I remember the conversation vividly.
We were on a conference call with a Real Estate consultant company a few years ago.
This company’s main business was/is to attract investors to their platform and then help them buy property in Central Indiana, along with a few other markets around the Country.
Many of those Clients then used us to manage the homes.
The President of the company was part of the call, along with all of his lead people.
Who the Company is isn’t important, because you likely haven’t heard of them.
At any rate, we were discussing various topics when he went into full sales mode…
“We preach to our Clients that real estate is the best investment of all.”
OK, I thought, I can get behind that statement.
“Our Clients love cash flow.”
Who doesn’t, I thought.
“And so, we tell our Clients that owning rental real estate is like owning an annuity: you get a set amount of money each month and then you also get the long-term appreciation. It’s the best of both worlds.”
Whoa, whoa, whoa.
Real Estate is like an annuity?
In what world?
Rental Real Estate is NOT an Annuity
Annuities are annuities.
And rental real estate is rental real estate.
Yes, both are investment vehicles and you can even purchase an annuity backed by real estate.
But, let’s be very, very clear… they are not the same.
The textbook definition of annuity is:
“A fixed sum of money paid to someone each year, typically for the rest of their life.”
If you do a simple Google search, you’ll find numerous articles on the pros/cons of buying a rental home vs. buying an annuity.
The KEY difference, however, is that while an annuity guarantees a fixed amount of income each month or each year, a rental property does not guarantee any such thing.
In fact, as many of you experienced investors know, rental properties can oftentimes cost you money each month.
A new HVAC system is expensive, and almost always more than any monthly rent you’ll get in Central Indiana.
A new roof could easily wipe out any cash flow for a year or more.
No, they are not the same at all.
Create the Proper Expectations
And so, as a property manager, we oftentimes find ourselves in the cross hairs of “investors” who have misinformed and/or flat-out misguided expectations.
After finding ourselves in that position all-to-often, we decided to make a fundamental change to how we approach our Client Prospects and how we interact with our Clients.
If you’ve spent any time on our website, or have done business with us, you know that we are big on education.
In fact, one of our four Core Values is “Always Educating & Advising.”
Real estate investing isn’t a simple topic and there’s so much to learn.
If you are a seasoned real estate investor, you know that real estate can be unpredictable.
Evictions can happen.
Major repairs WILL happen.
And when disaster strikes, cash flow disappears.
It’s critical to plan for those times and have necessary reserve funds set aside.
Those investors who aren’t educated or, even worse, are taught the wrong things (such as treating rental real estate as an annuity) will be in for major disappointment.
Unfortunately, we used to have many, many conversations over the years with these mis-educated Clients that went like this…
Client: “So, I just reviewed my year-end statement. Do you realize that out of the 12 month’s rent I received, there were two months where I didn’t receive my full rent amount?”
Me: “Right. I see you had a maintenance issue in June and another in October. You do understand that maintenance is an inevitable part of being a Landlord, right?”
Client: “Well, here’s the deal. I rely on that rent each month. I was told that this property would generate $350 in cash flow each month, and I need that money to pay my bills.”
You see the quandary here?
We feel genuine empathy for our Clients in this position.
They weren’t prepared to be Landlords.
And, frankly, they should have never been Landlords.
In the majority of these cases, the Client sold the property and cursed the day they bought it.
Over the past few years, we’ve invested a tremendous amount of time and resources to not only stock our website with valuable information for first-time investors, but also to spend time upfront to ensure our investors are prepared.
Do we still have issues with unmet expectations?
Of course, but it’s far less frequent than it used to be.
Expectations are everything, so be sure to set proper ones BEFORE buying your first rental home.
Which is Better: Rental Real Estate or Annuities?
First, I’m not a financial adviser.
Yes, we provide price opinions of properties every day and advise our investors on the pro/cons of particular homes.
Plus, we obviously love rental real estate, so our opinion is somewhat biased.
Here are my two cents, which probably won’t come as a surprise after reading the first part of the blog.
Rental real estate is, in my opinion, the best way to BUILD WEALTH for the average person.
Using someone else’s money (rent) to help pay-down and eventually pay-off a mortgage is a wonderful thing.
But, it takes many, many years to accomplish that.
In the meantime, you’ll have many ups and downs as a Landlord. Clearly, some of those down times will come with big expenses and, in some cases, real heartache and, yes, some second-guessing.
So, real estate is not for everyone.
We’ve blogged on the best age to buy real estate and there are plenty of opinions on that.
My personal opinion, and I certainly realize I may be in a minority here, is to buy rental real estate when you are young.
Young and “ready.”
Ready meaning you have the necessary cash reserves that a Landlord should have, you aren’t struggling for a down payment, you don’t have significant debt that will over-burden your monthly cash flow, etc.
I see value in annuities, particularly for people who want a predictable or fixed income. To me, that’s a product that best services older people who don’t want surprises.