Tag: Investing

Real Estate is Passive or I Make $2,800 Per Hour

What? $2,800 per hour? This must be a crazy MLM scheme or some sort of bait and switch scam, right? 

Not at all. On average I work one hour a month managing my two real estate properties. Each month I clear an average of $2,816 (including my principal and net of expenses and taxes). So my hourly rate is $2800! 

But “passive”? That is impossible, you might say. Yes, really. As I show below, the average percentage of my time (.006%) that I spend each year managing my two rental properties rounds to zero! It essentially takes me the same amount of time as investing in stocks.

For 19 years I have owned one or two rental houses at a time (I have two right now). I like to say I am a lazy landlord, but actually I’m an efficient landlord.

I bought and lived in all of my rental houses before I rented them out. I have calculated that buying is often a better investment than renting (comparable houses), but ONLY if you are willing to keep the house for 7-10+ years, much like long-term stock investing. Since keeping these houses instead of selling was the better long-term investment, I now rent them to other people instead of renting them to myself.

So How Much Time Does It Take To Manage a Rental Property?

Let’s put this in perspective: In the 13 years (156 months) of self-managing my current property in Ohio, I had 87 maintenance and repair expenses. In other words, on average I had a 20-minute issue to resolve every 1.8 months.

Of course, I can’t ignore the upfront and more time-consuming effort to get a lease, advertise, screen tenants, and then handover the property (~10 hours) and the infrequent work of replacing my tenants (6 hours) or renewing the lease (2 hours)–a great house rents quickly. There is also the rental-property related work on my taxes that takes about an hour each year, and maintenance inspections of the properties that take about two hours per property each year. (My trusted handyman actually inspects for me in OH, so now I only visit that property once every 2-3 years). 

On average over the last 13 years, I have spent about 35 minutes a month managing my OH property (not even a full hour!) and I clear over $1000 per month. That’s $12,000 a year for 7 hours of work – a pretty good wage. I make even more on my VA property ($1800 per month) and I average even less time per month managing it (25 minutes). I think you get the point–it doesn’t take that much time to manage a property if you have good systems in place.

Most months, nothing happens except the rent arrives by direct deposit. 

Setting Up Good Systems Saves Me A Lot of Time

  • Number one is finding good renters. I don’t skimp on tenant screening. I always call work and housing references, and I complete credit checks unless they are active duty military, and even then I still collect all the info needed for a credit check.

Great renters are looking for a quality home for their family. They tend to care about their belongings, their credit score, the appearance of the yard, and they will care more about my house. Many of my renters do simple maintenance and repairs themselves, or they are willing to pay for improvements they want. One renter (with the help of her handy dad) offered to install new composite decking if I paid for the materials. The house now has a huge, great-looking deck for 10% of the cost I would have had to pay a company to install it. 

  • Getting great renters requires a great house. I buy houses in desirable school districts and neighborhoods, which I know first hand because I first lived in them myself (my system works for a small number of rentals). I have bought in military communities, and I usually rent to senior-grade military families.
  • I make sure my lease agreement is comprehensive. Setting standards and expectations up front is key to avoiding problems later. My first lease was OK, but every renewal since I have strengthened it with lessons I have learned myself or learned from smart friends with more experience.
  • Set expectations with renters up front on maintenance and communication. I walk through with my new tenants how maintenance and repairs will work. For true emergencies (e.g., no heat in the winter or a water break), I empower them to call for repairs directly with the appropriate company if they can’t reach me quickly and it can’t wait. When they do reach me with a problem, I either have my handyman look at it (with a quick email or text), or I have the renter call a company of my choice (or theirs if I don’t have one lined up already).  I have the bill come directly to me. This saves everyone time as the repairman has to schedule with the renters anyway, and the renters are very happy to be in charge of scheduling.
  • A reliable handyman is recommended but not required. I have a great handyman for my OH property but I have yet to find one for my VA property. While addressing maintenance issues takes the same amount of my time, having a reliable handyman saved me money and improved my confidence in getting quality work. 
  • Take advantage of the quality and often free resources online to make renting a property easier. Online sites like Zillow (no endorsement intended) work great for advertising, tenant applications, and background checks. I invested about 3 hours, one time, to modify a premade lease for each state I rent in to make sure I comply with state landlord-tenant laws. I set up my property management tracking spreadsheet, where I keep a simple on-going record of income and expenses, in about 30 minutes. 

If I only focused on the initial one-time effort needed in the first few weeks of renting out my house, then it may feel like a lot. But over a 19-year time frame, each month it is hardly any time at all.

Skip The Property Manager – It Doesn’t Take That Much Time

Since I have two properties and live far from either of them, I must have a property manager, right? Nope! I learned the hard way that a property manager doesn’t really save you any time. 

If the water heater broke, the tenants contacted my property manager who would then call me about it. Then the manager called a repair person and scheduled the repair with the tenants. Then I was sent the paperwork each month that I needed to file away for taxes with the amount subtracted from my rent (or I was billed if the repair was major). 

Now that I’m my own property manager, the renters text me if the water heater breaks. I ask them to call a repair company and schedule the repair at their convenience and have the company bill me. It’s the same amount of effort on my part and more convenient for the renter to schedule their own repair, but without having a middleman or becoming the middleman between the renter and the repair company.

With a 5-minute call from the tenant (or usually a text with a picture), and a 5-minute call to the company to pay (usually an online payment), the work is done and the problem is solved. I then open up my property management spreadsheet and record the expense (another 5 minutes). So after 15 minutes of work, the problem is solved. 

On more complex issues like working with a neighbor to take down a shared tree, I had to write a good 10 texts back and forth to coordinate the work. It took me a whole hour total to get that job done – whew! 

As my good friend and real estate expert Keith Nugent shared with me at a CampFI, you need to be your own property manager until you understand every aspect of it and then only consider hiring one once you own five or more doors. My experience confirms this. Since I’m not planning to expand my properties past two, I’m never planning to hire a property manager. 

Don’t Confuse Stress With Work

It can be a stressfulI conversation to demand overdue rent or pursue eviction action, but these actions do not take up much actual time. The one time in 19 years I needed to pursue eviction it was definitely stressful, but it did not take much time to resolve. I called a lawyer (it took maybe an hour) who sent the eviction proceedings letter to the tenant. The tenant then left. 

The reason I hear that people feel renting properties is too much work often goes something like this:  “I don’t want to deal with calls at 3:00 am for an overflowing toilet.” I feel that is a worn out trope. For one, an overflowing toilet is almost always the renters’ fault for clogging it, so they would pay the bill for any repair or damage and clean up. My excellent renters have never called me for such things. 

My tenants did call once at 11:00 pm about the heat not working in the winter, and I empowered them to call a repairman directly and that I would cover any extra fee for an emergency response (I don’t skimp on safety). Then I went to bed and slept well. Being called after 10:00 pm has happened maybe 4 times in 19 years and it took me 5 minutes to resolve each one.

I try not to confuse stress with time. Over the years, tenant issues are infrequent and rarely take much time. Even getting quotes for a new roof or windows only took a couple hours. I am responsive and get the problem fixed. 

Is Stock Investing Truly Passive, but Real Estate is Not?

I often hear in FIRE podcasts and read in blogs that stock investing is truly passive – the old “set it and forget it.” While I am a “passive” index fund investor, I have found I actually need to spend some time managing my investments. 

I rebalance every quarter so my funds stay within the percentages of my investment strategy. I spent time calculating my traditional IRA to Roth IRA conversions (I have some after-tax basis). It takes many hours to rollover my wife’s and my 403b, 457b, 401k, 401a accounts to our IRAs. I keep an eye on the stock market and buy when it drops 10% or more (push more bonds into stocks) and then I rebalance when the market recovers. I spend about an hour each year on my taxes related to my stock investments.

I spend nearly as much time on my stock investments as I do my real estate management and both pay me a handsome wage per hour! So technically neither is 100% passive, and neither has to be a lot of effort.

Basic real estate investing in a few houses can be fundamentally as passive as stock investing. If I ever did get too many rentals where I noticed and cared about the higher workload, then I’d switch to a good property manager and drop my level of effort back down. 

Real estate investing, as with stock investing, benefits from up-front research. Setting up a good system will minimize your long-term efforts, diversify your portfolio, and save you money over renting if you decide that the renter of your house is you. 

So is Real Estate Passive Income? In My Book – YES!

So, with all of this talk about how much time it takes to manage rental properties, it can’t be considered passive, right? Let’s run some numbers…

There are 2080 hours in a work year (40 hours per week x 52). I work an average of 12 hours per year on my rental properties, which is .006% of traditional work time. Even if I doubled it with 2 additional properties or quadrupled the time spent, it would still round to zero! 

So, either real estate is passive income or I earn over $2800 an hour! Either way, it is worth the effort. 

P.S. For further information on how being a landlord does not have to consume a lot of time, and how to set up good systems to become a “Lazy Landlord,” check out James Lowery’s presentation at the 2023 ECONOME conference.

Is The Stock Market Becoming a Ponzi Scheme?

The convergence of the widespread use of 401k and similar retirement accounts coupled with the rise in index fund investing has created a Ponzi scheme-like dynamic with the stock market over the past 30+ years..

What is a Ponzi scheme? 

From Wikipedia, a Ponzi scheme “is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.” Is the stock market truly a Ponzi scheme? No, but since 1980 it has taken on some similarities with a Ponzi scheme that investors should be aware of.

Stock Market Valuation to Scale

Most graphics of the stock market (the Dow Jones Industrial Average) that include performance data before the 1980s, use a logarithmic scale. The log scale distorts the long-term variations in market value to make it appear that the changes over time are more consistent. On the chart below which uses a logarithmic scale, it visually doesn’t look like anything unusual happened around 1980. The only sizable blip in the trend is the Great Depression.

Source: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

A couple of years ago, I stumbled across an unusual graphic of the stock market’s historical performance that surprised me because it was to scale. 

Source: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

I was shocked to see that, relative to the performance in the last three decades, the previous eight decades were basically flat to include the Great Depression (now a very minor blip on the chart) and the industrial economic growth of the 50s and 60s. I wondered what happened around 1980 that exponentially changed the dynamics for stock market valuation. 

What Happened Around 1980?

Four major things: 1) invention of index funds (1971), 2) Individual Retirement Accounts or IRAs (1974), 3) the 401k plan (1978), and 4) increased institutional investment of pensions in the stock market. (Note that for this post I am using “401k” to mean all similar plans to include 401a, 403b, 457b, and the Thrift Savings Plan (TSP).)

Jack Bogle invented index funds well before 1980, but they did not take off on a mega-scale until the 401k, IRAs, and remaining pension plans began growing in number and size and therefore dramatically increased their share of the stock market. 

Section 401k of the Revenue Act, which became the namesake for the retirement accounts it authorized, was passed on November 6, 1978. The first 401k plan was implemented 3 weeks later. Since then, public and private employers have gutted the traditional pension plan. Employers have either replaced pensions entirely with a 401k (sometimes with matching funds), or they (often government entities) have deeply cut the value of their pension plans and then offered a 401k option to help offset the lost value.

According to a 2021 CNBC article, “401(k) and other defined-contribution plans like it quickly replaced traditional pension plans. From 1980 through 2008, participants in pension plans fell from 38% to 20% of the U.S. workforce, while employees covered by defined-contribution plans jumped from 8% to 31%, according to the Bureau of Labor Statistics.”

Even though the number and dollar value of pensions has sharply declined since 1978, they still represented 10% of stock market value as of October 2020. 

So How Does This Create Ponzi Scheme Dynamics?

According to Annie Lowrey in an April 2021 Atlantic article, “[s]ome $11 trillion is now invested in index funds, up from $2 trillion a decade ago. And as of 2019, more money is invested in passive funds than in active funds in the United States.” 

The issue here is that index fund investing works differently than other types of investments. Most IRA, 401k, and pension accounts invest in index funds each month regardless of the performance of the market or any particular company in the market. 

Index funds are cap-weighted, meaning that if a large company like Google represents 5% of the value of the index (e.g. S&P 500) then every month passive investors (i.e., everyone with a 401k in the stock market) will invest 5% of their monthly retirement dollars on Google whether or not Google is a good investment right then. This monthly automaticity arbitrarily drives up the price of Google stock because the index must buy the stocks in the index at their cap weight. Likewise, every other company’s stocks in an index are also purchased independent of performance.

Many stock investors, especially those investing for retirement, are not selling their shares each month when these new index investment purchases need to be made. They want to avoid stock market volatility. This dynamic creates supply and demand price pressures that help keep the valuations going up. 

The growing demand for index fund investments drives up the valuation of the stock market. This helps explain, at least in part, the meteoric rise of the stock market’s valuation over the last three decades. 

It doesn’t matter if the company is actually worth what its stock is valued at as long as investors keep passively buying the stock at a high price and driving it higher. And if this dynamic sounds familiar, it is: this is similar to how new investors in a Ponzi scheme keep the returns high for the older scheme participants. 

The expansion of retirement account vehicles like the IRA and 401k, with their strong tax incentives coupled with the increased ease and lower costs of stock investing, have helped this trend grow. The big question is, when will the new money stop rolling in every month and the first investors start selling off more than they are investing? This turn of events could cause a partial collapse of stock valuation, create great losses, and leave the more recent investors waiting for long-term returns holding the bag – again, similar to the effects of a Ponzi scheme collapse.  

It’s Not Really a Ponzi Scheme, Right?

Right. A Ponzi scheme is illegal, and there is nothing illegal about the investment vehicles I’ve just described. BUT, there are some Ponzi scheme dynamics at play in today’s market. I recognize that a large part of the amazing overall stock performance that I have enjoyed over the last three decades, particularly since 2009, is in no small part due to my fellow index fund investors who continue to invest in the stock market every month, regardless of performance.

While the stock market will continue to respond positively and negatively to economic events (e.g., COVID-19, an oil crisis, AI, interest rates, etc.), market drops are dampened and gains are propelled by the drumbeat of the monthly capital infusions from index funds. 

I agree with the MorningStar MarketWatch assessment that the market is overvalued based on any measure. Much of this overvaluation can be attributed to the relentless monthly retirement stock investments (passive and active). This overvaluation should not pose a problem unless (until?) the infusions of new investments in the market become significantly less than the amounts being withdrawn by investors over a prolonged period.

To prevent this devaluation, we “older” investors need to keep encouraging new index fund investing among our fellow citizens until we have sold our shares. Then those investors will need to encourage future generations to do the same. The current structure of the stock market will continue to need new investors, investing monthly regardless of individual stocks’ performances, to keep that line on the graph moving upward.

So while I remain fully invested in the stock market, I also remain vigilant to mega trends that might indicate the tide is turning on the Ponzi-esque dynamics on the market from index fund investing.

After Almost Two Decades of Investing, Why Weren’t We Rich or at Least Well on Our Way?

I thought my wife and I were doing everything right to achieve a rich, free life. Avoid debt – check! Spend less than we earn – check! Invest the surplus – check! So, after almost two decades of investing, why weren’t we rich or at least well on our way?

This essay is published in J.L. Collins new book Pathfinders (Harriman House publishing) — a follow-on book to The Simple Path to Wealth capturing personal stories of people who applied the many financial concepts from the book. Pathfinders is available on Amazon and other places where books are sold.

When I calculated our net worth 19 years after we started investing, we had invested $103K in principal into IRAs but their value was only $92K. We had actually lost money! I had also lost $15K out of $50K invested in a taxable mutual fund account and all of the $5K invested in individual stocks.

I thought I had done my homework. I had read an investment book, read several articles on investing, and sought advice from friends, but it wasn’t until I read J.L. Collins’ book The Simple Path to Wealth that I finally understood that my investing problem was…me.

I have been frugal and a great saver my whole life but, as you can tell already, I was a terrible investor. J.L.’s description of the “typical investor”– who panics and sells when the market takes a tumble, waiting to reinvest cautiously long after the market recovers – described me perfectly.

In 1992, when I was a young lieutenant in the US Air Force, I understood that investing in stocks for the long term was the path to financial success. My wife and I each opened a traditional IRA (this was before Roth IRAs) and invested in mutual funds.

With monthly automatic purchases, we invested the annual limit and put the rest in a savings account. After 5 years, our $17K invested had grown to over $90K and our savings was over $90k. So far so good, right? But, then along comes yours truly. Here are the most egregious examples of my rocky investing.

Individual Stock Picking Fail

In 1997, I purchased 1,000 shares of Boston Chicken (later known as Boston Market). We had recently lived in Boston and I loved our nearby Boston Chicken restaurant. I was convinced that home meal replacement was a growing trend and thus a great investment.

Unfortunately, the company was cooking more than delicious chicken. Just weeks before I purchased the stock (and unbeknownst to me), the company revealed it was recycling money by loaning to its franchisees to build new restaurants, masking its true, troubling financial picture–huge debt.

Boston Chicken soon filed for bankruptcy. I watched that stock drop from around $5 per share to pennies as the company financially collapsed. Believing that I simply needed to learn more about stock investing, I read The Motley Fool Investment Guide. It was no fun to read their take that delicious chicken does not necessarily make a great investment. I learned picking individual stocks can be very risky.

Buy High, Sell Low?

Not to be deterred, I continued to closely watch the markets for three years, saw their year-over-year gains, and thought: We can’t miss out on the tech stock boom any longer. So, in January 2000, after the Y2K scare passed but right before the dot.com bubble burst, I invested a quarter of our net worth ($50K) into mutual funds (half in a tech fund and half in an S&P 500 index fund).

Yep, I bought high, joining the excitement of a hot market. But the value of my shares burst along with the bubble. I held them for a measly four years, and when there was little to no recovery, I sold our shares, locking in a $15K loss.

I didn’t yet understand how to hold and wait for recovery. In fact, many of the remaining companies, such as Amazon and eBay, would eventually fully recover and make a lot of money. Sigh. Luckily, we left alone our only remaining investments–our IRAs–and they continued to grow… until the Great Recession hit.

In September 2008, when the Great Recession was in full swing and the stock market was way down, I convinced myself and my wife that we needed to pull our IRA investments to safety and avoid further “losses.” So with much angst, I transferred our IRAs into money market funds and locked in losses of approximately 25% percent each.

The recession made me wary of the market, so I kept our investments in money market accounts until February 2014, when I felt I couldn’t let the market rise without us any longer. By then, the market had long recovered, but my jitters remained. I was certain (as were many pundits) that the market would once again drop.

There Has to Be a Better Way

Finally, in early 2018, I found the Financial Independence movement and took on a new perspective of how to build our financial future. I discovered J.L. Collins on the ChooseFI podcast. I checked out The Simple Path to Wealth from my local library and read it from cover to cover. I gave it to my wife. I bought copies to share with my kids and friends.

Reading the book felt like J.L. was speaking to me directly, as if he knew me personally and my poor investing history. His approach is so simple, yet it eluded me for years. Armed with J.L.’s wise words (we began to think of him as “Uncle J.L.”), I now understood the importance of investing in broad-based index funds, paying low investment fees, and giving like a billionaire. But most importantly, I learned how to hold (and even buy) when the market is falling and sell (rebalance) when it is up.

Testing My New Resolve

My first big test was in March 2020 when the COVID-19 pandemic hit and the market plummeted. In the past, I would have pulled out my money after it dropped precipitously, but now I had Uncle J.L. over my shoulder reassuring me to stay the course.

I didn’t sell. In fact, I confidently optimized our available investment dollars and shifted into more stock. I now trusted that, eventually, the market would rise again.

In early January 2022, I rebalanced our portfolio, selling stocks at their peak and buying government securities (I needed to wait on bonds as interest rates were rising). In early June 2022, when the market dropped 15%, I shifted funds from government securities to buy stocks “on sale.”

When it further dropped into bear market territory, I purchased more stocks at a deeper discount. If it drops past 25% or even 30%, I’ll do it again. Since reading The Simple Path, our stock portfolio has increased by 60% and we have achieved financial independence.

I am no longer investing with angst and a trail of lost opportunities. Now, my wife and I are investing thoughtfully, our eyes on the horizon, confident the market will eventually recover. Our two children, both in their early 20s, are getting a great start to a lifetime of smart investing. Thanks, Uncle J.L.