226 – Why Rental Home Income Isn’t Worth The Hassle

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Why Rental Home Income Isn’t Worth The Hassle

Learn why rental home income isn’t as much as you think it is.

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Have you ever considered rental house income as an extra source to add to your finances? Things may not be as easy as they seem, as rental homes are often not delivering the expected returns for investors, especially in high property tax areas like Texas. Bob and Matthew cover the estimated yield income from a rental home property in comparison to other investment choices.

If rental income is something you’re interested in delving into a little more, a better alternative to rental homes may be to invest in a diversified portfolio of publicly traded real estate investment trusts (REITs). Not only can they provide higher yields of over 5% with more liquidity, they are also much less time and hassle than owning individual rental properties.

Mentioned In This Episode

Shawn (00:00):
Are you dreaming of real estate investing but concerned about landlord hassles? Many investors are surprised that rental homes aren’t delivering expected returns in today’s market. We’ll break down the real numbers behind rental properties in Texas and reveal a simpler alternative with better yields and less headache. Let’s get some perspective.

Matthew (00:27):
Hi, welcome to our program today, Christian Financial Perspectives. My name is Matthew Barrovecchio and I’m here with Bob Barber. And we’re ready to talk about something that Bob has a lot of experience in and is very passionate about – why rental home income is not worth the hassle. Tell me more. This is very interesting to me.

Bob (00:48):
Well, it is interesting to a lot of people because they’ve heard their whole lives how great rental homes are. You’ve got HGTV always pushing it, and to me, when I looked at it, and I’ve been down the road, by the way, I’ve owned rental homes. My dad owned like 40 of them.

Matthew (01:09):
You’re speaking from experience.

Bob (01:11):
A lot of experience and actually growing up in it and having to clean up after people with the way they left them. Alright? But the income from a rental home is, like you say, it’s just not worth the hassle anymore, especially here in Texas where we have high property taxes and a few other states do as well. And we’re going to prove that today, and I’m going to use some typical examples of homes here in the Austin, San Antonio area where we are, but other areas may have a higher price than this, but also the rent will be higher, so it will all kind of measure out the same.

Matthew (01:49):
Correct. Yeah. Yeah. The principle still applies nationwide, likely.

Bob (01:53):
Yeah. So I took a typical, if somebody’s going to says I want to go out and buy a rental home, a lot of times it’s a retiree because they like the income, say, I want to buy the rental home, and the income’s not the problem many times, but it’s the net income after all the taxes, insurance, the maintenance. So I picked a typical three bedroom, two bath, two car garage, single family home that’s about 2000 to 2200 square feet. Like I say, in the Austin/San Antonio region, which our whole region is about 4 or 5 million people. I mean, we’re big, and a lot of people are moving to Austin and San Antonio so they know what we’re talking about. But a home like that in some areas can be gotten as low as $350,000 today.

(02:39):
Which may surprise a lot of people that are, because we’re nationwide. Somebody might say, well, I can get that for 150, or some might say that would cost me a million dollars. But several years ago, that was about a 100k more when interest rates were so low. But since interest rates have been driven up so much, the higher interest rates have pushed the prices down very much around here. I found that – so you went and you buy this home for $350,000. I found that the typical rent for this home is $22,800/year. Right at, I mean, about $1900 a month is what you can rent it for.

Matthew (03:18):
Okay.

Bob (03:18):
So $22,800 a year. Now, right now you think, well, that’s a pretty good income on the $350,000 investment.

Matthew (03:26):
Yeah, it’s not quite 10%, but it’s getting close to it.

Bob (03:29):
But that’s not at all the whole story.

Matthew (03:30):
It’s not?

Bob (03:34):
I like it because isn’t it, there’s the old saying, it’s not what you make, but it’s…

Matthew (03:38):
What you take.

Bob (03:39):
It’s what you keep.

Matthew (03:40):
Oh, okay.

Bob (03:41):
It’s what you keep. It’s not what you make, but what you keep.

Matthew (03:44):
Okay.

Bob (03:44):
And in my research, the property taxes on this price of home in Texas, the property taxes run about $7,000 annually. Now, we’ve always looked at a lot of properties in Colorado because we always go there, but they have a state income tax, but the property taxes, there may be only a thousand dollars. So it’d be a big difference, but the home prices would be higher. So you’re stuck in this same thing. But here in Texas, the property taxes would average around 7k. Since insurance has gone up so much. We’ve all watched our homeowners insurance really skyrocket nationwide.

Matthew (04:18):
We’ve seen that in Florida a lot.

Bob (04:20):
So now that’s around $3,000. So immediately you’ve got $10,000, just the property taxes and insurance driving that $22,800 gross income.

Matthew (04:35):
Yeah, down by almost 50%.

Bob (04:37):
Exactly. Yeah, exactly. You take just that number and not what your time is worth. Not anything breaking, not a client moving out on you. Many time, renters will maybe stay in for two years and then there’ll be a month where it goes empty or two months while you’re finding another tenant, that gets that down to a 3.6% annual yield. So you with me?

Matthew (05:00):
I am. Money markets today are paying higher than that.

Bob (05:04):
They are, yeah. Yeah. CDs are right at about 4%. So why in the world would you want this risk of one property? Also, if you lose…

Matthew (05:16):
Not diversified.

Bob (05:16):
If you just lose one month’s rent or you have a water heater go out, or we had a hail storm here about a month ago, got to replace the roof, you would have the deductible. Every single time I talk to somebody who’s owned a rental home, they always say, yeah, we just had to do this and this and this. It’s always something that they had to do to that rental home, that knocks that yield even lower. I mean, you’re down in the 2.5% to 3% range, and no one really ever thinks of this. If you’re financing at today’s rates, you’re negative cash flowing.

Matthew (05:56):
With rates at what? 6-7ish percent?

Bob (06:00):
About 6-6.5 %.

Matthew (06:01):
Yeah.

Bob (06:02):
Right now you can get maybe a 5.5% loan at a 15 year loan, but then your payments are going to be higher paying ’em to pay it back in a shorter period. So what’s the alternative? I mean, you might like real estate. Real estate does produce income. I believe a good alternative to this, and I’ve fallen into this myself, is commercial real estate where you have triple net leases. What does that mean? The tenants are paying all the taxes, all the insurance, all the maintenance. Anything goes wrong. I was just telling you in my office building that I own, we just had to replace a toilet in the building. We just had to replace a faucet. Anything that goes wrong with that building, I get to pass that cost on to the tenants. There’s no such thing. I mean, maybe there is in some areas, but I’ve never heard of a triple net lease for a rental home, where you go back to the tenant and you say, “Hey, I had to replace this roof. I need to ask you to pay for the cost of this.” No, that’s not flying. But in a commercial situation, it does. But even at that, you’ve got to be careful about buying a commercial building because you’re putting all your, what did your mom always say? Don’t put all your eggs in one basket.

Matthew (07:18):
Yeah. I mean, think about just over the last five years, how commercial real estate and real estate in general has changed, right? By taking on that additional risk of putting all your eggs in one basket, it’s a huge risk, especially if the dynamic changes in the market.

Bob (07:33):
You’ve got one market, one area, one type of real estate.

Matthew (07:36):
Think about malls as an example.

Bob (07:40):
I think there’s an easier way, much easier way.

Matthew (07:44):
Tell me more.

Bob (07:45):
Okay. The easier way is owning commercially, commercial real estate traded through a real estate investment trust, and a real estate investment trust, what it does, is it goes in and it buys lots of different properties in many different categories. Now, you can have just a real estate investment trust. It just focuses on industrial buildings. You could have one that just focuses on offices. You could have one that just focuses on apartments. You could have one that just focuses on data storage that they’ve come out with those recently. When it comes to owner real estate trust, there’s also two areas I want to caution my listeners and those that watch us on YouTube, and that’s owning a privately traded REIT. Don’t get yourself caught in owning a privately traded real estate investment trust.

Matthew (08:42):
Why?

Bob (08:43):
Because they can pull the rug out from under you. And what I mean by that, that’s an old country boy saying – pulling the rug out from underneath you – is they can categorize, I mean, redo what the share price is per share without any notice, and you just get this letter in the mail, you bought into that privately traded REIT at $10 a share, and all of a sudden you get a letter, it says it’s worth $7 a share. Now you’re like, I dropped 30% in value.

Matthew (09:16):
How did that happen?

Bob (09:18):
Where a publicly traded real estate investment trust is daily traded in the markets. You always see the price. If it starts dropping, you see it and you know it. It’s very transparent. A privately traded REIT isn’t. In my earlier days, years. I mean, this is 15, 20 years ago when I did do commission-based products. We sold REITs back then. Real estate investment trust that were privately traded. About half of them did well, half of them didn’t do so well, and they got those letters. And so I would caution anybody against that.

Matthew (09:56):
Okay,

Bob (09:57):
So the answer to all this is putting together a good portfolio of publicly traded real estate investment trust between industrial and retail. It can be things like owning a Walmart and a Target, maybe an HEB here in Texas or Kroger.

Matthew (10:16):
Maybe an HEB in Florida someday.

Bob (10:18):
Yeah, you’re hoping that, right? There’s REITs that focus on lodging and resorts and hotels, office buildings, residential apartment homes, warehouses, healthcare. We’ve got all these listed here, even cell phone towers, timber land, farmland REITs, there’s even REITs that just buy outdoor advertising signs. That’s a good cash flow, all kinds of REITs. And we put together a couple years ago, because we had some clients that own rental homes. They’re like, I’m tired of these things. And when I pointed out to them…

Matthew (10:52):
“Get me out.”

Bob (10:52):
Yeah, the returns. So we put together a diversified portfolio of publicly traded real estate investment trust with a minimum investment of $100,000 to go into this. And it’s 30 different types of REITS within it.

Matthew (11:09):
3-0. Thirty.

Bob (11:12):
30. Yeah. Across all the different sectors. And the yield of that is over 5.25-5.5% even today. Remember what we were just talking about? With a rental home, that yield is going to be somewhere around 2.5 – 3%. So this gives you a better yield. It’s 100% liquid daily. There’s no title company you have to go to. There’s no closing cost. What you see is what it’s worth. If you decide you want to sell your real estate investment trust portfolio today, it’s sold within minutes.

Matthew (11:46):
And you’re not spending time on calls or maintenance or anything like that,

Bob (11:51):
None of that. We call it mailbox money, by the way. I personally have our portfolio, and of course I have to buy that after everybody else buys it or else it would be front running. So I buy behind everyone, but I’ve owned it for several years now and I really like the dividends that come from it. And I’ve had some very nice appreciation. Now you can have depreciation too, because it’s going to move with the markets, but it’s a long-term hold, and that’s the way I would look at it. So if you’d like something like this, it just kind of perks your interest and you’re like, I like the idea of getting income from rental property. This is really a good alternative to owning a rental home. Plus you just have so much more diversification and liquidity.

Matthew (12:42):
Right. Yep. That’s great. That’s great. And for the individual who wants to be in a rental home because they like working with their hands, go get a handyman job. Do things around the neighborhood.

Bob (12:56):
Exactly. You’re going to make more money.

Matthew (12:58):
Right.

Bob (13:00):
If you’re interested in this, give us a call. Our number is 830-609-6986. You can call or text that during business hours, and you can also find us on the web www.christianfinancialadvisors.com. Any last words you’d like to share?

Matthew (13:13):
No sir. Alright, grace and peace. God bless you.

Bob (13:15):
Alright, thanks.

[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.