3590: [Part 2] Rental Properties Pros and Cons by Andy Hill of Marriage, Kids and Money on Property Investment Planning

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[00:01:00] This is Optimal Finance Daily. Rental Properties Pros and Cons Part 2 by Andy Hill of Marriage, Kids and Money. Rental Property Drawbacks. Investors who've found success with rental property love to tell people about those wins, and they should. After all, real estate can really help you further your financial goals. However, it's important to be aware of some of the drawbacks that come with rental properties.

[00:01:28] Number one, real estate investing is not passive. Unless you're using a crowdfunding platform like Fundrise or Arrived Homes, traditional rental property investing is a lot of work. You're running a small business with real costs, real deadlines, and real human factors. Since this is not something to be taken lightly, you'll need to dedicate time to making sure you're doing it right financially, legally, and ethically.

[00:01:55] If you're in a busy time in your life already, investing in rental properties may not be worth it. Number two, unpredictable taxes and insurance costs. Most people who take out mortgages on rental properties have fixed mortgage costs. However, property taxes and homeowners insurance costs can swing, sometimes dramatically, depending on the area. If your rental income can't absorb those rising costs, you may have to raise your rent at the end of the lease.

[00:02:25] This can mean turnover in tenants and other issues. Number three, unpredictable neighborhoods. Sometimes rental property owners find themselves in for a surprise when the neighborhood their property is in starts to change. It's possible that an area can be hit with high unemployment if a big company goes bust. Other times, the age of a neighborhood starts to shift. Young families move out if school boundaries change, and so on.

[00:02:52] A changing neighborhood can make it difficult to lease your property, and it can also change the type of tenants who want to live there. Of course, one way to lower this risk is to stay involved in local news and politics to keep a pulse on the neighborhood. Number four, leverage requires increased risk. One of the reasons why real estate investments can sometimes outperform index funds is that they're sometimes much riskier investments. Scott Trench cautions, quote,

[00:03:22] This outperformance, this extra return that a real estate investor can generate, only works if the portfolio is leveraged. It has to be leveraged for the entire duration of the hold period, with regular re-leverage as notes are paid down, or average annual long-term appreciation sets in, and equity values increase, end quote. What does that mean? Well, it means that you need to really understand how your money is invested,

[00:03:50] and how your properties are generating income. That's because Scott also says, quote, So if you're going to use leverage over a long period of time, that creates additional risk. An uneducated, undisciplined operator can and will likely lose a substantial amount of money, or go bankrupt at some point in the hold period, if they're not managing their properties and their portfolio correctly. Either that, or they're going to seek to reduce risk by paying down their debt

[00:04:19] and owning the properties free and clear, end quote. Does this mean you shouldn't invest in real estate? Not at all. It means that you should do your homework first, which is true for any investment. The key to protecting your money is to not invest in something you don't understand. And number five, home values can drop in tough times. Deacon Hayes from Well-Kept Wallet currently owns One Airbnb, B&B.

[00:04:45] He's also had experience in the homeownership and rental market for more than a decade. He reminds us that home values don't increase indefinitely. Deacon says that in 2006, quote, I decided to buy two properties in Arizona. The housing crisis happened, and those properties were cut in half in value. It took almost, I think, 11 years for them to get back to even. However, one of them was foreclosed on.

[00:05:12] The other one we sold for like a $50,000 loss, end quote. Much like the stock market, it's difficult or even near impossible to predict how the real estate market will move. And just like the stock market, ups and downs are to be expected. Unfortunately, it's often only the market ups that are discussed. Making sure that you have a plan to weather market downturns in real estate or in other investments is key to managing this rental property con.

[00:05:41] Final thoughts on rental property pros and cons. The truth about owning rental property is that your results can vary depending on many different factors. That's why it's important to understand rental property pros and cons before diving in. You just listened to part two of the post titled Rental Property Pros and Cons by Andy Hill of marriagekidsandmoney.com.

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[00:07:32] And right now, you can save $20 on your first pickup or delivery order. Fred Meyer, fresh for everyone. Andy hit the nail on the head as to my reason for not investing in real estate yet. It's not a passive investment like investing in index funds. And right now, I don't have bandwidth for more active investments. I'm currently actively investing in my business, the Economy Conference.

[00:07:59] But I anticipate that over time, as the business grows and I can hire more help, I'll open up time and energy to look at other types of active investments. It's important to me to not stretch myself too thin, especially when taking on the risk that comes with being an inexperienced real estate investor. I left my corporate career to create more time and space in my life. So piling on too many active investments seems counterproductive.

[00:08:28] Yesterday, I talked about James Lowry, an Economy Conference speaker who has had great success with real estate investing. But not all real estate investors have such great experiences. Another Economy speaker, Gwen Merce, with Fiery Millennials, shared her disaster of an experience trying to invest in real estate. She bought a house that seemed like an incredible deal, but it ended up being a money pit. Everything looked great on paper.

[00:08:55] And when she explained why she invested in the house, we all nodded in agreement that it seemed like a good investment. However, looks can be deceiving. If you want to hear more about the disaster known as the Dingle House, check out Gwen's video on the Economy Conference YouTube channel. But that's going to do it for today. Thanks so much for tuning in and listening to both parts of this great post. And I look forward to seeing you tomorrow for more Optimal Finance Daily, where your optimal life awaits.