In my piece titled Trusted Friends or Profit-Driven Giants, I talked about how banks try to make it seem like they are your financial friend, looking out for your best interests, but noted that we need to remember that they are really profit-driven companies who pay attention mostly to the bottom line. I got a comment to that post which I posted in Comments: Trusted Friends or Profit-Driven Giants; Forget Financial Companies and Do It Yourself. The author said he didn't trust banks and was managing his retirement himself and investing in real estate. I said that was good for him, but I preferred the ease of using index funds.
Well, along came a reader and made a comment that got to the heart of why I prefer passive investing like mutual funds versus more active options like managing real estate. Here are his thoughts:
I used to own residential rental real estate. It was a good way to make money based just on my time & risk (I bought each property with no money down). However, as my family grew and my role in the company I work for grew, I sold the real estate. The freedom of not having the obligation to keep the tenants satisfied was great! I used the proceeds to pay off my home mortgage & used the saved mortgage payments to put my daughter through college.
In contrast, my employer has put my retirement money in trust at a local bank. It's been invested quite soundly and has averaged over 10% annually over the past 10 years (pretty good considering the tech bubble burst in the early 2000's). I don't need to do anything to see this increase. In a few years, when I reach age 59.5, I plan to just leave it right there. When I retire, I plan to have them send me a monthly check & increase it each year.
Yes real estate is a good investment, but managing it yourself constitutes a second job. I've seen both sides & prefer the lazy approach.
This sums up my thoughts exactly. I don't have the time or the patience to invest in real estate in a big way (I am a small part of a real estate LLC, but it's managed by a partner who is a full-time agent) and prefer investment options that take much less time (or even part-time). That's one reason I like index investing. That and the fact that it offers a good, solid total return.
You are right, real estate can be very time consuming. If you have to perform rehab to get the property leased, it can be time consuming whether you do-it-yourself or contract it out. Also, the time that goes into collecting checks, screening tenents, and performing repairs can be time consuming and can be at some of the most inconvenient times. However, there are options available, at reasonable prices. You can hire a property management company to to do everything from tenent screening, leasing, collecting rents, and performing maintenance. The only thing you have to do is get the property ready and turn it over. They will take about 6% off the gross rents, and send you a check. At that point, you can be as involved as you would like to be. If you want to check on the property, you can. If you want to forget about it for a year, you can. The question shouldn't be if you can handle (assuming you want to invest in real estate), it should be how can you handle it.
Posted by: Dus10 | February 17, 2006 at 08:47 AM