Why Rentals?

As I mentioned in past posts, buying more rentals is a part of our long-term wealth building strategy.

Background

I come from a family that ridicules anybody who invests in rentals.  To them, it’s the same as being a slum lord.  They say that rentals are high maintenance and come pretty close to flat out saying that land lords take advantage of people.  Which I’m sure is the case in some instances, but it’s a broad brush to paint all landlords with.

Despite their persistent criticism of rentals, I still believe they are a better investment than almost all other investments.

Chapter 1: The early years.

I distinctly remember an evening when I was about 13 years old when I was driving somewhere with my dad.  I was just starting to become aware of investments, debt, etc. and was quietly thinking about things in the back seat when suddenly I came up with an amazing idea to buy properties and rent them to pay the mortgage.  I thought about it for a little while and the more I thought about it, the more excited I became.

Eventually I worked up the courage to tell my dad about my most amazing idea and in his usual manner, he proceeded to tell me why it was a horrible idea.  Obviously, it’s not the most original idea, but to me at that young age, it was ground breaking.

It has probably stuck with me so strongly because I felt like it was one of my first business ideas I had come up with myself.

Chapter 2: Seeing the end result

I worked at a small wealth management firm for a summer in college.  And I remember one of the senior partners showing me the portfolio of one of their clients who was in her 70’s and had a net worth of approximately $14M.

At that point, I had been in college and my head was muddle with notions that wealthy people either made it all in one large sum, got lucky or inherited it, so I was shocked to learn that her husband had been a school teacher making a modest income their whole life.

The partner proceeded to tell me that from an early age, the husband had bought fixer uppers, fixed them up and rented them out.  So, she had about 40+ rentals that generated plenty of monthly income.

Since then I’ve met a handful of people who over their lifetime did the same thing and done VERY well.  It isn’t a get rich quick scheme.  It takes a long time.

Chapter 3: Public accounting

I went to work for a Big Four public accounting firm and quickly found myself in their Real Estate division auditing multi-family REITs.  What quickly struck me about the multi-family business was how stable it was and how the natural progression of commerce was very much in their favor.

  • They would borrow long-term at low interest fixed rates.
  • As rents naturally increased, their operating profits simply increased over time.  Obviously some expenses went up, but their primary expenses of debt stayed flat while income went up.
  • If the economy went down, people bought fewer single-family homes and rented more.
  • If the economy went up, younger people had more jobs and could rent more.
  • If inflation went up, they could raise rents.
  • And the simple concept of leverage always juiced their profits.

Chapter 4: (Current) DIY rentals

We bought all our real estate in the good days of 2007-2009 recession.  We bought our house, a condo to live in while I fixed up the house and a rental.  We have since sold the rental, but currently rent out the condo.  The next stage is to buy more rentals.  Eventually at the rate of 1-2 per year but we’re a few years away from that.

That’s the history lesson.

Here are the bullet point reasons that I’ve come to understand that make rentals a good investment.

  1. Appreciation agnostic.  If the value of the units increase … great.  If they go down, I don’t really care as long as they are cash flowing well and I have a good cushion for expenses and vacancy.  And if values drop, I can be ready to buy more units!!
  2. Inflation proof.  As inflation happens, rents rise over time and make the rental more profitable.
  3. Interest rate proof.  As interest rates rise, fewer people can buy houses, so they rent more.  Also, this might mean that values drop and we can buy more units.
  4. Easy to access debt market. The United States has an incredibly easy to access debt market for real estate purchases.  It is transparent, standardized and as a result has relatively low interest rates.
  5. Recession resistant. Unless a rental is an area that has a huge loss of jobs, if the economy declines more people need to rent because they can’t afford to buy.  And, again, if values drop, we can buy more units!

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