February 2025
The one-third who don't already may be considering it... but, there are some crucial questions to ask before anyone should start scrolling through Zillow. What are the pros and cons of owning a second property? What are the nuances of renting or keeping it solely for personal use, and what would make it a worthwhile investment? How about owning with your family members? Modearn™ Advisors Stacey McKinnon and Thao Truong are here to explore the complexities, risks, and benefits of calling more than one place, "home."
Here are some key takeaways from their discussion:
Watch previous episodes here:
Ep. 19 Smart Spending Strategies: Life, Family, Career and Investments
Ep. 18 How Your Money Mindset Impacts Your Goals
Welcome to another episode of Couchside Conversations. My name is Stacey, and I'm here with my colleague Thao. And we're going to talk about a topic that we think is the number one question we get asked by friends, family and colleagues clients, which is should I buy an investment property? And I think that this question has gotten really complicated because over the last 100 years, real estate investment has been an excellent investment.
People have made a lot of family wealth on it. They've changed their own stars by investing in real estate. But what we know about real estate is that it's cyclical. It has really good years and it has some not so good years. And the timing by which you get in, like completely changes the course of action as to whether or not it's actually a good investment.
And so we're going to talk about the good and the bad today and how I'd love for you to start with actually the good. So what makes a good real estate investment? What would make you want to dive in today?
I love this question. I think it would be a good investment if you can potentially rent out and earn an income of at least like 5 to 6% of its value. So let me give you an example for you. So you can easily understand. Let's say that if your property is worth $1 million.
Go on to Zillow rental and look for other properties that are renting around your same neighborhood like mine so that you can do an estimate and see if you can bring in an income of at least 50,000 to 60,000 a year, or equivalent to 4200 to 5000 a month. If you can earn at least that, then that would be considerable.
If it's not close to that then it may not be worth it.
So we have to look at the comps online and really understand is it getting that 5 to 6% return. And that's not just the income. Right. So you can't just see what Airbnb is charging and assume that's what you'll get. There's other expenses.
Exactly. You have to also think of the expenses that may potentially come up as well, because there's maintenance and upkeep that you have to do with. We can talk about Airbnb separately later, but, there's a lot of complexity.
Also think of the long term. Yep. Right. Because location matters so much. I mean, that's the basic rules of real estate location, location, location. Look for a place that you can potentially increase your rent in the future. Yeah. So be super helpful if your local areas have you know, like new developments or large infrastructure, like let's make a new stadium, okay.
Because that means that like more neighborhood will be coming into the places popping up.
So you have a better chance of increasing your rent in the future. Also like think of it as a long-term because I have a friend who bought a place in Mississippi 20 years ago at 200,000 because it was so affordable. Yeah, 20 years later, guess what? It's still at the same valuation. So that's something you have to be careful of as well.
Yeah. One nice thing of like rental properties is that you can, write off a lot of expenses. So things like property interest, sorry, mortgage interest. Property taxes, homeowner insurance, like the marketing expense, the appreciation. So over the long term, like all of those, expenses that you can write off, it can be very beneficial for you if you think of holding it as a long term investment.
If you want to remove some of the headache of maintaining these places, you can consider, hiring a property manager. So that they can elevate alleviates some of those headaches for you. They can look for new tenants, deal with the maintenance and upkeep. You just have to budget yourself to pay them around 6 to 8% of, management cost.
Yeah, those are all really good points. It sounds like the best thing to do is look it up online. Look up online. What's happening in the local area? Is the income worth it? Are the expenses something that you can write off? Will the property go up in value over time, and is there somebody that can manage it for you.
So you don't have to get the calls in the middle of the night? It sounds like if those things are all true investment, real estate could be a really good idea.
Of of course, it's really nice to have, you know, if you know how to handle it. But if you have someone who want to hand it off. Yeah, I think of a property manager is always helpful.
I totally agree.
Yeah, I have a question for you, because I know that you recently purchased a place in Tahoe and congratulations, because I know it means so much for you and your family. So can you walk us through and tell us how did you evaluate that purchase, even though you're not even renting it out right now?
Yeah, I skipped the whole evaluate the income part and just went straight to can I for the expenses. Yeah. So about a year or two ago, my husband and I kind of got together and we said, what do we want our life to look like? What's important to us? Where do we want to be? What would be fulfilling?
And we both grew up in Lake Tahoe. My mom lives one street over from the cabin that we purchased. We know that Tahoe is a part of our long term retirement plans. And so we went on the hunt for about a year, actually looking for a place. And we finally discovered this small little cabin. And we looked at each other and we said, is this a good financial decision?
And I think when you're making these types of calls, you have to ask yourself both the question of, is this a good lifestyle decision, which I think it checks all the boxes. It's close to family. It's a part of retirement plan. It's meaningful to us. But then the financial decision, you know, we had to really sit down and talk through that.
And so if you're going to be purchasing a place that you're not necessarily going to rent and you have to ask those same questions, I thought it would be helpful if I just walked through the conversations that my husband and I had. So number one, I think it's really important that both our primary residence in Southern California and our cabin in Tahoe, the total cost is less than 40% of our income after tax.
So you take your income, you minus the taxes, and then 40% of that number is what we want to keep our cost under. And so that checked that box okay. Great. So at least I know that with both homes I can afford it. And if something weird happens, I'm not going to be having to like, fire sale a home.
So that was something that was really important. The other thing is, cost of maintenance, care and fixes in Tahoe. One of the first things that happens is, heavy snowstorms. Our roof tiles fell off and I'm like, oh gosh, what am I going to do about the roof tiles?
I had to put a corrugated metal. So that the snow slides obviously. So I had to think through like, do I have an emergency fund to be able to pay for some of those costs? And so when you're thinking about buying a second property, I think that you should take those rules of thumb into account. How does it align with my lifestyle, but then also, can I afford it and can I afford the unknown things that happen and actually, maybe just a third piece is that Tahoe generally real estate has appreciated over time.
It gets a lot of attention from the Bay Area. It gets a lot of attention from Southern California. I feel pretty good that last, you know, last, case scenario, I would sell it and if I had to and it would be worth more than it was before, I probably wouldn't be the Mississippi example that you you gave earlier.
Well that's great. I'd like at least you guys have like a whole year period of thinking and thinking about it, thinking it through. And I love the 40% rule because the mortgage is just not the maximum price you have to pay compared to rent, right? So you have to also like have room for other expenses, like the snow and like all the cost, like all.
The other costs. Yeah. And truly I think to myself, like with both properties I have an asset to that will appreciate it. So if we live in Tahoe for retirement, I could sell my property down here or vice versa. And so it's almost it was almost a retirement plan for me to to have an asset that if I needed it, I could, I could sell it and access that money.
I love that.
So I mentioned Airbnb at the beginning of the episode, which is a controversial topic because so many people have flooded into Airbnbs over the last five years, especially since the pandemic. But there's some strong pros and cons to Airbnbs. Do you mind sharing your insights?
Airbnb. It used to be very good. And until today is to sell very good and easy, but only if you go through the process yourself. You will see it's not that good anymore. Yeah. There's so much regulation. There are so many things that are going on with it. First thing I think of is the fees are high.
Airbnb take 3 to 16% of the batch. Depends on whether you want to share that fee with your renters or not. And then you also have to understand, local laws and regulations, L.A. For example, they have very strict rules that you can only rent out your primary residence, and they have a cap of 120 days a year, so that you can rent it out as a short term rental property,
If you go over that, you have to have an extended permit. Normally you have to pay for city tax 14% already. So we've been extended the permit. Of course, the fee going to be higher.
I've heard that happening in other places too, where like basically the local jurisdiction is regulating how many people can actually provide rental services. So that's a big bummer for somebody who bought a property. Then all of a sudden the local town is saying, oh no, we don't want more of that, right?
Right. Yeah. The local people can make you take off your Airbnb listing. Or like, let's say that I have an apartment. Yeah. Like, I thought of renting out my apartment as Airbnb too, but my HOA don't allow that. So you really have to, like, break it down and go through every little steps to find out whether it's doable or not.
Another thing that I can think of is where we are today with interest rates, environment, you know, like especially if you buy a place on a mortgage, if the interest rate is so high and your rent is soft and fluctuate over time, that is something that you have to be considered as well, because you might end up struggling of like fighting away of how you can pay for that, interest rate that is flex for you.
Interest rate, property taxes, insurance. Like in my opinion, insurance is going to be probably the same cost as property taxes going forward in California. So really understanding what's your monthly cost? And are you actually going to make that amount of money exactly. Rental fees.
Yeah. And last but not least, competition.
For me personally, when I look through Airbnb and I see cleaning fee being so high, it I get side out. I don't want to book at all. So my other options right now and I'm seeing the trend on here that is going on right here as well is, boutique hotels. People kind of leading to a boutique hotel nowadays where the amenity, the service, it's like very consistent.
You know what you get, you don't have to worry about making your, your, your bed every day. You don't have to worry about asking someone to replace your towel. You know you're going to receive it versus Airbnb. You have to pay for high cleaning fee.
There has to be a special reason for me to Airbnb versus boutique hotel because when I go on vacation I do not want to clean. Cleaning is not on my vacation agenda. And so there has to be like a specific reason that I do that. But I think that those are all really strong points. One other just story from Tahoe is we have an Airbnb down the street from us, and in the winter the Airbnb never tells.
And there's nowhere on the listing that it's on a hill. And so every person that rents the Airbnb, it keeps getting stuck in the middle of the road and my husband has to shovel them out. And in addition, the neighbors behind have been complaining about noise. And so I'm wondering if eventually this person is not going to be able to Airbnb anymore, because all the neighbors are frustrated that the cars are blocking the street and it's too loud.
And so you also have to have some type of method to make sure that you're managing the guests, that you're actually having your Airbnb, because the power of the neighbors are strong. And so if it's a disruptor to the neighborhood, that could actually ruin your investment, too.
Yeah, it's definitely doable. You just have to do very careful research and make sure you deal with your neighbor. Yeah, you have to deal with your tenant. Like appropriate.
So tell them to bring snow changes. Well, so we talked about Airbnbs, but what about long-term rentals? Like what are some things that people should be thinking about if they're just going to get a long term tenant in their property?
I love long-term rental. When you think of llong-termrental, you also think of some hidden costs that are associated with that. If you want to protect yourself, think of having a title under an LLC in order for you to have an LLC. It does come with legal costs and ongoing maintenance. You know, like to to upkeep with your LLC.
Then there's also maintenance costs for you to, you know, continue holding on to the place.
Yep.
And I wonder, like, sometimes it may sound like it's a small problem, but think of like, someone calling you in the middle of the night asking you to help them with the plumbing issue. Then, like sometimes, there's maybe things going on with your tenants, but they don't tell you and you become a bigger problem. For example, I rented out my master bathroom, few years ago, and my renter have some issue with water.
She didn't tell me until it became potential mold.
Oh, no.
Yeah, I saw, like, a water slide outside of my bathroom. I'm like, what's going on? It's just like, I don't know. Oh, gosh. So we have to be out of the place for three months. I can get it fixed. And then coming back, I have to be super careful of, like, how to deal with her. Yeah. And our relationship because I don't want her as a tenant anymore.
Yeah. Like I was already. I was like engaging with my legal team. Right. But luckily it was a smooth departure. Yeah, but that's the thing. You have to be very careful. You have to understand the regulations and, you know, tenants and eviction last because in places like L.A., you know, tenants have a lot of protections and, a lot of time landlords feel like they have nothing.
You know, they are helpless because, you know, I hear, you know, about squatters and, you know.
Oh, I mean, I know a personal story of, somebody that rented a place, paid rent for one month, stopped paying rent, then listed it on Airbnb and collected income as a tenant on the property, and then took us nine months to evict. Like that is, yeah, bad. So you have to, generally speaking, I think you mentioned earlier, but maybe go through a property manager that actually that's these people.
So then that way you don't end up with going through the eviction process can be a long time.
Yeah. It's so sad. Stories like that happen so often. I mean nowadays like there are better rules to protectlandlordsd, but you have to go through legal, legal process again a long time. Yeah. So it's like a long time and a mental to that you have to go through. Sometimes it's not worth it, but it can be worth it if you do your homework again, understand the financial regulations, the legal process and, have a good property manager.
I have one last question for you. Many of our clients, instead of buying these places, they rather inherit those. But then also on the other hand, I also have clients. Well, this lady, she's young and she had three kids. Her goal is to eventually own three different rental properties so that she can pass it on to her three children and set them up for success.
Okay, both of these are great, but can you walk us through and tell us some of the things that people have to consider or evaluate when they are thinking of inherited properties?
Let's start with like the person who wants to give their children a property, right? They think it's a part of our family legacy. Wouldn't it be nice to have a cabin in Tahoe? Whatever the story is, and I'm going to have my kids share it. I think that ends up being a little bit, like, more idealistic than the logistics tend to be.
So a few things that people have to think about when they're giving a property, they really need to be thinking about giving a fund, as well as the property to pay for ten years of expenses. One of the biggest conflicts that happens is when you give your children, a cabin in Tahoe. Now they're like, who maintains it? Who's got to fix the roof tiles when they fall off?
How are we going to pay for things? And they might have inherited money, but if it goes into their pockets first, then now they feel like they're putting their own money into the house versus having a bucket of money for that property. So it can feel like a burden.
It can feel like a burden. Right? So if you the property costs 30,000 a year, maybe you put 300,000 into an investment account. You invest it into conservative things, try to make it a little bit of a return, and then that helps to pay for the maintenance of the property. And then you generally should either choose one of your children to be the manager or a property manager to help manage the property.
So setting up the inherited property for success, I think is an important aspect. If you're inheriting a property and you're asking yourself the question of like, is this a good piece of real estate for me to own? I would genuinely say that you should go through three different things. So the first thing you should do is you should look at the value of the property.
You should look at the net income. So the income minus expenses and you should say, what is the return I'm getting? Oftentimes I walk clients through this process and they are getting 2 or 3% returns. That's less than you can make in a money market fund today. And they don't know it, right? They think, oh, this is an income-generating property, but it's actually only making 2 to 3% returns.
And there's an argument that the property will appreciate over the long term. But that's a long ways away. And so you.
Don't know unless you go through the selling process.
And so it might be better to invest in something else. Like you should say thank you. Real estate for the run up. Thank you for like allowing me to inherit $1 million property. But it's been a good run. It's time to move on. And that might be like a real question and topic for discussion. Yeah. The second thing I would say is that it's really important for you to ask yourself the question, if I had $1 million today, let's just pretend like this property's million dollars.
If I had $1 million today, would I buy this property or what? I do something else. And just like a thought experiment of, like, would I make the same decisions today? Like, I got this inheritance, but is that really aligned with my values? Would I instead remodel my own home? Would I take more vacations? Would I, have more money available to be able to retire early?
Like, these are all really good questions to ask yourself with the home. And the third thing you should consider are some of the tax implications of your decision. Oftentimes when you inherit a home, it gets what's called a step up in basis, meaning, as of the date your parents passed, the home is now valued for that date.
And so if you sell it, you sell it at no gains, meaning no taxes. So this is unique to inheriting a home where immediately it might make more sense to sell it and to keep it. Now not every property gets a step up in basis. It depends on the entity it was in before you inherited it. But these are all really good considerations.
When you have a property come your way, you got to ask yourself these questions. And I think, one thing that we've talked to a lot of clients about, both you and I, is also just the headache of managing it. Do you want it to be a second job that you have to manage these properties? And even when you have a property manager, you still have to approve the new windows, the painting.
You have to do what you're probably going to do.
Yeah. So you kind of have to value your time a little bit too. And while I do think real estate has historically been an amazing investment, I don't know that the returns today are quite what they used to be. And so take that into consideration when people are making these decisions. Yeah.
Especially if you have many siblings and not all siblings are equally responsible or aware of what's going on. It can become like a responsibility.
A recipe for fighting. Yeah.
And what if you have more family members like you married and what's going on, you know, so is can is can be complex.
I totally agree.
All right. So as part of coach conversations, we do this very fun game called this or that. So I'm going to ask you a question and you're going to ask me some questions. And you have to choose which one. All right.
Let's do it.
Okay. Are you going to buy a property in California or out of state?
Are you asking me about familiarity and diversification? Yes, I love both. And I see the downside for both. For me personally, I would like to hire a, private real estate fund manager.
That has a lot of expertise and familiarity with the markets, which then has many. And I love that. Well, the reason why I do that is because that way I can be exposed to as many properties as possible, and I have a geographically diverse portfolio for myself. And these people have the time, the expertise, the professionals, people to really dig in and find out what is the next best opportunity for their clients.
And, that way I can just sit back, relax and collect my rent.
I think you just answered my question is neither. That's very good.
What about you? Are you going to be continuing to enjoy your property, your rental property, or you eventually going to rent it out?
Oh, I'm not renting it out. I don't want to store stuff in a closet. I don't want to take down photos. I don't want anybody to accidentally kill my plants. One of the things that I've done since getting the cabin in Tahoe is I've become like, plant collector. There's so many plants there, and I want them all to live, because I watered them, not my guests.
So it's like a baby.
Yeah, exactly. Another question for you. If you were going to buy. I mean, you already said no buying. I'm going to invest in a fund instead. But if you were going to buy, would you buy on your own or would you try to find other people to go in on it with you?
On my own, yeah. I don't want to deal with the headache if me and my other partners like, disagree.
Good.
Last question for you: property manager or self-manage?
Oh property manager, I actually think property managers, people shy away from them because sometimes the fees can be like 6 to 10% of the property. But you have to remember as property managers that they manage a lot of property, so they actually are able to get discounts with like the plumber or the little things that happen. And so if you have a property manager that does all of the like little things that have to happen and all the books and records, so a property manager will actually like upload to your CPA for bookkeeping for you.
All of that saves so much time and energy where I could make more money somewhere else doing the thing. I'm good at versus this other thing. I think property managers, if you can find the right ones, they are just superb.
Amazing, amazing.
Well, thank you for tuning in to this episode of Couchside Conversations. Please feel free to reach out to us if you have any questions about real estate properties or investments in general. Until next time.
