Yes, indeed, I am a lord o’er the land. Three little chunks of land, actually, and the domiciles that sit atop them. I’ve been lording these lands for nigh on 10 years, which, to hear some tell, means I should be a rich man. I am not a rich man. Nor do these properties represent, from my perspective, “passive income.” I didn’t feel very passive heading out every evening after work to gut and remodel the first two I bought. And even since then, with turnover, maintenance, repairs, and problem tenants, I feel pretty active about the whole darned thing.
All of this goes to say that anyone who tells you that investment properties are an easy way to get rich quickly is really making his or her money from the seminar fees you’re paying.
Despite these caveats, investment properties are probably not a bad way to get rich slowly. I felt a little vindicated a few years ago when a friend, who had recently earned his license to practice financial planning, looked over our numbers to “practice” his new craft. When we sat down to have our consultation, he told my wife and I that the investment properties were the smartest moves we had made. Which caused me to stick out my tongue at my dear wife, who had hated all the nights I spent away while I was refurbishing them.
Somewhat vindicated, yes, but not entirely so. The question remains whether all of my industry over that time period could have been better spent. Hell, Zuckerberg built Facebook into a billion-dollar enterprise in far less than 10 years, right?
Here’s one line of reasoning against investment properties that has occurred to me before, but lately I saw it being put forth by Mr. Money Mustache: According to his calculations, after maintenance costs, vacancies, taxes, and whatnot, you’re getting about a 7 percent return on the value of the property. Heck, he says, you could do as well as that by investing that same money into a Real Estate Investment Trust. With a lot less grief to boot.
Like I said, the same thought had occurred to me, even though I put my rate of return as being closer to 10 percent. But here’s the flaw I see in that argument: MMM owns his rental property outright. He had the cash to buy it. So for him it really was an option to take that cash and put it somewhere else. We, on the other hand, took mortgages on our properties because we did not have that cash on hand. We had down payments instead. The tenants are paying off the houses, however slowly, and that is how I’m being paid for all of my labor. I’m building sweat equity. So for the past ten years these houses have not been investments so much as they have been a second job. When they’re paid off, they will be investments.
So what we are talking about is two separate questions. Question one is, what do you do if you have $300K or so in hand? Do you buy an investment property, or do you seek another investment? That is MMM’s question. Question two is, what do you do if you don’t have $300K or so lying around but want to earn it? Do you take out a mortgage on an investment property and start sweating your butt off to pay it down, or do you do something entirely different? Neither question has an easy answer, but I hope you see that they are, in fact, different questions.
As for my family’s answer, I will say this. It is entirely possible that over the past ten years I could have put my extra energies into some other earning scheme, be it a second job or something more entrepreneurial, and I could have by now arrived at the same or a better place in terms of built equity. But I’m not going to beat myself up over it. The point is that I did something to better our situation, and something is better than nothing.