To rent or to buy, that is the question – Part 3

This is the last in a series of three articles on whether to rent or buy real estate. If you read the first two articles in the series (and I know you did), then you know when to rent and when to buy with the intention of occupying. However, you may think of real estate strictly as an investment vehicle.

You have money to invest and while you’re waiting for your big payoff, you figure you’ll rent it out. The allure of opening a bar or a restaurant is only second to the allure purchasing real estate. As a student of psychology and a beneficiary of my fair share of psychotherapy, I understand these strong emotions especially when they are reinforced by our hyper-consumption society. By the way, if we compare the failure rate of restaurants to marriages both within five years, the divorce rate of nearly 51 percent is lower than restaurant closings of 60 percent. So I would rather see you get married than open a bar or restaurant. Now back to real estate, it takes a special person to be a landlord, and I will assume you my reader, are that special type of person. Here are some things a would be landlord must consider;

1. You will face much tougher financing hurdles for investment property. You will need a larger down payment (25 percent – 30 percent) and be prepared to pay an interest rate that is at least 1 percent point higher than for a single family residence.
2. You will be required to submit a business plan outlining your expertise, pro-forma (future looking) financials and historical financial information on the property.
3. You will need to become a handy man/woman or employ one full time or on-call basis. You cannot just call a plumber or electrician from the yellow pages every time your tenant has an issue. As that will eat into your profits faster than Guy Richie ate into Madonna’s cash.
4. You will need to be a hard-ass. When people do not pay, you will need to kick them out. You will need to be tough, fair and hire an attorney. “Evictions are no fun,” so I have been told.
5. It takes a village to be in the leasing business. You will need to hire a CPA to do your taxes, an attorney to handle the leases and evictions and a realtor or apartment service to rent your apartment.

Hopefully, I have talked you out of this certain nightmare, especially if you were thinking of “winging it.” You need to be “all in” on this business because your competition certainly is. If you think you can maintain your, “day-job” and moonlight as a landlord, you are in for a very tough time. If you want to be in the real estate business, I give you the same advice I gave about donating money to a charity. “Go and walk the walk, before you run.” My previous advice was to volunteer at the charity before you give
them money. Here, my advice is to go to work in the real estate business before you invest your money in real estate as a business.

But wait, you want to know of an easier way to invest in real estate? Do you want to invest in real estate and not have to face a bank about your finances, not have to submit a business plan, not have to be a handy man, not have to be a hard-ass with tenants and avoid hiring an attorney, a CPA and a real estate agent? Consider investing in publically traded REITs, Real Estate Investment Trusts. Unlike investing in physical real estate, investing in a publicly traded REIT is simpler and less risky investment than a full blown real estate investment as you cannot lose more than you invest unlike the risks associated with direct-hands on real estate ownership.

Let’s take it from the top. A publicly traded REIT is a stock that trades on any of the major exchanges and which the objective of the company is to purchase any or all of the following: commercial properties (office buildings, hotels, malls, professional buildings, surgery centers), industrial properties (warehouses and data centers), residential properties (apartment buildings), commercial loans and mortgages or hybrid instruments with ownership rights. The REITs that invest in commercial, industrial or residential properties are referred to as “equity” REITs. The REITs that invest in mortgages and/or mortgage backed securities are referred to “mortgage” REITs. Lastly, REITs that invest in a strategies combining actual real estate properties and mortgages, are referred to as “hybrid” REITs.

This avenue of investing allows you, the investor, the opportunity to be either the “borrower or the lender” or both when it comes to how you invest your money. I like publicly traded REITs because they offer diversification in the number of properties owned and they offer geographical diversification by investing in multiple regions. As the old real estate saying goes, “what are the three most important things in real estate? Location, location and location.” Hence, this makes the all-important diversification possible, probable and profitable. I like the flexibility of deciding whether I want to invest in mortgages or properties or both.

In summary, why I would rather invest in a publicly traded REIT versus hands on real estate:

1. You already have the money (remember that hefty down payment?), so there is no need to go to a bank hoping to get something close to their highly advertised low interest rate. You get to read and critique business plans a.k.a. annual reports, versus writing one.
2. You cannot lose more money than you invest.
3. No calls from your tenants, as your investment is professionally managed and your investment is fixed to the amount of money that you invested.
4. You start earning income within 90 days. REITs must payout 90 percent of their income so you start earning income from the start. You will know exactly what you are buying and have immediate diversification in the number of properties and geographical areas.
5. Get in and get out with the press of a button or a call to your financial advisor.

If you have any questions or desire further information please do not hesitate to contact me directly. I hope you enjoyed these three articles and that they have helped you make the best decision possible with the facts in hand.

There are special risks associated with real estate investing and it may not be suitable for all investors. REITS have certain risks including possible illiquidity of the investment and should be considered a longterm investment as the purchase of real estate. A portfolio comprised of only industrial properties may be exposed to additional risks such as economic trends or events that may cause this portfolio to underperform a more diversified portfolio. There is no guarantee that any REIT will meet its objectives or that investors will receive distributions.

The opinions and recommendations expressed herein are those of Mr. Garrido and do not necessarily reflect those of the firm and are subject to change without notice. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. The information contained herein has been derived from sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved.