If you want to make the most money, be an investor in real estate, not a landlord.
I've been a landlord since 2005 (three properties) and I can honestly say there's been so many times where I just wanted to sell all my properties and simplify life.
Land-lording can be a harrowing experience that will test your faith in humanity because you might encounter some very selfish and uncaring tenants.
Instead of being a landlord, I'd much rather be an investor in various real estate crowdfunding projects around the country for diversification purposes and simplicity. You can earn 8% – 13% on average and collect income 100% passively. This is huge for me now that I'm a father of two young children.
Let me share with you my most recent land-lording experience that should make you think twice about buying rental property versus investing in bond, REIT, or real estate crowdfunding.
For the past two years, I've had five tenants in my Marina single family house. They seemed like nice enough guys with nice enough jobs to pay the nice enough rent. There was just one problem. They didn't give a FLYING F*CK about my property or the terms of the lease!
Be An Investor In Real Estate, Not A Landlord
Here are some reasons why you many want to avoid being a landlord. Ask an investor in real estate, you need to look at how capital can help you grow your wealth the best.
The First Thoughtless Situation
Out of the 24 months they rented my house, their rent was late EIGHT times. Per the lease, any rent paid after the 4th day is considered late and subject to a $250 fine.
The first late payment, I wasn't sweating it. I wasn't worried about the second late payment either. But when the third late payment rolled around, I had a heart-to-heart conversation with the master tenant to start being more responsible and considerate since I had my own expenses associated with the house I had to pay every month. He agreed, apologized, and promised not to be late again.
Five months passed and they were late again. I asked him what was up, and he told me that his bank had some type of error. Uh huh. I knew he was lying, but I let it slide because the rent showed up a day later. Once again, I was too nice to enforce the $250/day penalty.
Then on July 4th weekend last year their rent payment was late again. This time, none of the tenants could get back to me about where the money was because they were all traveling. They finally paid the rent on the 10th, six days past the deadline. I was trying to find someway to get it through to the master tenant's head that he was being completely irresponsible. So I used this analogy:
Imagine if your employer didn't pay you on time every two weeks. Imagine if they decided to pay you whenever they felt like it? How would you feel? Because that is how I feel every time you're late.
Once again, he nodded his head, apologized, and agreed to be more diligent. I forgave him again because I never felt he and the crew would not pay. I just felt they were completely thoughtless.
After the 8th late payment, I had a BRILLIANT idea.
I told the master tenant, “Hey man, I know you're having a tough time paying rent on time because you have to collect rent from four other guys, make sure everything clears, and then pay me at the bank. It sucks you can't just automatically wire transfer the $9,000 each month. So here's a solution! How about you cut me a written check and send it in the mail by the first of each month. I'll wait until the 5th of each month before depositing it so that you've got enough money. This way, I'll feel better knowing that at least I have a check in hand to deposit.“
He told me this was a fine idea, but never followed through. He proceeded to just go to my bank and deposit a check or cash into my account. At least I was getting paid. Then just recently, they finally gave me their 31 day move-out notice, HOORAY!
One tenant needed to save money so he moved back home with his parents. Another tenant's father bought him a one bedroom condo and will rent out his living room to one of the housemates. I'm not sure about the other two.
If you are an investor in real estate, you always need to stay on top of your capital.
The Second Thoughtless Situation
Part of the lease states to maintain the yard and return it in the condition it was originally in. Maintaining the yard meant not letting the yard get overgrown with weeds, regularly watering the fruit trees, and not using it like a dumpster. I spent about $2,500 making the yard look nice a couple years before they moved in. They agreed to hire a gardener to maintain the yard twice a month.
Of course, they did no such thing. Here's a picture of the yard during their time there.
They promised to get a gardener to make the yard look good again. But of course, the gardener never showed up four days before they planned to move out. Given they were consistently unreliable, I told them I'd do some leg work to make the yard look good again with my guy Luis, who ended up landscaping the back and front yard at my other single family home.
The tenants said OK. But then balked when I came back with the labor only price of $1,000. Then I told them if they were not willing to pay they should go ahead and do the work themselves, and they finally acquiesced to $800.
The Perfect Landscaping
After spending $1,400 (including materials) and two days completely overhauling the yard, a funny thing happened. As I was proudly showing the backyard to a leasing agent, I almost stepped in a pile of dog sh*t!
One of the tenants once again didn't give a sh*t and decided after all that time and money spent, they'd bring a dog into the backyard, let him drop a deuce, and just leave it there. Don't you just LOVE it when dog owners let their dogs sh*t all over the sidewalk and never clean up after them? It's infuriating. If you see a dog owner do such a thing, tell them to pick it up with their hands and dump it in their own house.
One tenant fessed up, “Sorry Sam, my girlfriend brought her dog to the house via the garage the other night for probably 5-10 minutes. I had no idea that happened, but my apologies. If not already cleaned up I will do it personally.”
Unbelievable. Be an investor in real estate, not a landlord.
The Third Thoughtless Situation
Two weeks before their move out date, I told the tenants to start getting rid of trash ASAP because the trash man would not pick up tons of extra trash that wouldn't fit in the bins on their move out date. He might pick up one or two extra bags if he was in a good mood, but not a massive pile of trash.
My tenants ignored me.
Upon the final walk through, they were already running 1.5 hours late trying to get things out of the house. When I saw the mounds of trash on the side walk, I told them there was less than a 10% chance all of their trash would be picked up the next day. I told them to take some trash with them. They refused.
I told them to come back later that evening to get rid of at least some of the extra trash. Leaving so much trash out is a target for human scavengers and raccoons.
They didn't oblige. Why? Because I made the cardinal mistake of giving back their deposit. A new set of prospective tenants were already waiting 20 minutes to see the place. I took 7% off of the $17,240 on top of the $800 deducted for the yard work. Lesson learned: Landlords, wait several days before returning the deposit! You have the power.
So guess what happened the very next morning when I came by to meet my floor refinishing guy and some prospective realtors?
Nothing! All the trash was still there and exploded on the sidewalk. I got another text message from my neighbor with this picture.
WTF! I couldn't believe it. I texted the tenants to get their asses over there to pick up the trash. And in the meantime, because I was so embarrassed with people coming over, I picked up the trash around the trash can.
Of course they didn't come over. They apologized, and called 1-800-JUNK to pick everything up 2.5 hours after I shot them the picture.
Be an investor in real estate, not a landlord.
Invest In Real Estate More Efficiently
The way I get through stressful landlord moments is by reminding myself that everything is fixable with time and money. Then I remind myself I have a nice big deposit and they are paying down my principal. If I didn't cut them their deposit before the trash explosion, I would have felt less stressed. Lesson learned.
I'm all about simplicity now. Two rental properties plus a vacation property is the maximum I can handle. All new money that I originally planned to use for physical real estate will now go towards buying municipal bonds, REITs and real estate crowdfunded projects outside of San Francisco. A 4% – 12% potential annual gain with no tenants to deal with is good enough for me!
Real estate still is my favorite asset class to build wealth. I just think there's a more efficient, less stressful, higher returning way to do so through Fundrise, one of the largest real estate crowdfunding platforms today.
For as little as $1,000, you can invest in commercial real estate and multi-family buildings across the country with higher yields and lower valuations. They've got an extremely thorough vetting process of deals that can make it on their platform as well.
I'm bullish on heartland real estate for the following reasons:
- There will be a net migration out of Blue states into Red states as more people realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- Trump’s tax plan calls for an elimination of State and property tax deductions, hitting California, New York and New Jersey the hardest, while benefitting cheaper states with no state income taxes to deduct e.g. Texas.
- Now that investing in real estate is more efficient, Red State 10%+ cap rates compared to <4% cap rates in Blue cities are too hard to ignore. The spread should narrow.
- A potential expansion of who can invest in real estate crowdsourcing will lead to an increase in demand and prices.
- The rise of real estate crowdsourcing platforms like Fundrise increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments.
You should also consider CrowdStreet if you are an accredited investor. They focus specifically on deals in 18-hour cities. It's free to sign up and explore. If you have a lot more capital, you can be an investor in real estate and build your own select real estate fund.
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.