Marc Cuniberti I often encounter the question from investors whether they should buy a rental home, or buy another rental home if the investor already has one.
Although more millionaires have been made in real estate, more people have gone bust in the same asset class. We only need to think back to the real estate implosion of 2008/09 to see multiple examples.
I have owned oodles of real estate. Although I made quite a bit of money from various real estate endeavors, I sold all my rental property in the year 2000 as I got tired of being a landlord and all the problems that came with it. Now I just own lots.
For me, empty parcels of land have none of the problems that come with rentals and their tenants. The rent moratorium implemented during CoVid only solidified my decision although I did not need any more convincing.
When asked why people like rental property, the reason is obvious and always the same. The consistent rent money.
In response to the inquiries, I ask the investor “If the renter didn’t pay, would it put stress on your finances?”
If the answer is no, and that the investor could whether his debt levels without the rent, I then ask if the rental will yield 8% return gross in relation to what they would spend on a property.
An example of that is spending 300k on a rental and receiving $24,000 in rent (8% of 300K), not counting expenses, taxes or insurance. 8% is regarded as an acceptable return when investing in real estate by many analysts.
Once that milestone is reached, I can comfortably give my blessings for the rental if the investor realizes the other considerations when owning a rental. These include vacancy costs, renter problems and upkeep costs on the property.
If the investor balks at the question whether they could cover the costs of the rental if the renter stops paying, then there is a problem.
I caution that renters can be in the lower income level, that it is possible a renter won’t pay, and do you wish to put your family’s financial future in the hands of another.
If the renter does stop paying, and you can’t cover the costs, your family’s financial security may be out of your control, right? And in the hands of the deadbeat renter.
Keep in mind, many people rent because they cannot afford a home. If they lose their job, or just decide to live off you for free, you could be in trouble.
As for me, I want my financial security in my hands, and not at the whims of a flakey renter.
If income is your goal, and it is for almost all landlords, there are ways to receive steady income without being a landlord.
Dividend stocks of solid companies that have been around for decades may be one option. Real Estate Investment Trusts (REITS) are publically traded companies and are in essence landlords of many properties. They share that rent with you in periodic distributions yet do the work of managing and collecting the rent. They also take all the risk.
Although the stock prices of both dividend paying stocks and REITS can go up and down, the payments can be ongoing just like owning a rental. Keep in mind you won’t get the appreciation of the properties like you might with a rental.
REITs and dividend paying stock are also liquid and you can sell them without a realtor commission, without waiting for a buyer, negotiating an escrow or haggling over a real estate contract.
Certain annuity products can guarantee generous returns if structured correctly and certain programs may exceed double digit returns. Laddered CD’s or bonds can also be an income generator without the hassles or risk of being a property landlord.
In conclusion, there are many options that are available to investors looking for a steady income stream. And some may yield in the double digits without the hassle of having a tenant.
Be aware that dividends and distributions from securities can be increased, decreased or eliminated by the underlying company and are not guaranteed. Income annuities, although not insured by the Government, are guaranteed by the underlying insurance company that issues them. Their ratings are publically available to insure you are dealing with a reputable and financially secure company.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. that can be contacted at (530)559-1214. Marc was voted best financial advisor in the county 2021. Email: [email protected]
