Why I Don’t “Own” Any Real Estate
If you’re reading this as a client or follower of mine, you know about me already and likely already know why I don’t “own” real estate.
But if you’re new to my content the first question you should be asking is “why does it matter that this guy doesn’t own real estate?” Lot of people don’t right?
Well, I’m 29 years old for starters and I have a net worth of over $3 million. I’m not Elon Musk by any means, but I’m aware that for 29 years old I am an anomaly. I didn’t build it through gambling on crypto or meme stocks. I didn’t rip people off selling “high ticket courses” or trying to teach people sales and digital marketing.
I own a financial education and financial services distribution company that clears 7 figures per year. I invest in real, tangible assets. I have real passive income from my investments that pay me month after month. This is not to brag, but to make sure you know I’m not some guru living in his mom’s basement who hasn’t earned his stripes.
Now let’s talk about owning real estate.
Most that do own real estate, own it in one of the following ways:
- They live in it.
- They rent it to others.
- They do both (live in a unit and rent the others out)
- They buy REITs (Real Estate Investment Trusts)
- They invest as a limited partner with someone else.
First, I want to talk about why I don’t live in Real Estate. I currently rent where I live and I have never owned the places I’ve lived in.
A few reasons.
Return on time invested is the big one. I’ve yet to meet a homeowner who doesn’t get sucked into the following projects:
- Mowing their own lawn
- Shoveling their own snow
- Remodeling the house themselves
- Repairing the house themselves
- Do It Yourself maintenance issues
Every single homeowner I’ve met in my life ends up doing these things. For me, I run a 7-figure business and my time is literally worth hundreds and sometimes even thousands of dollars per hour depending on what I’m doing. I need to protect my time so I can put as much of it into my business as possible. And after working that hard, the remainder of my time needs to go to things I enjoy doing. Owning a home is a liability for my time. I don’t have the time to mow my law, fix things, get sucked into remodeling projects, etc.
I’ll be honest, I don’t even cook my own food or fold my own laundry. I hire people to do all of that so that I can invest my time where it’s the most effective.
Second is the opportunity cost on down payment money and closing costs are high. If I keep my down payment money and invest it instead, I make a better rate of return than a home does. Granted, my rent costs are high and I could probably get a better financial ROI at this point by purchasing a home than renting. But again, back to my first point, that exposes my time to the liabilities that come with home ownership.
I won’t live in a home that I own until the finances make sense and I also find someone reliable that I can hire to be my groundskeeper, handling everything that goes on with the house.
Next, let’s talk about renting real estate to others.
I’m a tenant now and I can tell you I would HATE to be my landlord. I’m a good tenant, but even I get needy. Plus the other tenants aren’t always good. I don’t want to put up with marijuana and cigarette smokers who are breaking the property rules. I don’t want to fix things when they break. I don’t want to coordinate unclogging toilets at 2 am. And I don’t want to chase people down for rent or go through the pain in the butt of trying to evict them.
Renting out real estate that is self-managed is NOT passive income. It is a job and it doesn’t pay very well.
Well, what about hiring a property manager? Good question.
If I hire a property manager I am going to pay them at least 10% of my gross rent, plus they will still nickel and dime me for having to do repairs and things that are not covered in their management fee. Their job is to collect as much of my rent as possible, while doing as little work as possible because that is how they collect their profit. And less money collected with more work done means less profit.
So if a rental property currently yields 6% of its purchase price if I pay cash for it, that means after management costs I am closer to 5.4% yield. Now I still have to account for vacancies, repair costs, etc. Let’s say all of that brings the yield down to 5%. I can think of a lot more profitable ways to make 5% with my money with a lot less risk and headache. Now, I could use debt to buy the property and bring my yield up because of the leverage. But even then, my annual yield will probably not be any higher than 12%. Again, I can make 12% elsewhere with a lot less headache.
What if I live in a unit and rent the other 2–3 to tenants. We will keep this short. If the first 2 points were a bad idea by themselves, combining them is an even worse idea. Combine all of the liabilities of home ownership with then having an underpaying part time job…that you live at! Could you imagine that? You’re the owner and the property manager and all anyone has to do if they have a complaint is come knock on your door. I don’t think so!
What about buying REITs?
What is a REIT? It stands for a Real Estate Investment Trust.
It means that a trust that is managed by someone else, buys real estate. The trust owns the real estate, not me. I own paper shares of the trust. A REIT is not a form of investing in real estate. It is a form of investing in a paper asset no different than a stock or a mutual fund. Except most REITs are non-traded, meaning I cannot sell my shares. Once I’m in, I’m locked in for the term of the REIT or until they decide to cash me out.
I would never invest in a REIT just like I would never invest in a mutual fund.
How about Limited Partnerships?
Also known as an LP. This is where a General Partner creates an LLC that buys real estate. He selects it, he manages it, he takes fees, commissions and profit share. But he uses my money and pays me a dividend and then a percentage of the profits beyond that.
Here’s the issue I have. The dividend is going to be 4–6% at best and usually paid once per quarter. I can make 12% now, paid monthly.
The profit sharing beyond that is based on if sales or refinances happen. So down the road, I might make more and based on this my annual returns might be get up to 10–12%. However, the Time Value of Money (money is worth less over time) tells me that more money now is better than more money later. So if I can make 12% now, why would I want only 4–6% now with the chance of 12% later (when it isn’t worth as much)?
Limited Partnerships also often are a breeding ground for disagreements and disputes between the GP and the LPs. The LPs often have different expectations than were advertised or assumed and when the GP doesn’t meet their expectations, problems arise. This is quite literally a business partnership and shouldn’t be taken lightly. It is the business equivalent of a marriage. You want to know fully who it is you’re partnering with and what they have going on in their business, financial and personal life. There is a lot of personal due diligence that needs to go into a partnership before it is formed. The GP doesn’t have the intention for this and they will glibly take your funds and go invest and likely will not be interested in a personal due diligence cycle.
So what do I do instead?
I am a secured private lender on real estate.
Like a bank, I am the mortgage on the properties.
I don’t have tenants. I don’t have to live there. I don’t have any responsibility to the property at all. And I don’t have partners.
I collect my interest check each month, which is completely passive, and if the borrower doesn’t pay me I can foreclose and take away their asset.
When I foreclose, I actually make money. I loan on properties where it is worth 30–50% more than I am lending. So if I take the property, I get more in assets than I originally loaned out.
Plus, in many instances a foreclosure is faster and easier than evicting a tenant from a rental.
Not to mention that the amount I collect for their monthly payment is dependent on them (their down payment, credit, term length, etc.) and is not limited by “market rate rents” or even rent control.
There were no moratoriums on private mortgages in 2020, but there were on rent payments in many states.
When would I own rental real estate?
If I was a W2 income with no ways to reduce my taxes, then I would own rental properties.
If I was a W2 income and I had no way to increase my income, I might take on rental properties as a form of self employment activity with the hopes to collect rent and sell or refinance for a profit with my weekend and evening hours.
But even in these cases I can think of better ways to reduce taxes and better ways to earn extra income.
In summary, rentals aren’t “bad”. Lots of people do own them and do make money with them.
My conclusion is that they aren’t passive and they aren’t the best form of investment return. I do think they’re better than stocks, crypto and other asset classes. But I don’t think they’re the silver bullet they’re made out to be.
If you’re reading this and my viewpoint was new and interesting to you or if you’d like to learn more about secure private lending and how I do that, then I want to invite you to register for my free training this coming Friday at 10:00 pm EST!
Every Friday night for about the last 4 years now, I’ve taught a free course on money and finances sharing the truth about how the Top 1% really invest and build their wealth.
Here is the replay of the one I did last week:
If you’d like to register to attend this Friday at 10:00 pm EST, just click here!
To Purpose, Wealth & Freedom,
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)