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 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!

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!

Just my two cents.

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 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

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!

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.

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.