I never thought I’d see the day, but in an effort to juice my monthly income, I’ve joined the ranks of America’s landlords.
Real estate is an incredible way to bring in more money in retirement or otherwise. But it’s not an easy game to play.
After learning valuable (and sometimes painful) lessons, I want to share my thoughts with all our prospective real estate investors out there.
Let’s see how you can make real estate work for you in this week’s Investing With Charles. Check out some of the highlights from my conversation with research analyst Matt Clark below.
Real Estate vs. Stocks
Matt: You recently became a landlord. You rent out a house you used to live in. That brings about an interesting question: How can investors use things like rental properties or real estate as additional revenue? How difficult is it to get into?
Charles: Let’s back up a minute and ask: Why invest in the stock market over real estate?
The stock market is wildly profitable. It’s been a massive wealth generator over the last 200 years. To not participate in that would be insane.
Beyond that, the stock market is liquid. It’s easy to get in and out of stocks.
Real estate is the opposite. It takes weeks to buy a property. It could take weeks to sell a property. There are lawyers, contracts, agents — all these hurdles to get through.
So investing in the stock market is always going to be preferable for a large chunk of your assets just because it’s easy and it’s historically profitable. But you don’t want to have all of your eggs in that basket.
You can go through periods where even fantastic stocks don’t do well. Your buy-and-hold portfolio could stall out.
Remember when the S&P 500 didn’t go anywhere from 2000 to 2013? There can be stretches where it just doesn’t pay to be purely a stock investor if you need income.
The stock market could go up, it could go down, it could go sideways. But that doesn’t affect the performance of a rental property.
A rental property has its own idiosyncratic risks. Any number of things can happen that could cause a rental investment to not perform as expected. But it’s not going to be something from the stock market. It has its own risk — and that’s what makes it attractive.
Real Estate Investing Risks
Matt: Let’s talk about how smart investors out there can mitigate some of those risks with real estate investing.
Charles: The biggest thing to determine is your margin of safety.
You want to make sure you have enough cash on hand to handle any unexpected expenses. We don’t have to worry about this too much with an asset like a dividend stock. Unless the company hits financial stress, which does happen, you can expect that quarterly payout.
With a rental property, it’s tougher. Maybe it takes longer to get the thing rented than you thought. Maybe there were some repairs you didn’t take into account. Maybe you were too aggressive in your assumptions on how easy it would be to get a renter.
You thought you had a renter tomorrow, and it ends up taking a month or two to find somebody. During those periods where there’s no income coming in, you’re covering the mortgage, utilities, yard care and other expenses. Make sure you have ample cash in reserve before you even start looking for a property to buy.
This is cash outside of what you’ve planned to use for the down payment. So keep in mind that there will be vastly higher expenses than you expect.
If you’re thinking: “Hey, I’m going to clear $1,000 a month on this,” but then you’re only clearing $800 or $500, that’s where the margin of safety comes in.
If it’s tight, don’t do it. If you’re barely covering your mortgage, don’t do the deal. You’ll likely end up losing money on it.
Where to Find Us
Coming up this week, Matt will have more on The Bull & The Bear podcast, so stay tuned. Don’t forget to check out our Ask Adam Anything video series, where chief investment strategist Adam O’Dell answers your questions.
You can also catch Matt every week on his Marijuana Market Update. If you are into cannabis investing, you don’t want to miss Matt’s weekly insights.
Remember, you can email my team and me at Feedback@MoneyandMarkets.com — or leave a comment on YouTube. We love to hear from you! We may even feature your question or comment in a future edition of Investing With Charles.
To safe profits,
Charles Sizemore Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.