I've been trying to research this and built a very low fidelity model with rent growing at 1% a year and the s&p at 7% and was getting that the s&p would be better over 30 years. Anyone have more insight, it seems that the passive income stream might be better for FIRE but the market could grow more long term wealth?
The difference here is leverage. Letâs use small numbers: 10k If I had 10k, I would buy 15k max worth of S&P. Thatâs max margin limits. Over the last 30 years, thatâs 7% return per year. With the same 10k, I would buy 5 properties at 20% down. Iâve effectively used leverage to increase my purchase power (also risk). If you are even cash flow neutral, in 30 years you will have 5 properties paid off, yearly depreciation from five property, and a continued rental income stream from those properties. Your 30 year margined S&P purchase grows to 85k at 7% Your 30 year leveraged RE growing at 2% each year gets you 85k also (in addition to the other benefits listed). Why ever do RE? 1. Appreciation - According to Case Shiller National, the return rate of RE over the last 30 years is 3.5% (I used 2% above) 2. Depreciation - Ask your tax accountant especially if youâre high income. 3. Section 179 Rule - Also awesome if you are high income and need to offset income against expenditure in certain years. 4. Leverage - No sane RE person waits 30 years before taking cashing out from a rental and using those funds to buy even more. Soon your isht looks like a pyramid. Cons 1. RE done well is not a passive income business. Dabblers are at risk of losing their money and this is much less the case in S&P investing 2. Barrier to entry is capital. 10k gets you nothing (that you would want anyways). Whew. Done. Edit Not quite. Now letâs say after 4 years, of constant mortgage you decide to re-lever. Now youâve paid enough mortgage to cash-out-refi into a 6th property (assuming a 2% appreciation) and still be at a 25% DTV rate. Next time it takes you 3.5 years to afford property 7. And 3 years for property 8. So with your initial 10k, you now have 8 properties 10.5 years later. Extrapolate this out and see the power of leverage. Leverage is a double edge sword. Anyone that was in RE in 2008 has some really really good stories to tell. I still carry my scars.
This perfectly sums it up. I am huge RE fan. But I keep money in stocks too.
So you are cash flow neutral typically for a while? Any good books on this subject?
There is an article on biggerpockets on exactly same topic. Google it.
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To me this is more about control, i do have that in RE, but not in stock