Wednesday, August 20, 2014
I have to start this post by saying I love real estate. I have said it before and I mean it every time. Andrew and I literally enjoy just driving around looking at property on the weekends for no particular reason. Even back to my high school years I can remember staying up late at night watching the "Real Estate Channel". So understand that the remainder of this post is what I have learned over the past decade about owning rentals and some of the things we did not consider when we started investing but that does not mean that I do not still believe in real estate as an excellent investment vehicle in some circumstances..
Side note:This post was actually inspired by a comment that was left on a post I wrote about the Top Ten Things Every Landlord Should Know. To keep things in context here it is important to note that I would consider Andrew and I upper middle class in terms of income. We are not rich by any means nor do we struggle financially. When it comes to our rental properties, they were all acquired at different times under different circumstances but they all have mortgages. As I discuss my point of view on this please keep that all in mind as this relates best to scenarios in which properties are NOT purchased with cash and are owned by people with similar income to ours.
When we started purchasing real estate we had always been of the mind set that building wealth with other peoples money (i.e. the bank) was a smart thing to do. There are many great investors that build entire businesses out of teaching people this principle and we were drinking that Kool Aid big time. If we found a good investment property, could get a mortgage on it and were comfortable that we could flip it or rent it, we bought it. That mind set created some very stressful moments but also yielded rewards as we made profit on some of our rentals every month and took advantage of great tax write offs each year. It also brought us to the point where Andrew and I owned five properties by the ages of 28 and 29 respectively. We were completely comfortable with that and quite proud of it to be honest until a couple things changed. First we had children, which of course made us think more critically about our finances. Having children made us desire security in our finances above all else. Secondly, we started a small business (not real estate related) and although the business is doing very well there is still a certainly sensitivity to the whole security issue. So this is where we get into the "dangers" you have been so patiently waiting to hear.
1. Property Repairs: Whether we are talking about a flip or a rental if you don't have loads of cash to just throw away on a whim, you likely have a budget for flips and safety net of cash for repairs on rentals (hopefully). So what happens when you purchase a property to flip and your contractor runs into unforeseen issues that increase your cost by 5, 10, or 15 grand? Are you going to drain your families savings account to save your investment and pray you get that money back if and when you sell it?
In the case of a rental property this is not quite as big of an issue if you only have one but keep in mind we have 5 properties including our home so that is where I am speaking from. Folks, we have seriously had months where three different properties needed repairs in the same month. When you learn that an AC unit stopped working and will cost you 700 dollars to repair, another tenant's washing machine has stopped spinning, and a third tenant has a leaky toilet you realize how quickly your rentals can drain the life out of your personal finances.
2. Vacant Rentals: There will inevitably be times when your rental property is vacant. It may be a short time or it may be several months. The danger with owning several properties is that you could have multiple properties vacant at once. If all of our rental properties went vacant at the same time or ever over lapped we would hold the weight of about 5,000 dollars in monthly mortgage payments! Talk about scary. How long would it really take of us carrying those payments until we had completely drained our family finances? Then what? We allow them to go into foreclosure? Sell them at a loss in order to sell them quickly? I realize this sounds extreme but the more property you own the more likely it is that there may be over lapping vacancies.
3. Other Homes Take Priority: Because landlords have a responsibility to maintain their property and ensure their tenants have a decent place to live (which we take very seriously) we have on some occasions had to put the needs of other properties ahead of our own. Prime example, the kitchen in our home could use some updating and we have talked about getting a new kitchen for a few years. However, we also have another property that needs lots of updating in several areas. This has made the property very difficult to rent so it creates a pretty lame dilemma.
These "inconvenient truths" have really caused me to rethink when it is appropriate to own several properties from a financial perspective and we are now taking our family in a very different direction. In my opinion, it is much more valuable to seek a path of paying off the mortgage on your home and saving the big time investing for when your rental properties will be a true asset and not as much of a liability. So you will lose tax breaks because you have no mortgage? So what?! You will truly own your home! Too many Americans learned the hard way that we never truly "own" a home until you kill the mortgage. For far too long we have allowed ourselves to believe that having hundreds of thousands of dollars in debt is OK if there is a house tied to it. If you lost your job, how long would it be before the bank takes your house? This is the new perspective that we have taken on. That mortgage debt is not OK and using the banks money is not ideal. In fact, it can ruin families financially. Mortgages in my opinion should be a short term solution (if used at all) not a 30 year burden.
As for us, we are on a track to selling our rentals when we can to help us achieve this goal faster. Will there be a time that we resume investing and purchase more property? Absolutely, but it will be during a very different phase of life. I heard someone say once that delayed gratification is a sign of maturity and with regards to owning real estate that couldn't be more true.
Let me know your thoughts, experiences, and questions in the comments. I would love to hear from you.