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So a beloved uncle and fellow investor recently forwarded me an article from the magazine Market Watch, asking for my opinion, titled: “Rental properties are a ‘terrible investment,’ says fintech company with $22 billion in assets under management”
As a former journalist, I find some articles disturbing, as they are essentially editorials masquerading as news. The writer, Shawn Langlois, basically gives a fintech company called Wealthfront and their CEO Andy Rachlee, carte blanche to pooh-pooh residential real estate rental investments. You can read it for yourself here:
I don’t know about you, but I had a good laugh when I read this pile of fresh, steaming crap, and I broke down every point Rachleff made for my uncle in a response to his email. After sending it, I thought I’d share my response here with the good people who read my real estate blog, because there are a lot of financial ‘journalists’ out there trying to move money and investments away from real estate and into Wall Street to the benefit of their advertising clients and the industry in general.
Now, I don’t necessarily think stocks and bonds and the like are a bad investment, but when I read articles like this one that baldly generalize about real estate investments, I have to call it out as opinion, not fact. They want to push you and your money into stocks and bonds and high-fee mutual funds, and they achieve this by disguising their editorial opinion as news.
Here’s how I broke it down for my uncle, point by point. The article’s bullet points are quoted and in italics. My rebuttals are in bold.
1. “Most real estate investments, especially residential properties bought for investment, don’t generate positive cash flow for quite a while. That means you have to fund losses each year.”
I guess no one taught this dude to ‘just say no’ to deals that don’t generate positive cash flow. I would never, ever buy a property that doesn’t cash flow. I don’t care how ‘hot’ the area is going to be ten years from now. I always line up my math based in TODAY’S market. Any rental property that wants to be in my portfolio will enjoy all four benefits of rental properties: Appreciation, Tax Depreciation, Renter-paid Equity Paydown, and CASH FLOW. If this writer is writing a check every month on his rentals, that’s his own damn fault for not patiently and soberly evaluating the deal before he bought it. This broad generalization he paints makes me laugh, but I also know that many new investors get their emotions involved when buying rentals, and end up in the position he describes.
2. “It’s hard to generate a compelling return: Generating a compelling return on an investment property requires significant appreciation.”
Once again, it is hard to draw such a broad generalization. Each property is different, and there are many ways to structure a deal to achieve one’s goals. Furthermore, it all depends on where the property is located plus a careful study of the area and it’s projected growth prospects. Also, the biggest advantage of real estate is only realized by holding long term. Sure, if you’re a hedge fund manager who needs to maintain maximum flexibility at all times in order to surf the volatility waves, the 1-5 year returns on a rental property are probably not that compelling.
3. “Diversification is critical, but more difficult: “The idea of trying to choose the “right” individual property is alluring, especially when you think you can get a good deal or buy it with a lot of leverage.”
I’m not sure what the heck he’s driving at here. Real Estate is a full deck of investing cards, and there are plenty of investments out there plus ways to minimize risk. In addition to traditional rental income, you can AirBnB, you can renovate to flip, you can buy commercial/office properties, arbitrage those properties, owner-finance some, renovate notes or bad paper, buy tax liens, recover overages, wholesale, the list goes on and on and on. Every time I turn around, some colleague of mine has found another hidden vein of gold buried in Real Estate mountain.
4. “It’s illiquid: Unlike a real estate index fund, you cannot sell your property whenever you want.”
Yes and no. If the market is up, that property might as well be made of money. If it’s down, it just takes longer to sell, or you have to take a lower price and maybe a loss, but you don’t HAVE TO take that loss, because the property generates cash flow that can see you through to the next bull market. Also, that real estate index fund isn’t generating rents when the market is down. It’s just a loss on paper that you have to sit on until the next bull market.
I find it hilarious how this writer uncarefully reveals his editorial slant in the last paragraph of the article:
“Of course, there are exceptions to the rule, but, generally speaking, Rachleff, who’s got a vested interest in investors putting their money to work in the stock market, says “you’re unlikely to come out ahead” dabbling in rental properties.”
So, I guess what Mr. Langlois is driving at is that I need to put 90% of my money in the stock/bond market and stay away from the big bad rentals? Yes? That’s the obvious conclusion silently stalking every word of this article like a shark behind a life raft, and Langlois is welcome to go swim in it.
This article strikes me as a general-audience soft-core pump-n-dump scheme meant to sway people’s minds and money into Wall Street, and away from real estate. This is why I generally shun financial editorials and stick to the strait journalism. If you don’t know the difference between the two, I’ll clue you in: There are no strong counter arguments to be found in this article. Langlois wrote it with a mission to change your opinion of rental real estate, based on testimony from one luckless fund manager who obiously doesn’t know shit from shinola when it comes to rental real estate.
If you are considering buying a rental property, educate yourself first. Learn how to properly find, evaluate and finance these lucrative investments BEFORE you open up Zillow and start calling agents. You can have your rental and cash flow too, but you need to know how to evaluate that rental, and that takes work and expertise. If you want to learn more about how to do that, please read our page on investing and/or contact me by email: firstname.lastname@example.org.
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