Real estate investing is touted as a great way to make
money, particularly if you’re using someone else’s cash. During rising real estate markets in certain
areas, it’s possible to make money this way.
However, it’s hard to time the bottom of a market just before it booms
and even more difficult to determine the top of a market just before it goes
bust. If you miss the timing on the
front side you won’t see many gains and if you miss the timing on the back
side, you can easily lose your backside.
This truism is relevant for the fix-n-flip crowd, but also
holds water for buy and holders planning to rent a property until the market
rebounds. I was one of those buy and
holders. It didn’t work.
 |
| This old investment. |
I owned one or two rental properties at a time continuously
for about 13 years. One property I held
for 11 years cost me $55,000 during that period. That money, had I invested it in high quality
dividend paying stocks, would have eventually paid the college bills for at
least one of my offspring – maybe two.
Consequently, I know of what I speak when I write there are 7 Reasons
Dividend Stocks Beat Real Estate Investing.
1) Low Initial
Investment. You can buy dividend
paying stock for tens of dollars to get started e.g, ARCC is at $16 - $17 with
a dividend of about 9%. Unless you go
back in time to the early 2000s when “no doc” loans were popular you can’t get
into a piece of real estate for anything less than several thousand
dollars. According to Zillow.com, the average home
price in the United States, as of this writing, is $218,000. If you qualify for
a VA
loan, you may be granted the loan with no money down, but you’ll still pay a
loan origination fee of 2.15% or $4,687.
And just so you know, you won’t get a VA loan for rental property. Furthermore, you can’t go back in time to
2003 and get a no documentation loan. A
“no doc” loan meant all you had to do was tell a lender you made $150,000
annually. They’d take your word for it
and give you an enormous loan based upon your statement. Is it any wonder we had a housing crash?
By the way, any conventional loan is likely to require you
put 10% down ($21,800 for our average home), then pay Personal Mortgage Insurance
(PMI) on top of your monthly loan payment.
Otherwise, you’ll need 20% down or $43,600. If the lender suspects you’re buying a rental
property, the institution will require 25% down ($54,500) since it’s
effectively a commercial loan. How many
people have that kind of coin to get into real estate investing? But what if you could finance the whole
thing, 100% of it, with someone else’s money?
That’s called leverage.
2) Financial
Leverage: Investopedia loosely defines leverage as
the use of borrowed funds to increase the potential returns of an
investment. Note the word “potential” in
front of “returns” and keep it in mind as you read. When you borrow money for a real estate
investment, there is a possibility you can use those borrowed funds to
significantly increase the return on your down payment. To be overly simplistic, let’s say you put
$10,000 down and borrow $90,000 to buy a $100,000 property. If the property appreciates in value to
$110,000 you will have “earned” $10,000 on your original $10,000 investment,
less any interest payments you made in between the purchase and sale. As a result, the simple return on your money
would be 100%. Not bad. Then again, nothing in real estate is simple. Funny thing about leverage, though. It works both ways. If the value of the house falls to $90,000
and you have to sell, you lose 100% of your down payment since funds from the sale
cover only the loan amount you owe. If
the value of the house falls to $50,000, you lose your $10,000 investment and
still owe another $40,000. Now you’re
upside-down. That’s being polite about
it. You’ll use more colorful language
with your bowling buddies if this happens to you. I’m sure of it. After a $55,000 bath, my language rivaled a
rainbow.
If you buy dividend stocks, however, leverage won’t be
involved – unless you’re stupid. Don’t
ever buy stock using borrowed money. If
you want to do that, then do real estate and go big. May as well get a fun story out of your
destitution, right?
3) No management
overhead (headaches): Dividend
paying stocks require very little management work on your part. You do your research, you purchase your stock,
and you monitor for catastrophic events.
Otherwise, you watch your dividends reinvest and your initial purchase
compound. Pretty straight forward.
Real estate investing confers brain damage of the first
order whether you’re a fix-n-flipper or a buy-and-holder. Beyond the mind numbing purchase process
common to both cases, which is far more onerous than buying stock and carries a
much higher transaction fee, the fix-n-flipper has to find a trustworthy,
reliable, competent general contractor at best or sound handy-man at worst to
do the fix up. This assumes, of course,
the investor isn’t going to act as his or her own construction agent which is
often equivalent to representing yourself in a court of law.
Once the contractor is on the hook, you’ll probably have to
micromanage the contractor to keep him on schedule and close to budget. You’ll deal with all kinds of direct
management headaches while doing this and the project still won’t complete on
time or budget in most cases. This of
course costs you in materials and labor overruns plus the additional carrying
costs you’ll incur because you can’t put the house on the market as soon as
you’d like. The time value of money is
real, folks.
Then, like the buy-n-holder, you’ll have to navigate the
aggravating process of selling your investment trinket, covering your 6%
transaction fee, and hoping the market doesn’t tank before you unload it. Otherwise, you may become a rental landlord
whether you want to or not.
As a rental owner, you’ll enjoy the process of finding and
vetting renters, including all the no-shows who will fill your schedule to look
at your place, then bail out with no warning.
Once a renter is installed, you’ll be surprised at the number of calls
you may get for things like water leaks, electrical problems, strange smells,
broken appliances, and various other “defects”.
These calls normally don’t occur during optimal hours. Instead they’ll happen during family
vacations when you’re out of town, on birthdays, during holidays, the middle of
the night, or when emergencies such as a family member’s hospitalization occurs. Then you’ll have to drop everything and find
someone to address the problem or take care of it yourself.
And if you don’t have a financially responsible renter,
you’ll get to chase them down to collect the rent they owe you in addition to
the fun above.
After your renter moves out, you’ll experience all the
property repair, replacement, clean-up, and preparation activity needed to
start the new renter search. This
happens about every 12 months unless your renter ditches you with no warning in
which case you’ll conduct this process more often. This scenario is not uncommon.
The best part of the whole real estate investing bonanza is
that as the travel distance from your rental increases the aforementioned time
and effort seems to increase exponentially as you endure the extra drive time
to and from your real estate funplex.
An alternative to this party is a property management
company which requires plenty of management overhead on your part, but not as
much as if you do it all yourself. The
trade-off is that instead of paying with your own time, you’ll pay fairly high management
fees each month (like an annuity!) turning your positive cash flow property, if it is, into a cash negative
money sink instead.
Although this trauma isn’t guaranteed, it’s highly
probable. I lived it for over a decade
and don’t recommend it. Dividend paying
stocks are far less troublesome from a management perspective. Someone else gets paid handsomely to take
care of this management joy on your behalf and you?
You get to collect the dividends.
The thoughts and opinions expressed here are those of the author, who is
not a financial professional, and therefore should not be considered as
investment advice. This information is
presented for education and entertainment purposes only. For specific investment advice or assistance,
please contact a registered investment advisor, licensed broker, or other
financial professional.
No comments:
Post a Comment