Nothing Real About Real Estate (Part 2)

In my first article, I explained a little bit about the downsides of rental properties as something you might consider before purchasing one. Here are some more details.

Renting isn’t Forever:

People who are contemplating this business really need to do their homework and research what it takes and means to be a landlord before contemplating getting into this business. In fact, they should not just consider the day-to-day costs and savings needed for them, but they should also consider an exit strategy in the event that things sour. This includes the possible legal ramifications for evicting a tenant if needed.

A Glut Of Rentals:

In this case, if the value of properties and homes plummits going forward, there is a strong chance that many border-line renters will decide to purchase a home if they have been saving their money for a few years. This means that they will be reducing the demand for rentals and there is a chance you might have a vacant property. Then if you end up needing to sell the property, you will likely get much less than it is worth because you are “upside down” on the mortgage and cannot afford the payments. And that’s IF you can sell to begin with.

In the end, when you have a mortgage yourself, in my opinion right now, it just doesn’t make a whole lot of sense to get into real estate. Diversification is one of the best ways to keep your assets safe. However, when you are in the situation (like the people I’m talking about) where you cannot absorb somewhere between 6-8 months of mortgage payments on the rental property without the rental income, you are setting yourself up to fail. Evictions can take months, and you’ve taken most of your assets and put them in a single place: real estate. And the only real thing about that is that it is a huge risk.

REIT is the word:

REITs or (Real Estate Investment Trusts) are another way to get into real estate for those who who like real estate as an investment, but don’t want to deal with managing their own properties. Similar to a way you can buy a mutual fund that invests in a bucket of stocks, a REIT invests in a bucket of real estate. And like mutual funds, REIT shares are usually tradable on exchanges. Vanguard’s VNQ is an ETF that represents real estate that you might consider. (I own shares of this myself.)

Again, it is a decision you’ll have to weigh for yourself. I like diversification. I think it makes assets safer and grow at a more consistent rate over the long haul. So as risky as REITs can be as an investment class, it is likely far less risky to take some money and put it into a REIT if you are really gung ho about real estate, rather than tying up a few hundred thousand in a rental property.