Lately, I’ve been sharing our family’s interest in buying our first rental property. I’ve written articles, done at least a dozen podcast interviews on the subject and I’ve even looked at some houses with my wife Nicole.
I’ve learned 1% rule, the 50% rule and how to analyze a deal. It’s been fun!
During this whole time, I’ve been asking for people’s feedback, experience, and advice because I’m a complete newbie with real estate investing.
One person who reached out to me recently was my friend Deniz. He shared his difficulty with real estate investing over the past 13 years. He's had tenant issues, rent competition and overall, it's been difficult as he's moved out of DC and into the suburbs as a new father.
Our conversation made me want to get more perspectives, the pros and cons of real estate investing. We're considering making a $100,000+ investment. I want to make sure our family is making a smart move.
With that said, here are 13 additional pros and cons from former and current real estate investors:
Tom Sylvester, Entrepreneur & Owner of Rental 18 Units, Lifestyle Builders
Pro: Tax Advantages
“You're also able to make money from the tax savings and some of the write-offs you'll get from mortgages, so multiple ways to make money. That was really a big pro to me.”
Con: Research Required
“It takes work to research and make sure that you're buying the right property and that you're buying it at the price. It also takes work to put the systems and processes in place to screen tenants, to get your system set up to be able to collect rent, and ultimately to make sure that you're continuously making money off of that.”
Kathy Kristof, Award-Winning Journalist & Former Rental Property Owner, $ideHusl
Con: Difficult Tenants
“People love the idea of buying rental real estate as an investment, but it's the only investment that I've ever had that lost money and swore at me at the same time. The problem was that the economy went south and our renter lost his job. Therefore, he couldn't pay rent anymore, and even though you want to be sympathetic, at some point you need to start collecting rent again. At that point he was very, very angry.
“It took us six months to actually evict him because he never did regain his work, and we felt terrible, but we were also out a huge amount of money. We eventually sold that investment and didn't lose money on it, but didn't make that much money. Meanwhile, you could invest in the stock market and nobody calls you when the toilet is running or the pipes are broken or there's some other problem with the house.
Joel Larsgaard, Podcast Host & Rental Property Owner (5 Units), How to Money
Pro: Second Income
“The best thing about investing in real estate has been that the cash flow has basically acted like a part-time job for our family. My five rental properties have allowed for my wife to be able to stay at home with our kids during their earliest years.
“That was something she really wanted to do and I feel like owning a few rental properties in our area has made that a possibility where it might have been much harder to make that happen otherwise.”
Con: Takes Lots of Time and Patience
“My goal is to buy a property every two years, and so it's slow going. Then also the time that it takes to make sure that a property is in good condition, dealing with tenants. Basically, real estate isn't nearly as passive as some people make it sound.”
Lisa, Blogger, Podcaster and Owner of 1 Rental Property, Mad Money Monster
Pro: Consistent Tenants Make it Easier
“I've been lucky so far that I've only had two sets of tenants and never a late rent payment, so that's pretty amazing in my opinion. Now I do use a property manager, so I must give him some credit as far as screening tenants and getting the right people in there, however, that does eat into my profits.”
“But for me, it's worth having the peace of mind that he provides as far as legal documentation and action if we would ever need to move forward in that direction.”
Con: Not Diversified
“Anybody who's invested in real estate, you're invested in a single property in a single town on a single street, so if something happens to that town or something, to that street … It's kind of like investing in a single stock in my opinion. The company can go bankrupt, right? It's a little risky in that regard, but not enough to deter me.”
Jason Cabler, Dentist, Blogger and Owner of 1 Rental Unit, Celebrating Financial Freedom
Pro: Property Management Helps
“I don't really have to do any management. I have a property manager, so it is a very, very low hassle investment, but she only charges me 10% of the rent and since I paid cash for the house, I don't have a mortgage payment, so it's wonderful in that way.
“It's very low stress. She takes care of everything and I get a check for well over $1,000 in my account every month, which I reinvest in the stock market, mutual funds, crypto, anything that I want to invest in. Eventually, I will build that account up to where I will invest in another rental house.”
Scott Trench, Podcast Host, Author and President of Bigger Pockets
Pro: Outperforms Index Fund Investing
“I believe long term, a leveraged real estate portfolio that has operated well can and statistically should out-perform 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.”
Con: Must Use Leverage to Succeed
“This out-performance, this extra return that a real estate investor can generate only works if the portfolio is leveraged and 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.
“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 are not managing their properties and their portfolio correctly. Either that or they're going to seek to reduce risk by paying down their debt and owning the properties free and clear.”
Deacon Hayes, Author, Blogger and Owner of 1 Airbnb Rental Unit, Well Kept Wallet
Con: Home Values Can Drop in Tough Times
“So 2006, I decided to buy two properties in Arizona. The housing crisis happened, those properties were cut in half in value and it took almost I think 11 years for them to get back to even. However, one of them was foreclosed on. The other one we sold for like a $50,000 loss.”
Pro: You Don't Need to be a Landlord to Invest in Real Estate
“Today I'm investing in crowdfunded real estate through Fundrise and Rich Uncles. Those two platforms have done decently. They're not crazy good, but it's kind of like a set it and forget it. Instead of having the hassle of dealing with traditional real estate, I was able to get say somewhere between 7 and 10% returns through crowdfunded real estate. We also have an Airbnb now. It's not profitable but it's a place that we can stay as a second home.”
“So for some people thinking about getting into real estate, building equity, having a second home and then Airbnb-ing it, it's just a nice way to have a place to go and have some income coming in, but not necessarily a great return.”
Related Podcast: How to Achieve Financial Independence and Retire Early
Pam Andrews, College and Scholarship Coach and Rental Property Owner, The Scholarship Shark
Con: Adversely Affects College Financial Aid
“Real estate really is considered an investment asset when it comes to the FAFSA or even the CSS Profile if you have college-bound high school kids. So for families who have kids, high school-aged kids or current college students, you just need to factor in that into the equation because the more accessible assets that you have, the more money your family's going to be expected to contribute to the cost of their college education.”
Related Interview: How One Parent Helped Her Son Earn $700,000 in College Scholarships
Paula Pant, Podcast Host, Writer and Owner of 8 Rental Units, Afford Anything
Pro: Quicker Income Stream Than Stock Market Investing
“When you're investing in a rental property, the returns bias towards that dividend, 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. Let's say you put it into an S&P 500 index fund and that over a longterm 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 could then keep that 6%.”
Related Interview: Financial Independence Through Real Estate – with Paula Pant
Dave Pere, Active Duty Marine and Owner of 13 Units, Military to Millionaire
Pro: Builds Generational Wealth
“it allows you to build generational wealth by harnessing the powers of cashflow, appreciation, depreciation, debt pay down from your tenants. Also, you have control of the asset and its performance.”
Jonathan Verhaeghe, Procurement Professional, Blogger and Owner of 1 Rental Unit, Joney Talks
Con: It's Not Passive
“There's a myth of passive income, which actually real estate is a great way to make passive income, but there's a myth in the sense that it requires a lot of work upfront like researching the right properties.
“More like researching the properties, securing the right tenant, running the numbers, taking all the parameters into account, contingency, etc. So there's a lot of work to do up front before you actually buy your rental property, whether it's a parking spot, an apartment or a house.”
Sean Mullaney, Fee-Only Financial Planner and Accountant, Mullaney Financial
Con: You Need to Understand the Real Estate Business
“When you invest in real estate, you really need to know that business in order to make money. Say you instead invest in index funds. You wind up owning pieces of all sorts of different types of businesses. You don't need to know a single thing about operating a company or generating sales or managing expenses in order to make money investing in broad-based index funds.”
“Real estate on the other hand is a little different. In order to make money in that business, you really need to know how to find properties, find the right types of tenants, manage your expenses and those sorts of things.”
Chad Carson, Author, Podcast Host and 17-Year Real Estate Investor, Coach Carson
Con: Slower Startup
“The negatives for a lot of people is that upfront real estate investing is very much like a startup company. It's more entrepreneurial than it is investing.
“So if you're used to pressing a button and buying an index fund at Vanguard or something, this is not like that. So you've got to think about it like a business. You've got to put time into it, you've got to learn how to find deals, how to build a network and a team. You've got to do all those things that you would do in any business to be successful.”
Pro: Real Estate Investing Can Provide a Full-Time Income in the Long Run
“It gets better over time. My example might be informative. When I first started I was of course hustling, and I still hustle off and on today as well, but a couple of years ago my wife and my two kids who are 6 and 8 now, we went to Ecuador for 17 months. We basically lived off our rental income the entire time.”
“I might have spent 30 minutes to an hour a week paying some bills, so it can become very passive after you get over that startup stage so if you're interested in it I hope you'll check out more real estate investing and get both the pros and the cons.”
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What are your pros and cons of real estate investing?
Please let me know in the comments below.