My Love/Hate Relationship With Real Estate Investing

My Love/Hate Relationship With Real Estate Investing

My friend over at The Dollar Disciple recently posted a 2-part series of articles on the reasons why he loves real estate. I agree with all of his points, but I think its also important to balance the positive attributes of real estate with some of the negative experiences that I’ve dealt with.

In a previous post, I highlighted some practical tips to consider for someone who is looking to purchase rental real estate.  This post will highlight some of the negative experiences.

If your MAGI is greater than $150,0o0, you can’t deduct rental losses

Being a 1 percenter, I experienced this first hand. I bought my first and second rentals when I earned significantly less income. The IRS states that, if you actively participate in a rental activity you can deduct up to $25,000 of the rental loss. To actively participate means that you own at least 10% of the property and you make major management decisions, such as approving new tenants, setting rental terms, approving improvements, and so forth. (No, you don’t have to mow the lawn or answer middle-of-the-night phone calls from tenants about a backed-up toilet.)

But this exception phases out as your income rises. If you have modified adjusted gross income over $100,000, the loss you can deduct decreases by $0.50 for every dollar over $100,000. The maximum loss is completely phased out when your modified adjusted gross income reaches $150,000.

If you are not using a property manager, you are always on call

Most of us have enough to worry about with our primary homes, let alone a second or third property. You can forget about turning your cell phone off, or feeling 100% at ease on vacation. If your tenant calls with an issue or emergency, you are obligated to resolve it.

Evictions

In this day and age, even people with good credit will lose jobs and subsequently, unable to pay rent. I dealt with this firsthand. The hardest part is going to the apartment the day of the eviction with a police officer and a locksmith. One of the hardest things I had to do.

Loss of personal security & privacy

Even though I use a PO Box and a Google Voice phone number, if someone wants to find you, they can. Though it doesn’t happen often, if you evict someone, you are their enemy from their perspective. If they want to harm you or your family, they can find you.

Repairs

Though landlords budget for expenses and repairs, no one can anticipate a major repair. A water heater bursting, furnace needed repairs, a new roof, toilet leaking are all repairs that have to be addressed. These types of repairs can be quite expensive.

Knowledge of local and federal laws

There are more laws and regulations being created every day – and a huge volume of them are associated with the private rented sector. Landlords not only need to be aware of the Housing Acts, the Landlord and Tenant Acts and the Rent Acts; they must also be familiar with and observe all the frequently changing regulations for health and safety, gas safety, fire safety, landlord licensing and local authority enforced minimum standards.

Vacancy

Sooner or later your tenant will leave. Whether you hire a realtor, or do it yourself, everyday that the property is vacant is another day that YOU have to pay for a second mortgage. We are lucky enough to be in the 1% of income earners in America and living below our means so we could absorb it, but it may be difficult for most Americans.

So there you have it…the downside of being a landlord. I still think there is value in it, but its a personal decision and depends on your risk tolerance. Everyone will take the pros and the cons and come up with a different benefit/risk ratio. For me, I would have to take drastic measures to mitigate the risks I listed before I pursue another rental property.

About The Author

Edwin is a marketer, social media influencer and head writer here at I Am 1 Percent. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

15 Comments

  1. Julie @ Freedom 48

    Not just repairs – but the PAIN you experience when you see that your tenants have neglected or damaged something that you’ve worked so hard to make. Like when our tenant decided to “weed” the garden… and pulled out ALL of the perennials that I’d planted over the years. I almost cried when I discovered that.

    Reply
  2. Dollar D @ The Dollar Disciple

    These are some excellent counterpoints.

    I almost mentioned to MAGI limit for depreciation but the post was going long anyway. Even though you can’t take that depreciation, you don’t lose it so you can take it in a year when you make less income or you can use it to offset capital gains when you sell.

    The rest of them are spot on. Like you said, it’s a matter of your risk tolerance.

    Reply
  3. Norman

    Extremely important is knowledge of local and federal laws, I’ve had rental houses in the past and my city conducted an awareness meeting to make people aware of city ordinances. I found out they required that every room in a rental house have a smoke alarm. Had I not made the effort to attend the meeting I wouldn’t have even known about it.

    Reply
    1. iam1percent

      Exactly..and there are so many more regulations that a landlord must comply with…

      Reply
    2. Dollar D @ The Dollar Disciple

      Around here, a lot of cities have a “rental inspection” program where the inspector will point out all of these issues. What we do is judge our houses by the toughest set of rules for any city. That way, if it passes in the toughest city, it will pass everywhere.

      Reply
  4. so

    I feel like the primary difficulty in getting into real estate for most people is that it is so capital intensive: 25% down, plus you should have heavy cash reserves / credit lines to handle repairs. Lenders want at least 6 mos reserves, but a year is preferable, especially in the first few years before the property stabilizes a bit and you get to know it. Once you know the property, you can address issues on your own time. That’s how we’ve handled repair / vacancy issues.

    We’ve dealt with the eviction issue by only doing high-end properties in A neighborhoods with minimal leverage. It costs more to get in (relatively, we’re in W PA, so it’s not too much), but the rent prices are always good, and we charge under market & do open houses, so we’re able to have pull a good roster of prospective renters from those events and can screen intensely.

    For me, the hardest part of real estate investing is being patient enough to wait for us to be properly capitalized before jumping on a good deal. I have to remember that there are no once-in-a-lifetime deals, and we’re in this real estate thing for the mailbox money and to avoid stress, not to incur the stress that comes from finding and doing multiple deals in a year. There’s always another property out there that can make you money.

    Reply
  5. JT

    I don’t think it can be said enough that real estate is work. Truthfully, I see real estate as more of a business than I do investing.

    There are only two ways to earn a return in excess of the risk-free rate: take on risk, or work for it.

    Real estate obviously has some risk. But I would say that more than anything the excess yields come from your labor. I can buy a share of stock tomorrow after research that I did in my underwear, and listening to conference calls I streamed online from the comfort of my own home. When people call in sick to the company, they don’t call me. When the business needs more customers, I don’t list ads in the paper to go find them. To purchase real estate requires you to leave the home, actually inspect a property, and then work to find a renter.

    In a perfect world, nothing would break, and tenants would stay in one place forever. But it never happens. You can hire property management to erase these problems, but 10% off the top cuts into margins considerably. Taking out the work effectively slaughters your returns.

    Real estate allows you to achieve a very good ROI after several decades of work to maintain your portfolio. It might not be as active as owning a restaurant – though it is far more capital intensive – but real estate does still require considerable amounts of elbow grease. Call it real estate investing all you want, but if you do, realize that it is your labor that helps your capital achieve those investment returns.

    Reply
    1. Dollar D @ The Dollar Disciple

      Real estate is definitely more business than investment. Land lording in particular is more like self-employment than a “passive investment”. I’m a self-employed property manager and you’re never hear me say otherwise. People that call real estate “passive income” are either 1) talking about a different kind of investing (private lending, managed properties, large multi family) or 2) trying to sell you a book or bootcamp course or audio training program.

      That being said, because it’s a business, you can set up systems to streamline the process. For example, I look for property at home (often in my underwear). It’s only after I get an accepted contract that I put on pants and go see the property.

      Yes, real estate is more work than researching paper investments. But I think that *perception* of work also makes people less willing to put forth the perceived effort.

      Reply
      1. photohunts

        I would consider everything you listed in #1 to be investing in real estate. Is it not?

        Reply
    2. photohunts

      A PM will certainly decrease your woes with dealing with a property and tenants, but not eliminate them. The reasons why so many landlords avoid them and choose to self-manage are two-fold: 1) margin in the deal is too thin and 2) discontent with the value gained from a PM in regards to fees and services (why pay someone when you can do it yourself mindset). The latter is arguably synonymous with how much you value your time, but the unknown is how much time will really be spent dealing with the investment.

      Reply
      1. iam1percent

        That’s the analysis and approach I took for my rentals. At the time, I thinking was why pay someone for something I can do myself? Now, that I am very involved with my career and 2 kids later, my time is valuable and would gladly pay a PM if I had originally built it into my rental property investment calculations.

        Reply
  6. Noah

    I know you said you have a PO Box and google phone number so does that mean your tenants have to mail in the rent?

    Reply
    1. iam1percent

      Yes, I require them to mail the rent. Much more convenient than picking it up.

      Reply
  7. Honolulu Aunty

    What I have found with our rental real estate investment properties is that the return is boring – small but steady. Rental real estate costs a lot, and there is that period of time in the beginning with rehabbing, advertising, screening tenants that are the weeks of nail biting because it is a negative return on investment, and then after 3 months of a tenant’s payment of rent that we can sit back and breathe again.

    However, having rental real estate as a senior citizen is just what the doctor ordered. A constant flow of passive income. For us, the most important element is a great (not just good) property manager, especially since we invest on the “mainland” and not in Hawaii (too expensive to cash flow).

    I like your blog! Found it by following a link in JoeTaxpayer.com’s website – another nice young man who has a great blog.

    You young people are terrific, thank you for sharing!

    Aunty

    Reply
    1. iam1percent

      I agree..I invested in rental real estate because of the long-term net return..not to make a quick buck. Thanks for stopping by the site, Aunty!

      Reply

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