Dave Says: Nothing Passive About Real Estate
Dear Dave,
We sold our rental property recently. When we bought it, we thought it would be a good source of passive income. But owning it wasn’t passive at all. It got to the point where the work and hassle became too much. We have $240,000 from the sale, and we’re debt-free except for our home. We owe $140,000 on our house, and could pay it off instantly, but part of me wants to invest the proceeds from the sale of the rental property. Is it better to become completely debt-free at this point, or should we invest it so we can have even more money for retirement?
Anthony
Dear Anthony,
You mean you had to actively manage your rental property? Listen, anyone who tells you real estate is passive income is full of crap. It’s a natural extension of the garbage people spout about how it’s okay to go into debt to buy real estate, because the renter is making your payments. No, it’s your payment. And when the renter doesn’t pay, or it sits empty, guess what? You have to pay it.
If you want passive income, buy an S&P 500 index fund. Set it and forget it. You won’t have to fix a leaky roof, replace worn out appliances or try to collect from deadbeat tenants. Real estate is a great way to invest, if you do it the right way. I love it. It’s anything but passive, though.
Let me ask you this about your situation. If you had a paid-for house, would you borrow $140,000 against it to invest? Of course not. It’s pretty much the same thing, and that would be dumb. Pay off your home, brother. Just pay it off. You’ll be debt-free and you’ll still have six figures to invest.
I love that you’re thinking about the future, Anthony. And I know the compound interest you’re visualizing down the road is really tempting. Your compound interest calculator will tell you some amazing things, but what it’s leaving out is risk. It also can’t tell you about the carefree way you’ll walk, and how it’ll feel like a huge weight has been lifted off your shoulders when you don’t have a house payment. You’ll be able to live life on your terms, and all the decisions you make will come from a completely different point of view—one that isn’t burdened by the weight of bankers hovering around, waiting for you to give them what’s theirs.
The borrower is always a slave to the lender. Think about it. Only one implication of slavery is mathematical. All the rest are spiritual, physical, relational, emotional and mental. Being debt-free changes your life from the inside-out. Not only does it make your life better, but it allows you to give with incredibly generosity, and be an agent for positive change in the lives of others.
Pay off the house!