WELCOME
It’s Not a Sure Thing, But It’s Awfully Close
The good news is, you sold a big-ass house and have a fat commission check coming your way.
The bad news is, your head is spinning over how to make this windfall work for you. Hopefully y’all have been watching me long enough to know what not to do with that money.
Of course, you could put that cash in the stock market and hope and pray it’s not going to take you on a rollercoaster ride, if you don’t know what you’re doing. Or, if you do know what you’re doing, likely your life will be dictated by staring at tickers from 9:30 a.m. to 4:00 p.m., five days a week, if you bought anything but a SPDR, which will return an average of 7-10% per year. (Also, no one wants to discuss P/E ratios or Fibonacci sequences with Bobby and Suzie at parties, trust me here.)
Or, you might think about investing in the more stable bond market… as soon as you figure out how exactly the bond market works and discern what hoops you have to jump through to buy certain products like T-bills. (Do not even start me on the house of cards nonsense that are the crypto and NFT markets. No. No, ma’am.)
Or, you could do what I suggest, and that’s to buy an investment property, because guess what—real estate is your forte. No one’s gonna make better decisions than you because no one knows the market better.
Maybe let’s do that.
THE REALITY OF REAL ESTATE
So You Think You Want to Be a Landlord
Let’s have ourselves chat about the benefits of owning an investment property, which I’m lumping in everything from rentals and short-term rentals to vacation properties.
Obviously, there’s a boatload of tax benefits, from deducting for expenses to deducting for depreciation. According to Investopedia, “Depreciation may produce a nominal loss, which in turn you may deduct against other income. In other words, you may achieve net positive cash flow from the rental income minus expenses and still have a net loss for tax purposes. But be aware that depreciation also reduces the cost basis of a property for calculating capital gains when you sell your property.” That’s a lot of fancy-schmancy talk for saying your investment property will never depreciate like a spankin’ new Mercedes Benz, driven straight off the lot.
Anyway, here’s what y’all have to keep top of mind if you’re thinking about dipping a toe in the rental market.
You’re gonna need a larger downpayment, more like 15%, which is fine because you have it from selling that big-ass house because you listened to me and didn’t buy a bunch of pretty shoes with red soles.
You can expect to pay a higher interest rate, as rates on investment property loans are generally higher than that of a primary residence. What goes hand in hand with this is needing to pay a higher tax rate, as investment properties are taxed higher.
Get yourself a handyman or a property management company if you’re not real skilled with an Allen wrench, because you’re now in charge of whatever can and will go wrong in that property, and you’d better do it in a timely manner. Remember, nothing ever goes wrong on a Tuesday afternoon at 2:00 p.m. It’s inevitably going off the rails on Christmas Day or New Year’s Eve or the hottest/coldest day of the year, so plan accordingly.
Figure out your desired level of involvement. If you’re looking to be more hands-off, consider a single-family home or a condo. If you want to get your hands dirty, you might be better off with a multi-family property.
Obviously I don’t need to talk to y’all about location as this is not the first day of real estate school. What should also be obvious—but even the best of us can get over our skis sometimes—is to make sure you can A) afford the property, and B) you’re gonna bring in enough income to cover your costs.
Now, if you choose to go the Airbnb route, factor in the cost of hosting, from fees to management to insurance to having to pay to clean up after your guests decide to turn your quaint seaside cottage into a set for an, ahem, erotic video, in which case, you may also want to budget for a good attorney.
And speaking of money, if you think you must pay cash for a rental property, think again.
ONCE UPON A TIME WITH GLENNDA
Short Answer, Yes, Longer Answer, Also Yes
I work with a whole lot of people who are looking to purchase investment property to either fix it and flip it or to rent it out.
Right now, we are in a crazy time, so when people ask me, “Glennda, are rental properties a good investment right now?” I always say, “It’s six of one and half dozen the other.” In the long term, yes, of course. In the short term, if you get somebody in a rental property and they’re not paying their rent, then you can’t pay your mortgage. No bueno.
So, let’s say you have your primary residence. You bought two rental properties and now we’re in March of 2020 when the pandemic hits. Sam loses his job he’s your tenant—he can’t pay his rent, but you can’t put him out because there’s an eviction moratorium. So, Sam’s living in your house for free. You’re not getting any rent, but you still you have a mortgage and that is a huge problem for you. You don’t have any way to make your payments! Anytime that your asset is leveraged, it is a liability. Don’t be confused about that—you’ve got to make the payments to the bank or they’re going to take your house, so when I say you should invest in real estate, this is always the caveat.
Even though we’re on the other side of the pandemic, people are still losing their jobs. As a landlord, you want to be compassionate to someone who’s out of work through no fault of their own. However, you need to keep in mind you’ve gotta make your payments as the landlord because the bank isn’t waiting for you just because the tenant isn’t paying.
So, when I’m going out with investors and we’re looking at rental property, we’re very, very selective on what we’re purchasing. I make them ask themselves, “Are you purchasing it to hold it and rent it later? When you’re looking at investment property, let’s think through the use of it and how that’s going to land when you put a tenant in it.”
Now that I have scared y’all with worse case scenarios, let’s look at an example of the best:
A BRIEF RESPITE
Do Y’all Need a Minute?
I know the last section was a little bit doom and gloom, so I have just what the doctor ordered—a much needed laugh with a unique, weird, and wild new real estate newsletter from my friends at Estate Media.
And oh, my stars, this name says it all—Zillowtastrophes!
GLENNDAISM
If the House Always Wins, Become the House
“Real estate is the closest you can come to a sure thing in an investment.”
Glennda Baker
