How to lose $53,900 on a rental town home (Part 7): Lessons

You’ve heard the backstory and the bellyaching.  Below are 8 lessons taken from it.  All can be applied to investing in areas other than real estate and support the 14 Reasons Dividend Stocks Beat Real Estate Investing.

1) Financial Analysis:  When investing, don’t let the wonderful numbers in a spreadsheet hypnotize you.  Pay strict attention to cold, hard cash.  Dividends, anyone?

2) Financing:  Creativity in financing is so named because of the novel ways in which it can empty your pocket.  If the terms seem too good to be true, they are.  Complexity kills.  So does fiction.  Financing not require to get dividends.

3) Leverage:  It looks good on paper and great when it works.  It can be catastrophic when it doesn’t.  You should think about losing your principal and then some with real estate.  If that thought gives you pause - keep thinking, but don’t act.  Getting into similar trouble with stocks is impossible unless you’re foolish enough to use leverage when not needed.  No need for leverage with dividends.

4) Timeframe:  The window of time you anticipate holding an investment in a projected short-term venture is liable to be much longer than imagined.  Count on it.  If you can’t afford to hold the property at least twice as long as you think, you may not want to hold it at all.  However, if you’re a buy and hold investor, short horizons aren’t a problem.  Think dividends stock.

5) Expense Forecasting:  When forecasting expenses, it’s nearly guaranteed your vision of realistic at the beginning will be drastically altered by the end.  Think about a bad end and work back from there.  Minimize, not theorize, expenses at every possible point.  You won’t know where break-even is until you arrive.  Reducing expenses lowers the break-even point, increases margin of safety, and gets to safety faster.  No operating expenses with dividends.

6) Workload:  In most cases, work expands to fill the time available.  With real estate the work can easily expand to fill time you have and time you don’t.  Think about dealing with property issues during holidays, late nights, weekends, family events, and even critical healthcare emergencies.  These challenges happen at the least convenient time you can imagine and those you can’t.  Dividend stocks present no such hardships.

7) Management:  It’s possible to find others willing to manage your real estate or stock investments.  However, hiring said folks to do so can be more expensive than you’d like while providing headaches of a different sort.  Minimize your expense and your headaches by investing in areas that don’t require as much of either to be successful. DIY Dividend Farming.

8) Exit:  It’s possible to find yourself under water with real estate quickly and deeply; to the extent you can’t surface without loss of financial life.  When that happens, good exits don’t exist and even the bad ones consume time and money you might not have.  Dividend stocks can be sold 5 days a week, excluding holidays, any time during the day.  Accessing cash is available with the stroke of a key on a computer.  Exit is a matter of minutes if needed.  Real estate doesn’t offer a ready off-ramp.

Does this mean all real estate investing is evil?  No.  However, it was evil for me for the following reasons:

1) I used too much financial leverage trying to juice my ROI.  Cash flow was an afterthought.

2) My DIY repair skills weren’t sufficiently honed for land-lording.  Operating costs were greater than expected because I had to outsource work.

3) The time soak involved in dealing with a rental property exceeded my estimates.  My quality of life was diminished without a positive financial offset.  I paid dearly to waste my time.

The moral of the story is this:  

If you want to make a small fortune in residential rental properties, start with a large one.

If you have excess time, money, and handyman skills rental real estate may be a great investment vehicle with which to achieve financial freedom.  However, if you’re like me and countless others, dividend investing requires less time and work, it’s less stressful, and a more reliable means of achieving the financial freedom you want.