Should I invest in Real Estate?
With any investing idea, there are definite pros and cons. No one can intelligently answer the question "Should I invest in rental real estate?" without knowing what you are all about. What is your risk level? How do you handle stress? Do you panic and sell when an investment misbehaves? Do you have alot of money in reserve? What are the best and worst case scenarios of the investment? You should get to know yourself and be clear on your situation before investing or becoming a landlord. Decide what your goals & values are. And get clear on the all-important "WHY?"
Knowing your values, or what's important to you, is paramount. For example, my top three values are family, freedom and health. I want to be there for every one of my daughter's horse riding competitions, spend time with my wife in the evening, have family dinner together and visit new, exciting (warm) places together. I want freedom to go hunting in the morning, take a nap in the afternoon once in a while, and be able to buy my wife and daughter nice things from time to time. My health is of utmost importance, and I find that eating healthy foods, and getting a monthly massage and chiropractic visit are important to my continued health. I do my very best to mold my business around my values, and not the other way around. I don't allow other people to tell me "how the real estate business is." I define how my real estate business is. I decide what being a landlord is like. That's a bold statement, I know, but let me explain. Many people told me things like, "I'd never get into realestate because I don't want to unplug toilets at 3 O'Clock in the morning!", or "Tenants! Once they're in, you can never get em' out!" When we tell some landlords that we charge an entrance fee for pets, they say "Wait 'till they call back and tell you they have a therapy pet."
Basically, we have a barrage of ego driven information coming at us, and if we take it all on, we're bound to create our reality based on the horror stories we're hearing. Most of those things are part of that person's "story." Not wanting to unplug a toilet at 3 AM might just be their way of justifying staying put in their current situation and not taking any risks in life. The "therapy pet" warning might just be an egotistical landlord not wanting to admit they should be doing the same thing. One of the things we do as human beings is "tell stories" to ourselves and others. This is a way to add mortar to the bricks of our identity. It's how we keep our identities firm, it's how we even keep grudges and judgments alive. It's also a way to balance things out, if we're feeling envious or unsuccessful. For example, when you hear someone say, "I wouldn't want to be a landlord like Mr. Smith down the street. Yeah, he might be rich but his wife is a bitch, and he's always up to his elbows in someone else's shit. I'll keep my life, thank you very much!" This is a way of "balancing" things to make ourselves feel better. Yes, Mr. Smith might be more successful than me, but my life is more peaceful. My wife is nice and my forearms are fecal-free, and the last time I had to get up at 3 AM was to let the dog out!
So that's about as much as I dare impersonate Sigmund Freud today. The point is, don't let other people's descriptions of reality become your own without a good fight. Become convinced that you have control over your world. For more on the concept of "descriptions of reality," read Carlos Castenada. His first book, The Teachings of Don Juan: A Yaqui Way of Knowledge is a life changer.
That all being said, here is my list of pros and cons of investing in real estate that I've collected after ten years in the business. Keep in mind this is my "description of reality," so decide what's useful to you and discard the rest.
Real estate can be a complete pain in the ass; at the very least, it's alot of work. You have to learn a lot about real estate, preferably from a mix of sources: Books, websites and someone local and knowledgeable who can mentor you in the direction you're going. You've got to be willing to look at a lot of buildings, some of them a second time, create offers, negotiate, fill out a lot of paperwork, and keep everything very organized. Once you get a few units under your belt, you have to develop and maintain good systems. You now have to learn the ins and outs of property management. If you do your own repairs, you'll be working hard physically. If you have a job, you'll need to figure out a way to deal with urgent real estate matters as they come up, or hire someone to do that for you. A lot of decisions, a lot of work, (at least up-front) and sometimes a lot of stress.
With real estate investing and landlording, you may have to deal with a lower class of people. Men and women who tell you lies to convince you to rent to them, then behave disrespectfully once you do. You can get jaded against people if you're not careful. I know long time landlords who treat everyone as if they're going to screw them the minute they let their guards down. They're not any better to deal with than the tenants that helped them become that way. I can say that I became much quicker to anger my first few years in the business. There are just a lot of unexpected things that come up in this business, in terms of repairs, complaints, move outs, etc. And what I Iearned about myself is that I don't react well to the unexpected. I should've already known this; in my lawn care business, I always bought brand new equipment and traded it frequently so that I would be less likely to break down. I would be stressed and livid every time something wouldn't start, or made a noise. I thrive on consistency and have a much worse than average reaction to unexpected challenges. When someone tells me "Hey, the Chinese symbol for challenge and opportunity are the same," I reply with a particular gesture that utilizes my longest finger. When someone rubs their hands together and says, "Ooh, I love a good challenge", I want to smack them repeatedly. So I arrange my realestate business as best I can to minimize sudden unexpected unpleasantries. Whenever a problem comes up that I haven't encountered before, I figure out a solution, then make sure I automate it somehow so it takes care of itself next time.
People in general want to complain about things when they happen, as they happen, instead of making a note and calling the next day. So your phone might ring at 10 PM sometimes. (Don't believe people who tell you your phone will be ringing off the hook all day and night. You've got to do a lot of things wrong, over and over again, for that to happen.) To head off this jangling in the middle of our favorite TV show, we make it clear to our tenants and many contractors that we turn off our phones after 5 PM and that any concerns should be emailed, called in the next day, or delegated to a service person if it's an emergency.
It's easy to lose your shirt. If you're starting out, you'll probably be excited and underestimate your costs and over estimate everything, especially your own skill and intelligence. If you don't have enough reserve set aside, you'll have to either borrow it, use money earmarked for other bills, or declare bankruptcy. Then you'll be the one telling all the other successful landlords that you got out of it because you didn't like fixing toilets in the middle of the night!
Lastly, there's no guarantee that your building will return the kind of money you're hoping. You might get to the end of 20 years of those fabled 3 AM plugged toilet calls and realize you made 1% a year on your money, and had to work your butt off for it to boot. This probably won't happen if you buy at a fair price, underestimate income and overestimate expenses, and tend to your business professionally.
Now on to the good stuff!:
We didn't lure you here to talk you OUT of real estate investing did we? So...number one, you get to run a business that not only can make money in the here and now, (cash flow) but the business assets (buildings) can go up in value, giving you an extra payout when you sell. So far, that's not different than a dividend paying stock, but there's yet two more ways to make money here. You also get wealthier on paper because as you pay (your tenants pay) your mortgage balances down, you own more and more of the assets. (Your equity builds) Lastly, you can conceivably make a profit on paper, but use a depreciation deduction on your building(s) to make it look like you took a loss, and thereby pay less taxes, even if your building went up in value! So there are more ways to make money than in many other investments.
Number two, real estate more than most businesses allows you to delegate its operations more easily. By this I mean that most day-to-day business needs are repairs and maintenance related tasks that can be handled by a well chosen, competent tradesman. Property management can literally be handed over to a specialized company that does nothing but manage other people's rental properties. Now I don't want to make it sound as simple as buying a bunch of buildings willy-nilly and picking up the phone and handing the operation off and all you have to do is collect the checks. Those outsourcing companies in India won't be of too much help for those 3 a.m. no heat calls! But it's much easier to delegate pieces of the operation in real estate than with most other businesses.In contrast, we own and manage a landscape business. Our clients like to hear from us and like to see the same person service their properties every week. They rely on my personal expertise when it comes to servicing their property, and they even like to see me personally from time to time. I can't just hand them off to another landscaper without a lot of training and relationship building. Restaurant owners will tell you the same thing. They have to be there, especially on weekends, to make sure things are running the way they want.
Third, income is fairly steady year round. People need their homes all year, not just during cold weather! Our lawn care business, by contrast, shuts it's doors mid November until early April. Restaurants, retail stores, hair dressers and carpenters all have ups and downs dependent on the season, weather, even road construction. There are external factors on which real estate depends, like the enconomy and housing prices, but all in all, the income level tends to remain steady year round.
You have a place for your aging parents to live, if needed. You can retire, sell your home and keep an apartment vacant just for you and your wife when you come home to visit.
If you arrange things so that they run themselves, you can have a lot of time to do other things. I'm not talking about just kicking back in the tropics, I mean pursuing another career or hobby, living in another part of the country or world for a month or more per year, and you can work when you want to work. I do my best and most focused work between 4.30 AM and 6.30 AM. I like to help my daughter with her homework when she gets home. I couldn't do that if I had a job or business where I had to be a certain place all day. I work my ass off. I just have my work life arranged in a way that allows me to dictate, within reason, when and how much I work.
There are a lot of different avenues to make money with real estate. Buying nice single family homes and flipping or buying & holding & renting them so you're always dealing with white collar, productive people. You can go the other route and buy nothing but $15,000 houses in the worst part of town, have lots of headaches and hassles, but make 50% or better returns on your money. Or you can mix it up. A couple of single family's, two or three fourplexes, a 20 unit complex. You can lend other investors money at 10-15% (hard money lending), or buy mortgages from other people who've sold their real estate using selller financing and held the paper (discounted note buying). There's a lot of ways to engage in the real estate business. Some are more work than others, some more fun than others.
So no one can really tell you whether or not you should invest in real estate. And the real hard core truth is, "you may not know whether it's really for you or not until after you do it." Many people would call that bad advice, but sometimes it might just take buying a house or two and dealing with all that before you decide how deeply you want to get into it. When we started, my wife Deb wanted no part in it. I just wanted to start buying discounted blue collar homes in decent neighborhoods one by one. I ended up deciding that I preferred multi family apartment buildings for a few different reasons, and my wife decide to step up and own the leasing operations. We went from thinking about maybe buying a rental house or two to diversify our retirement portfolio to owning 53 units and having real estate become our primary source of income in only four years.
Like what you've read so far? If you're hungry for more, see our purchase options below. We think you'll earn back the money you spent on this package with your first deal.
Knowing your values, or what's important to you, is paramount. For example, my top three values are family, freedom and health. I want to be there for every one of my daughter's horse riding competitions, spend time with my wife in the evening, have family dinner together and visit new, exciting (warm) places together. I want freedom to go hunting in the morning, take a nap in the afternoon once in a while, and be able to buy my wife and daughter nice things from time to time. My health is of utmost importance, and I find that eating healthy foods, and getting a monthly massage and chiropractic visit are important to my continued health. I do my very best to mold my business around my values, and not the other way around. I don't allow other people to tell me "how the real estate business is." I define how my real estate business is. I decide what being a landlord is like. That's a bold statement, I know, but let me explain. Many people told me things like, "I'd never get into realestate because I don't want to unplug toilets at 3 O'Clock in the morning!", or "Tenants! Once they're in, you can never get em' out!" When we tell some landlords that we charge an entrance fee for pets, they say "Wait 'till they call back and tell you they have a therapy pet."
Basically, we have a barrage of ego driven information coming at us, and if we take it all on, we're bound to create our reality based on the horror stories we're hearing. Most of those things are part of that person's "story." Not wanting to unplug a toilet at 3 AM might just be their way of justifying staying put in their current situation and not taking any risks in life. The "therapy pet" warning might just be an egotistical landlord not wanting to admit they should be doing the same thing. One of the things we do as human beings is "tell stories" to ourselves and others. This is a way to add mortar to the bricks of our identity. It's how we keep our identities firm, it's how we even keep grudges and judgments alive. It's also a way to balance things out, if we're feeling envious or unsuccessful. For example, when you hear someone say, "I wouldn't want to be a landlord like Mr. Smith down the street. Yeah, he might be rich but his wife is a bitch, and he's always up to his elbows in someone else's shit. I'll keep my life, thank you very much!" This is a way of "balancing" things to make ourselves feel better. Yes, Mr. Smith might be more successful than me, but my life is more peaceful. My wife is nice and my forearms are fecal-free, and the last time I had to get up at 3 AM was to let the dog out!
So that's about as much as I dare impersonate Sigmund Freud today. The point is, don't let other people's descriptions of reality become your own without a good fight. Become convinced that you have control over your world. For more on the concept of "descriptions of reality," read Carlos Castenada. His first book, The Teachings of Don Juan: A Yaqui Way of Knowledge is a life changer.
That all being said, here is my list of pros and cons of investing in real estate that I've collected after ten years in the business. Keep in mind this is my "description of reality," so decide what's useful to you and discard the rest.
Real estate can be a complete pain in the ass; at the very least, it's alot of work. You have to learn a lot about real estate, preferably from a mix of sources: Books, websites and someone local and knowledgeable who can mentor you in the direction you're going. You've got to be willing to look at a lot of buildings, some of them a second time, create offers, negotiate, fill out a lot of paperwork, and keep everything very organized. Once you get a few units under your belt, you have to develop and maintain good systems. You now have to learn the ins and outs of property management. If you do your own repairs, you'll be working hard physically. If you have a job, you'll need to figure out a way to deal with urgent real estate matters as they come up, or hire someone to do that for you. A lot of decisions, a lot of work, (at least up-front) and sometimes a lot of stress.
With real estate investing and landlording, you may have to deal with a lower class of people. Men and women who tell you lies to convince you to rent to them, then behave disrespectfully once you do. You can get jaded against people if you're not careful. I know long time landlords who treat everyone as if they're going to screw them the minute they let their guards down. They're not any better to deal with than the tenants that helped them become that way. I can say that I became much quicker to anger my first few years in the business. There are just a lot of unexpected things that come up in this business, in terms of repairs, complaints, move outs, etc. And what I Iearned about myself is that I don't react well to the unexpected. I should've already known this; in my lawn care business, I always bought brand new equipment and traded it frequently so that I would be less likely to break down. I would be stressed and livid every time something wouldn't start, or made a noise. I thrive on consistency and have a much worse than average reaction to unexpected challenges. When someone tells me "Hey, the Chinese symbol for challenge and opportunity are the same," I reply with a particular gesture that utilizes my longest finger. When someone rubs their hands together and says, "Ooh, I love a good challenge", I want to smack them repeatedly. So I arrange my realestate business as best I can to minimize sudden unexpected unpleasantries. Whenever a problem comes up that I haven't encountered before, I figure out a solution, then make sure I automate it somehow so it takes care of itself next time.
People in general want to complain about things when they happen, as they happen, instead of making a note and calling the next day. So your phone might ring at 10 PM sometimes. (Don't believe people who tell you your phone will be ringing off the hook all day and night. You've got to do a lot of things wrong, over and over again, for that to happen.) To head off this jangling in the middle of our favorite TV show, we make it clear to our tenants and many contractors that we turn off our phones after 5 PM and that any concerns should be emailed, called in the next day, or delegated to a service person if it's an emergency.
It's easy to lose your shirt. If you're starting out, you'll probably be excited and underestimate your costs and over estimate everything, especially your own skill and intelligence. If you don't have enough reserve set aside, you'll have to either borrow it, use money earmarked for other bills, or declare bankruptcy. Then you'll be the one telling all the other successful landlords that you got out of it because you didn't like fixing toilets in the middle of the night!
Lastly, there's no guarantee that your building will return the kind of money you're hoping. You might get to the end of 20 years of those fabled 3 AM plugged toilet calls and realize you made 1% a year on your money, and had to work your butt off for it to boot. This probably won't happen if you buy at a fair price, underestimate income and overestimate expenses, and tend to your business professionally.
Now on to the good stuff!:
We didn't lure you here to talk you OUT of real estate investing did we? So...number one, you get to run a business that not only can make money in the here and now, (cash flow) but the business assets (buildings) can go up in value, giving you an extra payout when you sell. So far, that's not different than a dividend paying stock, but there's yet two more ways to make money here. You also get wealthier on paper because as you pay (your tenants pay) your mortgage balances down, you own more and more of the assets. (Your equity builds) Lastly, you can conceivably make a profit on paper, but use a depreciation deduction on your building(s) to make it look like you took a loss, and thereby pay less taxes, even if your building went up in value! So there are more ways to make money than in many other investments.
Number two, real estate more than most businesses allows you to delegate its operations more easily. By this I mean that most day-to-day business needs are repairs and maintenance related tasks that can be handled by a well chosen, competent tradesman. Property management can literally be handed over to a specialized company that does nothing but manage other people's rental properties. Now I don't want to make it sound as simple as buying a bunch of buildings willy-nilly and picking up the phone and handing the operation off and all you have to do is collect the checks. Those outsourcing companies in India won't be of too much help for those 3 a.m. no heat calls! But it's much easier to delegate pieces of the operation in real estate than with most other businesses.In contrast, we own and manage a landscape business. Our clients like to hear from us and like to see the same person service their properties every week. They rely on my personal expertise when it comes to servicing their property, and they even like to see me personally from time to time. I can't just hand them off to another landscaper without a lot of training and relationship building. Restaurant owners will tell you the same thing. They have to be there, especially on weekends, to make sure things are running the way they want.
Third, income is fairly steady year round. People need their homes all year, not just during cold weather! Our lawn care business, by contrast, shuts it's doors mid November until early April. Restaurants, retail stores, hair dressers and carpenters all have ups and downs dependent on the season, weather, even road construction. There are external factors on which real estate depends, like the enconomy and housing prices, but all in all, the income level tends to remain steady year round.
You have a place for your aging parents to live, if needed. You can retire, sell your home and keep an apartment vacant just for you and your wife when you come home to visit.
If you arrange things so that they run themselves, you can have a lot of time to do other things. I'm not talking about just kicking back in the tropics, I mean pursuing another career or hobby, living in another part of the country or world for a month or more per year, and you can work when you want to work. I do my best and most focused work between 4.30 AM and 6.30 AM. I like to help my daughter with her homework when she gets home. I couldn't do that if I had a job or business where I had to be a certain place all day. I work my ass off. I just have my work life arranged in a way that allows me to dictate, within reason, when and how much I work.
There are a lot of different avenues to make money with real estate. Buying nice single family homes and flipping or buying & holding & renting them so you're always dealing with white collar, productive people. You can go the other route and buy nothing but $15,000 houses in the worst part of town, have lots of headaches and hassles, but make 50% or better returns on your money. Or you can mix it up. A couple of single family's, two or three fourplexes, a 20 unit complex. You can lend other investors money at 10-15% (hard money lending), or buy mortgages from other people who've sold their real estate using selller financing and held the paper (discounted note buying). There's a lot of ways to engage in the real estate business. Some are more work than others, some more fun than others.
So no one can really tell you whether or not you should invest in real estate. And the real hard core truth is, "you may not know whether it's really for you or not until after you do it." Many people would call that bad advice, but sometimes it might just take buying a house or two and dealing with all that before you decide how deeply you want to get into it. When we started, my wife Deb wanted no part in it. I just wanted to start buying discounted blue collar homes in decent neighborhoods one by one. I ended up deciding that I preferred multi family apartment buildings for a few different reasons, and my wife decide to step up and own the leasing operations. We went from thinking about maybe buying a rental house or two to diversify our retirement portfolio to owning 53 units and having real estate become our primary source of income in only four years.
Like what you've read so far? If you're hungry for more, see our purchase options below. We think you'll earn back the money you spent on this package with your first deal.
