Rental Properties vs S&P

New / R&D
🍻ilkebeer

New R&D

🍻ilkebeer
Jun 18, 2019 8 Comments

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?

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TOP 8 Comments
  • New / Other
    DuQvV7y

    New Other

    BIO
    Did stuff. Hustled hard. Retired
    DuQvV7y
    The difference here is leverage.

    Let’s use small numbers: 10k

    If I had 10k, I would buy 15k max worth of S&P. That’s max margin limits.

    Over the last 30 years, that’s 7% return per year.

    With the same 10k, I would buy 5 properties at 20% down. I’ve 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 you’re 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 let’s say after 4 years, of constant mortgage you decide to re-lever.

    Now you’ve 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.
    Jun 18, 2019 5
    • New / R&D
      🍻ilkebeer

      New R&D

      🍻ilkebeer
      OP
      So what if you're a noob like me, then what
      Jun 19, 2019
    • New / Other
      DuQvV7y

      New Other

      BIO
      Did stuff. Hustled hard. Retired
      DuQvV7y
      There are too many factors for me to answer this intelligently

      Risk tolerance, income profile, cash flow, investment style, target market etc.

      Someone also starting out may have much better advise than someone getting out.
      Jun 19, 2019
  • To me this is more about control, i do have that in RE, but not in stock
    Jun 18, 2019 0
  • There is an article on biggerpockets on exactly same topic. Google it.
    Jun 18, 2019 0