Yes. But you don’t have to choose; you can do both. I have never found real estate to be a hassle. If you do the heavy lifting in the beginning by finding the right tenants (credit score is my go to filter) you prevent a lot of future problems. For example pets are a potential problem. You can avoid all those problems by excluding tenants with pets. Pet lovers hate to hear that, but it’s true and any property owner will confirm this. Even fish can be a problem; what happens to your property when the tank leaks or spills happen? You can avoid all that by not allowing it in the first place. On the other hand, you can charge a pet deposit, pet fee, or even a monthly pet fee for people with pets. I do not allow pets of any size. Again, pet lovers hate to hear this, but the truth is for every prospective tenant with a pet, I can find ten who have no pets. The best solution to a problem is to prevent it from happening in the first place.
Whenever I have a whole house up for rent, I get calls from people asking if I take Section 8. I do not—but you cannot legally say that. Instead I tell them that I require a credit score above 800 or 820. No one on Section 8 has a score like that… so they politely go away. I know there are exceptions, but low income tenants and Section 8 tenants come with problems… and many have living habits that damage your property. Risk assessment is part of my approach and I have learned to solve problems by avoiding them before they can manifest.
Fair play on the above. I just could never reconcile the risk to return ratio.
Returns are pretty simple; while the real estate is occupied, bully to the landlord in the form of property taxes and upkeep paid for, as well as the lien against the property (mortgage, etc...). And one might also fairly assume profit margin over and above costs. At the end of it all, a paid-for-asset to the landlord that can continue to generate future cash flows, or be sold on the market for a fair return.
Risks, however, get dicey (and for my liking, would require the kind of rent that might not generate much interest); you've got to choose an environment where taxes match tenants (much sits with bureaucrats on that one). You have months of occupancy, and months without. You have upkeep. And you have the potential that at the end of it all, if zoning doesn't do its job, your asset might not have accumulated the capital gains you'd hoped for. Oh yeah...and capital gains taxes when you sell (likewise for bonds/stocks, so like-for-like horse trade there).
So it begs the question: if an index fund can return, over the long term (20+ years) an average of 7% CAGR, what can a well chosen property? It would have to be considerably more basis points of return, because an index hedges. A property in a neighborhood is decidedly not well hedged at all. Meaning more risk, meaning higher need for return.
Bay - do you really outpace the index market with property? What are some tips to squeeze alpha out of property that the casual outsider (me) overlooks?
