Investment Properties as Passive Income: a Terrible Idea (Part 1)

I am just at the tail-end of a decade of owning investment properties, and I want to share some insights with you that I don’t think you’ll find in “Rich Dad, Poor Dad.” My friends, I have found real estate investing to be an overall nightmarish experience that is not only not profitable, but is perhaps only profitable to the parties involved who are telling you how profitable it is (like snake oil salesman Robert Kiyosaki, author of the afore-mentioned “inspirational” tome). I actually think Robert Kiyosaki is responsible for the housing crash of 2007, because absolutely everyone read that book in the time period prior to that, which made demand go up, which drove up prices.   I don’t want to flatter Robert Kiyosaki by saying this is the only factor, so I will simply say that a lot of people read that book and took action on it, and at the same time, that whole “mortgage crisis” was happening, which I suppose was a bad coincidence.

Here are some reasons to “just say no” to real estate as an investment, if you are on the fence:

  1. The investment potential is actually not as good as you’d think. Yes, it is true that if put 20% down on something, and you make 100% on that money, you are doing pretty well. But, this does not truly count as “passive” income because you will have to spend time managing it, dealing with repairs, getting / maintaining tenants, etc.     You will do these things because you want to maintain your investment. You will not necessarily enjoy these things, but you don’t want to end up with 0% of your investment left. Meanwhile, that money you invested in a mutual fund and set to “dividend reinvestment” is chugging away, year after year, using the power of compounding to make itself make money. Bottom line:   there are far better things you could do with your money, so don’t kid yourself that just because you don’t have a bunch of investment properties you’re missing out on some huge money-getting opportunity.   Totally untrue.
  2. Your access to your money is left to the whims of the real estate market.   Real estate, as you probably know, goes up and down in value. If you need your initial downpayment (and any gains), you’ll need to wait until circumstances are favorable to sell, or you’ll end up leaving a big chunk of your investment on the table. Real estate brokers will tell you that markets go in 10-year cycles. Do you like the idea of not being able to get at your money for 10 years?   I didn’t enjoy it at all.
  3. It’s going to cost you money to get at your money.   I’m sorry to tell you this, but if you are selling property, in most states YOU are going to pay the realtor’s fees on your side and the buyer’s side.   Depending on the price of the property, that can end up being a HUGE chunk, and that chunk, along with taxes and fees is going to really bum you out when you get the final wire transfer at the end of a long ten years of hard work.
  4. Renters are renters. Renters are usually not as clean as homeowners, because the property doesn’t belong to them.   They sometimes don’t pay on time, because they don’t have the fear of repercussions that you do as the mortgage holder. Oh, if someone doesn’t pay their rent? Your mortgage company will not care. You will never get to pay your mortgage late. Renters will tell you sob stories about how they or one of their kids got sick, and they missed a bunch of hours at work, and can they please make it up to you next month?   This is not a good pattern to get into, and yet, finding another renter brings up all sorts of other fees (like replacing the paint and the carpet, depending on what state you live in), plus you will need to fix whatever damage they did before you rent the place again. All of this can lead to a very sad looking balance sheet at the end of the year, and that “guaranteed income” you were salivating over when you bought the place goes right down the drain.
  1. Hidden costs are going to bite you. Taking yet another bite out of your potential profit is the fact that physical property ages, and as it does, things wear out and break. As a landlord, you’re not going to be able to “just live with it” the way you would if it was your house, so you’ll need to pony up to get the washer repaired, or get a new fridge, or completely repair the air conditioning because it is summer and your tenant cannot inhabit the residence without a proper A/C. These are all actual experiences that I have had, and each and every one of them ate into my bottom line until I finally gave up.