Hey Brian,

I know you’ve thought a lot about investment / passive income, etc. so I wanted to get your thoughts…

I can see how real estate is a great investment if you can get someone else (a renter) to pay the entire mortgage for N years, and then you sell for a profit and you make money. Maybe you can even rent it for more than that and make money every month.

But what about when you can’t rent it for that much? In a few years I will probably move out of my condo, so I need to think about whether to keep it as a rental. Total cost per month that we’d still owe with a renter (mortgage, property tax, and condo fee) is about $2200/month. And I honestly don’t think we’d be able to rent it for more than $1900/month. Maybe rents would go up in 10 years. But the condo fee would also go up over time.

To make money, the value would have to increase faster than inflation. Anyway I’m just curious what you think!
K

Hi K,

Good thoughts all around. Negative cash flow properties can still make sense.

On the plus side…

• Don’t forget a small part of your mortgage payment is going to pay off the principal (maybe $100 on yours per month?) and that is really your money, it’s no different than putting $100 in a savings account each month except it’s equity in the house which you will eventually get back in a refinance or sale, so while I wouldn’t count it as cash flow, it’s also not money spent in your -$300, it’s money saved.
• Real estate gives you tax benefits…all the interest payments, improvements to the house, and property taxes are deductible, some other stuff too like people calculate travel mileage. It adds up quick, I ended up taking a huge deduction in taxes from real estate last year. People who own lots of real estate get away with murder regarding the tax system in this country. Some of them are millionaires and qualify for wellfare because they show such low income, and it’s perfectly legal. So that’s one other side benefit.
• I wouldn’t worry about the inflation part of it, real estate automatically adjusts for it (both rents and values). When people talk about appreciating values or rent going up they mean above and beyond inflation, so yeah I don’t think real estate ever loses value to inflation the way cash would since rents and home values are liquid markets just like any other good. Most leases I’ve seen have an automatic price bump built in each year for inflation, as an example.

On the negative side…

• Don’t forget to include cost of insurance in your cash flow (although that may be part of the condo fee?)
• You’re right condos aren’t ideal because they can assess greater fees whenever they want
• It’s a pain just in answering phone calls from tenants and repairs once in a while, and when someone moves out you have to use their deposit to get it ready again, etc. Your time is certainly worth something. What works out best I think is pricing the rent slightly below market so you get lots of rental applicants, then you can run credit checks (and criminal) on every applicant (costs about $15 each) to make sure you really find a good tenant who will stay in there forever and treat it well. I also have a home warranty policy which covers most repairs so they can just call that number instead of me, costs about $350 per year in Houston, but of course there are always little unexpected surprises so owning real estate is never stress free.

Anyway, it’s not an easy decision, but if it were me I would probably keep it unless you have an immediate need for the cash. In the long term real estate is always a good investment. Many people inadvertently wind up millionaires just because every time they move they don’t sell their old house, they rent it. And for sure that thing will be worth millions some day, hard to say when, but your mortgage isn’t getting any bigger so you know that. Rich people all own loads of real estate, so I say the more of it you can get your hands on the better.

Good luck, and until next time, keep breaking free!
Brian Armstrong

P.S. Also, one more thing…to get your cash out of it, you don’t necessarily have to sell it. You can refinance it out and still have the asset plus rent coming in. Some people say never sell a piece of real estate since you can refinance the money out and it will keep paying you both in rent and equity build up.