Is it better to be a landlord or a mortgage holder?
There is a lot of talk, mostly inaccurate, about passive income these days. Self-styled internet "influencers" exhort their followers to seek out "passive income" as a way to get ahead in life. Social activists, on the other end of the spectrum, decry passive income as parasitical losses and argue that landlords shouldn't exist - and everyone should own their own home, which is the "American Dream!"
Both are laughably wrong.
But let me address that last argument to get it out of the way. The American Dream has never been about home ownership! The American Dream was the idea that you could succeed on your merits in a society, regardless of your background or social status. Granted, it is often a laughable farce - the two people touting a "meritocracy" today - Trump and Musk - were born into privilege and wealth in the millions. They hardly "succeeded" based on merit, but moreso based on background, a huge head start, and lots of chicanery.
But the idea itself has merit, and while a child in the ghetto has little chance of becoming a Billionaire, you can elevate yourself somewhat in society by applying yourself. My Grandfather, for example, was born poor as his Father had killed himself. He went to City College, got a law degree, joined a firm representing "City Bank of New York" and became partner, moved from Brooklyn to Larchmont and even became Mayor. Local boy makes good!
And similarly in my own life, I went from college dropout stoner to millionaire lawyer in about a decade or so, mostly by not being a stoner anymore. I'm not saying that luck isn't a factor - it is. I'm not saying that everyone can do it - statistically they can't. But the American Dream isn't about owning shit, it's about not being locked into the caste you were born in, as was (and is) the case in so many parts of the world today (and what the "meritocracy" mavens want to make permanent in America).
And yes, owning a house is just owning shit. It is a machine for living (a term coined by Le Corbusier, btw) with lots of expensive parts that break regularly. I guess when I was a kid, I thought if I owned a car free-and-clear I would be set for life. Only later did I realize that cars are just appliances and they wear out fairly quickly. Houses are no different, and they can be expensive maintenance nightmares. Even just keeping them clean and tidy is a chore, over time. It is only those who are renting who look on wistfully at the "lucky" homeowner who is up on his roof blowing off pine needles or cleaning gutters. There are advantages to renting that most tenants don't realize.
Which brings us to the second point - are landlords "parasites" who shouldn't exist? Well, there are situations where people want to rent for logical reasons (other than not being able to afford to buy). My next (and last) home, for example, will likely be rented, as I will not have to worry about maintenance and repairs as I become more decrepit. Young people starting out in a new city and a new job likely would prefer to rent as buying a home involves not only down payments, but transactional fees that can be as much as 5-10% of the purchase price (on both ends). If you don't plan on living in a house for at least five years, it makes more sense to rent than buy.
And ask the folks who bought at the peak of these real estate bubbles how "lucky" they feel to be a homeowner! No, no, there are legitimate reasons to rent and legitimate reasons to be a landlord. It is only in recent years we have seen mega-landlords using software to collude on rental pricing. That is the problem, not renting in general
But what about passive income? As recently noted in an article online, it is sort of insulting to tell poor people - who spend 100% of their income on survival needs - to seek out passive income. To have passive income - in the form of rental income, interest income, dividend income, capital gains, and the like, you need to have money to invest or at the very least, a decent income stream to cover money you borrow. Yes, my first real estate "investment" was a nothing-down deal, but I couldn't have swung it without a substantial income stream and disposable income.
So, on to today's topic! Finally!
Last month I was a landlord. This month, I am a mortgage holder - a banker of sorts - as the buyer for our condo asked us to take back a mortgage. So they gave us about $30,000 and asked us to take back a note for $110,000, payable in monthly installments at 7% amortized over 30 years, at $750 a month. Their first monthly payment cleared the bank yesterday.
As a landlord, I was responsible for all repairs and maintenance to the inside of the condo, and I had to find and vet tenants and deal with vacancy when they left, as well as rehab the place when it got worn down. We also had to pay property taxes, insurance, as well as the condo fee and special assessments. In addition, as remote landlords (a bad idea) we had to pay a management company to manage most of these things.
Probably the best year we had was 2023. No vacancy, no repairs, no increase in the condo fee, no lease-signing fees by the management company. According to Quickbooks, we cleared $6403. Other years, we lost money or made far less. It isn't easy being a landlord, to be sure! And if our tenant stopped paying rent, we would have to initiate eviction proceedings, which can take months, cost money and you never get reimbursed for the costs.
Now, as a holder of the mortgage, we stand to make $8941.80 a year in principle and interest payments, which is steady regardless of whether there is a tenant in the property or not. We don't have to pay for repairs, condo fees, taxes, or insurance. Just those checks coming in, no hassle. What's even better is that if the buyer stops paying the mortgage, we can foreclose on the property and take it back. The costs of foreclosure all come out of the buyer's pocket, in the form of their down payment or even their own wallet. It is a much nicer deal all the way around.
Mark's Father used to do this in rural Maine. He would buy distressed properties for cheap - often bank foreclosures - as he knew the mortgage managers at the local banks. He (and Mark) would fix up the properties and then sell them. Since most rural Mainers had little money and crappy credit histories, he could take back a mortgage as payment and have a steady income stream in retirement. Naturally, he vetted his buyers carefully, which in a small town wasn't hard to do as everyone knew your business. That is, of course, the key - finding a good buyer.
But the point of this posting is that, in terms of passive income, being a landlord is a shitload of work and a shitload of risk, for less reward than other forms of passive income. You would probably be better off just investing in a mutual fund. Yes, the depreciation deduction is a nice perk, particularly if you are in the higher income brackets. But after ten years, well, that's done and now you have a capital gains problem!
And that capital gains problem can be alleviated, in part, by using the installment provision of the tax code - by taking back a mortgage.
