Some call it “real estate”, others call it “property”. Either way, it’s a huge asset class that a great many people invest in. Following a comparison I did between likely returns from stocks and real estate, I got a lot of feedback from OfWealth readers about their personal experiences as landlords. Anyone who is already a landlord, or thinking of becoming one, should read on.
A few weeks ago I wrote two articles that compared the returns from stocks and real estate. In case you missed them, here are the links:
I’ve lived in three countries where people get very excited about real estate: Britain, Hong Kong and Argentina. In all those countries, and beyond, I’ve known people who have made good money from real estate investments. Some have made a fortune.
At the same time, I’ve known people who have discovered that property can be a money pit. That includes people in the renovation game or trying their hand at farming.
Worse than that, I’ve known people who were bankrupted by property. All that’s required is excessive leverage taken on at the wrong moment in the price cycle, or just before interest rates head up.
So, is it all worth it?
After the previous two articles, many readers wrote to me about their experiences. Some bought property on the cheap after the last crisis, and have done really well out of it.
For example, H.E. from Florida says he’s making net yields on his initial outlays – which are spread over multiple properties – that run well into double digits on average. But he also says that, even with a professional management company, it’s still time consuming and hard work.
In fact a common theme from the messages was how much hassle it is being a landlord. Even if you employ a management company – which should save some time, but will reduce returns – you still have to manage the managers. There’s no free ride.
The money pit
One reader in particular, George T. from California, shared some particularly grim experiences. Below I’ve shared them in full, and with his permission.
In the early nineties a friend and I decided to invest in rental property. Both of us were new to rental income investments, so it sounded attractive and interesting.
We bought two residential homes in Southern California. One had almost a half acre which you could have horses on. The other in a residential neighborhood.
I have to tell you being a landlord is no easy task. In the beginning we spent so much time and money fixing up the places getting them ready for tenant occupancy.
One of our first encounters at one of the properties was when we were working on one the properties a neighbor came over to talk to us. He asked us if we were going to move into the property. We told him we were going to rent it out. He turned around and walked away. Never talked to us again. Welcome to being a landlord! Tenants coming and going, neighbors complaining about your tenants, running credit backgrounds, and always working on the properties. It became a headache.
Remember, when you are the landlord if something happens to the property you have to fix it. I was working so much on my properties that my own house was being neglected. It got to the point when my tenants would call it’s like “What now”.
Then you have to call them if their rent was late and of course they would give some B.S. excuse. Better yet, one time my partner and I had to pay one of the tenants a visit for being late on the rent. When he came to the door he had large knife in his hand. Before I could turn around and say anything to my partner he [the partner] was halfway down the block running away. Of course our tenant said he was just about to cut open an avocado.
One time we decided to pay a visit and look through the property unannounced. My partner and I couldn’t believe the filth and trash all over inside the house. Not to mention the dog crap on the carpet that looked like it had been there awhile.
My partner couldn’t take it after about five years or so. We ended up selling because I didn’t want to buy him out and manage the property on my own. We sold when the market was low and we lost money on the investment.
Of course if we would have waited a few years we could have made some good gains. It’s always should have and what if?
Bottom line is I don’t think I would do it again at managing the properties. I would hire a management company. Also I’ve talked to other property owners about tenants. Man do they have some great stories to tell. One good thing, I became a pretty good handy man.
It’s good for your readers to know that owning rental income is not for the faint of heart. Do your homework, run the background checks. Is the car they drive in good shape? Ask “Why are you moving?” Even then you could still end up with bad tenants.
That’s not to say we didn’t have some good tenants. It’s just you always remember the bad ones.
I will also tell you this. If you have some tenants that don’t pay their rent on time or cause all kinds of problems: there will be a time when they may look to move to another property. They will most likely put you down as their last landlord on the new application. The new landlord or rental agency will call you about the prospective new tenants.
Well, when they ask the questions about good tenants and do they pay on time? Well what do you think I told them. “They were the best tenants ever and they always paid on time. I hate to lose them”. You know what I mean. Better to pawn the bad tenants on someone else. You learn these things. Sadly, this is reality.
Sorry for the long email but rental income is not easy. I’d rather invest in REITs (like your article) or some other real estate investment and not dealing with tenants. [Editor’s note: REITs are Real Estate Investment Trusts – companies that invest in real estate.]
I recommend prospective landlords or current landlords to watch the psychological thriller movie “Pacific Heights” with Michael Keaton. At least read what the movie is about. It’s pretty extreme and keeps you on edge.
George T., California, USA”
Many thanks to George for his honesty (and the film recommendation). It sounds like he had more than his fair share of problems when he got involved in being a landlord. I doubt much has changed since the 1990s.
By the way, I’ll follow up with more about investing in REIT stocks later in the week. Most REITs are companies that own physical real estate (good), although some involve complex financial engineering and are really just hedge funds that make leveraged bets on bonds and interest rates (bad). The question is, are they a way to invest in real estate with much less hassle? And how profitable are they?
In the meantime, directly-owned real estate can be profitable – especially if you buy in the right place at the right time. But it’s also likely to be a lot of work, even with a manager. If you’re thinking about it for the first time, you’d do well to bear that in mind.
Finally, I’ll leave you with this short summary from another reader, P.A. from Florida in the USA:
“It’s great to own a little real estate. It’s not so great to be owned by a lot of real estate.”
What do you think? Please keep your thoughts and experiences coming via the usual email address (below), whether on this topic or anything else that I write about.
Stay tuned OfWealthers,