First, I must preface: this is not an anti-real estate post. I think real estate is an excellent wealth building tool, and don’t want to discourage anyone out there from buying rental properties.
That being said, I’m thinking about downsizing my rental portfolio this year, and don’t have any plans to buy more properties in the near term. A few people reached out and asked why I was selling, so here are my thoughts and feelings on the matter.
I’ll begin with some background info on which hopefully provides a more complete picture of how I got to where I am today.
A Real Estate Focused Upbringing:
My grandpa was a successful realtor. My favorite uncle was a successful mortgage broker. They both owned a handful of rental properties, and I grew up wanting to be like them. I heard from school friends that “most rich people are rich because of real estate”. Whether that’s a right or wrong statement, I didn’t care. I was always focused on owning real estate.
When I was 18, my parents had an opportunity to buy their first investment property. I jumped at the chance to invest with them, and put all my hard earned savings from McDonald’s to work. I was finally the proud owner of ¼ of a little 2 bedroom townhouse. Mum made me manage the books, and I quickly learned how cashflow worked. I loved it.
I remember my uncle sat me down one day when I was 19. He said, “Joel, you should save up enough money to buy out your parents’ share of the rental. Then, save up and buy a full place on your own. Then buy 2 more properties, then another 4 properties after that. Real estate multiplies.” This didn’t really make sense to me at the time, but now I understand. I pretty much followed his exact advice, and 15 years later I owned over 20 doors (some myself, some with investing partners).
Anyway, the reason I am so real estate heavy today is because I had tunnel vision growing up. I never learned another way.
There Are Other Ways To Build Wealth?
I owned 3 properties before I really learned how a 401k worked. I had zero knowledge about mutual funds, index funds, or how to evaluate publicly traded companies (still don’t know how to do that actually). I was almost 30 before I began educating myself on other types of investments.
I started hanging out with a new crowd at work. These people were maxing out their 401ks, always talking about the stock market, and they seemed to be making money hand over fist. (This was in the mid-2010’s). This was the moment I realized I should probably have a broader view about how to build my fortune.
Specifically, I recall 2 moments that humbled me:
- I ran some numbers on the very first investment property I bought when I was 18… I compared its performance over 15 years of ownership to how the stock market performed over that same 15 years. Guess what I found? If I invested my cash in the SP500 back then instead of buying that rental, I would have earned almost the exact same ~9.5% YoY return (Comparison figures posted here if you’re interested).
- I realized saving up cash for many years to build up a down payment had great opportunity cost. It took me about 7 years to save up 60k for my duplex. If I had been trickling that money into an index fund instead (better yet, inside a tax advantaged account like a 401k), I would be in a much better position today.
While investing in real estate matched my experience, personality and skills earlier in life, I’m not sure it matches my future.
So, here are the list of reasons — some technical, some emotional — why I’m slowly transitioning away from rental properties.
1) I don’t really find it fun anymore
This is listed as reason #1 intentionally. When my heart’s not 100% in on something, it’s very difficult for me to wake up every day and try to be a master at it.
I used to dream about buying large apartment complexes. In my sleep I would create imaginary rent rolls, vacancy rates, maintenance costs, and try to calculate the ROI in my head. (I know, this is really nerdy! But I couldn’t help it. That’s just where my mind drifted.)
Today, I don’t fantasize about real estate any more. I dream about other weird problems. Like, Why are so many people out there in consumer debt? How can I help this situation? Why isn’t personal finance taught as a mandatory subject in middle/high schools? How can I help change this?
2) Trying to better adjust my asset allocation
You probably gathered this from my backstory… I am heavy in real estate holdings and need to play catch up on the stock side of my portfolio. Some experts recommend having a 20% steak in real estate investments (not including your primary home). I’m like over 50% currently.
Since my wife and I don’t have great incomes right now, we can’t contribute huge amounts of new money into the stock market to correct our asset allocation. Selling a few rental properties and reinvesting that money into stocks is a quicker way to lower our overall real estate percentage.
Stephen Covey says, “begin with the end in mind”. If you asked me 10 years ago what my end goal was, I would have told you I wanted to own 100 x rental properties. These days, my perfect retirement portfolio is more like ~$1M in a pre tax IRA, ~$1M in a after-tax brokerage account, and 2 small rental props.
Since my end goal is changing, my strategy is accordingly.
3) It’s more work than I thought it would be
Owning a rental property is not “passive income”. It requires ongoing work. Owning 2 properties requires double that work. Owning 3 starts to bog you down more, and the problem only gets worse from there.
There are certainly systems and automated processes to help you manage scaling, but those systems also require more money and maintenance. All businesses reach a point of diminishing returns, and I’ve hit mine.
Don’t get me wrong – I’m not scared of hard work. I actually love working hard. But I’m chewing so much right now I don’t have room to bite into other projects I want to pursue. So I need to spit a little bit out.
Part of this realization — and this is completely my fault — is messing up on property classification. A few properties I bought thinking that they were “B class” and wouldn’t be much effort or hassle. Turns out they are more like “C class” properties, and have more maintenance and issues than I accounted for. Another time I’ll go into the massive differences between A, B, C, and D class properties, and why it matters greatly!
4) I own a couple of sub-par performers
My plan is to keep the best performing properties with the most prosperous outlook, and sell some of the lower ones that give me the most headaches.
They aren’t terrible investments, but they certainly aren’t winners either. My feeling is that I can make the same amount of returns with that money invested elsewhere, for less ongoing efforts.
I’ve asked other investors and mentors about holding onto low-performing investments, and I get split responses… Some people say, “Just wait. If you hold property long enough it’ll eventually make money”. Other investors say, “Get out ASAP. Sitting, waiting, and hoping for appreciation isn’t a good investment strategy”.
I kind of agree with both sides. So I’m going to do both. I’m going to keep a few rentals and sell a few rentals. Only time will tell if I’ve made the right decision. I’m not worried because my wife and I will survive either way.
5) Emotional Simplification :)
This might not make sense to some of you, but it’s weighing on me more and more.
When you own rental properties, you take on a certain amount of responsibility for other people’s livelihood. I have 20+ families living under roofs that I own… And even though I’m not responsible for them living their life, I can’t help but wonder if there’s something more I could be doing to help them.
Sometimes running a business means turning off your emotional side. It’s about numbers, profit, and what makes sense for the business. But, I am finding it harder and harder to do this. I’ve tried to play the role of ruthless asshole unemotional landlord – and it’s just not me. I don’t like doing business that way.
Maybe it’s the pandemic. Maybe it’s all the late rent, job loss stories, squatters, and evictions that are getting to me. Offloading some of my properties to another young enthusiastic entrepreneurial investor would be a win/win.
6) My relationship with “cash” is changing
As I’m learning more about investing, earning less income, and slowing down our route to FIRE, my feelings about cash are changing.
I used to LOVE storing up huge amounts of money in my checking account (it gave me freedom and flexibility to jump on new opportunities). But now, I feel the opposite. Any cash I hold is money that isn’t working for me. It’s a burden.
There are 2 problems I have with real estate investing and cash needed:
First, any new real estate purchases require a good sized cash deposit to begin. (yes, I know all about the $0 down options and OPM strategies – they are not for me). Since my wife and I have lowered our income, it’s difficult for us to save up a large deposit. Saving up money in cash over many years means it’s not earning good compound interest in the meantime. I don’t want to do this anymore.
Second, owning rental properties means you gotta have large amounts of cash reserves for each property you own. It feels good when you only own a few places, but as you scale you realize that you’re holding onto multiple emergency funds. I’m uncomfortable with how much cash reserves I’m sitting on.
7) I can always buy more real estate later, and in other ways.
Buy and hold rental properties isn’t the only way to invest in real estate. There are a ton of strategies out there, each with different pros and cons. Private partnerships, money lending, REITS, crowdsourced investing, etc.
I’ve got decades to study, learn, and experiment with different methods of buying more real estate. While none of these excite me right now, that doesn’t mean I can’t change my mind and invest more later.
My reasons don’t need to be your reasons!
Sorry if some of my dot points above sounded complain-y. They are all good problems to have! Hopefully you have insight now into why I’m transitioning away from owning individual rental properties.
But just cause I’m selling stuff, that doesn’t mean you shouldn’t be buying stuff! Real estate has been a wicked (and fun!) vehicle for me so far in life, and I LOVE helping beginners roll up their sleeves and get involved in new rental projects.
Would love to hear from you guys with similar experiences, or opposing views. Shoot me a note or post in the comments below. :)
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I really like this checklist and honestly, I think that your number 1 reason for not enjoying it anymore would also be my number 1 reason for leaving real estate.
I’ve had some very close family friends relate to me as well that they don’t enjoy renting out homes anymore because of the hassle in dealing with renters – and frankly, that’s an aspect I’m not really looking forward to, either.
Although there are rental and property management companies out there, they take roughly 10% of the rent and I’m not too keen on giving that up either. It’s certainly a double-edged sword at this point!
Hey Fiona! Even with a property manager in place, I still feel involved and connected. Maybe that’s my fault – but I’d rather be over responsible than irresponsible minding my business. Glad to know I’m not the only one feeling this way :)
I can agree with you about leaning towards downsizing your real estate Joel. If its not fun anymore than get out of the game. With the cash for selling them the potential is unlimited for building the same return of growth. Nice read.
Appreciate that, Beau! Even if I make a slightly less return, I’m actually OK giving up the dollars to rebalance and have less time involvement. Cheers!
Rental isn’t something I have any interest of getting back into. I was sort-of “forced” to be a landlord when I changed duty station in the US Navy and couldn’t sell my house for what I owed. We lost money overall and it caused a lot of stress.
There are too many passive ways to make money with far less effort and risk. Just the numbers of people that are behind in rent due to job loss due to covid makes me wonder how many real estate investors are tapping out their reserves to cover their loans with reduced revenue.
I am unaware of any assistance programs for real estate investors (who can’t even evict renters due to the restrictions). Great, those families have a place to live for a few more months, But how long will it be before the landlords start going bankrupt?
Sorry, got a little dark there. I know it’s not all gloom and doom. But I don’t think I could get comfortable with being a landlord again. And I know that I don’t want to invest the time and effort to do really well at it.
On a more positive note, I appreciate that you wonder if there’s something more you could be doing to help your renters.
I had a thought:
There must be some in-expensive on=line courses which teach basic personal finance. You could sponsor each of your tenants to take those courses. I doubt that the cost would be astronomical. I don’t know it could even be a deductible expense.
Not only would you be fulfilling tour desire to help your renters, it also addresses the dreams you have about helping educate people on personal finance.
And in the ultimate “Win-Win” maybe that class you get them helps them improve their financial resiliency. And maybe some day in the future, they are able to ride out a financial hardship while still paying all their bills, and then you won’t have to evict them and be the “ruthless asshole unemotional landlord” after all!
Hey Gene! Strangely, most of the landlords and investors I know have faired OK during last year. My reserves were tapped into a little, but not too bad.
Love the idea about helping the renters. I know one landlord who helps his tenants learn and save up money to buy their own house. His wife is a realtor, so he wins when they buy a house locally, and allows the tenants out of their lease if they do. Not sure if it would work for my situation, but cool idea to help people!
Really appreciate this article! It’s nice to see a well rounded view of this investment class. Too many of us forget about asset class diversification and get blinders and become narrow focused. It’s great to zoom out to the grandest picture.
Thanks Josh. Sometimes a narrow focus is needed, getting specific in a niche allows you to master certain things. But I definitely agree with you… If you travel that path for too long you miss other easy opportunities and bring on too much risk. Zooming out once and a while is eye opening :)
~$1M in a pre tax IRA, ~$1M in a after-tax brokerage account, and 2 small rental props – what a co-incidence. I was telling my wife exactly that the other day.
Also, I was expecting one reason to be not getting value for your money. The 1% rule is almost not possible in Denver (correct me if you think I’m wrong).
I’m not sure if we’ll end up as clean cut as that, but it’s a fun and tidy goal to shoot for. I have a lot of work to do :)
I know what you mean about areas not meeting the 1% rule. There probably are deals out there somewhere, but you gotta work hard to find or create them!
If your hearts not in it anymore I think it’s best to walk away. Now is the time to sell in most of the country prices are way up and I think the market is bound to crash in the near future with that being said so will the stock market. Due to my outlook I keep all my housing money in cash. Yes, I might be “loosing” money with inflation but I want that money readily available to buy real estate when the market crashes. I remember in 2011 I could have bought brand new houses outside of Atlanta for $50k I mean never lived in homes now worth $200k. We didn’t have the resources back then but I want to be ready. Live and learn…
Good stuff, Liz. I know a bunch of people that were cashed up when the RE market crashed a decade ago, and pounced like tigers. They faired very well because of preparedness + opportunity! I hope it works out well for the areas you’re looking at!
Very interesting! I’m new to the site after it was sold.
I sold one of my key rental properties in 2017 mainly because I wanted to simplify life. But I also got a great deal as well.
Now that interest rates have plummeted during the pandemic, I’m very focused on buying more rental properties. The value of rental income has gone way up because interest rates have gone way down. And now takes a lot more capital to generate the same amount of risk adjusted income.
I believe buying rentals now it’s going to be one of the best investments going forward.
You’ll have to share with us how you were able to buy a rental property at 18 years old! I had just graduated from high school then and had maybe $2000 from working minimum wage jobs.
Thx,
Sam
Hey Sam, thanks for reading! 3 questions for you sir:
– Are you planning to buy physical properties yourself, or do larger partnerships/syndications?
– If physical props, what areas and asset class you’re looking at?
– What approx % of your overall portfolio are you dedicating to physical properties?
My first place was 1/4 of a small townhouse that I bought with my parents. It was $200k, and we split it up into 4 x $50k chunks. We divided all the expenses down to the exact cent, and split all incoming rent the same way. I owned 1/4, and my ~$7k downpayment was cash saved from my 4 years working at Maccas through high school. :)
Ah, the bank of Mom & Dad. Nice! I was too proud to let my parents help me financially. As a result, I am poorer because of it.
For example, if I bought a Manhattan property back in 1999-2000 when I started working in finance, it probably would have appreciated by over $1.5 million!
I realize that doing things the hard way to the pride is not a winning formula.
The trick is now figuring out how To give all our advantages to our kids without spoiling them. Do you have kids?
I am investing in big city real estate and real estate syndication deals. To be able to capture Principal price appreciation and rental price appreciation for the coming two years is going to be huge IMO.
You can see my investment composition breakdown in the website URL.
Sam
Hey Sam,
No kids for us yet. But if/when that happens, I’ll try to be just like my parents. They introduced a cost of living to me in my early teens, and taught me to work hard and save. They gave me everything in the world, *except money for nothing*. Some stories here if you wanna read more. :)
Have a great week!
Joel
Joel, I’m so glad you said that!! I was in real estate rentals in 1999 to 2002, Back then my goal was to have 10 properties in 10 years, I had always worked in mortgage lending and currently worked at a Real Estate office. After 3 years of intense working on properties and working with renters, I realized that this wasn’t passive income at all. I learned that I made more money and peace of mind by saving and investing. So I sold 5 units off, thankfully made money and maxed my and my husbands 401k and IRA’s. I really believe it paid off better than the cumbersome rental units that I would sometimes have nightmares about. I liked working my job and taking advantage of the opportunities there, my husband and I have now retired and thankfully live a comfortable frugal life with no financial worries. Happy and carefree, yay! Thanks for all you do.
Glad to hear it all worked out Mary! :) I can see how working in the RE industry would be an advantage, but also a disadvantage exposing you to the raw and horrible sides of RE investing. Peace of mind is becoming more important to me over time, so even if the money wasn’t greater in the long run, I still want to downsize rentals a little :). Cheers and have a great week!
Over the years I have heard so many people say you have to take emotion out of financial decisions. While that does make sense, it ignores how much our financial well-being affects our mental and emotional health. We aren’t computers. When an investment begins to make you less happy, I see nothing wrong with lessening your ties to it. Otherwise what is the point of it?
Several times over the years I have considered property investment. Frankly the work that comes with making it profitable just doesn’t appeal to me. I have no desire to be a landlord. REITs are my compromise.
Yeah it’s tough balancing emotions with investing. On the one hand, emotions can help you drive harder and be more determined, etc. if you use them to your advantage. On the flip side, (and specifically with rental props) sudden unexpected headaches can ruin your day if you let it. RE investing is not for the faint hearted. Love that you found a good balance with REITs! :)
I experimented with being a landlord early in my career when we rented out the mobile home we had lived in before buying our house. I quickly learned I did not have that dispassionate business personality to be good at it. But my college roommate is retired with a dozen or so properties and he and his wife find it an entertaining hobby that makes a good retirement income, so I think it depends on your personality and desires. I can certainly understand why your preferences have shifted over time. I’ve always thought buying rental property is really buying a job, and it makes sense if you enjoy the work but not so much if it starts to feel tiresom. Very interesting and thoughtful post!
Someone should conduct a survey of a few thousand successful RE investors (specific to owning physical properties and managing themselves) and figure out the exact character traits that make them successful. Then create a quiz that helps people identify whether they possess those traits, or if they can be learned easily, and give them a heads up on how difficult/easy their journey is going to be in real estate going forward.
I guess we don’t really need another website to tell us whether we are capable of something or not, just an idea. Cheers, Steve, have a great week!
That sounds like something ESI money would do, although on a smaller scale
He’s certainly already mingling with the right millionaires to ask the questions :)
I’ve been a landlord of a few properties over the last 30 or so years and always struggled with the social side of it since I’m also a counselor by profession. I can relate to not having the heart to be cutthroat and also wanting to help out my tenants at times. So even though I know real estate can be a way to build wealth my personality is not the best suited. But then the tenants love you. If someone did do the characteristics test of those that do super well in real estate my guess is that would share some anti-social/sociopathic personality characteristics. Some of the statements I hear investors make about how they conduct business and what they are willing to do to tenants are absolutely ruthless!
Thanks for sharing Lisa, and glad to hear I’m not the only one with these feelings! When I started investing in real estate my goal was to build up a 100 rental property portfolio. I only thought about the numbers, never about the feelings and management required. So now I’m more realistically thinking I don’t want to own more than 2-3 rentals. I’m happy to trade more profits for simplification!
“I’ve always thought buying rental property is really buying a job, and it makes sense if you enjoy the work but not so much if it starts to feel tiresome.”
100%!! And this aspect of it is not taught or discussed much.
Hi Joel, thanks for your thoughts. I hade tried rentals before, too, and stepped away from it. I found the cost for upkeep and repair getting too high over time. Maybe a poor choice of renters? However, I’m not closing the door on rentals totally; perhaps I will revisit this option in the future again. Good Post Joel. Love your thoughts. Wilfried
Cheers! I also have higher than expected maintenance costs, but this is completely my fault for underestimating the initial calculations. I get what you mean about not closing the door fully on rentals, and I’m right there with you! Have a good one, Wil!
Real estate can be stressful… Like when your tenant is selling drugs (or themselves…..) out of your property. I really appreciate my investments when I don’t have to get the police involved! Your #1 reason makes a lot of sense to me. Simplifying life is really nice.
All those tenant horror stories kind of distort your faith in humanity over time. I guess it does make you stronger and more resilient though. Hope all is well, Gwen!
From someone who has always been interested in investing in real estate but has never pulled the trigger, thank you for your honest and transparent thoughts on your experience with this. It seems like the personal finance world glamorizes owning real estate making it seem like it’s a breeze when I know that’s not the case.
I can also relate to you thoughts here as these are things that keep me up at night: “Why are so many people out there in consumer debt? How can I help this situation? Why isn’t personal finance taught as a mandatory subject in middle/high schools? How can I help change this?”
Great post. I appreciate you sharing your thoughts on this matter.
Jason.
Yes I think people naturally share more positive stories than negative ones. This coupled with FOMO, new investors sometimes rush into real estate a little blind. :(
Glad you’re thinking about the same world problems at night :) I must admit many of my dreams are also about surfing. The other night I caught a really long wave and then suddenly turned into a dolphin. Weird!
Joel- I jumped in to real estate a few years ago, and I credit you for a big part of my early motivation and journey. So thanks for that! I’ve had a lot of success in that arena.
I understand some of your motivations to divest, but why not 1031 exchange into a more profitable property and use a property manager? Past returns do not predict future returns, as you know, so expecting returns like we’ve had in the stock market in the past decade may lead to real disappointment. My brother and I are planning to sell our first property this year and exchange into a commercial property expecting far better returns.
Either way, may the odds be ever in your favor! Nice article; keep up the good work!
Thanks Ben! Glad your props are working out well! :) You definitely did it right!
Re 1031, since there’s not too much cap gains, and wife and I are in a low income bracket this year, we’d prefer to sell vs. 1031. Then we have the freedom to invest anywhere at anytime. Good luck with your exchange – i’m curious to know how it all goes!
Joel,
Thanks for your insight as always! My wife and I are at the opposite end of the timeline as you. We are starting to get closer to a personal reserve fund we feel comfortable with (6 months), and then we will have to weigh:
A) building more reserves in case I want to look for different primary employment or simply having cash for the eventual down payment to buy a rental,
B) investing all excess cash with the optimistic perspective that it will grow and either help us purchase a rental property (we’ve owned rentals before, but currently have none), or even in a negative stock market environment, we’ll have shares of ETFs that will one day appreciate.
I’m leaning towards option B. One other thing that I and many others often fail to consider in comparing real estate to typical stock market investments is that real estate is typically leveraged and stock market investments typically are not. To me, for a true comparison, it almost makes sense to compare a real estate property with a loan to stock investments bought on margin. Thoughts?
For comparison, I would compare what YOU would do in RE to what YOU would do with stocks. If you’re planning to leverage, use those calcs, and if not, don’t use them. Given the low interest rates, real estate leverage makes a lot more sense right now. Personally I will probably never buy stocks bought on margin, so it doesn’t matter to me if it’s the winner in profit comparisons, I will probably never choose to pursue it. That’s how I look at it (but I’m no expert on comps… If I was I’d already have a more balanced and winning portfolio!)
Cool! Love this. I am the opposite – heavy in index and looking to buy real estate right now. Although, I am curious as to what will happen with the economy and housing prices this year once the eviction moratorium is over.
Awesome! Glad you’re diversifying and going the other way :) Please let me know how it goes when you find a place!
Thank you for sharing your thoughts on real estate. For myself, I am having serious struggles with concept of getting into rental real estate. I love single family homes more than anything in the world. After growing up in a dysfunctional family and always being poor and/or living under the poverty line prior to graduating college, purchasing my home is still the best decision that my husband and I made. I moved half-way across the country to do it, and escaped a neighborhood that went from completely safe to horribly dangerous when all the other apartment owners on our street went 100% section 8 (think large teenage gang fights in the streets). Our complex had finally landed a good landlord, and it finally forced him to sell. Now I find myself in a position where I (a) own my first home outright, (b) know that I should add some additional diversity into my portfolio other than cash/bonds/equities (c) would like to move to a more walkable area with neighbors who we might have a little bit more in common with. It seems like it would be flat out stupid to sell this home from a financial standpoint. It’s a 1541sq ft home on 1/3 acre in Charlotte. These homes sell before they are even listed half the time here b/c our market has gone outright bat-crap crazy. But you could never buy a rental property in my area for anywhere close to what I bought my home for 15yrs ago anymore (not even as a tear down). Now enter the moral dilemma. What is making me want to leave the home that I wanted to be my forever home is actually all the rental homes that have invaded my neighborhood., and I’m not sure that the mom and pop owners are that much better than the out of state LLC’s either. We have gone from a quiet area, to one that increasingly has to deal with hearing about someone being shot on a close street, having to fight to get a tenant out who has 11 pit bulls that he is being investigated by the city for using in dog fights., having a shoot out between 2 rental tenants at the grocery store at the entrance to our overall neighborhood., your standard car break-in rings hitting at 4am, and renters who drive up and down the street at all hours of the day and night blaring their base so loud that reverberates throughout your entire home even when they are a quarter of a mile away (and they are grown adults). Do I contribute to the further degradation of my neighborhood for the remaining home owners down my street just to potentially make some money and diversify my portfolio? I would of course be very picky about tenants, but you never know, and I certainly would not feel good about letting renters into my home before Covid restrictions are lifted. This is not a home that we moved into and just didn’t allow to rot underneath us. We have put real love into this home. Ex: upgrading things for longevity, fully repairing wood rot, sustainable flooring, outdoor space additions, lawn soil improvements, gardening for wildlife/pollinators, caring for the wild trees at the end of our property line, etc. I believe we have a duty to be good stewards of the land that we own and care for those ecosystems that we choose not to see anymore. I’m not sure how emotionally turned off I could be when it comes to the land here. If I had a tenant who sprayed for mosquitos or applied heavy duty weed killers to my lawn (thus decimating the bee population, lady bug population, fireflies, and monarch caterpillars I’ve worked so hard to attract) I might lose my mind and go nuclear. I really struggle with this one, so I appreciate hearing your more genuine and balanced thoughts around real estate investing. If I end up going the rental route (I’d at least control the land!) I want to go into it eyes wide open. I hope the moves you are starting to make to simplify your own portfolio lead to more peace of mind in your life. Besides, you’ll need all that extra brain space if you and your wife do end up choosing to adopt a child and become parents in the future. :-)
Hey J. Wow. Longest comment ever. :) But I love it! Thank you for reading and interacting :)
From what I’ve read, I think you should avoid rentals. One thing I’ve learned with my properties is that you can choose your tenants, but you can never choose your neighbors tenants. Even if you get the best tenants in the world for your house (people just like you), they will eventually want to move out because of the area (just like you are). It’s the area that attracts tenant types, not just the specific property.
Diversification can be done in a number of ways. You don’t have to buy a rental property to have exposure to real estate in your portfolio. I should write more about these other alternatives. Stay tuned. :)
Thank you for your feedback. I’ve been trying to figure out if I do move how to choose an area that won’t just have the same thing happen to it. We have way too many out of state investors, and they are now starting to buy up homes priced even higher than ours to turn into rentals (think $250-$275K). There is no way they are getting the 1% rule met since you are looking at rents in this part of the city at $1200-$1400. At the same time, though, it would be very silly to buy a 3k sq ft home in the $450-$500K price range for what will only ever be 2 people. It would probably be one of the most un-FI things I could do. lol No answer yet. Still gathering data. I look forward to hearing about your alternatives for exposure. I know REITs are one way to get exposure (I’ve actually been on an audit team for a REIT client in the past), but I’m concerned with what their future rental collections rate will end up being once many of these moratoriums end. It would be interesting to hear your take on REITs in a future article if you have some experience in that realm.
Your not asking my opinion but sounds like I would sell now while prices are so high. If the neighborhood is already bad how will it look after a market crash? I live in Tampa, fl where prices have also went insane and not affordable for most locals. My husbands military so we know we move in August and we decided last October to just sell and step out of the market while times are good. I did not want to be forced to keep it as a rental.
Emotional Simplification: I relate to you explanation of this one the most. Sean and I own 2 rental properties. The market here is booming and we could be making a much healthier profit. But we decided to offer stable rents instead. We want to make a small difference in our community.
Thanks for explaining your reasons because it’s always good to see the rationale behind the decision.
It’s only important that you make the best decision for your family and you have obviously given this deep thought! It’ll only get you closer to your goals. Bravo!
Thanks for sharing your thoughts, Joel.
Thanks Simone! Glad to hear i’m not the only one thinking outside of the profit margin. :) Stability and helping others is a noble cause. In case nobody has told you yet, THANK YOU for what you and your hubs are doing.
Joel! I feel like I could have written this article word-for-word. I own 6 doors and I already feel and experience everything you do with 20. Like you, I’m considering a slow exit and keeping just one right now (the one my mom lives in!) I have wanted to write something similar in the BiggerPockets forum, but there’s is such a pro-REI bent there, that I didn’t think my realizations and vulnerabilities would be well-received by many! So, I’m just appreciative of your transparency. Like you, I was (and still am to an extent) REI-obsessed, but the reality on the ground is different from the spreadsheet fantasies in the mind! Thanks again. I hear you, I see you, I’m with you!
Glad I’m not the only one, Julie! Thanks for the encouragement. Sometimes I feel crazy downsizing something i worked so hard to build up. But, it feel right for me at this stage, and, I can always rebuild it all later if we want. Thanks again for the support and good luck downsizing yourself! :)
In real estate what I like is the fact that my wealth increases across so many fronts, i.e. tax breaks, appreciation, and equity build up plus the cash flow. I can’t get that with any other investment class.
In addition, I love how I can purchase an asset so much higher than the cash I have on hand, finance it through the bank, and have the tenant pay it off for me. In stocks I can’t do that unless I want to margin trade, which is a bit too speculative for my taste.
Now having said all of that I still put cash in retirement plans and invest heavily in stocks, which I have done since graduating college. The real estate actually came a bit later. I can also see your point about it not being a “passive” investment despite what the IRS says. It is true, it can be passive for a while until problems occur than it is a headache.
On your point about the opportunity cost of saving up a chunk of cash for a down payment. I had my financial planner set up a plan for me where I can invest my down payment as I am building it. I explained I needed a non-retirement plan with solid investments that didn’t have too much volatility, but still earn a return. He did exactly that and my account I use for real estate is in stocks and earns anywhere from 5-8% per year on average, rarely goes down in value and is very liquid so I can pull it out for down payments. By doing it this way I feel I get the best of both worlds, stock exposure earning a return, but available cash to put into real estate in the future.
Hey Mic, that’s awesome! I agree with the multiple ways to earn through real estate. These benefits might seem small on a monthly basis, but all added up over multiple years holding really does pay off in the long run. Principal paydown alone is a sneaky profit I sometimes forget about. It’s only a few grand per year, but over a long hold period tenants can completely pay off your loan.
Glad you found a good system for downpayments and keeping the cash invested in the meantime! That sounds awesome!
All of you guys should consider since you already have properties group homes or rooming houses. You can be affiliated with veterans affairs. Have deposit and monthly rent automatically deducted from their benefits and direct deposited in your accounts. If you have a four bedroom home that’s eight tenants each paying you rent. Let’s say a family rented a home for 2,000 a month. You could charge each tenant 1200 a month. That rent would include utilities and cable. That’s 9600 a month from one property. You can have cameras in common areas . If I had property that’s what I would do. You don’t have to provide anything for the tenants except a residence. You also can have rules and regulations over your property unlike when renting to families. By using your properties this way you are also helping your community.
Love hacks like this! Great way to think outside the box.
But, I must say I’d definitely proceed with caution. If it were that easy, everyone would be doing it. I have experience with Section 8 housing, a similar program. The government pays rent for low income people who qualify, and there are set rules and regulations around the whole system. It’s sounds amazing, right? Guaranteed money each month from the government… But in reality the tenant hassles and ongoing maintenance aren’t worth the money you receive.
Hi Joel,
Great article and timely for me.
I’ve always wondered if I should buy rental properties. And I would devour articles from successful bloggers like Paula Pant of “Afford Anything” and Rich of “Rich on Money”, and I even read a great article by JL Collins on his experience with a rental of his own, among many other great and informative articles.
I did this over the years to determine if I should buy rentals. But I always had a nagging doubt on buying rentals for all of the same reasons you mentioned!
As you’ve said, their are the successful ones in the business but there are a lot of unsuccessful ones as well, and it became a tug of rope in my head.
You mentioned a lot of the same exact things that were nagging at me if I were to jump into rentals. Like, the opportunity cost and time required to save that down payment. Which meant for us not investing in our 403b’s/457’s/Roth IRA’s and brokerage account.
And the fact that I would be buying myself another job!, Sure I can hire a management company, but would they seek and evaluate the best options when it came to repairs or replacing appliances? Like you said, you still need to manage the management company to ensure their decisions align with yours.
I’m somewhat handy but not handy enough to tackle big projects. And to avoid hiring a management company at the expense of paying them 10%, I would need a team of TRUSTED professionals in place to do the work. Again, more expenses! And more work to find and keep the right people in place. Not to mention, the time it would take for me to do the repairs, upkeep, in addition to working my regular job.
Tenants. They are people, and people have issues outside your control that even with the best screening and background checks are out of your control like, job loss. They won’t ever care for the property like you would because they don’t have a vested interest. And you should be well versed in the laws regarding evictions, because if you’re not, and go the attorney route to handle them, more expenses.
Contingency funds as you mentioned also ran through my head. I’d have to have about $10-&15K, in cash or a bond fund, to cover unexpected repairs, vacancies, and for clean ups/repairs when tenants moved out.
As a commenter above stated, there are tax breaks and leverage to rentals. However, as you know leverage works both ways! Get a few bad months with vacancies or big tickets items and your profits for the year are gone or a best you break even. And even with the tax breaks, you have opportunity carrying costs of keep capital liquid, which could have otherwise been invested in VTSAX over the long term. And this could outweigh the tax breaks in the long term.
He mentioned his financial advisor that kept his cash in stocks that returned 5%-8% which rarely goes down. First off, if you’re getting that return it’s due to the risk of being in stocks. Risk and Reward, plain and simple. He’s taking risk on assets that should be liquid. And when that “rarely” event happens, what are you going to do when you need the money? Not to mention, I didn’t factor in the cost of a financial advisor who’s skimming a little off the top.
All in all, this is a business and I would ask myself, will I be able to out perform the stock market in the long term for all the additional considerations. Otherwise what’s the point in taking on all these extra headaches.
Just to be able to say I have property? Is it suppose to give me a sense of prestige and status because I can drive through neighborhood and point to places I own? Because it’s tangible and an alternative like a mutual fund/index fund is not?
In my mind, I believed owning real estate would give me a sense of prestige which is why for the past 26 years, I have debated on and off whether to invest. I came close twice, but the deals fell through. Perhaps those were blessings in disguise.
I live outside Chicago, and in C Class neighborhoods, the taxes alone make finding cash flowing properties difficult! And if you find one, it’s only like $150-$200 a month, which gets wiped out with a vacancy or possibly a repair. And the rate of return is 4%-5% on average in a best case scenario!
So what have we done for the past 26 years as we pondered this question on investing in rentals. The following.
My wife and I started working in 1992 and 1994. Not such great starting salaries, which made buying real estate more difficult because of the time required to save that down payment and then a contingency fund for repairs.
We both started investing in index funds within our plans at work and within several short years, we were maxing out her 403(b) and her 457, my 457 and both of our Roth IRA’s. As our income grew, I added a taxable brokerage account and invested the surplus that was left over after maxing out the above accounts in an Index Fund (VTSAX).
As our accounts grew, our home was paid off, we had three small kids, and the idea of rentals still nagged at us as a way to retire early.
But between all of the concerns I listed up above and taking into consideration my time and abilities to either manage and to fix up a fixer upper, we didn’t find a rental that would cash flow and check the boxes.
So for the past 28 years we invested in the stock market, a Total Stock Market Index Fund to be exact. Although it wasn’t how we started investing from day one, I quickly learned the error of my ways with the help of many good books, and within a year and a half, we were 100% in Vanguard’s Total Market Index. A big shout out to JL Collins- The Simple Path to Wealth!
We have amassed in all of our accounts combined, $2.8 million. which doesn’t include our paid off house and no debt. That $2.8 is all in VTSAX, except for $24,000 in cash.
I am paying Vanguard $1,110 in total expenses (.04 er) on $2.8 and I have zero headaches!
In four years, I’ll get a monthly pension of $7,700 with 3% yearly cola’s and my wife will get a slightly smaller pension, $6,900 per month with yearly 3% cola’s as well.
Our situation worked out well without rentals and I know there are opportunities out there with rentals for people that have the right temperament, capital and capital reserves, and the ability and knowledge to do repairs and handle legal matters.
This is no different than running a business, and like any other business owner, knowing your business, will help you succeed.
For those feeling that “itch” like I did, know there are more than one way to skin a cat! Know yourself and have REALISTIC expectations!
Geno
Geno, I thought J’s comment was long, but you’ve absolutely taken the cake with this one!!!
Where do I even start?! Umm… First off congratulations for sticking with the simple path to wealth and proving that it works! I’m happy to hear you didn’t let real estate de-rail your journey. This is awesome advice for people that have the ‘itch’. Everyone’s path to building wealth is different.
The prestige of owning real estate definitely wares off quickly. If we were to drive past some of my buildings, I wouldn’t be pointing them out with pride… I’d be locking the car doors driving past as fast as possible :) haha!
Great article, Joel. I’ve been tempted to buy investment properties in the past but have always decided at the last minute not to do it – mostly from the fear of making a huge financial mistake, but also because of the work involved in keeping them attractive and dealing with tenants. I’ve had pretty good luck with REITs in the past as a surrogate. Lately, I’ve been building a dividend portfolio kicking off about $28k a year in dividends, which is truly passive income. That’s my strategy going forward. Build up to around $50k a year in dividends and then retire (I have two pensions as well).
Just my two cents.
Love the dividend portfolio! I’m jealous :) I need to figure out my stock market strategy, and I suspect it’ll change as I get older and have higher net worth.
Glad you found success outside of real estate, and seems like you not pulling the trigger on any deals worked out for the best. Thanks for sharing Mark!