Many people shy away from owning investment real estate. They worry about the hassle and risk.
Tenants can sometimes be a pain in the neck. Or you can face periods when the property is empty, where you don’t have a tenant paying rent… but that mortgage (if you have one) still needs paying every month.
Natural events can sometimes cause damage – floods, typhoons, storms.
But as I’ve said many times in the past, I believe owning rental properties is right up there among the best investments that you can ever make.
Let me tell you a story about my friend Rod.
The ‘happy money bell’
I first met Rod whilst travelling with my wife in the deserts of northern Kenya in the mid-1970s. My legs were sticking out from underneath our Volkswagen Kombi as I wrestled to bolt the gearbox back into place. Rod rode up to the rescue in his Peugeot, gave me a hand and invited us to stay at his place in Nairobi. He offered the services of his company’s workshop to make a more permanent repair to our vehicle. He worked for a global company that made and distributed farm and construction equipment, tractors, ploughs, cranes, lifts, bulldozers and so on. We became very good friends.
A few years later, after about 15 years in Africa, Rod quit his job and returned to Auckland, New Zealand. He had no clear plan of what he was going to do. Soon after his arrival back home his brother invited him to come over to a friend’s house. They sat on the expansive deck of an expensive house, overlooking the harbour, enjoying a few cold beers and chatting. His host was clearly enjoying his delightful property.
Rod happened to notice a bell ring somewhere in the house every 15 or 20 minutes throughout the afternoon. He eventually asked his host what this bell ringing was all about. ‘Oh that’, he said, ‘is my happy money bell’.
‘Huh?’ Rod asked.
‘Yes, that reminds me that every time I hear it ring another $20 has landed in my bank account’.
‘How come?’ asked my friend.
‘From my portfolio of rental properties,’ was the reply.
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‘And what’s more, it keeps ringing when I’m asleep at night, when I’m out fishing, and when I’m on the golf course.’
Rod did some quick mental arithmetic and figured that at that rate, his host was earning about $43,000 each month. That was a HUGE amount of money at the time, and even today is a substantial income.
What’s more, this regular income was coming in without working 80-hour weeks. The host enjoyed his fishing and was a handy golfer as well.
Soon after that Rod embarked on a small business venture buying and renovating residential and commercial properties. Some he would sell, and others he would keep for rental income. He invited me to join in a couple of his projects, and I still own the first property that I bought with him. It is a great little money earner. The annual rental income is now roughly 50 percent of what I paid for the property back then.
I always smile to myself when I remember that story. I have relayed it to many people. And that story has helped guide our own activities over the years to build a rental property portfolio that will keep turning out solid rental income year after year.
Rentals are one of the better investments you can make today
So, yes, owning rental properties is not hassle-free, nor is it entirely risk-free. The properties need to be managed. Bills need to be paid, and renovations undertaken from time to time. Tenants can sometimes be a pain in the neck. There can be periods of no tenants when the property might stand empty for some time. (That risk can be mitigated by ensuring you follow this critical rule).
But for long periods of time, not a lot needs to be done. You can just sit back and watch the rental income hit your bank account.
And in terms of reward for effort, I think it is right up there among the better investments that you might make. It certainly has proved so for me and my family.
It is also usually a pretty inflation-proof investment. Rentals do tend to grow along with the economy, incomes, and inflation.
Perhaps you should be thinking of ringing your own ‘happy money bell’.
I can think of several markets where that makes a lot of sense right now. Interest rates are low in most western markets and I believe they will stay below long-term averages for some time to come. In times of stress, rental yields (calculated as the annual rental income divided by purchase price) tend to be on the high side. And as markets improve, yields come down – normally because values go up more than rentals. I like that equation.
That is exactly where many real estate markets are positioned today. And here’s a market I visited recently that I think presents an excellent opportunity for investment real estate as well.