and good and great cash flow as well.

I don't think anyone could persuade me to quit investing in rental properties.  Over the years I have seen our net worth increase slowly, but very steadily.  Five to ten years ago, I might never have imagined owning a home worth over a million or purchasing an investment property well over a million.  Today, because of my rental properties it is easily possible to do this.

Investing in buy and hold properties is not a quick way to get wealthy, but if done right is a almost sure way to get wealthy over time.

I think it is also important to learn how to purchase properties in good times and bad.  I've had employ different strategies over the years and have always purchased properties that cash flow in spite of the occasional bad tenant and major repairs that come up from time to time.

I have learned as well that reserves are a must.  We have always maintained a cash reserve and credit reserve.

Dennis Treacy · Answer

I like to do my own maintenance, I fixed a toilet today, it took all of 5 minutes to replace the flapper valve.

The guru's speak of toilets like we poor landlords are cleaning the bowl, sorry I don't clean anything, I can get someone to clean for $50 dollars a day.

I could hire a handyman to do these small repairs, but I like to use these repairs as a means to enter the rental unit and spy on my tenants, to see if they are trashing or doing some other elicit activity in my property.

Tenants like to rat on other tenants, I believe the stories I can verify, but would not have access to the snitch if a handyman was the go between.

Account Closed · Answer

I also love the fact that rental properties provide  income and help reduce income taxes from other earnings.

Are rentals really a smart choice?

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