*This post is updated from its original posting about six months ago. I have been thinking about buying real estate to add to my portfolio. I thought a multi-family home next door to us would come on the market as a foreclosure, but that isn’t going to happen. So I have been thinking about how else, if at all, do I get into real estate. So while this was a thought experiment 3 years ago I still think about it a lot. I guess I am just waiting for the right opportunity.
This post is really more of a thought experiment than a reality. Part of the reason is that with the combination of my mortgage and our student loans I basically have two mortgages already, potentially adding a third, even if it is paid for with rent, sounds like a lot of risk and I don’t know if I want that much right now but I could be talked into it if the numbers made sense.
Many of the people are their way to financial independence own real estate as a means to diversify their income streams and have some passive income coming in so they can truly pursue their passions. As of this moment, if I were to retire early or something, my only income stream would be from some investments. However, if the market goes down I would presumably lower my withdrawals and lower my income. It can be somewhat perilous to have all of your eggs in one basket. Because of that I have thought about what it might be like to buy a 2 or 3 family home. Two and three family homes are huge in the Northeast where I live. You can purchase one, live in one unit, and basically have your tenants pay part or all of your mortgage. Sounds like a pretty good deal.
Another reason for this thought experiment is I have been thinking a lot about what the next five years should bring. As my parents get older should I make it a priority to move closer to my home state? What about our children (if we have them) and their grandparents? What if we want to live abroad for a while? Having passive income through rent would be a great way to supplement our income and I wouldn’t have to worry so much about staying somewhere or going somewhere I don’t necessarily care to be (that is not the case currently).
Potential Real Estate Investing For Me
For me it seems like there are two major ways to invest: 1) buy a property; 2) invest in REITs (real estate investment trust).
The advantage of buying a rental house is that I could physically see, feel, and touch the property. It would an asset right up front. I could get tangible income from it right away. However, there are several draw backs.
First, I have only bought one house in my life. I would have to learn how to spot a “good” deal on real estate. I wouldn’t just want to buy anything.
Second, I am not a handy person. I am not going to be a landlord that comes over in the middle of the night. I could hire a property company to manage the property and find tenants, but they would take at least 10-15% of the income for their fee.
The biggest drawback is getting the money to buy the property. I have equity in my own home that I could leverage to buy a property. However, what happens if I don’t have renters? Or they destroy the house? Carrying two mortgages and not having a way to pay for that 2nd home would be a lot of risk. Do I want to take that risk at my age? Mrs. ROB and I have a lot of student loan debt that will take away to pay off can I realistically afford it?
The other way to invest in real estate for me is REIT (real estate investment trust). REITs can be a great thing because they are like a mutual fund where you are buying slices of all kinds of properties. You diversify your risk from just one property. You don’t have to worry about if the sink breaks down. You don’t have to worry about tenants. Additionally, I could invest in it at a much lower cost. I wouldn’t have to carry a mortgage and debt.
However, REITs can be risky. First, there is no guarantee that the basket of real estate you are buying will go up in value. You don’t necessarily have visible tangible evidence of this particular piece of real estate.
Second, REITs aren’t large pieces of your net worth. When you buy a rental home it is worth whatever it is appraised with. With REITs there is no large piece of property. If you invest $2000 you investment is $2000. If you put a down payment on a house for $2000, the physical property is probably worth in the six figure range, plus you might have larger equity, which increases your net worth.
One of the biggest drawbacks with a REIT is the fact that it doesn’t provide the passive income that you might want. When you have a tenant paying your mortgage and potentially clearing a few hundred dollars per month or more than you have that cash instantly. REITs often pay out dividends (like a mutual fund or stock) but it might or might not be monthly. You don’t have the passive income and cash flow like you do from a property.
Intellectually, I like the idea of being a landlord. I love the idea of having someone else pay my mortgage. However, realistically I don’t know if it is possible or even likely. I am not handy. I don’t necessarily want to deal with the hassle of other tenants, but I love the idea of multiple streams of income to free me up to be able to do what I want.
This isn’t a conundrum I am going to solve anytime soon. And considering mortgage rates are going up I might have missed my window to get a great deal on real estate. I might just have to go with REIT or continue on with my normal investments.
Any thoughts? For those of you who are landlords any advice? Drawbacks? What would you advise?