Rental vs index investing, are they basically yielding the same returns long term?
Hah.
When my crystal ball is back from the shop, I'll let you know. ;)
Just gonna give you a live example so you can weight in yourself..
Our rental has a 6.3% return on the money, annually.
As our rental market is heating up, we plan on raising rent which gives about 0.4% more on return each year.
We purchased the unit in 2004,so it has only appreciated 7.7% in 8 years on price.
Now let's look at the S&P index. S&P has appreciated around 24% in one year, 28% in 2 years and -3% in 5 years. If dated back to 2004, the same time when we bought our condo, it has appreciated 27.81%. That shows you the housing market definitely took a huge beaten comparing to the stock market. The same time, the S&P dividend yield has been around 2-3% only for the last 8 years..
So here is the thing, from pure income perspective, rental definitely beats index assuming your mortgage comparing to rent you collect is very small. Or even better, pay cash for the rental.
However, from capital appreciation perspective, we will need a crystal ball... If you bet the housing price will outpace stock market, you should go with rental unit. If you are betting on high flying stock market and a depressed recovery in housing market, then you should bet on index fund...