In this interview‑style video, Left Brain research director Brian Duresse talks with CIO/CEO Nolan Langford about whether individual investors—particularly 45‑50‑year‑old professional executives with excess cash—should add residential rental properties to their portfolios. The discussion walks through the core decision‑making framework: defining investment goals (cash‑flow, appreciation, or a “business‑like” experience), estimating realistic cash‑flow yields (around 5% before maintenance, dropping to low single‑digit after accounting for 1% annual maintenance and 8‑12% management fees), and understanding the leverage dynamics and interest‑rate sensitivity of real‑estate investments. They outline the pros (potential appreciation, passive‑income feel, capital‑gain tax treatment when done well) and the cons (high ongoing costs, liquidity constraints, credit‑score impact, financing caps after about four properties, and the need for favorable market timing). Throughout, they reference current market conditions (May 2024 rates near 7%) and the influence of financial‑media hype, aiming to give advisors a systematic way to advise clients on the trade‑offs between active real‑estate ownership and more passive investment vehicles.
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Should you invest in real estate properties? In today's Fundamentals of Investing, we answer that frequently asked investor question both by the numbers and discussing pros and cons. I'm your host, Brian Duresse, director of research here at Left Brain, also an advisor, joined by our chief investment officer and CEO, Nolan Langford. Nolan, thank you for joining us.
Thank you, Brian. I'm happy to be here talking about this exciting topic, real estate.
Yes, Nolan, it's definitely a good topic for us to be discussing because as advisors, we're on the front lines of answering investor questions. Many of our clients own real estate. Many of our clients want to know about doing more in real estate from an investment point of view. Many clients want to know, should they get started in real estate? And we wanted to answer that question for them systematically and go through some of the pros and cons of making that decision. So, Nolan, we want to do that. We're going to compare this active portfolio management of real estate with passive forms of investing, and hopefully at the end a conclusion will be drawn for investors out there. Nolan, any opening thoughts on this topic? And can you speak a little bit to why we hear this question so often?
You know, I wish I had an answer for why we hear it so often. All I can tell you is we do. Our typical client base is going to be that 45 to 50-year-old professional executive, typically working at a big publicly traded company throughout the country. And oftentimes, as a couple is building that net worth, when they're in that creating wealth stage, often they get the idea that, hey, we have this extra money, we have this money piling up in cash at the bank, how should we invest it? And quite commonly, they come up with the decision that residential real estate or rental properties is a good target for their investment. So that's why we're covering this today. It comes up often.
You know, it's interesting, Nolan, if you look out at the influencers in the financial space, you hear a lot— there are a lot of people out there speaking the quote unquote gospel of buying rental real estate. And we definitely want to take a look at that concept and, you know, help investors out there determine whether that makes sense for them. I guess the first question I have, Nolan, is defining goals. So when people are trying to invest, when they've got excess cash on hand and looking for ways to put it to work, one of the questions that they probably need to ask themselves is what is their goal in buying real estate? And what are your thoughts around that question?
That is the number one question I think couples need to ask themselves. Why are we buying this real estate property or looking to get involved in this endeavor? Is it cash flow? Are we making a big cash outlay because we think it's going to improve our monthly inflow and our income? Are we doing it for appreciation? Are we going to put this $500,000 in property looking for 10 years from now to have turned into $2 or $3 million? Or do we just want to dip our toe into doing business? We work full-time, we get a W-2 and a paycheck. We think it's really cool to be in a business, but we don't really have the gumption to do a real business or C Corp or anything along those lines. So we decide dipping our toe into residential real estate is a way for us to to be boss of some properties. That could be an idea. Or somebody could be ambitious and have the idea that, hey, I'm going to have— I'm going to be the new real estate kingpin. I'm going to have 10, 20, 50, 100 properties, and this is going to be my new way of living. So the first thing that all investors need to ask themselves is which category they fall into.
Okay. And along the same lines, Nolan, you've got plenty of experience as an advisor. You've been asked this question many times by investors. I know clients I ask this all the time. Why do you think people like real estate as an investment?
It probably has something to do with human nature. When this country first started, you know, government gave away land. From the most ancient times, wealth, I think, was associated with being a big landowner and having a big estate and a garden. I think even to today, that's still with us. And people feel like, hey, if I own a lot of property, I'm wealthy.
Definitely interesting stuff there. We're going to talk a little bit about the pros and cons, but we've run some of the numbers on real estate on a hypothetical piece of real estate. We're not going to go through the nitty-gritty of that. We may do that in a future video. But it's interesting because the opportunities out there— we looked at a, a possible rental property in a single family. Looks like the cash flow yield on that, assuming a 6% interest rate, which is a little lower than what it is when we're doing this video here in May 2024. Is about 5%. So the cash from the cash that you put in to purchase the property and the cash that you take out each year is about 5%. And Nolan, that, that's not including maintenance. So before we get into pros and cons, can you talk a little bit about maintenance costs on real estate?
And we didn't get to maintenance costs. And also management fees are a really big one that we did not put into our model and they soak up a lot of cost. You got to get the trees, trimmed. You got to get the, you know, the garden pruned so there's not weeds in the lawn. You got to get the windows clean. You got to get the gutters cleaned here in the Midwest. And so there's maintenance with these properties. Let's assume a low number, 1% a year or something, which isn't very expensive at all. And so if you shave a 1% number for maintenance, now you're down to about a 4 or 4.5% cash flow number. And then the final one, you know, again, a lot of our clients are executives and they travel and they have families and a life, and they're not looking forward to Friday night calls about a window being broke or a plumbing leak at a, at a unit. So a lot of our clients will tend to have brought on a management firm who will take over the day-to-day responsibilities of managing the property. And if you look at, you know, the management cost and management fees, they are not cheap. And so if we're at 4.5% after maintenance, 5.5% before maintenance, you're going to be about half of that after the management fees. So you're looking at a low single-digit number here on a cash flow basis.
And that's interesting, Nolan. Again, going back to what you mentioned about what is the goal of the real estate investment, if your goal is cash flow, it's really a dubious discussion of whether that is actually what you're going to gain from, from from owning a piece of property. Like Nolan said, maintenance costs and then also management fees, which can be somewhere between 8% and 12% of your rent that you, that you collect. Pretty quickly, your cash flow positive turns into cash flow negative. So with that being said, let's move into the pros and cons. Nolan, let's talk about the pros of real estate investing. Talk a little bit about, again, why people like to do this and what are some of the positives of investing in a piece of real estate? Particularly in a rental property?
Well, if you select well and you time it right and you get good financing and you get good tenants and you have purchased in a good location that's going to show appreciation and your holding time is optimized by real estate trends, you can do very well and you can make money somewhat passively and have your gains taxed as capital gain at the end when done well.
Okay. I counted 6 ifs in there, so that's a lot of ifs. You got to have a lot of things in your favor for it to work. Certainly it's good to have property, it's good to have assets, and it puts you on a strong footing. But as you mentioned, and we're going to get into on the con section, there's a lot of work that goes into investing in real estate and the tax benefits aren't quite there. So let's, let's shift over to the cons. Nolan, we've got quite a few on our list here. I'll just let you run here. What are some of the cons on, on real estate investing from your point of view?
So from a con perspective, Brian, there's a few things that investors really need to consider and think about. You mentioned one of them earlier, which were interest rates. You know, real estate is really a leverage play. Typically, you're not going out buying, paying cash to buy these rental properties. If so, we'd be happy to run a cash-on-cash return number to really compare the numbers we ran before, which we're assuming alone. So real estate is really a leverage play. I get to use a small amount of money, borrow a big amount of money, and if the asset I purchased goes up, then the little bit I put in can grow a lot. And that's called leverage. So interest rates are a really big driver of returns. So you really need to be careful on where we are on interest rates and have some sort of forecast of whether you think it's going to be a stable rate environment or if rates are going to be going up, which may hurt me as a real estate investor. If interest rates are going down, this is really going to help me. So that would be the, the first thing that I would say investors really need to pay attention to is the interest rate environment. Okay.
And that's a good point. And Nolan, again, we're doing this here in May 2024 when interest rates are pretty high, probably in excess of 7% if you want to buy any sort of property. And if it's not your main dwelling, probably a little higher than what you'd get on your own family home. And kind of along the same lines, Nolan, talk about what buying multiple properties does to your credit.
Real estate— there's a couple of hidden perils that we can face if we're doing real estate and we're not careful. One of them is the lack of liquidity if we need to sell. But more importantly, even if we're not selling, if we're taking out a loan to buy this real estate, remember that goes on our credit report, which does affect our credit score. There's also a max borrowing. So there's a HUD disclosure that banks use when they look at financing real estate investors. And it's generally once you get to 4 properties, that's generally the max that you can get financed for. And at that point, you know, if you go to get some traditional credit from someplace and you have those 4 rental properties that show on your credit report, it just won't— it doesn't mean you won't get approved for things. It just won't be as easy or simple to get approved without a bunch of documentation. Hopefully we don't get into any negative cash flow situations.
Okay, so that's kind of numbers, that's financing. So that's part of the issue that goes along with, with real estate.
