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Is a Warehouse Store (Costco, Sam’s Club, BJ’s) Membership Worth It? – Costs, Pros & Cons

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Smart-shopping blogs and magazines teem with stories about the great deals you can get at warehouse stores. Shopping experts say joining a warehouse club can save you money on nearly everything — groceries, tires, even vacations. 

But there’s one obvious snag. Before you can fill up your cart with these bargains, you have to pay an annual fee of around $50 just to get in the door. How can you tell if your annual savings will be enough to offset this membership fee? 

To answer that question, you need to delve into the murky depths of warehouse store shopping. That means getting the details on how warehouse clubs work, what they cost, and how good the prices are on the items you buy most.

How Warehouse Stores Work

Warehouse stores use a different pricing model from other retail stores. Regular retailers, such as Walmart, make their money from the markup they charge. That’s the difference between the wholesale price they pay to their suppliers and the retail price they charge to customers.

According to Entrepreneur, the markup at a typical retail store is around 50%. In other words, the price you pay is twice what the store paid.

By contrast, warehouse stores charge a much lower markup. For instance, Costco’s markup is only 14% to 15%, according to Forbes. They make up for the lost profits by charging a fixed yearly fee to each customer. 

That’s why these stores sometimes refer to themselves as buying clubs. You pay upfront to become a member, and in return, you get to buy products at rock-bottom prices. In addition, you gain access to various other special deals on everything from health care to travel.

Top Warehouse Store Chains

There are three major warehouse chains in the United States. The biggest is Sam’s Club. Sam Walton, the founder of Walmart, started this store in 1983 as a supplier for small businesses.

Today, Sam’s Club is a nationwide chain with nearly 600 stores in the U.S. and millions of members. Its products range from groceries and office supplies to big-ticket items like jewelry and furniture.

The closest competitor to Sam’s Club is Costco. This chain started in Seattle in 1983. Ten years later, it merged with another club store called Price Club, which had been catering to business owners since 1976. 

Today, Costco boasts over 100 million members and has hundreds of stores stretching across the United States and beyond. The chain sets itself apart from other warehouse stores with its focus on high-end goods, such as organic food and designer jeans.

The third major chain is BJ’s Wholesale Club. BJ’s is a smaller chain than its competitors, with 200-plus stores in the eastern U.S., Michigan, and Ohio. But like Sam’s Club and Costco, it offers a wide range of goods and services, from groceries to vacation packages.

Warehouse Stores Work

People who love warehouse stores really love them. Forbes reports that Costco members are extremely loyal, with more than 9 out of 10 choosing to renew their membership each year.

And they have many good reasons to feel this way. Warehouse stores offer a plethora of benefits, including the following:

1. Low Prices — At Least on Certain Items

The main reason shoppers love warehouse stores is their low prices. Independent studies have found that warehouse clubs really do offer great bargains in certain areas, such as:

  • Groceries. In 2018, Consumers’ Checkbook went grocery shopping at warehouse clubs and supermarkets. It found that prices at both Sam’s Club and Costco beat major supermarket chains by 17% to 41%. (However, BJ’s prices failed to beat Walmart’s.)
  • Gasoline. A 2020 analysis by CSP compared prices across gas stations around the country. Costco was the winner, beating the national average price by nearly $0.25 per gallon.
  • Prescription Drugs. In 2018, Consumer Reports checked retail prices on five drugs at over 150 U.S. pharmacies. The complete set cost over $900 at CVS, but only $153 at Sam’s Club and $105 at Costco. And some generic drugs at Sam’s Club are only $4.
  • Car Tires. In a 2021 analysis by Clark Howard, Sam’s Club was second only to Walmart for the lowest average price on car tires. All three warehouse clubs were in the top six.
  • Booze. According to Spoon University, Costco offers the lowest unit prices on all types of alcohol. For those willing to buy in bulk, the club charges significantly less for Skyy vodka and Blue Moon beer than other retailers.
  • Pet Food. In a 2019 analysis of name-brand pet food prices by Consumers’ Checkbook, Sam’s Club and BJ’s topped the list for lowest average prices. (Costco, which mainly sells its own Kirkland Signature brand, was not covered.)

2. Access to Services

When you join a warehouse club, you don’t just get access to its products. These stores also offer a variety of services exclusively for members.

For instance, a Costco membership gives you access to Costco’s car-buying service. It provides haggle-free low prices on new and used cars and RVs from approved dealers. It also gives you 15% off car parts and services from participating providers.

Costco members can also save on vacations with Costco Travel. It provides special deals on airfare, hotels, auto rentals, cruises, and travel packages. The store also offers photo printing, banking services, insurance, home renovation, eye care, and bottled water delivery.

Other warehouse clubs offer a similar menu of services. Sam’s Club doesn’t provide banking or insurance services, but it gives members discounts on concert and theater tickets, theme parks, and attractions. 

Sam’s Club also offers discounts on various subscription services. Members can get lower prices on music streaming, video streaming, educational apps for kids, and fitness apps.

Likewise, BJ’s offers travel, vision care, home improvement, and photo services for members. One special perk it provides is free technical support for all its electronics.

3. High-Quality Store Brands

Shoppers are impressed with the quality of warehouse stores’ house brands — especially at Costco. In a 2019 Consumer Reports survey, Costco was one of only three out of 96 grocery chains to earn top marks for the quality of its store brands. 

The magazine’s editors get more specific in a 2017 article. They call several Kirkland products  as good as or better than name-brand competitors. These include laundry and dishwasher detergent, batteries, toilet paper, bacon, mayonnaise, and organic chicken stock. 

Another product that gets high marks from reviewers is Kirkland Signature dog food. According to DogFood.Guide, this brand has “surprisingly high quality” for a store brand. It’s made by Diamond Pet Foods, a leading manufacturer of high-end foods like Taste of the Wild.

Both Kirkland and Member’s Mark, the house brand from Sam’s Club, get good reviews for some wines and liquors. The Beverage Tasting Institute gives ratings of at least 90 points out of 100 to several Kirkland wines and to Member’s Mark tequila, vodka, and gin.

4. One-Stop Shopping

Warehouse stores allow you to condense many errands into one. You can pick up your glasses, shop for shoes, get new tires, book a vacation, and buy groceries all in one trip.

5. Free Samples

On weekends, shoppers at warehouse stores can stroll through the aisles noshing on samples of assorted food items. Naturally, the stores hope that trying the products will inspire you to buy them, but there’s no obligation. You’re perfectly free to chow down and walk away.

6. A Pleasant Shopping Experience

On the whole, warehouse club members are satisfied shoppers. In a survey by Consumer Reports, Costco shoppers reported being more satisfied with their experience than shoppers at nine other major retail chains. 

A 2021 report by the American Customer Service Index found similar results. Costco topped a list of 20 retailers, with 81% customer satisfaction. Sam’s Club and BJ’s came in a bit lower down the rankings, with a respectable 79% and 77% respectively.

7. Good Returns Policies

One likely reason why warehouse store shoppers are so satisfied is that if they’re ever unhappy with a purchase, it’s easy to return. Both Costco and Sam’s Club offer an absolute 100% money-back guarantee on virtually everything they sell.

If you’re not satisfied for any reason, you can return it with your receipt at any time. One exception is electronic items, which can’t be returned after 90 days. BJ’s policy is a bit more restrictive, allowing returns only up to one year.

Costco Warehouse Good Returns Policies

Although warehouse stores have undeniable benefits, they have their drawbacks too. Here are a few good reasons not to do your shopping at a warehouse store:

1. Membership Fees

The most obvious downside of warehouse club membership is the membership cost. The standard annual membership fee for a household or a business is $45 per year at Sam’s Club, $55 per year at BJ’s, and $60 per year at Costco. 

In addition, all three of the major warehouse chains offer higher-tier memberships. They’re called Executive Membership at Costco, Plus at Sam’s Club, and Perks Rewards at BJ’s.

These tiers cost roughly twice as much as a regular club membership. In exchange, they give you 2% back on nearly everything in the store. That means you have to spend between $2,750 and $3,000 per year before the higher-level membership will pay for itself.

2. Oversized Packages and Quantities

Warehouse stores are known for their jumbo-size packages. Buying in bulk to save money makes perfect sense with nonperishable goods, such as soap or paper towels. You can safely stock up on these bulk items as long as you have the space to store them. 

However, bulk buying can be a problem with products that don’t keep well. A five-pound bag of shredded cheese is no bargain unless you can (and actually want to) eat that much cheese before it goes bad.

3. Limited Selection

Warehouse clubs are good for grocery shopping, but you can’t always buy everything on your shopping list there. In the 2018 Consumers’ Checkbook study, the three warehouse stores only carried about half the items in a standard basket of groceries.

BJ’s was the best of the lot, with about 57% of the items available. Sam’s Club had 52% of them, and Costco had only 44%. Moreover, most of the items at all three stores were only available in bulk containers, not standard sizes.

4. Impulse Buys

Warehouse stores are huge and crammed with an incredible variety of goods. Even if all you need is cereal, milk, and toothpaste, you’ll probably have to walk past jewelry, clothes, and toys to get to those three staples. 

This makes it very easy to fall victim to the temptation of impulse buys. You could easily go in with your three-item shopping list and walk out with a whole cart full of unplanned purchases. Worse, some of these could be big-ticket items like a TV set.

5. Restrictions on Coupons

If you’re in the habit of using coupons to save money on groceries, the warehouse store isn’t the place to do it. Neither Costco nor Sam’s Club accepts manufacturer’s coupons at all. BJ’s takes them, but it only accepts select coupons in digital form.

5. Deals That Aren’t So Great

With such a vast assortment of goods gathered together in one store, warehouse stores seem ideal for one-stop shopping. However, if you buy everything on your list there, you’ll probably spend more than you need to.

My local Costco has great prices on a few staple foods, such as nuts. But its fresh foods, such as produce and eggs, are nearly always more expensive than the ones at nearby supermarkets.

Even paper goods like paper towels and toilet paper aren’t such great deals. Two dozen rolls of toilet paper at Costco cost more per roll than one dozen of the store brand from Trader Joe’s.

Warehouse stores also tempt buyers with big-ticket items like appliances, furniture, and electronics. But these products are almost never bargains. 

For instance, the current Costco savings brochure advertises LED TV sets for $700 to $3,000. But the top-rated LED TV in the same size range at Best Buy costs just $600. And a laptop Costco advertises for $700 is similar to one Lenovo sells for $565.

Deals That Arent Great

Deciding Whether It’s Worth It

The best way to figure out whether a warehouse club membership is worth it for you is to check it out in person. Scout up and down the aisles, check prices on the items you buy regularly, and  compare them to the prices at your local supermarket.

There’s just one problem with this plan. Most warehouse stores won’t even let you in the door to check prices without a membership card. One way to get around this problem is to ask a friend who’s a member to let you tag along on their next trip. 

Also, nonmembers are allowed to shop at Costco with a store gift card. However, only Costco members can buy these cards. To get around that rule, ask a friend to buy one for you or buy one secondhand through a gift card exchange site.

Two Real-Life Examples

Back in 2006, my husband and I took advantage of a free day pass to check out the prices at our local BJ’s Wholesale Club. We found that for most items we buy, BJ’s didn’t have lower prices than other stores. 

For instance, the $18 DVDs and $700 laptops in the electronics section couldn’t beat online deals. A 12-pound bag of baking soda cost more per pound than a supermarket store brand. And 24-roll packs of toilet paper cost nearly twice what we paid per roll at Trader Joe’s.

We still found good deals on a few items, like cereal, rice, and chocolate chips. But crunching the numbers, we found that we wouldn’t save enough on these items in a year to pay for the club membership.

But in 2017, we decided to give Costco a try. My husband needed new glasses, and we found the savings on those would more than pay for the $60 membership cost. 

Once we were inside the store, we started finding deals on all sorts of other things we buy regularly. Organic sugar, raisins, nuts, oatmeal, milk, and olive oil were all cheaper at Costco than at local supermarkets.

Here’s a sample of our savings from a single Costco trip. For each item, I’ve listed the amount we bought, the price, and what the same amount would have cost at the next cheapest store.

Product Costco Price Competitor’s Price Savings

Raisin Bran (14.34 pounds) $21.87 $24.38 (Aldi) $2.51

Brussels Sprouts (2 pounds) $4.99 $4.99 (Trader Joe’s) $0

Clementines (5 pounds) $5.49 $5.49 (supermarket sale) $0

Birdseed (80 pounds) $27.98 $31.96 (Lowe’s) $3.98

Organic Raisins (4 pounds) $10.79 $11.96 (Trader Joe’s) $1.17

Walnuts (3 pounds) $10.89 $14.97 (Aldi) $4.08

Canola Oil (6 quarts) $7.69 $9.00 (Shop-Rite) $1.31

Organic Sugar (10 pounds) $7.99 $17.45 (Trader Joe’s) $9.46 (less packaging waste as well)

On this one trip, we saved a total of $22.51 on a bill of $99.54. That means we saved about 22% off our entire bill. According to our credit card statement, we spent a total of $723.50 at Costco in 2018. If we saved 22% on everything we bought there, that’s a savings of $159.17.

In addition, by becoming members, we qualified for a Costco credit card. It offered 4% cash back on gas, 3% on restaurants and travel, and 2% on everything at Costco. Those rewards save us another $34 per year or so.

So, all told, our Costco membership is saving us over $193 per year. That’s more than three times the cost of the membership card. 

Factors That Affect Your Choice

As you can see from our experience, warehouse stores aren’t all the same. BJ’s Wholesale Club definitely wasn’t a money-saver for us, but Costco definitely was.

However, what works for our family isn’t necessarily what will work for yours. It depends largely on what you buy and how much you pay for it.

Based on our experience, these are the factors most likely to make a warehouse club membership a good deal for you.

Bulk Buying

On our initial trip to BJ’s, we had to pass up a lot of deals because the containers were too big. A 30-pound sack of rice cost less per pound than a 10-pound bag, but it would have taken us years to go through it all.

However, if you have a large family or a small business, you probably go through supplies faster. That makes these jumbo-sized packages a more reasonable deal for you. All you need is enough storage space to hold them and keep them fresh.

Brand Loyalty

My husband and I usually prefer to buy store brands rather than name brands. For most products, we find their quality is just as good and their price is much lower. Most of the products we buy at Costco are the ones that come in the Kirkland store brand. 

That’s one reason we didn’t have much luck at BJ’s on our first trip. Most of its products, at least at the time, were name brands. The store’s price for Star-Kist tuna was cheaper than the price for Star-Kist at our local Stop & Shop, but no cheaper than the Stop & Shop store brand.

However, many people are loyal to specific brands. For instance, your family may insist on Heinz ketchup or Downy fabric softener. If so, there’s a good chance that a warehouse store can offer you a better price on it than your regular supermarket. 

But before you sign up for a membership, make sure the warehouse store actually stocks the specific brands you want. If you shelled out $50 for a membership card and then find out the store doesn’t carry Heinz ketchup, you’re out of luck.

Few Local Supermarkets

Nearly all our food savings from Costco come from just a few items. On most foods, especially fresh foods, the warehouse can’t beat the prices at our area supermarkets. Even if their regular prices are higher than Costco’s, we can always wait for a sale.

However, in some areas — especially rural areas — there are no big supermarkets. The main food sellers are local grocery stores and convenience stores with high prices and few great sales. If you live in an area like this, the regular prices at warehouse stores look a lot more appealing. 

A Convenient Location

Finally, location matters. If the nearest warehouse store is 50 miles away, it isn’t practical to shop there more than once or twice per year. That hardly gives you a chance to get your money’s worth out of your membership. Plus, the cost of gas will eat into your savings. 

But if the distance to the store is less than 10 miles, regular trips become practical. You can visit every few weeks to stock up on everything you need. 

Factors Affect Choice

Avoiding the Pitfalls

If you decide to invest in a warehouse club membership — or you already have one — use it wisely. To get the most for your money, maximize the benefits of warehouse shopping and minimize the drawbacks.

Don’t Give In to Temptation

Impulse buys are one of the biggest hazards of the warehouse store. This can happen at the supermarket too, but Costco and Sam’s Club have a much wider array of shiny toys to tempt you. 

However, you can avoid them the same way you would in any other store. Make a shopping list and stick to it. If you see something that looks irresistible, don’t stick it right in your cart. Instead,  jot down the item and the price and walk away. 

The next day, take another look at your note. If you still want the item, you can go back to the store and get it. But chances are, by the time you’ve had 24 hours to cool off, the new toy will have lost a lot of its appeal.

Check Unit Prices

Warehouse stores don’t always beat the supermarket on price. However, comparing prices is tricky because the containers at the warehouse store tend to be so much larger. 

To be sure you’re getting a good deal, compare unit prices. That’s the cost per ounce, quart, or whatever unit the product is measured in. 

Some stores have the unit prices of different products marked on the shelf. However, if your warehouse store doesn’t, it’s easy to calculate. Just whip out your phone and divide the total price by the container size. 

Then compare this number to the price you’re used to paying at your regular store. It helps to keep a grocery price book that lists each store’s unit prices for items you buy often. That way you don’t have to try to remember one number while staring at another.

Don’t Overbuy

When you compare unit prices, the biggest container often looks like the best deal. However, a five-gallon tub of mayonnaise is no bargain if it goes bad before you use it up. 

If you’re buying something with an unlimited shelf life, such as shampoo, then buying by the case is no problem. But when you’re shopping in the food department, try to be realistic. Go for a size you can handle, even if the unit price is a bit higher.

Focus on the Best Deals

It’s tempting to take advantage of the warehouse’s store’s variety and do all your shopping in one trip. But if you do this, you’re almost sure to overpay for something. To get the most bang for your buck, focus on the items that are great deals at your particular store. 

This goes double when you’re shopping for a big-ticket item, such as jewelry or electronics. Don’t assume the warehouse store’s prices are lowest. Take the time to shop around and look for the best deal.

Focus Best Deals

Final Word

A single visit may not be enough to figure out whether a warehouse club membership is a good deal for you. If you’re still on the fence, try signing up on a trial basis. 

From time to time, BJ’s Wholesale Club offers a free 90-day membership to give shoppers a chance to get to know the store. Keep your eyes out for these offers in your mailbox and in coupon circulars.

If you don’t want to wait, try BJ’s discounted membership offer. It gives you all the benefits of membership for $25 — less than half the regular price. It’s not free, but it’s a chance to try the store without risking the full $55.

Moreover, all three warehouse chains — BJ’s, Costco, and Sam’s Club — promise a full refund of your membership fees at any time if you’re not satisfied. You can give any of these stores a try for a month or two, then cancel if you decide it’s not for you.

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Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.
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10 Ways to Turn Off Potential Buyers

As a result of our obsession with photos and visuals today, buyers make judgments of homes immediately. Many will do their first showing online, so if your photos turn them off, they may never step foot inside.

Sellers need to go to great lengths to get buyers in the door. If you can get them through, it’s the small (and often obvious) things that will keep them interested. Though it’s a home first and foremost, it’s also an investment. Make changes or alterations that could turn off a buyer, and you risk hurting your bottom line.

If you’re planning to put your house on the market, be aware of these 10 ways you might be turning off potential buyers.

1. Turn your garage into a family room.

A family room might be attractive – to a family. But if you’ve sacrificed the garage, the trade-off might be a turn-off, especially to people who don’t have kids or who live in dense urban areas, where parking is at a premium. Even in the suburbs, most people want a covered, secure place to park their cars.

Don’t forget that a garage often doubles as a storage location, housing everything from the lawn mower to excess paper towels and cleansers. If you go glam with your garage, you’re likely to force a buyer to look elsewhere.

2. Convert a bedroom into a something other than a bedroom.

Aside from location and price, one of the first things a buyer searches for is number of bedrooms. Why? Because it’s a fundamental requirement.

You might think that having a wine cellar with built-in refrigerators in your home will make it attractive to potential buyers because it was attractive to you. But that’s not for everyone.

And while it’s true many people work from home today, at least part of the time, that doesn’t mean they want a dedicated home office -especially one with built-in desks or bookcases they can’t easily remove.

If you must convert a bedroom into something else, make sure you can readily change it back into a bedroom when you go to sell. If you have lots of bedrooms, buyers might be more forgiving. But a buyer who needs three might see your custom home office as a turn-off.

3. Lay down carpet over hardwood floors.

People like hardwood floors. They look cleaner, add a design element, don’t show dirt as much, and consumers with allergies prefer them over carpets.

If you have gleaming hardwood floors, show them off. Let the buyer decide if she wants to cover them. It’s easier for her to purchase new carpeting of her choosing than to get past yours.

4. Install over-the-top light fixtures.

A beautiful chandelier can enliven a dining room. But it can also turn off buyers who prefer simpler, less ornate fixtures.

Did you fall in love with a dark light fixture on a trip to Casablanca? That’s great. And you should use it for your enjoyment. But when it comes time to sell, replace it with something more neutral.

Remember, you want to appeal to the masses when your home is for sale. You want to stand out from a crowded field of sellers – but in the right way.

5. Turn your kid’s room into a miniature theme park.

Little kids have big imaginations. They tend to love Disney characters, spaceships, and superheroes, and their parents are often all-too-willing to turn their rooms into fantasy caves.

But the more you transform a child’s bedroom into something resembling a Disneyland ride, the more you’ll turn off most potential buyers. Your buyer might have teenage children, and see the removal of wallpaper, paint or little-kid-inspired light fixtures as too much work.

If you can, neutralize the kids’ rooms before you go on the market.

6. Add an above-ground pool.

Does it get hot in the summer where you live? Wish you had a backyard pool, but can’t afford to have a “real” pool installed? Then you might be tempted to buy and set up an above-ground pool.

For most buyers, though, these pools are an eyesore. Also, an above-ground pool can leave a big dead spot of grass in your backyard – another eyesore.

If you must have it, consider dismantling it before going on the market. Of course, be sure you’re ready to sell, or you may be stuck without a place to cool off next summer.

7. Leave dirty dishes in the sink.

A kitchen full of dirty dishes is not only unattractive, but it sends a strong message to the buyer: You don’t care about your home.

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If your home is for sale, buyers will be coming through, and you want to impress them. Would you keep dirty dishes in the sink for your in-laws or overnight guests? Probably not. Then why wouldn’t you clean up for your potential customers?

Putting your home up for sale, and keeping it on the market, is work. If you aren’t cut out for it, considering holding off until you are ready to clean up for the buyers.

8. Make buyers take off their shoes.

This turn-off cuts both ways. As an agent, I always hated being forced to take my shoes off in someone else’s home - until I sold my own. Not only was it inconvenient, but also I wasn’t happy about my socks picking up a random homeowner’s dirt, pet hair and dust.

Once I became a first-time home seller, and one with sparkling new hardwood floors and carpet, I couldn’t imagine allowing dirt and grime from the outside world to dirty up my floors.

So what’s the compromise? Shoe covers from a medical supply store. Buyers and agents don’t need to take off their shoes, simply cover them. It’s a win-win for everyone.

9. Smoke cigarettes in every room of your house – for years.

Over time, the smell of smoke permeates your home. It gets into the carpet, drapes, wood paneling - just about everywhere. And that’s a big turn-off to most buyers today.

Getting rid of the smoke smell can be a big job. If you’re a smoker, seriously consider how you want to present your home to the market. For a long-term smoke-filled home, it means painting, removing carpets, and doing lots of deep cleaning. If you don’t do it, don’t expect to get top dollar for your home.

10. Keep Fido’s bed and toys front and center.

Family pets bring a lot of joy to the home. But they don’t always bring the same joy to a prospective buyer. Dog’s toys, filled with saliva, dirt and dust, can be a sore both for the eyes and the nose.

If you have a pet, put a plan in place to move the food and water bowls as well as the toys and dog’s bed to a better location, like in the garage.

It’s your home – for now

Part of the joy of owning a home is that you can do whatever you want with it, to it, and in it. You should enjoy it. But if you want to sell it quickly and for top dollar down the road, try to picture how others might react to any renovations, additions or modifications you make.

The more specific you get – such as turning your kid’s room into a miniature castle – the harder it will be to sell your home later, and the less return on investment you’ll get. When considering changes to your home, always consider resale.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

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How Risky is Investing in Rental Properties?

I am trying to buy as many rental properties as possible because of the great returns they provide. I am also trying to help other investors discover the fantastic world of investing in long-term rentals through my blog. However, I run into a lot of feedback from people who are worried about how risky it is to invest in rental properties. I hear: “my friend went broke investing in real estate” or “my parents had a rental and it was a money pit up until the day they were forced to sell it.” There are many horror stories involving real estate, but I have no doubt whatsoever long-term rentals are a great investment if you do your homework and buy properties right. Most of those horror stories come from people who did not do their homework, turned a personal residence into a rental out of necessity, or were hoping for appreciation. What are the real risks of rental properties and how can you mitigate these risks?

What are the main risks of investing in rental properties?

There are real risks with investing in rental properties. Many people felt the wrath of these risks in the last housing crash. Housing values plummeted and in some areas rents plummeted as well. Interestingly enough, not every area saw lower rental rates. Some areas saw rents increase because there were so many more renters (people who lost their houses) and the demand pushed rents up.

The investors who were hurt the most in the housing crash were those who were breaking even on their properties or losing money each month and hoping prices would increase to make money. When the bottom dropped out, they now had a property that was losing money each month and was worth less than they had bought it for. Many investors allowed these homes to go into foreclosure because they didn’t think they were worth keeping.

Other risks come from rentals when people buy a property and do not have enough cash to maintain the property or hold it when it is vacant. Most banks will require a certain amount of reserves when you get a loan on an investment property. But as soon as the property is purchased there is nothing stopping the owners from spending that reserve money. When you own a rental there will be times when the tenants move out, there can be evictions, and rarely a tenant can destroy a property. We see these situations occur quite often because people love to see drama but for the most part our tenants take care of our rentals and are awesome.

Why invest in rentals with these risks?

Rental properties have made me a ton of money over the last decade. Prices have increased significantly, which is great, but the properties also make money every month, and I always get a great deal on everything I buy which means I build equity on day one. There are many ways to mitigate the risks of rentals and the money I have made from my properties more than makes the risks worth it!

A lot of people will assume that when you are investing in large value assets like real estate and there can be huge returns, that the risk must be through the roof. There are types of real estate that can be very risky. We flip houses as well, and that is a much riskier venture than owning rental properties in my opinion. Development can also be much riskier but again come with huge rewards as well.

I also was an REO broker during the housing crash and I talked to many investors who lost homes. I was able to see why they lost their homes, what they could have done differently, and what happened after they lost their homes. For the most part, they bought houses that did not cash flow or make money every month and when things went bad they lost the motivation to keep paying into them. Losing the houses was also not the end of the world for these investors. Many of them had put little money down thanks to the crazy lending that was happening prior to that last crash. They were also able to keep those houses for quite a while after they stopped making payments. Many investors kept collecting rent during this time period which may or may not have been legal, but it did happen.

Many of those investors got right back in the real estate game after recovering and invested the right way with cash flow!

How can you mitigate the risk from rentals?

Buy below market value

One key to a low-risk rental strategy or any successful real estate strategy is to buy property below market value. Buying a property below market enables you to create instant equity, increase your net worth, and protects against a downturn in the market. One of the investors who was hurt badly during the crash was buying brand new houses and turning them into rentals. The houses were in great shape, but he paid full retail value for them.

When I buy rentals I want to pay at least 20% less than they are worth after considering any repairs are needed. For example:

  • A home needs $20,000 in repairs and will be worth $200,000 after those repairs. I want to pay $140,000 or less for that property ($200,000 x .80 – $20k). If I am flipping houses, I need to get an even better deal!

I also usually put about 20% down when I buy rentals which means after the property is repaired I have a loan around $110,000 and a property worth $200,000. Even if prices lost 30%, which is about how much they dropped across the county I am fine.

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Cash flow

I consider cash flow the most important factor in my long-term rental strategy. I want every property to make money each month after paying all expenses. Finding these properties that are also a great deal is not easy, but if you want to change your life with massive returns, it is not easy! When I invest I look for a return of 15% cash on cash. That means I make 15% on the money I have invested into the property. These are very high returns and not everyone needs to make this much but it is what I shoot for.

When you have cash flow coming in every month, it does not matter if values decrease because you do not need to sell the property. While it is true that rents can decrease and lower your cash flow, that is very rare and was even very rare in the last housing crash. There were some areas like Florida and Arizona that were massively overbuilt that saw lower rents, but the nation as a whole barely saw any drop.

My cash flow calculator can help you figure the real income on rentals.

Type of property

The older the property, the better the chance of a major repair needing to be done. I have enough cash flow coming in to account for major repairs, but homes over 100 years old can have issues come up that could wipe out all equity. It is rare, but a foundation or structural problem can make a property uninhabitable and cost tens of thousands of dollars to repair. By purchasing newer properties, I lessen the chances of running into repairs that could wipe out my profit for a year or even two.

Multifamily and commercial real estate can also carry more risk. Those types of properties are more complicated and have fewer buyers. I also buy multifamily and commercial properties but I am very careful what I buy and understand there will most likely be way more costs and exposure if the market changes.

If you buy properties that need a ton of work that can add to the risk as well. On my flips and rentals, the worst deals I have done were properties that needed massive remodels. It takes so much time, so many resources, and there is so much that can go wrong. It can also be risky trying to do all of that work yourself!

Cash reserves

One of the most important things to have when investing in real estate is cash! If you buy rentals or flips that can be expensive at times. It is very important to set aside cash to take care of the problems that might come up. When I figure my cash flow I set aside money for vacancies and repairs. You need to have cash set aside in case something goes wrong and this is one of the biggest mistakes landlords make is not having cash around.

Ironically, getting a loan allows investors to have more cash in many cases. Paying down the mortgage early or trying to pay it off with all your extra cash can leave you in a bad situation. If you do pay a property off and need to access that money in an emergency it can be hard to get to without selling.

Good management

Another way to have problems with your rentals is to manage them poorly. Many people have no idea how to manage a rental but decide they can do it on their own. They choose a bad tenant after not screening them, then never check on the property, and are surprised when it gets trashed. If you are going to manage rentals on your own you have to take the time to learn how to manage them. You have to screen tenants, and keep tabs on the properties!

If you don’t want to manage them yourself, you can hire a property manager as well. It takes time to find a good property manager and this is where it takes from work from the landlord as well. Again, no one said owning rentals was easy, but there are many ways to make them a great investment if you are willing to put in the work.

Liability and damage

Another risk that comes with rental properties is natural disasters or liability from accidents. People can get hurt and can sue tenants or tornados can wipe your property off the earth. Both instances are rare, but they happen. To mitigate the liability side you can put your properties in an LLC or make sure you have the property insurance coverage like a landlord and umbrella policy. With these policies, if you have a tenant destroy property or need to be evicted, they can help cover those costs as well! Putting a property in an LLC can help with getting sued but is not foolproof.

It is important to make sure your insurance agent knows you are using the property as a rental so you have the right coverage. It might be cheaper to leave homeowners insurance on the property if you used to live there but that can cause problems down the road.

Risks that are tough to mitigate

There are some cases where a landlord does everything right but still has a massive loss. These are rare but can happen and just about any investment or simply living life comes with risks.

  • Meth or drug house: If someone is cooking meth or using meth in your house it can cause damage that insurance will not cover. You may have to make major repairs depending on how bad it is. These risks can be alleviated by good tenant screening and checking on the properties often. It is not always the case, but many drug houses we see have cameras all over. That can be a sign to check the house out more if you see cameras on your rental.
  • Floods: Not all floods are covered by insurance. You often need an additional rider or flood coverage. If you are in a flood zone the lender will require the additional coverage but if you pay cash or use private money you may not be required to have it. There is also the risk of a flood outside a flood zone. If the property has a risk of flooding it is important to talk to your insurance agent about additional coverage.

Why does everyone say rentals are risky?

I won’t tell you it is impossible to lose money investing in long-term rentals. It can easily happen if you don’t have a plan, have reserves, or are impatient. It is not easy to buy properties below market value with great cash flow. If it were easy investing in long-term rentals, everyone would be investing in real estate.

The reason so many people think rentals are risky is that they hear anecdotal stories. Stories are good for entertainment and drama but they don’t give the entire picture. “my cousins, aunts, friend, lost all their money when their rental was trashed!” They failed to tell us the person self-managed a property they used to live in from 4 states away and never once talked to the tenant in 3 years. Then they were surprised it was trashed. There are all kinds of stories but usually, you can find one of the main reasons above for why people lose money on rentals. Overall, real estate is one of the best ways to build wealth!

Don’t be scared to invest in rental properties

There are many people who have gotten rich and retired early by investing in long-term rentals. There is a lot of opportunity and many advantages to investing in real estate. Just because you can have some great rewards does not mean there is a massive risk. Some risk? Yes of course and the less you pay attention to your investment the riskier it will get!

Categories Rental Properties

Source: investfourmore.com

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What You Need to Know About Virtual Open Houses in the COVID-19 Era

In 2019, the real estate industry celebrated 100 years of open houses. Over the course of those decades that real estate professionals have been hosting open houses, they have evolved, and in some cases, disappeared. Since the arrival of the COVID-19 crisis, the real estate industry has scrambled to evolve once again. That includes if, and how, open houses are conducted. At the guidance of the National Association of Realtors, open houses during this time should look different and those marketing properties have found new ways to make touring the home virtually accessible.

The traditional open house is what we’re all widely familiar with. It’s hosted by a real estate agent and potential home buyers are allowed to come and go while they tour the property. However, since the COVID-19 outbreak, the National Association of Realtors has advised suspending in-person open houses. While this is simply a guidance to brokers, many state and local governments have also enacted “shelter-in-place” orders which deem in-person open houses not permissible.

Virtual Open Houses: A Quick Guide

What is the Difference Between a Virtual Tour and a Virtual Open House?

Many programs exist to provide 24/7, 360-degree virtual tours to buyers. While a virtual tour is the first step any prospective homebuyers should take, if interest is there for that property, a guided tour would be the next step. The difference between virtual tours and virtual open houses are that a real estate professional will guide you through the open house while virtual tours are completed on your own. Virtual tours can be completed from the listing page of a property without any prior scheduling. Virtual tour software goes beyond photography and provides 3-D, walking virtual tours of a property. This allows potential buyers to feel like they are literally standing in the middle of the room touring the home, but without having to leave the comfort of their own home.

Young woman sitting on bed in bedroom and having video call via laptopYoung woman sitting on bed in bedroom and having video call via laptop

Virtual open houses can help provide more insight to potential homebuyers. They’re usually scheduled after you took a virtual tour or looked through the listing’s photos and felt interested enough to see the property in all its glory. Buyers can schedule a virtual open house with an agent directly from the Homes.com listing page. As in-person open houses and home tours are suspended, the prevalence of virtual tours will be of paramount importance.

Having these services are a crucial part of an effective real estate marketing plan during this time, so if you’re looking to sell, make sure you can find an agent that has the capability to utilize virtual tours and open houses.

Questions to Ask, or Be Prepared for, During a Virtual Open House

While your agent helps conduct the virtual open house, it’s always good to be prepared in advance with a list of questions for each property you’re going to see (virtually, that is). Start gathering your list after, or during, the virtual tour of that property. You can find a list of questions to start here, but also take into consideration that you’ll want to know the following:

  1. What’s the neighborhood like? Is it safe and walkable? Are there kids in the area and is it in a good school zone? These questions are important to ask local real estate agents, so make sure you’re working with someone who is familiar with the area you’re shopping around in.
  2. Are the current owners living in the home? Is it move-in ready? If the current owners are still living on the property, get an idea for the length of time to help set a basis for when you’ll be moving.
  3. Is the home in a flood zone? If so, what does the cost of flood insurance look like? If you’re in a coastal city or living near a body of water, these questions are pertinent to ask during the virtual open house.

Looking to Sell? Try These Alternatives in Addition to Virtual Open Houses

Despite a pandemic, many homeowners still need to sell their home which requires creativity on the part of the listing agent to market the home effectively and safely. By hiring an experienced and innovative real estate professional to the list a home, homebuyers can be rest assured that Realtors are working to reinvent the wheel and best serve their clients through a host of options.

Professional Photography

While hiring a list agent that understands the value of professional photography over cell phone list photos has always been crucial, the quality of digital images is even more important as more buyers will be searching on sites like Homes.com. By incorporating high resolution professional photography into the marketing plan, homes have statistically sold 32% faster.

A kitchen in a modern farmhouse.A kitchen in a modern farmhouse.

Drone Video

The rule of real estate is location, location, location. Even with the best professional photography and 3D tours of a home, many of these options lack the ability to properly view the location of the home. By incorporating drone images and video into a marketing plan, home buyers can evaluate surrounding conditions, proximity, as well as other factors. In fact, homes with aerial & drone photography sold statistically 68% faster than listings without aerial images.

As Realtors work to promote social distancing and safe practices, they have not slowed in their efforts to effectively assist buyers and sellers. If anything, real estate professionals are working harder than ever to reinvent the wheel and evolve in an ever-changing climate. While open houses and real estate marketing may look different than before, the real estate industry has incorporated multiple tools that adhere to social distancing guidelines without sacrificing the exposure of available properties.


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Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com

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American Option vs European Option: What is the Difference?

Two of the most popular types of options are American and European. American and European options have a lot in common, but there are some key differences that are important for investors to understand.

Options Basics

One of the reasons investors like options trading is that it provides the right, but not the obligation to the buyer, to buy (call) or sell (put) an asset. Making the choice to buy (call) or sell (put) is known as exercising the option.

Recommended: Call vs Put Option: The Differences

Like all derivatives, the value of options reflects the value of an underlying asset. The value of an option changes as its expiration approaches and according to the price of the underlying asset. Investors using a naked option trading strategy may not have the cash or assets set aside in their portfolio to meet the obligations of the contract.

If the value of the contract or the underlying asset doesn’t increase, the investor would choose to let it expire and they lose only the premium they paid to enter into the contract. Both put and call options contracts include a predetermined price to which the buyer and seller agree, and the contract is valid for a specified period of time.

After the contract ends on the expiration date, so does the option holder’s ability to buy or sell. There are many different options trading strategies that investors can use.

Recommended: What Is a Straddle in Options Trading?

What Are American Options?

America options are the most popular, with both retail investors and institutional investors using them. One of the reasons for their popularity is their flexibility. Traders can exercise their right to buy or sell the asset on any trading day during the term of the agreement.

Most often, American stock options contracts have an expiration period between three and twelve months.

American Option Example

Say an investor purchases an American call in March with a one-year expiry date. The contract states that the investor has the option to purchase stock in Company X for $25 per share. In options terminology, $25 would be known as the option’s strike price. As the price of the underlying stock asset changes, the value of the option also changes.

After the investor purchases the American call options, the value of the stock increases. Within a few months the price was $50. The investor decides to exercise their option to buy, purchasing 100 shares of the stock at the agreed upon strike price of $25/share, paying a total of $2,500. The investor then sells the shares at the current market price of $50/share, making a profit of $2,500 because their value had doubled, not including the premium paid.

Investors can also buy put options, which give them the right to sell instead of the right to buy. With put options the scenario is reversed in that the investor would exercise their right to sell if the asset decreased in value.

What Are European Options?

European options are similar to American options, but holders can only exercise them on the expiration date (not before), making them less flexible.

European Options Example

Let’s say an investor purchases a European call option for 100 shares of Company X with a strike price of $25 and an expiration date six months from the time of purchase. Three months after the contract starts, the price of the stock increases to $50/share. The investor can’t exercise the right to buy because the contract hasn’t reached the expiration date.

When the option holder is able to exercise three months later, the stock is down to $30/share. So the investor can still exercise the option and make a profit by purchasing 100 shares at $25 and selling them for $30. The investor would also need to subtract the upfront premium they made, so this scenario wouldn’t be nearly as profitable as the American option scenario.

This is why European options are not as valuable or popular as American options. Options pricing reflects this difference. The premium, or price to enter into a European option contract is lower. However, traders can sell their European options at any point during the contract period, so in the example above the trader could have sold the option for a profit when the stock price went up to $50/share.

American Style Options vs European Style

American and European options are similar in that they have a set strike price and expiration date. But there are several key differences between American and European options. These include:

Trading

One main difference between American and European options is traders typically buy and sell European options over-the-counter (OTC) and American options on exchanges.

Premiums

American options typically have higher premiums than European options since they offer more flexibility. If the investor doesn’t exercise their right to buy or sell before the contract expires, they lose the premium.

Settlement

European options tend to relate to indices, so they settle in cash. American options, on the other hand, typically relate to individual stocks or exchange-traded funds and can settle in stock or cash.

Settlement Prices

With American options, the settlement price is the last closing trade price, while with European options the settlement price is the opening price of index components.

Volume

American options typically have a much higher trading volume than European options.

Exercising Options

Traders can only exercise European options at the expiration date, while they can exercise American options at any point during the contract period. Traders can sell either type of option before its expiration date.

Pricing Models

A popular pricing model for options is called the Black-Scholes Model. The model is less accurate for American options because it can’t consider all possible trading dates prior to the expiration date.

Recommended: Black-Scholes Model Explained

Underlying Assets

The underlying assets of most American options are related to equities, European options are typically pegged to indices.

Risks of Americans and European Options

American options are riskier to an options seller because the holder can choose to exercise them at any time.

For buyers, it’s easier to create a hedging strategy with European options since the holder knows when they can exercise their right to buy or sell. Day traders and others who invest in options realize that there are risks involved with all investing strategies, along with potential reward.

The Takeaway

Options are one commonly traded type of investment, and many traders use them to execute a trading strategy. However, it’s possible to build a portfolio without trading options as well.

If you’re interested in a more straightforward approach to investing, one great way to get started is by opening a brokerage account on the SoFi Invest platform. The trading platform lets you research, track, buy and sell stocks, ETFs, and more right from your phone.

Photo credit: iStock/AleksandarNakic

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3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

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What Is Earnest Money?

Earnest money is a deposit a potential homebuyer places to signal to the seller that they have serious interest in a property. Also called a “good faith” deposit, this money benefits both the buyer and the seller during the homebuying process.

Purchasing a home involves a number of financial transactions, like saving for a down payment, securing a loan, and paying closing costs. Earnest money is another cost associated with buying a home, but it has the added role of protecting both buyers and sellers from some of the risks associated with a real estate transaction.

  • If the purchase falls through, earnest money helps sellers recoup time lost when the house was off the market.
  • If the contract terms are not met, earnest money is often refunded to the buyer.
  • If the purchase is successful, the earnest money deposit is applied toward the down payment for the home.

Read on to learn all about how earnest money works, how it benefits buyers and sellers, and what these deposits look like in different situations.

How Earnest Money Works

When a buyer is serious about purchasing a property, they use earnest money to signal their intent to purchase it. Although the deal is not finalized at this point, a significant earnest money deposit often prompts the seller to accept an offer, which changes the listing status to “under contract.”

While the amount of earnest money required varies, it frequently amounts to 1 to 3 percent of the total cost of the home. While earnest money is not always required, most sellers do prefer the deposit as a way of finding serious offers, and in competitive markets, a larger deposit provides the possibility of standing out in a crowded field of offers.

When a buyer places an earnest money deposit, the money goes into an escrow account, which means that a third party keeps the funds safe until an agreement is reached. After the house is closed on, the money is applied toward the down payment.

However, the real value of earnest money comes from the way it benefits both homebuyers and sellers.

When Is Earnest Money Refunded?

Earnest money deposits can be refunded in situations that don’t go according to plan, helping to protect homebuyers from several risks.

After the deposit is placed, a buyer and seller enter into a contract to begin the process of changing ownership. This contract describes several contingencies, which are conditions that have to be met before the contract is considered binding.

If any of these conditions are not met, then the contract falls through — and in several cases, the buyer will get their earnest money deposit refunded.

situations-where-earnest-money-is-refunded

In the following situations, a homebuyer will have their earnest money refunded:

  • If the appraised value of the home is lower than the cost to purchase, the buyer can back out of the sale with their deposit.
  • If the home fails inspection, the buyer can leave the sale with their deposit or negotiate a lower price based on the cost of repairs.
  • If the buyer cannot secure a mortgage for the cost of the home, they are able to void the contract and reclaim their deposit.

That said, all of these situations are only covered if these contingencies are specifically laid out in the contract, so make sure to read carefully before signing. In any case, it’s very helpful for homebuyers to know that their deposit can be refunded in situations where the contract cannot be fulfilled by the seller.

Earnest money deposits also benefit sellers, who take on a risk when they begin contract negotiations with a buyer.

How Earnest Money Benefits Sellers

The most obvious way that earnest money benefits sellers is that it provides a clear signal about which buyers are serious. That said, there is an even more crucial way that earnest money deposits protect sellers during the course of a real estate sale.

After a potential buyer has put down an acceptable earnest money deposit, the seller will typically enter into negotiations. As a result, the listing for the home changes to “under contract,” which discourages other potential buyers.

If the buyer backs out of the sale, the seller has lost time that the house could have been shown to other buyers, and they may need to pay additional costs to re-list the house on the market. However, because the seller is given the earnest money deposit in this situation, they are able to recoup some of their losses.

While these deposits may at first seem burdensome, ultimately they are beneficial to everyone involved in the process of buying or selling a home.

Examples of Earnest Money Deposits

In order to truly understand how earnest money works, it can be helpful to imagine some of the main scenarios that occur after a deposit is placed.

three-scenarios-for-earnest-money

After a buyer puts down an earnest money deposit and contract negotiations begin, there are three typical situations:

  1. The buyer backs out: If the buyer backs out of the sale, the seller retains the earnest money deposit.
  2. The contract conditions are not met: Conditions that are not met — like the home inspection contingency or the appraisal contingency — lead to a void contract, so the buyer can walk away with their earnest money.
  3. The sale closes: If the buyer and seller agree to terms and the sale closes, the buyer’s earnest money deposit is applied toward the down payment.

As you can see, earnest money deposits are positive for both buyers and sellers. Sellers benefit because buyers are more committed and financially invested, and buyers benefit because contingencies allow them to walk away from a situation that was not as it appeared. And if the sale closes, the earnest money is applied to the cost, leaving all parties satisfied.

Purchasing a home is an important financial milestone, and understanding earnest money is a great first step in the process of buying real estate. To make sure you’re on track, fine-tune your budget before preparing to buy a home. And once you’ve settled on the right place, don’t forget to consider additional costs like home improvements or home repairs.

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