Should you invest in the stock market or in real estate properties?
I was in a conversation the other day about a guy waxing poetic about how he is buying more properties to keep building his little rental empire.
I listened along because I do like listening to how people invest their money even if it isn’t the way I do my own investing….
Anyway, his main point ran along the lines of:
I could rent this place out and it would cover everything!
Everything meaning all the costs:
- Condo Fees
Utilities they would obviously cover, and maintenance would be his bag if they ruined the apartment.
I didn’t say anything but the only negatives that keep me from investing in real estate as an investing strategy (not as my primary home to live in) are pretty solid arguments:
Actual, proper return on your money
I have not done the math, but for it to actually make good money and not just cover costs (I mean a PROFIT), the equation that works for me is:
A property should be able to be rented for 1% of its price.
So a $300,000 property of what he is talking about, should be able to be rented for $3000 for it to be a GOOD DEAL. I’d be all over that ish.
$1500 on such a property per month may cover the mortgage, taxes and condo fees, but even if you own a property at the end of it all, you still want to actually MAKE MONEY on it while you’re renting it (hello? investing?), not just have your capital tied up in a physical asset and having someone pay for it in the end.
Where I am living, I would need to rent my place out for $6000 a month (STEADILY) for it to be worth “investing” in as a property…
Not that simple to liquidate…
Need the cash?
Can’t just sell some stocks at a loss and use the money.
You need to sell the whole apartment, and not only that, engage a real estate agent who will take a commission, make you keep the place in perfect showroom condition, and then run you through the mess of papers and so on.
Dependent on the moods and natures of renters
If you get steady renters, this is great. If you don’t, you’re on the hook for that mortgage and all of the fees.
If your renters are great people (like we were) and took care of the place like gold, you’re fine.
But if they trash it, like the renters down the hall from us? OMG.
Scratches on the door, it looks like they just continually rammed things into the door, I am sure the floors and walls are ruined from their epic fights over the past year…. (yeah, cops called on them and all that).
Not exactly a great treatment of your money or asset.
This is why I prefer my money in the stock market. Sure, I own my house free and clear (paid cash because I don’t like the mental baggage of debt), and I have some retirement stuff that is locked in until I am 65, but I won’t be a real estate mogul any time soon unless I fall upon a really, really good deal.
Depends on the state and city, but in some places in the US, the rules are so stacked against landlords. For example, when I lived in Washington DC if you sold your place you had to let the tenant have the first right to buy. And if someone didn’t pay their rent, it would take FOREVER to kick them out. And the amount of security deposit you can collect is pretty low–not enough to cover any real damages.
We’re doing both investing in the stocks and renting. The net return on our properties is around 5%, after taxes, maintenance, time without tenants, etc. We don’t have mortgages, but actually, borrowing the money to finance can be a smart move in some cases. For example, you put in 20% of the money, but get return on 100% of the price of the property.
The risks in renting are less in my opinion that on the stock market, if you pay in cash for your property. The risk is then just that your return is going to be 3%, not 8%. You can always find renters for a property, it’s just the price that might not be the one you want.
If you borrow to invest, it can be a mixed bag. But it’s still less risky to borrow to invest in a property than it would be to borrow to invest in the stock market. The first is risky but with enough math upfront, you can reduce the risks. The latter is almost always guaranteed to end in tears.
But yeah, it’s not for everyone. For us it’s mostly fun, like Monopoly. But we did have a 10 pm call on Easter Sunday that a pipe had burst. We’re taking the view that bad things will happen, it’s just a matter of time, and we don’t take anything about our rentals personally. It’s like any other business, sometimes things just break and the only thing to do is to charge rent appropriately, so you have enough profit to repair or replace them. We even started to think about our own furniture and furnishings as a consumable good that has a X years lifespan, so we became way less attached to material goods as a result.
Unless you’re investing in REITs, real estate is a job. It seems a lot of beginners don’t realize how much work is involved in maintaining rental properties.
I have no desire to dabble in real estate because I already have a job that pays well, and my free time is much more valuable to me than taking on a second job to potentially make more money. The big advantage of owning index funds is that I don’t have to do anything. They gradually grow over time, in some cases making me more money than my day job, and if I ever need the funds, I can get it in cash in my bank account within a couple of days.