Yesterday I did a post describing the benefits of a rental property after 20 years of ownership. Please read Real Estate Investing Versus The Stock Market : Part 1 for the entire scenario and to catch up to where we are today. Because today we’re going to ask what if you had taken that $38,500 ($35,000 for the down payment and $3,500 for closing costs) and left it in the stock market versus investing in a rental house.
I will readily admit to not being as in tune with the stock market as quite possibly many of our readers. I do real estate. So that makes sense. Yes, I have an IRA. Yes, my wife has a pension with KPERs. Yes, I have other investments (though not large) in mutual funds and one other well known stock. The point is, I don’t eat, breath and live in the stock market. And I don’t believe most working professionals have the time or expertise to follow the market on an hourly or even daily basis, either.
So we’re going to say that your $38,500 is in a nicely performing mutual fund (or stocks, heck, I don’t care.) that after all the buy fees, sell fees, yearly fees, etc, is yielding you a nice return of 9% per year, for the next 20 years. I’m told, and have researched, that 9% is a good return number to be expected. (Are you getting 9%?) Yes, I am well aware that spikes and dips can happen. But how is that any different than real estate?
So, using a very simple investment calculator math you simply take that $38,500 at a 9% annual return and you end up with a balance of $215,770.
REAL ESTATE VERSUS STOCK MARKET
Looking at yesterday’s real estate returns after 20 years (but not calculating increases in rent or tax benefits and conservatively adjusting for additional obsolescence) we had a total benefit of $216,611.
The same $38,500 invested in the stock market over the same period of time became $215,770.
Can we agree here that the difference is not that great? But what if…?
Rents rise and fall like housing prices…and the stock market. Let’s just say that rents rise over the years at 2%, or slightly less. Not unusual. Well, with that being the case, we have a different ball game.
Remember, our Part 1 scenario considered the cash flow before taxes to be $1,536/yr based on a rent rate of $1,575. Now lets say that we calculate the rent rises. I won’t bore you with all the math, but it takes our total 20 year cash flow before taxes number from $30,720 to $63,150. That’s another $32,430 in favor of the rental house.
Listen, in my experience real estate is not as easily liquidated and carries more risk. However, it is easily leveraged by real estate investors with good credit and assets and you can harvest the equity out of this house 10 years in to create a second income property with similar numbers. Now the game has changed!
To be fair, stocks/mutual funds take less management, are easier to liquidate or buy/trade, and carry a whole let less risk.
And, let’s be clear, I own both rental property and mutual funds/stocks. My preference after I have maxed out my IRA (and that of my wife) each year is to put the money in to real estate. Just makes more sense to me. Why?
- Real estate has better returns.
- Real estate has better tax advantages.
- Real estate can be passed on capital gains tax free.
- Real estate can be leveraged.
- Some one else (tenant) is providing some of the equity growth.
- I have more control over house or property manager than I have over a far away company making widgets.
I could go on and on. I am not saying don’t invest in the market. I am saying, you should also be investing in real estate.