Apartment for Rent?

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Owning a rental property can be a great investment.

Especially if the neighborhood you buy in is growing fast, there’s lots of demand and not a lot of supply, and your tenant also happens to be a nun.

But that’s almost never the case. In fact, I’ve heard, and seen, some horror stories.

Drug dealing tenants, mice, bed bugs, holes through drywall, backed-up toilets…you name it.

I’m telling you this not to try and scare you away but to make you aware. I also know a lot of people who have had great success investing in rental properties, both commercial and residential, without too many headaches.

Their days are envious. A few phone calls to their property manager in the morning, troubleshooting any issues that come up in the afternoon, and cheques arrive in the mail or through direct deposit the first of every month. Not a bad gig.

As far as investments go, real estate has a lot going for it. It’s a hard asset, meaning you can reach out and touch it. It’s relatively stable — regardless of the economy, people still need a place to call home.

And, having tenants that pay you rent every month, qualifies you for some decent tax breaks. But should you buy a rental property and become a landlord or is it smarter to invest passively in real estate?

First, What’s the Difference?

The main difference between becoming a landlord and passively investing in real estate is the time commitment.

When you buy a rental property and become a landlord, you’re essentially signing up for a second job. At a moment’s notice, you might have to drop what you’re doing and worry about things like:

  • Lost keys in the middle of the night
  • Noise complaints
  • Backed-up toilets
  • Bed bugs
  • Property taxes
  • Property depreciation
  • Drugs
  • Tenants that don’t pay their rent
  • Mice and other rodents
  • Unreliable property managers
  • Broken appliances
  • Broken windows

However, the upside is you could own a property that only requires minimal maintenance, with a tenant that’s respectful and pays their rent on time. While your mortgage is being paid off, you’re building equity until you finally decide to sell or buy another property.

Or, your house might be paid off already and you decide to rent a room or separate floor — that creates another stream of income you can use to help fund things like your next vacation, a new car, or boost your retirement savings.

But becoming a landlord is not the only way to invest in real estate. There are lots of passive investment opportunities in real estate that don’t come with as many hassles.

The most popular is publicly-traded real estate investment trusts (REITs). These funds are professionally managed and typically consist of many different properties pooled together.

You can also look into directly investing in one real estate project at a time by buying shares of debt or equity, or both.

A History Lesson on Crowdfunding

In 2012, Obama signed the JOBS Act to encourage funding of small businesses in the U.S. by easing securities regulations.

What drew the most attention from the bill was Title III, also known as the CROWDFUND Act, because it created a way for companies to use crowdfunding to issue securities.

All to say, it created the opportunity for online platforms to develop where individual investors could pool their money together and directly invest in things they might not have been able to before, like real estate.

Here’s what it could look like:

A developer is trying to drum up $10 million in financing to renovate a 30-unit apartment building. What typically happens is the developer will tap his friends, family, and network to invest.

But he needs a bigger investor base if he’s going to reach his goal. So, he decides to sell securities (debt or equity) as an investment opportunity to any individual accredited investors.

If all goes to plan, then it’s a win-win for the developer and the investors. Without the financing support, the project might not have gone ahead. But with the pooled investment dollars, the reno moves forward and now the investors have the opportunity to earn passive income from the rental property. All without having to become a landlord.

Not All Deals Work Like This

This isn’t always the case though. Sometimes you invest in projects and they go bust. Like any investment, real estate carries it’s fair share of risk with no guarantees.

But, as long as you’re aware of the risks going into a project, you can decide how much you’re willing to invest.

It’s also important to note that not all real estate investing platforms are created equal. Some are exclusive to commercial real estate, whereas others focus on residential. And, you typically choose to invest in either debt, equity, or both.

Lastly, some platforms are marketplaces where anyone can sell — be careful in these. While other platforms, only vetted and underwritten opportunities get listed.

The Question: Should You Become a Landlord?

If a friend asked me this question today, I would ask them a few follow-ups:

  • Do you have time to manage another property?
  • How familiar are you with the neighborhood?
  • What’s the supply and demand like where you’re looking?
  • What would you do if property taxes changed? Could you still afford it?
  • Are you willing to take phone calls in the middle of the night?
  • Do you have enough savings to go to court if you have a bad tenant?
  • Will you hire a property manager or DIY?

These questions aren’t to deter my friend from investing or becoming a landlord. They’re important to ask because you need to consider all your options if the worst case scenario were to happen.

Passively investing in real estate is no better than physically managing properties yourself. But they both come with pros and cons. If you love doing renovations and keeping busy, then becoming a landlord might be a nice second career.

If you’re strapped for time or money, but still want to invest in real estate then crowdfund opportunities could be the right play. There’s no definitive right or wrong answer here. It’s also worth considering the type of returns your investment could make elsewhere too.

To a richer life,

Nilus Mattive

Nilus Mattive

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How THIS Is Making the Housing Crisis Worse

This post How THIS Is Making the Housing Crisis Worse appeared first on Daily Reckoning.

It’s happened several times in the last couple of months – someone approaches me, clipboard in hand, and asks if I’m a California voter. Then, barely waiting for my response, they start asking me to sign a petition related to rent control.

The first time it happened, at my local organic market in Santa Barbara, I just politely said “no thanks.”

The most recent time, at a professional women’s surfing contest in San Diego last week, I couldn’t hold back and ended up saying a bit more to the solicitor.

And now, after hearing Bernie Sanders mention the idea during last Tuesday’s primary debate, I want to tell you a more expanded version of where I stand on the topic (and why)…

My Grandparent’s Experience

Let me first say that, like Bernie Sanders and other proponents of rent control, I’m very familiar with the plight of poor families that rent all of their lives …

My mom’s parents rented the same apartment in downtown Wilkes-Barre, Pennsylvania for more than 50 years.

Her father grew up in such poverty that he had to drop out of high school to go work in the coal mines.

Her mother graduated from high school but stayed home to take care of the kids.

They were Depression-era people, conservative with what little money they had, and they never made the leap to home ownership.

After leaving the mines, my grandfather made his living doing all kinds of odd jobs – car mechanic, electrical work, etc. – including helping out his landlord whenever needed. His rent still went up on a regular basis. Even when my grandmother was living in the apartment alone in her early 90s, the landlord was talking about another increase.

Would it have been nice if their rent, established in the 1950s, could have only gone up 3% or 4% a year so long as they stayed in that apartment? Absolutely.

Still, they never complained. They knew prices for things went up over time. They cited a few times in the past when they might have been able to buy a house in the neighborhood but just couldn’t mentally commit to the idea. Nor did they like borrowing large sums from banks.

My grandmother died in that small apartment, with not very much to her name.

Now, let me tell you another story…

Where Rent Control Goes Bad

As my grandmother was into her 80s, I was moving into New York City and looking for apartments.

I was working for Standard & Poor’s and making a good salary, but hardly anything exorbitant. My one-bedroom apartment just off Wall Street was $2,300 and was subject to market rate increases going forward.

My boss, perhaps 30 years older than me, lived a couple neighborhoods away. He obviously made more than me but he’d been in New York for a long time and his apartment – twice the size of mine – was under rent control. I don’t know exactly how much he paid but I would guess a third of my rent for twice as many bedrooms. He also owned a vacation home outside the city.

Meanwhile, there were plenty of rent-controlled people charging large amounts of money to let someone move into a vacant bedroom while their landlord received nothing.

I also knew someone who lived in another state almost all of the year but maintained a rent-controlled NYC apartment as a little getaway (lying about residency in the process).

This is just a little taste of what I saw, but the big-picture was pretty easy to see – rent control largely rewarded people who got there first, regardless of their financial status … it was easily abused … and it did very little to help newcomers or anyone looking to move from one place to another.

There is also no doubt that many landlords do everything in their power to screw over tenants, especially in a place like New York City. And from what I saw, rent control didn’t help that situation either … it merely discouraged building owners from improving their rent-controlled properties any more than was absolutely necessary.

Indeed, New York City just changed a bunch of rules related to rent control and we’re already hearing about landlords bailing on big capital investments.

But you don’t have to accept my personal experience or anecdotal evidence.

The academic research is pretty decisive that rent control doesn’t work, whether you’re talking about New York or Paris.

As Reason noted in a recent article:

“Brookings Institute associate professor of economics Rebecca Diamond did a recent review of the literature on rent control, finding that ‘Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood.’ The reason is simple and boils down to the law of supply and demand. While some of the people renting may benefit from rent control by removing some of their risk, it also gives landlords an incentive to alter their supply of rental property.

“They have several options based on the circumstances. First, they may withdraw their properties from the rental market to sell them as condos. Former George Mason University Chairman of the Department of Economics Donald Boudreaux summed it up nicely in a 2006 letter to the editor of The New York Times: ‘By decreasing the profitability of supplying units occupied by renters, these controls spawn condo conversions and prompt builders to construct fewer rental units and more units for sale to owner-occupiers. People who can’t afford to buy housing are unnecessarily disadvantaged.’ Landlords may also stop investing in maintenance, which, over time, may lead to neighborhoods with many run-down properties. The bottom line is that rent control never increases the supply of affordable rented housing.”

What about this legislation they’re trying to pass in California?

Well, after I explained that I recently purchased a million-dollar home and would never want to cap my own future rental potential, the solicitor at the competition assured me that it would only apply to landlords who own three or more properties.

At that point, I didn’t bother to explain that I also recommend investing in companies like Real Estate Investment Trusts (REITS) that are essentially corporate landlords.

It was clear we simply had different ideas about capitalism and free markets.

If Rent Control Doesn’t Work, What Will?

From my perspective, the person who took a chance on New York City back in the 1970s – when it was a far cry from its current look and feel – deserves to get market rates for that money invested and risk undertaken.

As did my grandparents’ landlord…

As do I for working hard, and saving enough to buy a house in Santa Barbara.

Can you imagine what it would be like if we suddenly capped the amount of dividends that stocks could pay to their investors?

Well, that’s exactly what rent control does with real estate.

Perhaps the biggest irony is that some of the same people here in California who cry for more affordable housing are the very same people who don’t want garages converted into auxiliary dwelling units, Airbnb listings allowed in residential neighborhoods, or high-rise buildings in land-constrained areas.

Look, housing affordability is a complicated issue. In highly desirable locations with little room for further development, it’s doubly complicated.

But I would much rather see solutions that start with increasing supply, even if it’s something small like simply allowing existing homes to be partitioned into several micro houses. At least it’s a start to fixing a long term problem and not a band-aid that will fester given enough time.

Thinking we can wave a magic wand and keep prices in check through artificial rent controls isn’t going to cut it.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post How THIS Is Making the Housing Crisis Worse appeared first on Daily Reckoning.