Christian Financial Perspectives
192 – Are Rental Homes The Worst Way To Invest In Real Estate?
Are Rental Homes The Worst Way To Invest In Real Estate?
Learn about REITs and what could be a much better investment than a typical rental home.
Considering becoming a landlord through rental property? Do the returns justify the hassles involved? After insurance, mortgage payments, repairs, and/or marketing costs, a rental home isn’t the cash cow you might think it is. Bob and Shawn discuss the pros and cons of rentals while providing some alternative options to consider.
Instead, Real Estate Investment Trusts (REITs) may be a better option for the average investor. They explain that REITs allow investors to access a diversified portfolio of properties across various sectors, such as industrial, retail, lodging, healthcare, and more.
HOSTED BY: Bob Barber, CWS®, CKA®
CO-HOST: Shawn Peters
Mentioned In This Episode
Christian Financial Advisors
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Bible Verses In This Episode
ECCLESIASTES 11:2
Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.
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EPISODE TRANSCRIPT
Intro:
Considering becoming a landlord through rental property? Do the returns justify the hassles involved? Well, today we will discuss the pros and cons of rentals and provide some other options to consider. Let’s get some perspective.
Shawn:
Welcome to another episode of Christian Financial Perspectives. I’m Shawn Peters, joined as always by my co-host and Father-in-Law, Bob Barber. Today we’re going to be talking about investing in real estate. Obviously there are a lot of options within that topic, but what we’re really going to be focusing on today is presenting some of the common options available to the average investor. So we’re not talking about a super high net worth individual here. We’re talking about those with less than a million dollars, overall, that they might be investing in real estate. Now, unfortunately, I had to kind of drag Bob in kicking and screaming for this one. I know, Bob, you hate talking about real estate.
Bob:
Oh, just hate it. Oh yeah, absolutely. No.
Shawn:
No. In all seriousness, Bob, you can’t stay away from real estate. I do know that.
Bob:
I love real estate, always have loved real estate. Shawn, my dad was in real estate for 45, 50 years. So I come from a background of real estate and really understand it, and I saw a lot of the mistakes that he made.
Shawn:
Which kind of makes sense with your career path then, because you went from your dad having that background, and then you went into more of the finance business side of the home building and then eventually into investment management, financial advice.
Bob:
Yeah, that’s exactly right.
Shawn:
So yeah, so today the primary things we’re going to be covering is rental homes. That’s one option that the average investor, and that for most people, I think that are the fit in within that category of under a million dollars. That is probably the first thing people think of if you say invest in real estate.
Bob:
Without a doubt.
Shawn:
Single family rental home. So we’re going to be covering that, pros and cons, we’re also going to be covering real estate investment trusts. We’ll kind of go over a little bit of what that is and the two different kinds. So if you’re waiting for us to talk about the pros and cons of investing in a large apartment complex with a couple million dollars or a large commercial, we’re not really going to.
Bob:
But you could do that through a real estate investment trust.
Shawn:
You could. Yeah. Okay. But anyway, without further ado, Bob, would you like to start us off on rental homes?
Bob:
I will. Rental homes are an interesting subject to talk about. We’ve had many podcasts, at least three or four in the past, out of our 180 to 200, I know we’re coming on 200 podcasts. And talked about just the entire episode has been about rental homes and is it a good investment today? We’re just going to talk a few minutes about it.
Shawn:
We’ll link that in the description. By the way, for those of you who want to see something specific on the details of a rental home and the math behind it, we’ll link that in description.
Bob:
Yeah, it goes way back. Yeah, we’ve done a couple of them, but in my opinion, Shawn, rental homes are the worst way to invest in real estate.
Shawn:
I’m so shocked. I didn’t see that in the script at all.
Bob:
Now, why would I say that rental homes are the worst way to invest in real estate? Well, one of the reasons is the tenants you have to deal with. You don’t have diversification. It’s just in one spot. But the other thing is just the yield itself. The actual yield, not appreciation.
Shawn:
The math, basically.
Bob:
When you look at the math, I went out a couple of days ago and we’re in the Austin, San Antonio area. So I looked at a suburb of Austin, Buda, or Kyle, Texas. I don’t expect of this you up north to know where that is, but just think of the…
Shawn:
Between Austin and San Antonio.
Bob:
It’s just one big city, by the way. Then I came closer to home, which is in New Braunfels, where we are, which we’re closer to San Antonio, and Buda is closer to Austin, but I found that the prices were about the same. And in our area, about a 2000 to 2200 square foot home was around that $500,000 – $600,000 range, even as we speak with the interest rates that have gone up. So I looked and I found a lot of them for sale, as you know right now with the high interest rates. So I looked in this area, you can do this, by the way, on a realtor app, and you can do the same thing.
Shawn:
Don’t just take a word for it. This is just what Bob found.
Bob:
You do the filter and you do “buy”, and then you can just go to the filter and say “rent”, and you’ll see what those homes are renting for. So I found a lot of homes for rent in the for sale areas probably because things are moving slower, and I found the rent to be between $1,800 – $2200 per month. So if you take those numbers and the range of 500k to 600k, I’m just going to use $550,000.
Shawn:
Split the difference.
Bob:
Right in the middle. And let’s say rent’s on the high side. Let’s say it’s 2200 a month that you’re receiving in rent. Take that, multiply that times 12, you’re at $26,400 in gross rental income. Sounds good so far.
Shawn:
So far. Okay. $26,400 gross.
Bob:
But here in Texas we got the property tax, and I know in a couple other states they have some high property taxes as well, which computes like in the Kyle Buda area at 2.19%. So the property tax is about $10,000 a year.
Shawn:
So now we’re down to $16,000.
Bob:
Got it. And then take another $1200 or $1500 away from that for the insurance.
Shawn:
So let’s just say $1200. Okay.
Bob:
So bottom line is you’ve moved that gross rental income from $26,000 down to $15,200 after just, Shawn…
Shawn:
Just taxes and insurance.
Bob:
What about your time or if you hire a property manager?
Shawn:
Or if there’s some sort of maintenance issue where something breaks overflows, water heater breaks down.
Bob:
So the way you do this is you take that $15,200 and you divide it by 50, and that’s going to give your yield. Shawn, say what that yield is.
Shawn:
2.76% per year.
Bob:
Is that crazy?
Shawn:
Which, even under normal conditions, that is barely above average inflation. And it’s below what we’ve been seeing recently.
Bob:
And Shawn, you realize this is if you pay cash.
Shawn:
That doesn’t even factor in a mortgage.
Bob:
If you finance today, you’re going to be in a major negative cashflow position. So the only thing you can rely on is the appreciation in that case. This just doesn’t make sense to me.
Shawn:
That could be a whole other topic. If any of you are curious, look at the actual change in average prices of homes over the years. When I hear about people talk about, oh, look how great the appreciation is over time, it’s a similar number.
Bob:
It’s about inflation. So it hangs right with 3% to 4% inflation, and we’ve been in a 10 year period of ultra low interest rates that were artificially stimulated by the Fed. And those days are over, folks. They’re over. Get used to interest rates being back to where they are today. Go to tradingeconomics.com and put in the average means for interest rates and the fed rate, and you’ll see that. We’re right where we should be with interest rates.
Shawn:
So basically to summarize it, rental home, even if you buy it with cash, you’re still in this example, you’re still looking at less than 3% average return, assuming no additional time for the time you’re putting in to doing anything. You don’t have a property manager. You’re not spending any money on marketing to try to get a new renter whenever the renter leaves and the lease is over. No money for annual repairs, none of that. That’s just, that’s basically your gross.
Bob:
Shawn. I’ve never seen one. And we have a worksheet if you want to see the worksheet. I’ve never seen one in my entire career that gets over 4%. And today, CD rates at 5% plus. So why would you do that?
Shawn:
Why take that risk?
Bob:
You may say because of the appreciation. Okay. So now we’re going to get into what, I feel, is the easiest and best way to invest in real estate.
Shawn:
Which is a REIT or real estate investment trust. So what exactly is that, Bob?
Bob:
It buys a diversified portfolio. It could be housing, it could be apartments.
Shawn:
But it’s not a home. It’s maybe hundreds of homes or thousands of homes or apartments or multiple apartment complexes.
Bob:
It could be healthcare, it could be hospitals, it can be anything real estate. There’s ones that own billboards.
Shawn:
Okay.
Bob:
Because it’s all about generating income, by the way.
Shawn:
Point being is you purchase this one position or make this one investment to give yourself access to multiple properties.
Bob:
That’s correct.
Shawn:
Across various sectors and industries. So within that though, there are two types. I want to make sure we make very clear. There are publicly traded and there are privately traded REITs. So before we get into – which today we’re really recommending the publicly traded REIT option, we’ll go with that. But Bob, why would we say to people to avoid privately traded REITs?
Bob:
I’ve been down the road, Shawn, I’ve been down the road with both of them, and the privately traded REIT really locks you in. If you get into a privately traded REIT, it may sound really good upfront, like maybe they’re going to give you a 6% or 7% dividend, but then they can pull the rug out from under you. And because it’s privately traded, you can’t do anything about it.
Shawn:
You’ve got to basically get it redeemed by the company.
Bob:
By the company itself, or somebody’s going to come along and give you pennies on the dollar. I’ve seen it.
Shawn:
And if they didn’t manage it well, then all of a sudden you’re kind of in a bad spot because there’s no one really to redeem the shares from you.
Bob:
I’ve seen it and even had some clients experience this, and this is why I veer away from privately traded REITs now, because overnight you can go from $10 a share down to $8 a share without any warning whatsoever. You just get the letter and it’s happened. We’ve had some privately traded REITs go public, and we’ve done very, very well at the same time. But in my opinion, you should stay in the publicly traded real estate investment trust arena.
Shawn:
So just some highlights before we get into the type of REITs. Why do you say the publicly traded then are a better option?
Bob:
Along with just the REIT itself, the reason I like it is there’s no closing cost. There’s no sales commissions, buying or selling. It’s just so easy, and I call it mailbox money because you can invest in these REITs and they all have a certain dividend that they’re paying and you just collect it at the mailbox or electronically have it put into your account. You don’t have to deal with the tenants, you don’t have to deal with the water heaters breaking.
Shawn:
None of that. So going back to compare with the rental home, you don’t have to deal with anybody.
Bob:
One we’re going to talk about later, but I’ll just mention it right now. We’ve put together a diversified portfolio of 30 plus real estate investment trusts across all the different sectors as we’re about to go into. And the yield is beyond 6% plus appreciation. It can depreciated as well, but it’s because it’s going to go with the markets. But you get the appreciation just like you could in a rental home, back to it.
Shawn:
Long story short, publicly traded – a lot of good options. It’s way easier to get in and out of it. You don’t have to deal with tenants like you do with the rental home. There’s no commission sales charges. Great. So Bob, what kind of REITs – we’re going to cover this quick – what kind of REITs are available within the publicly traded space?
Bob:
There’s industrial, that’s warehouses and distribution centers. There’s retail, like large regional malls, outlet centers, grocery, anchored shopping centers, and power centers that feature box retailers, like the big Targets or Best Buys. There’s the lodging and resort hotel type REITs. There’s the office REITs, there’s the residential apartment buildings, student housing, manufactured homes, single family homes, warehouses.
Shawn:
Then we’ve got healthcare, so senior living facilities, hospitals, medical office buildings. We have data centers. So these are services that keep servers and data safe. There’s uninterruptible power supplies, air chill coolers, physical security. Then there’s cell phone towers. I always thought that was kind of an interesting one. Timberland and lumber. Then you have infrastructure for fiber cables, wireless infrastructure, telecommunication towers, kind a little bit of a crossover with cell phone towers, but it is separate. And you’ve got mortgage – So financing for income, producing real estate by purchasing the or originating mortgages, mortgage backed securities, farmland, and outdoor advertising.
Bob:
There you go. 14 different ways. You did good because that’s all the different ways that we can invest in. And when we look at building a portfolio of real estate investment trust, publicly traded, real estate investment trust, we look at all of these different sectors because it really goes with the scriptural principles being that we’re Christian Financial Perspectives of Ecclesiastes 1:2, the wealthiest man that ever lived in the history of the earth, Solomon, he said, “Give your portions to seven. Yes, to eight because you do not know what disaster may come upon the land.” So the reason you want to diversify, maybe office is not the best place to be right now. Of course, housing’s not a good place to be, but the housing REITs have depreciated so much….
Shawn:
Might be a good time to buy.
Bob:
Yeah, because you want to buy when things are down, like cell phone towers. I mean, that’s pretty solid, but the dividend may not be as good on those because it is so solid. So we built this real estate portfolio of approximately 30 different, deep valued REITs using our program looking at value and fundamentals of the REIT. We have two different ways that you can buy it through us. One is we do a buy and hold strategy for at least a year for the capital gain. And that is just 30 basis points a year. That’s what we charge as our management fee. Or you can buy one that’s more actively managed and that’s our 1% fee per year. And you can get in as low as $30,000 to $50,000.
Shawn:
Exactly. And right now the yield, as of recording, was over 6%, plus whatever appreciation or depreciation might occur. So if you’re interested, as always, we’re here. Check us out www.christianfinancialadvisors.com. You can also call or text during business hours at (830) 609-6986. Thank you so much for joining us today and God bless.
[CONCLUSION]
That’s all for now.
We invite you to listen to all of our past episodes covering many financial topics from a Christian Perspective. To make sure you don’t miss any of Bob’s upcoming episodes you can subscribe to Christian Financial Perspectives on iTunes, Google Play Music, Spotify, or Stitcher. To learn more about integrating your faith with your finances, visit ciswealth.com or call 830-609-6986.
[DISCLOSURES]
* Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.
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