June 26, 2009, 5:35 am

Can We Still Make Money Out of Rental Properties?

by: The Financial Blogger    Category: Investment, Market and Risk,Properties
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Yesterday, I wrote about the fact that I truly believe that we can still make money out of the stock market. I think that there are 3 main ways to make a lot of money (there is technically a 4th one which would implicate you working like a damned demon for a company for several years and hope to get the VP position). The first one is to invest in the stock market. This one is quite “easy” as if you simply buy ETF’s and wait 30 years, you will wake up one day with a lot of money! However, it requires golden guts ;-)

The second option that we will be discussing today is through rental properties. This is the baby boomer’s classic success story of the guy who didn’t have much education but was a hard worker. He pilled up his money to buy his first property, than his second one and he bought a land, build 20 properties on it and he is now living by the lake… I must agree with you that I also fell in love for this story. We all know people who succeeded through real estate. We all know them because real estate is easy to see, buildings last and it makes us think it is safer.



However, while I still think that we can make money through real estate, it is far from being a safe investment. There plenty of risk that you must consider (illiquidity, default payment from renters, major repairs, drop in value (think of the American market), etc.). So don’t think that it is that amazing! What is really cool though, is that it can be used as a big “dividend tank” that send you money months after months!

Why you can still make money with real estate:

Depending on where you live, there are several reasons why you can still make money through rental properties. The major point is that borrowing doesn’t cost much right now. I am convinced that people who have the guts to borrow as much as they can today will be greatly rewarded in a few years. We have a unique chance of paying almost no interest in order to buy depreciated assets… Doesn’t this sound like the opportunity of a lifetime?

The second point is that there are a lot of rental properties which has been depreciated in value. This is probably a great timing to start looking around and look at how much it would cost to buy real estate in your area. Unfortunately, this is not the case everywhere. In Quebec, value didn’t drop much. In fact, my house keeps increasing in value years after years. However, I would be curious to look at properties in Florida!

The third point is the blessing of having a recession (say WHAT?). Well if people start losing their job, they will probably consider selling their house and start looking for an apartment. Therefore, you have better chance of getting renters. On the other side, it might become harder to get paid on time ;-) Nonetheless, the demand for apartment will definitely increase in the upcoming year. I don’t think that young couple will get their first 350K mortgage at the age of 25 anymore… they will stay in an apartment for a few more years and gather more money before buying! This would be the client you should be looking for!

Any thoughts on real estate investing?

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Comments

It has often been said of real estate that you make your money when you buy. Buying in a recession when the consensus of opinion is that property is a poor investment makes a lot more sense than waiting until the market has recovered and every Casey Serin wannabe is bragging about how much money they are making flipping houses instead of working for a living…..

I don’t know anything about real estate investing. If something breaks, I won’t know how to fix it. I would most likely hire some sort of a contractor person that would eat up my whole profit. I am also afraid that my tennants would be methlab entrepreneurs and would eventually burn down the whole place. Diversification is important as well if you ask me – what happens if I buy a rental in a certain place and it goes great for a few years, before your region gradually becomes an unsafe neighbourhood or the major employers in town have to billions in government bailout money. ( Think of Detroit and recent headlines about houses selling for $10K/piece)

That’s why i simply invest in REITs. It’s easy, you get instant geographic diversification, and some REITs even pay you monthly distributions instead of quarterly.

My 2 cents is that Real Estate also gives you the greatest leverage with moderately small risk

What other asset can let you borrow to 80% when you only have to put in 20%, and that you are making money, with bank and tenants’ money :-)

I certainly hope we can still be profitable through RE…. I hope to get into that when I can – luckily I’ll have plenty of other successful bloggers to talk to for the advice!

Rental properties can be very profitable. My parent rented out a big house to college age girls and they’re receiving more than enough revenues to pay the mortgage!

I certainly hope we can still be profitable through RE…. I hope to get into that when I can – luckily I’ll have plenty of other successful bloggers to talk to for the advice!
Oops…forgot to say great post! Looking forward to your next one.

by: The Financial Blogger | June 27th, 2009 (6:30 am)

DGI,
I think you bring a good point by buying REITs. I don’t know much about real estate investing (besides that I made a good deal when I purchased my house ;-) ). Sometimes, it is better to stick with what you know. However, I would like to give it a try someday…

Jerry,
I would says that the biggest risk when you borrow 80% of the value of the property is that rent won’t be enough to cover all your fees (including maintenance, insurance, taxes and mortgage payments). Therefore, you will have to disburse money every month… I don’t like this scenario too much. I think it is best to buy an asset that will immediately produce income.

I know people WANT to be able to get into the rental property ownership business because they think it is a good way to make some passive income, but they’re leery because of tenant issues that could arise. In this market, it’s tough to get people to take a risk on something like this, even though it makes sense on paper. They know it’ll take time and effort dealing with tenants and maintenance, or will require further investment into a property management company. I think it’s those that not only have extra money to invest in such a property, but enough money to not be afraid of a potential loss that are more likely to invest into something like this.