There is a lot of talk about buying investment properties with housing prices still recovering from the housing bust. Buying an investment property can be an exciting and fun challenge (and more work than you think!). While most will focus on how much money they will make each month from the renter, you have to also consider any possible headaches that might arise as well.
Being a Landlord
Currently, I am a landlord. I’ve always wanted to try this out and because of my circumstances, here I am. I bought my house just before the bubble popped, meaning I bought at the peak. Fast forward a few years and my girlfriend and I are discussing moving in together. Because of the locations of our houses, her house made more sense for both of us to live in. I was then faced with the decision of selling or renting my house. The decision for me was actually fairly easy: my house was underwater (worth less than my mortgage) and I didn’t have the cash to fix the situation. So, renting my house became my choice.
So far, I have had nothing but great things to say about being a landlord. My tenant is great and takes care of the house almost as well as I did. Finding her wasn’t easy. It took me a handful of ads and meeting of potential tenants before she found me.
I have had the fridge break down in the house, which was not fun replacing, but it is part of being a landlord. One aspect of my situation that is nice is that my house is in a condo development. As a result, if any emergencies occur, my tenant is to call the management office first, and then call me. This is nice because they will handle many of the larger issues that might arise. This allows me to slowly become acclimated with being a landlord as opposed to jumping into the fire. Of course, for this “service” I pay a home owner’s association fee which makes my profit margin non-existent.
Overall though, it has been a great experience and one that I look forward to replicating in the near term.
But not all landlord stories are as good as mine. There are some horrible stories out there. When I spoke to my attorney about renting, he instructed me to watch Pacific Heights. He said if I am OK taking the chance of renting to this person, then I should become a landlord. He did say that there is only a 10% chance of this happening, but it is a possibility.
Note that you can always hire a property manager to handle the finding of tenants, screening, collecting of rent, etc. But you are still going to be involved in with the rental. I feel that just starting out, you should try to do it on your own as opposed to hiring a property manager as this is the best way to learn and to not make the same mistakes twice.
Alternative to Landlords
If you don’t think that becoming a landlord is right for you, or you just don’t want to own an investment property can you still partake in investment property? The answer is yes!
Instead of buying a duplex or apartment building you can just invest in real estate investment trusts (REITs). These are publicly traded companies that acquire buildings and then rent them out to tenants. By law, for a company to be considered a REIT, they have to pay out at least 90% of their taxable income to shareholders. If you were to invest in a REIT, you would get a payment, usually a quarterly dividend that represented your ownership in the REIT after all expenses were paid.
The key difference between buying a house and renting it and investing in a REIT is this: you are renting a house to person, while REITs purchase shopping malls, warehouses, hospitals, office buildings, apartment buildings, hotels, and even timberlands.
It will be much harder get rich off of investing in REITs. This is because you are a shareholder along with hundreds or thousands of other investors. Your investment in a REIT is a small percentage, whereas your ownership in a rental property is the equity in the property, which over time will grow into 100% ownership. While you own 100% of the property, you will still be collecting a monthly income less taxes.
Another downside to investing in REITs is selling. When you sell your REIT shares, you will get your investment back plus or minus and share appreciation. When you sell your investment property, you will get the equity in the property. Of course you will have to pay taxes on this money, but in most cases, the amount of money will be much more than if you had invested in REITs instead.
There are plenty of advantages to investing in REITs however. The biggest is the lack of time commitment. Once you research and invest in a REIT, you can sit back and do absolutely nothing. This is not the case with buying an investment property. You have to prepare it for renting, find tenants, collect rent, and respond to and maintenance issues.
Another benefit is diversification. When buying shares in a REIT, you are immediately diversified. You own a handful of real estate properties, ideally spread out throughout the country. As we all know, real estate is regional. Once region could be seeing big price gains while another might be stagnant. When you buy an investment property, you only have that one property and the risk is what happens in that local market.
There are advantages and disadvantages to both owning rental property and owning shares in a REIT. At the end of the day, you have to decide what works best for you. If you don’t have much free time, or a large sum of money for a down payment, owning REITs might be your solution. Only you can decide how comfortable you will be dealing with tenants. The good news is that even if you want nothing to do with tenants, you can still be active in the real estate market.