Author Topic: Rental Properties vs. Stock Market Investing  (Read 2835 times)

Cwadda

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Re: Rental Properties vs. Stock Market Investing
« Reply #50 on: October 06, 2017, 07:46:13 AM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

Some people are cool with buying a $500k house and renting it out for $2k/month.  But no thanks, not for me.  I don't like buying liabilities and gambling on appreciation, i.e. putting your money into a bank account that has negative interest.

Lots of people, wealthier than I'll ever be, have done the opposite.  To each his own.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #51 on: October 06, 2017, 09:47:29 AM »
Based on this thread, I wanted to see, locally, how real estate has appreciated net of inflation and compared to stock market increases (how often was it better to have real estate than stocks?)

My cheating shortcuts

I used net of inflation to sorta - kinda approximate the drag that higher mortgage interest rates would have, and I did not compare to actual stock market returns, just a target rate of 5-6%, net of inflation, net sale (assuming realtor commission is 6%).

I assumed maintenance and taxes were a function of the expenses to live there or use it as a rental business., e.g., i excluded these costs.  I assume that rental income versus expenses is BUSINESS income, that you work for, not investment.
Looked at average increases over rolling 5, 7, 15 year periods.



The DATA:

House data for Greater Vancouver, HCOL with outrageous prices today... and CPI for British Columbia, which is lower than Canada's average --
Years -- Jan 1979 to Jan 2017.   (interesting fact, home prices doubled in 1981, were flat for 8 years from 1993, but that doesn't get a lot of press)
Year 2017 value is $1.6 Million; Year 1979 value is $68,200.   So an impressive run up in value in 38 years.

Result
 
60% of the time, home ownership returned at least 6% annually to the homeowner, net of inflation.  Sometimes a lot more:  1 out of 7 years, the 5 year return exceeded 15% annually, net of inflation.. However,  1 in 6 years the 5 year appreciation was actually negative.   


TLDR
This means that in the 1980's through today, more than half the time, owning a home for 5 or more years would have beaten the long term average stock market real returns.  Buying property within a year or two of a sudden dip appears to be the primary driver of returns, especially if it is held deliberately until a minimum annual target increase is achieved (need to hold between 5 and 19 years).

I was honestly expecting a much better frequency of success by owning real estate in Vancouver from 1978 to today.

I'm concerned with the total return of real estate (home value appreciation + rental income) vs. the stock market, not just the rise in the value of the property. According to my calculations, real estate handily beats the stock market, provided that you purchase a fixer-upper for less than 50k and are able to rent it for $800-$1,000/mo.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #52 on: October 06, 2017, 09:50:37 AM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

Some people are cool with buying a $500k house and renting it out for $2k/month.  But no thanks, not for me.  I don't like buying liabilities and gambling on appreciation, i.e. putting your money into a bank account that has negative interest.

Lots of people, wealthier than I'll ever be, have done the opposite.  To each his own.

That's a measly 0.4% monthly ROI. My minimum requirement is 2%, or I won't even consider it.

afox

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Re: Rental Properties vs. Stock Market Investing
« Reply #53 on: October 06, 2017, 12:21:46 PM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.


That is *exactly* how it works in my real world. Managing your property is a job, not an investment. If it doesn't beat the market, even after hiring out everything but the occasional phone call, it is a shitty real estate investment.

I'm glad you're providing affordable housing. So am I, but I'm also earning 2-3x average market returns for my trouble, with hired management.

That's phenomenal, well done sir!

Cwadda

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Re: Rental Properties vs. Stock Market Investing
« Reply #54 on: October 06, 2017, 02:33:59 PM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

Some people are cool with buying a $500k house and renting it out for $2k/month.  But no thanks, not for me.  I don't like buying liabilities and gambling on appreciation, i.e. putting your money into a bank account that has negative interest.

Lots of people, wealthier than I'll ever be, have done the opposite.  To each his own.

That's a measly 0.4% monthly ROI. My minimum requirement is 2%, or I won't even consider it.

Yeah, I'm only going to invest in something if it beats the stock market. Any lower and it's not worth the headache.  My property is pulling 36.5% annually with management, but I'm self managing for now so it's returning 57.7% currently.  Either way it works.

Goldielocks

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Re: Rental Properties vs. Stock Market Investing
« Reply #55 on: October 06, 2017, 02:51:36 PM »
Based on this thread, I wanted to see, locally, how real estate has appreciated net of inflation and compared to stock market increases (how often was it better to have real estate than stocks?)

My cheating shortcuts

I used net of inflation to sorta - kinda approximate the drag that higher mortgage interest rates would have, and I did not compare to actual stock market returns, just a target rate of 5-6%, net of inflation, net sale (assuming realtor commission is 6%).

I assumed maintenance and taxes were a function of the expenses to live there or use it as a rental business., e.g., i excluded these costs.  I assume that rental income versus expenses is BUSINESS income, that you work for, not investment.
Looked at average increases over rolling 5, 7, 15 year periods.



The DATA:

House data for Greater Vancouver, HCOL with outrageous prices today... and CPI for British Columbia, which is lower than Canada's average --
Years -- Jan 1979 to Jan 2017.   (interesting fact, home prices doubled in 1981, were flat for 8 years from 1993, but that doesn't get a lot of press)
Year 2017 value is $1.6 Million; Year 1979 value is $68,200.   So an impressive run up in value in 38 years.

Result
 
60% of the time, home ownership returned at least 6% annually to the homeowner, net of inflation.  Sometimes a lot more:  1 out of 7 years, the 5 year return exceeded 15% annually, net of inflation.. However,  1 in 6 years the 5 year appreciation was actually negative.   


TLDR
This means that in the 1980's through today, more than half the time, owning a home for 5 or more years would have beaten the long term average stock market real returns.  Buying property within a year or two of a sudden dip appears to be the primary driver of returns, especially if it is held deliberately until a minimum annual target increase is achieved (need to hold between 5 and 19 years).

I was honestly expecting a much better frequency of success by owning real estate in Vancouver from 1978 to today.

I'm concerned with the total return of real estate (home value appreciation + rental income) vs. the stock market, not just the rise in the value of the property. According to my calculations, real estate handily beats the stock market, provided that you purchase a fixer-upper for less than 50k and are able to rent it for $800-$1,000/mo.

I understand what you are saying, but after managing a rental for ourselves, honestly, I look at the positive cash flow more as income for the time and hours we put into it (for maintenance, renting it out, learning about the lease contracts, checking up on it to ensure no illegal activity, cleaning to reshow it, giving back the deposit).

To me it is two investments in one -- a) a second job or a self managed business, plus b) a real estate investment in future appreciation.

The reason is that I could put in the same time into a different side hustle, to earn similar monthly cash flow.  Maybe I haven't had enough free cash flow on my properties, but it worked out to only $50/hr.  If you are a fully hands off investor, with a property manager, it makes sense that you would combine your net cash flow each month into your investment returns.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #56 on: October 07, 2017, 12:43:17 AM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

Some people are cool with buying a $500k house and renting it out for $2k/month.  But no thanks, not for me.  I don't like buying liabilities and gambling on appreciation, i.e. putting your money into a bank account that has negative interest.

Lots of people, wealthier than I'll ever be, have done the opposite.  To each his own.

That's a measly 0.4% monthly ROI. My minimum requirement is 2%, or I won't even consider it.

Yeah, I'm only going to invest in something if it beats the stock market. Any lower and it's not worth the headache.  My property is pulling 36.5% annually with management, but I'm self managing for now so it's returning 57.7% currently.  Either way it works.

Those are some phenomenal returns. I would be thrilled if I could get even 20% on my property.
How much do you pull in rent and what did you pay for the property?

powskier

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Re: Rental Properties vs. Stock Market Investing
« Reply #57 on: October 08, 2017, 05:57:59 PM »
If I were as close as you are to being done, I would not buy rentals.

I own 7 units in a lower end part of town and to be fair the money has been good BUT the hassles and potential unexpected losses can start gnawing at you as time goes on.
When everything is groovy RE is great but when things hit the fan it can get brutal pretty quick. I've had everything from a great tenant who took a serious turn for the worse and trashed a newly remodeled place  to a serious economic downturn that is dropping rents and upping vacancy rates. It took me 5 months to actually get ( legally) the guy out of that unit.
I would not run the risk this close to finish line in a state that is so pro tenant. Maybe hedge your bets by doing a flip , sound like you have the skills.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #58 on: October 08, 2017, 08:37:17 PM »
If I were as close as you are to being done, I would not buy rentals.

I own 7 units in a lower end part of town and to be fair the money has been good BUT the hassles and potential unexpected losses can start gnawing at you as time goes on.
When everything is groovy RE is great but when things hit the fan it can get brutal pretty quick. I've had everything from a great tenant who took a serious turn for the worse and trashed a newly remodeled place  to a serious economic downturn that is dropping rents and upping vacancy rates. It took me 5 months to actually get ( legally) the guy out of that unit.
I would not run the risk this close to finish line in a state that is so pro tenant. Maybe hedge your bets by doing a flip , sound like you have the skills.

5 months to evict a tenant? Geez. Add another 2-4 months to find another tenant, and that's a loss of nearly a year's worth of rental income. Meanwhile, the bills keep piling up.
I may consider doing flips, but I'm a little skeptical of it because I associate that with scammy real estate infomercials that I've seen since the early-90's.
« Last Edit: October 08, 2017, 08:47:02 PM by joer1212 »

Cwadda

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Re: Rental Properties vs. Stock Market Investing
« Reply #59 on: October 09, 2017, 07:17:30 AM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

Some people are cool with buying a $500k house and renting it out for $2k/month.  But no thanks, not for me.  I don't like buying liabilities and gambling on appreciation, i.e. putting your money into a bank account that has negative interest.

Lots of people, wealthier than I'll ever be, have done the opposite.  To each his own.

That's a measly 0.4% monthly ROI. My minimum requirement is 2%, or I won't even consider it.

Yeah, I'm only going to invest in something if it beats the stock market. Any lower and it's not worth the headache.  My property is pulling 36.5% annually with management, but I'm self managing for now so it's returning 57.7% currently.  Either way it works.

Those are some phenomenal returns. I would be thrilled if I could get even 20% on my property.
How much do you pull in rent and what did you pay for the property?

Paid $347k, rents for $4500/month.  Granted, that's with a 3.5% downpayment so I'm only getting those high returns on about a $30k total investment. So the numbers seem much better than normal financing situations.

With a 20% downpayment, the return would be 25% without management and 18.6% with management.

Car Jack

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Re: Rental Properties vs. Stock Market Investing
« Reply #60 on: October 09, 2017, 07:40:31 AM »
Parts of the Berkshires are upper level properties.  But that is far from new.  I know Stockbridge down into Connecticut (Canan, CT) very well and grew up in Western Mass.  Sure, you can buy the house in the center of Stockbridge and hope to attract some uppity fancy pants business starter who just sold his NYC based software company and wants to be Bob Newhart.  Chances are, he's going to build his own house.  But overall, Western Mass has a much lower outlook on employment in general and as a result, the general population is much poorer than a drive through Stockbridge or tour of the many private high schools on top of hills within 25 miles might indicate.

I'm trying to think where else you might be looking.  Areas around ski areas are very seasonal, despite efforts to keep something going on during the off season.  Tanglewood doesn't attract a big full time crowd.  Pittsfield is dead.  The only thing left of GE is the PCBs they left in the Housatonic.




makinbutter

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Re: Rental Properties vs. Stock Market Investing
« Reply #61 on: October 09, 2017, 08:14:50 AM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

Some people are cool with buying a $500k house and renting it out for $2k/month.  But no thanks, not for me.  I don't like buying liabilities and gambling on appreciation, i.e. putting your money into a bank account that has negative interest.

Lots of people, wealthier than I'll ever be, have done the opposite.  To each his own.

That's a measly 0.4% monthly ROI. My minimum requirement is 2%, or I won't even consider it.

Yeah, I'm only going to invest in something if it beats the stock market. Any lower and it's not worth the headache.  My property is pulling 36.5% annually with management, but I'm self managing for now so it's returning 57.7% currently.  Either way it works.

Those are some phenomenal returns. I would be thrilled if I could get even 20% on my property.
How much do you pull in rent and what did you pay for the property?

Paid $347k, rents for $4500/month.  Granted, that's with a 3.5% downpayment so I'm only getting those high returns on about a $30k total investment. So the numbers seem much better than normal financing situations.

With a 20% downpayment, the return would be 25% without management and 18.6% with management.

Cwadda, those returns sound outrageously high on the figures you have quoted.  Are you sure you're calculating one-time, far-off lumpy costs (capex etc) correctly?

Back of envelope calcs from a random internet dude (me):
Gross rent $4500
Mortgage (assuming 4%) on 315k: $1500
Insurance: uhhh WAG, probably $200
Taxes: Another WAG, call it another $200
PMI: ???

Assuming you lose 50% of your gross rents to expenses (another WAG), you're going to net something like $2000-2500 over time.  You'll be out of pocket like $1900 monthly, meaning you'll make... call it $500 a month, 6k a year.  That's a great return on $30k initial investment, but it's a far cry from 50% returns.  What am I missing here?

The only way I see you making 50% CoC returns (meaning you're pulling 15k per year on your 30k investment) is if you manage to profit something like 1.5k per month.  I just don't see that happening with the figures you quoted over the long term.  If you don't mind, can you share some of your calcs?

(ETA: I see that you meant 50%+ if you were to manage on your own, but still I'm not seeing how you're getting 30%+ returns with paying a PM)
« Last Edit: October 09, 2017, 08:17:08 AM by makinbutter »

Cwadda

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Re: Rental Properties vs. Stock Market Investing
« Reply #62 on: October 09, 2017, 08:27:04 AM »
Sure, I'll include the spreadsheet I use.  It's very handy for running numbers on cash flow.

Current inputs are for said property.  I haven't sat down and logged every receipt of every immediate repair expense, but I've estimated $8k to be pretty close to what I've put in so far. It could be slightly lower, bringing this to a $28k-$30k total investment.

Vacancy of 2.1% assumes one unit being vacant for 1 month of each year.  This is how it's been so far, and I anticipate next year being similar.

mattgwt

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Re: Rental Properties vs. Stock Market Investing
« Reply #63 on: October 09, 2017, 08:41:38 AM »
Which investment strategy would produce a higher and more reliable income in retirement, buying rental properties or maxing out my retirement accounts?
What are the pros and cons of each?

Details:

- I am single, 48 years old, with no kids

- I have about $500,000 in my 401(k) and other accounts

- I contribute 43k/yr to these accounts (90% stocks, 10% bonds)

- I make 78k/yr

- My goal is to retire by age 55, with at least 1m saved

- I will receive a partial pension at age 62 from my employer (about 15k/yr.)

- I live in Brooklyn, NY, and I'm considering buying rental houses in Massachusetts

Any thoughts and suggestions are highly appreciated

Thanks


You are very heavily weighted towards stocks for your age - what are you going to do if the market takes a 40% dive a year into your retirement, and doesn't recover for 5-7 further years?

Stocks are unlikely to return more than 5% long-term from here, so quality rental real estate in good areas yielding 4-4.5% net of everything, plus modest appreciation to keep up with inflation, is IMO an excellent alternative for you - you're likely to make about what you would in stocks with much lower risk, and far more than in bonds for modestly greater risk.

Owning a rental four hours away from you is hardly impossible, especially once you're retired, but it can be a hassle. You will likely need property management so be sure it's worthwhile.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #64 on: October 09, 2017, 09:11:58 AM »
Parts of the Berkshires are upper level properties.  But that is far from new.  I know Stockbridge down into Connecticut (Canan, CT) very well and grew up in Western Mass.  Sure, you can buy the house in the center of Stockbridge and hope to attract some uppity fancy pants business starter who just sold his NYC based software company and wants to be Bob Newhart.  Chances are, he's going to build his own house.  But overall, Western Mass has a much lower outlook on employment in general and as a result, the general population is much poorer than a drive through Stockbridge or tour of the many private high schools on top of hills within 25 miles might indicate.

I'm trying to think where else you might be looking.  Areas around ski areas are very seasonal, despite efforts to keep something going on during the off season.  Tanglewood doesn't attract a big full time crowd.  Pittsfield is dead.  The only thing left of GE is the PCBs they left in the Housatonic.

What do you think of North Adams, Pittsfield and Adams?

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #65 on: October 09, 2017, 10:17:35 AM »
Which investment strategy would produce a higher and more reliable income in retirement, buying rental properties or maxing out my retirement accounts?
What are the pros and cons of each?

Details:

- I am single, 48 years old, with no kids

- I have about $500,000 in my 401(k) and other accounts

- I contribute 43k/yr to these accounts (90% stocks, 10% bonds)

- I make 78k/yr

- My goal is to retire by age 55, with at least 1m saved

- I will receive a partial pension at age 62 from my employer (about 15k/yr.)

- I live in Brooklyn, NY, and I'm considering buying rental houses in Massachusetts

Any thoughts and suggestions are highly appreciated

Thanks


You are very heavily weighted towards stocks for your age - what are you going to do if the market takes a 40% dive a year into your retirement, and doesn't recover for 5-7 further years?

Stocks are unlikely to return more than 5% long-term from here, so quality rental real estate in good areas yielding 4-4.5% net of everything, plus modest appreciation to keep up with inflation, is IMO an excellent alternative for you - you're likely to make about what you would in stocks with much lower risk, and far more than in bonds for modestly greater risk.

Owning a rental four hours away from you is hardly impossible, especially once you're retired, but it can be a hassle. You will likely need property management so be sure it's worthwhile.

When I get closer to my actual retirement date, I will surely modify my portfolio. But, I don't yet know when that date will be exactly. It can be as early as age 50 or as late as 62. It's not written in stone. That's why I opted for an aggressive portfolio. Worst case scenario, I can always work longer if my investments take a dive. So far, that strategy has paid off. I mean, had I gone conservative, I would have left some phenomenal stock market gains on the table during the last 5 years. Going forward, I'll maintain the same aggressive strategy, despite predictions of financial gloom and doom, because the reality is that the stock market will often defy predictions. No one knows what it's going to do. People have claimed armageddon is imminent since 2009.

I agree that it makes sense for me to diversify into rental properties, at least from a purely financial perspective. But, one of the main issues is time. I only have 2 days off every week to fix up my property in order to prepare it for rental. It's kind of unrealistic to expect me to drive 8 hours r/t to do construction after working all week. But, even if I could do this nonstop, it would take many months to do significant work at that rate. Sure, I could hire a contractor, but that will run into potentially tens of thousands of dollars, which may render the investment not worthwhile.
 
There are also many other variables to consider.

What if I get bad tenants that trash my property, which took me months to build?
What if it takes forever to find a suitable tenant?
How long will it take to evict a bad tenant in Massachusetts? How much will this cost?
Will a good property management company take care of everything, including repairs? How much will this cost? Will dealing with the property management company be almost as much of a hassle as the tenants themselves?
What about unexpected expenses?

I know I sound fussy, but I have to weigh these realities against my current hands-off stock market investing approach.

« Last Edit: October 09, 2017, 11:09:20 AM by joer1212 »

makinbutter

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Re: Rental Properties vs. Stock Market Investing
« Reply #66 on: October 09, 2017, 12:27:51 PM »
Sure, I'll include the spreadsheet I use.  It's very handy for running numbers on cash flow.

Current inputs are for said property.  I haven't sat down and logged every receipt of every immediate repair expense, but I've estimated $8k to be pretty close to what I've put in so far. It could be slightly lower, bringing this to a $28k-$30k total investment.

Vacancy of 2.1% assumes one unit being vacant for 1 month of each year.  This is how it's been so far, and I anticipate next year being similar.

Right on, thanks for throwing out some numbers!  I guess the only thing I personally would think needs a little revision is the capex/maintenance (which you have at $310 total monthly).  I tend to be a little more conservative and would figure on this being closer to $500-600 over the long term, but it's a relatively small quibble. 

If *I* were running the #s, I'd probably bump up the CapEx/maintenance numbers accordingly, which would knock cashflow down to around 1k.  Still a 12k return on 30k, so CoC is still 40% (with you doing the management) or if you figure management will cost $450 a month, you'll be pulling $550-650 a month / 7kish per year, which would be 23% CoC (if you're outsourcing management).

All of these are, of course, back of the envelope numbers.  Either way, kudos, get a couple more of those and you're done-zo.

AlienRobotAnthropologist

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Re: Rental Properties vs. Stock Market Investing
« Reply #67 on: October 10, 2017, 10:32:41 PM »
I'm also interested in where in the Berkshires you think is up and coming. My assessment:

Williamstown - no real industry other than Williams college, so standard small college town economics
North Adams - Mass MOCA is OK I guess, but I'm no art critic. Not much else there
Pittsfield - only major employer is GD, which is very stable, but probably won't expand much. Solidly meh town with plenty of lower class people who don't work at GD. People who grew up there seem to speak more negatively of the town's trajectory than people that moved there.
Lenox - nice touristy town, but small and no growth prospects

The Berkshires aren't a bad place to live, but it's mostly just typical rural and small town USA. And economically, wealth has been consolidating in major metropolitan areas while the rest of the country rusts away for some time now. I haven't gotten this far, but I expect that eastern MA, not necessarily Boston, but reasonably populous towns with stronger economic prospects would likely be better to look at for a rental. I'd want a town with at least 3 major corporations, the more the better.

topshot

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Re: Rental Properties vs. Stock Market Investing
« Reply #68 on: October 11, 2017, 02:26:41 PM »
So far, we've determined that long distance landlording for a guy like me is not something I want to get into. But, what about if I hire a property management company?

Hire your brother if he's so gung ho to get you into this.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #69 on: October 11, 2017, 02:52:09 PM »
The Berkshires aren't a bad place to live, but it's mostly just typical rural and small town USA. And economically, wealth has been consolidating in major metropolitan areas while the rest of the country rusts away for some time now. I haven't gotten this far, but I expect that eastern MA, not necessarily Boston, but reasonably populous towns with stronger economic prospects would likely be better to look at for a rental. I'd want a town with at least 3 major corporations, the more the better.

The problem is that larger and more established areas, such as Boston, are far more expensive, lowering ROI.