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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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.
Risk tolerance, income profile, cash flow, investment style, target market etc.
Someone also starting out may have much better advise than someone getting out.