As Mrs. WoW from Waffles on Wednesday recently mentioned in a post, everyone in the FIRE community seems to have a side hustle. Another mainstay of the FIRE community seems to be real estate, rental properties in particular. In the back of my mind I’m thinking – do we need to invest in real estate to be part of the FIRE crowd?
Numerous bloggers we follow, or have had the pleasure of meeting, have rental properties as part of their investment portfolio. From our DC Money Nerds meetup, Military Dollar has a rental property and it’s a main focus for Guy On Fire. Jillian over at Montana Money Adventures has a rental, Joe at Retire by 40, ESI at ESI Money, and the list goes on.
Are we missing out on a good thing?
Real Estate Investing Benefits
There is certainly the potential to make a lot of money in real estate (like that Trump guy). Even if you aren’t looking to become mega rich from real estate, there are quite a few likely benefits from having a rental property. Here are a few:
- Cash Flow – Assuming you’ve gotten a good deal on the property and the rent is competitive for your area, you should receive monthly cash flow from your properties. Of course you need to make sure that all your expenses are covered, including things like annualized maintenance and vacancy rates.
- Gain In Equity – If you’ve taken out a mortgage on the property, every month the rent is paid you are gaining equity in the property.
- Possible Appreciation – Hopefully the value of your property will go up over time. However, as our current home has shown, that is not always the case.
- Tax Benefits – This is an area I need to learn more about. Coach Carson has a nice article on the Mad Fientist on the tax benefits of real estate investing. Depreciation of residential real estate over 27.5 years can help shelter your income from taxes.
- Hedge Against Inflation – If you take out a fixed rate mortgage and inflation starts to kick in, you should be able to raise your rental rates along with inflation. Meanwhile, your payments are fixed to the extent you have one balance and one interest rate for the duration of the loan (some things will vary like taxes and insurance).
Diversification is another benefit of real estate for us. All of our savings and investments are in short term savings, bonds, and stocks. Although we are big fans of index funds and JL Collins ‘The Simple Path To Wealth‘, we do like the idea of diversifying our overall portfolio.
I’m not too familiar with currency trading (Bitcoin anyone?), precious metals, or other commodities. As Warren Buffet suggests – invest in what you understand. Although we have more to learn about real estate investing, we understand real estate and home maintenance.
Concerns About Real Estate Investing
All of those benefits mentioned above sound great, right? So why don’t we have at least one rental yet?
One of our concerns is having crazy destructive tenants. I know we should view it as a business and the likelihood of ‘bad’ tenants very low. But the thought of someone possibly stealing and destroying my property leaves me a bit uneasy. At our last neighborhood, the house two down from us was a rental. The family there was certifiably crazy. They were eventually evicted by the sheriff.
Another major concern is not being able to rent the property. Joe at Retire by 40 recently wrote about this problem with a condo he has in Portland, OR. I suppose you can always lower the rent to attract a tenant, but you want to at least cover the overall costs associated with the property.
Although real estate and rental properties is commonly referred to as passive income, there is some work that goes into it. We could manage the properties ourselves. However, I don’t think we want to commit the required time right now. I can’t even seem to dedicate the time to writing a blog post more than twice a month! I suppose we could always hire a property manager, but that would cut into our profits.
Rounding out our concerns is the cost of real estate in our area. Although we could buy out-of-town, I think we would prefer to buy a property locally. We live in the DC metro area, Montgomery County in particular. Although the cost of housing isn’t quite as crazy as other areas, it’s still pretty damn high. We would need to do the math on a given property to see if the ROI would be worth it. With Montgomery County on the shortlist for Amazon HQ2, who knows? Perhaps this would be a good area for a few rentals.
Our Real Estate Investing Approach (For Now)
I just don’t think we can be committed to a rental property right now. Once we leave the 9-to-5 world, I think we will seriously consider it. As we mentioned in our Finding Your Target Retirement Location, we will likely leave the DC metro area once we retire. That said, we still want to have some exposure to real estate investing now.
Enter PeerStreet. Basically, PeerStreet is a crowdfunding platform for providing peer-to-peer lending for real estate. There are a few other players in this space, but posts from Mr. Money Mustache and Max Your Freedom leaned us towards PeerStreet. Those posts will give you a good background on PeerStreet.
PeerStreet provides an Automated Investing option that choose properties that match your criteria and automatically invest in those. The criteria matching is pretty basic and just considers the interest rate you are looking for, Loan-To-Value (LTV) ratio, and loan term. I prefer to look at the properties in detail and tailor choices to what we may find attractive or perceive to have lower risks, so we don’t have the automated investing feature enabled.
We opened the account in mid September 2017 with $10,000 and initially selected four properties with a $2,500 investment in each. On average, we are getting around 8.00% interest across our investments. One property has already had it’s loan mature and they paid off their loan. Hooray, they paid!
In the four months since we’ve been investing with PeerStreet, we’ve made $256 in interest on our $10,000 starter investment. Nothing to write home about, but it’s been a solid 8% or so of income. Now that we have our feet wet, we may consider putting more into this investment option to further diversify our holdings and performance.
Speaking of income, we received both an 1099-INT and 1099-OID form from PeerStreet for our 2017 taxes. I know that tax reporting was one thing that Mrs.Need2Save had questions about so I thought I mention it if it helps others.
Although we are off to a tepid start, we now have some exposure to real estate in our portfolio. Once we stop working full-time and eventually settle down, I think we will give more consideration to trying out a rental property. Until then, I’ll continue to follow the real estate successes and perils of our fellow FIRE bloggers and keep the Bigger Pockets podcast in my podcast rotation.
Tell us about your experience so far with real estate investing. Are you rental property owners? If so, would you consider peer-to-peer lending options to round out your property exposure?
If you own neither rental properties or investments in peer-to-peer lending, do you consider real estate a viable future option? If not, tell us why.
If you prefer REITs, tell us why!