By Mike Bodeen · 28 December 2015
The Year Nothing Worked: Stocks, Bonds, Cash Go Nowhere ***It’s the worst year for asset allocation funds since 1937 and; ***A 2.2% gain in the S&P 500 is the best anyone can do (Bloomberg News 12-28-2015)
My Monday morning work day started by viewing the above Bloomberg headlines. So I thought, the Phoenix Metro residential real estate market’s rental returns are not making those lousy financial headlines. On the contrary, Phoenix landlords are doing quite well.
Supply of rentals are short, good tenants are plentiful, rents are rising, and property values are rising.
Why aren’t more consumers considering these? I think the reasons for that include that many people believe:
1) Rentals are a headache
2) Rental Returns don’t compare to stocks
3) Real Estate Investment Risk is higher
4) It’s not a liquid investment
5) Stock Brokers (and many Financial Planners) Don’t Recommend Real Estate
I could have titled this article the “5 Myths of Rental Investments,” except that #5 above is unfortunately not a myth. Let’s look at each:
1) Rentals are a headache
This can be true if one is personally involved in the management process. Unless you have experience and a certain gator-like skin thickness, management needs to be left to the professionals. Period. Pay a good property management firm their monthly fee of 6%, 8%, or 10%, and just collect your proceeds check each month.
2) Rental Returns don’t compare to stocks
If you had invested $300,000 cash in a well located rental at $1500 per month and if half your rental proceeds went towards all expenses including management, reserves, repairs, vacancy etc, you would have reaped a 3% return, or $9,000. On top of that there was an average of about 5% appreciation on the residence which would have added $15,000 to the value, totaling $24,000, or an 8% total return. But even if you didn’t count on appreciation, which would be historically wrong, a 3% return would have been your best 2015 investment.
3) Real Estate Investment Risk is higher
According to the article, it sounds like the other investments are the risky ones.
4) It’s not a liquid investment
If what is meant by not liquid that you can’t make a phone call and get your funds in a week, that’s true, but I’ll have to throw back the line that the “financial professionals” use to deter us from selling, which is that you invest for the “long haul.”
5) Stock Brokers (and many Financial Planners) Don’t Recommend Real Estate
I believe a good financial planner will advise clients on all assets which would include those that they don’t get paid a fee on.
As we’ve stated in the past, we don’t recommend people have all their investment eggs in one basket. On the other hand, if you had to pick one investment for the long term, especially given the degree of current global insecurity, what would you do?