3589: [Part 1] Rental Properties Pros and Cons by Andy Hill of Marriage, Kids and Money on Property Investment Planning

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[00:00:30] This is Optimal Finance Daily. Rental Properties Pros and Cons Part 1 by Andy Hill of MarriageKidsAndMoney.com. At some point in your money journey, you've probably heard someone excitedly share all the benefits that come from real estate. And you've probably found yourself wondering what's the truth about owning rental property. That's why we tapped a team of real estate experts to learn more about rental property pros and cons.

[00:00:58] Plus, we'll share our personal favorite way to invest in real estate so you don't have to worry about the majority of common real estate drawbacks. What are rental properties? Before you can weigh the pros and cons of rental properties, it's important to be clear on the definition of what a rental property is.

[00:01:17] A property is a rental property if an investor purchased the home, tenants other than the investor live in the home, and a lease or other rental agreement outlines this arrangement. If a city or town zones a property as residential, it can be lived in. That means that they are supposed to be occupied by individuals or families, not commercial businesses. Types of rental properties.

[00:01:44] Now you're clear on what rental properties are, but did you know that there are actually different types of rental properties? Rental properties can include single-family homes, duplex and other multifamily homes, apartment complexes, and condos and townhouses. There are also commercial rental properties in addition to these residential types of rental properties. However, we'll keep our focus on residential rental properties for this article.

[00:02:12] You can also get more details on residential rental properties from the IRS to know exactly what qualifies as a rental and what counts as rental income. Rental property pros and cons. If you've spent any amount of time working on your money goals, you've probably heard someone talk about real estate. Adding rental properties to your portfolio can help you on your financial journey. However, it's key to be aware of rental property pros and cons before diving in.

[00:02:41] Rental property benefits. Some of the most important rental property benefits relate to how much income they can generate and how quickly you can potentially see that income. However, there are lesser known rental property benefits that you also want to explore. Number one, outperform index funds. It's hard to find an investment that is loved more than index funds. In fact, they're probably the simplest hands-off way to become a millionaire.

[00:03:10] However, real estate investors like Scott Trench from BiggerPockets point out that real estate can outperform index funds. Scott says, quote, I believe long-term, a leveraged real estate portfolio that is operated well can and statistically should outperform a comparable index fund or other average stock investment. I believe that that effect can be very dramatic over a long hold period of let's say 10 or more years. End quote.

[00:03:38] Of course, this isn't a guarantee. And that's why people often diversify their investment portfolio to include real estate as well as index funds and other investments. Number two, grow your money more quickly. Another benefit to rental properties is how quickly you can grow your income stream. Paula Pant from Afford Anything owns eight rental properties. Paula says, quote, When you're investing in a rental property, the returns bias towards that dividend.

[00:04:07] They bias towards the income stream. What that means is that rental property investing is a more appropriate choice for somebody who has the goal of building passive income to reach financial independence. Because of the fact that the returns bias towards the income stream. Now, assume the property just keeps pace with inflation and no more. That means the total return would be 9%. And so comparably, you might put that same $300,000 into the stock market.

[00:04:36] Let's say you put it into an S&P 500 index fund and that over a long-term aggregate average also has a 9% return. But in the case of the rental property, you have 6% out of that 9% coming in the form of an income stream. Which means that if you were to achieve an early retirement or you wanted to live on passive income, you can then keep that 6%. End quote. Number three, house hacking.

[00:05:03] One way that people hit fire or coast fire faster is through house hacking. They rent a room or an area of their home and that covers much of their housing costs. By minimizing your own housing costs, you can find financial freedom a lot faster. In addition to potentially covering all or part of your mortgage, rental properties often come with tax benefits. Even if you only rent extra space in your primary home, you can often write off a portion of your mortgage interest.

[00:05:33] And number four, set it and forget it options exist. If you talk to rental property experts, it can often feel like there's a steep learning curve. In fact, many people worry that it's too complicated or might even feel like a second job. But there are plenty of ways to take a set it and forget it approach to rental properties. Working with a property manager is a great way to ensure you never have to field a late night flooded basement phone call.

[00:06:00] Additionally, you can invest in real estate platforms like Arrived Homes that do all the research and homework for you. Rely on other experts who've analyzed the market and selected high performing properties. You can eliminate a lot of the risk and a lot of the work and still reap the benefits of rental properties in your portfolio. To be continued.

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[00:08:18] The majority of my friends who have reached FI quickly did it by aggressively investing in real estate. My friend James Lowry, who blogs at Rethink the Rat Race, spoke at the Economy Conference about how he and his wife reached FI in two years through acquiring 10 doors. To demonstrate his point on speed, he offered this example. Let's say you make $100,000 per year and you spend $50,000 per year. That means you have $50,000 per year to invest.

[00:08:48] If you passively invest in index funds, it will take you 13.1 years to reach your FI number. This is the point where your investment portfolio can handle a 4% per year withdrawal to cover your annual expenses. But if you leveraged that $50,000 per year to buy long-term rentals, you'd be able to cover your expenses in 6.8 years with 17 doors that profit $250 per month each.

[00:09:16] And if you have a real need for speed, you could consider short-term rentals. In this same scenario, you could reach FI in 2.4 years with 4 doors that profit $1,042 per month each. James also expanded upon the systems he's implemented that have allowed him to manage his properties as a lazy landlord. His words, not mine. So if you'd like to learn more, check out the full speech on the Economy Conference YouTube channel.

[00:09:45] But we're only halfway through the post, so be sure to come back tomorrow where we'll finish this up and where your optimal life awaits.