Author Topic: Rental Properties vs Stock Market  (Read 3914 times)

markram

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Rental Properties vs Stock Market
« on: May 17, 2021, 07:24:13 PM »
Hi all,

Over the years I've invested in both rental properties and index funds. Based on quick, back-of-the-napkin math, it always seemed like Rental Properties were more profitable, so I decided to officially map out the differences.

I used the first property I bought as a case study, made some general assumptions, and used 8% annual returns as the basis for the stock market.

The result?

Rental Properties have the potential to earn you 3x more than the stock market over the length of a 30 year loan - if not more.

This honestly is higher than I thought. Is there anything I forgot to consider? I've been speaking alot about this topic recently, so I wanted to make sure I really have the ins and outs down pat.

Let me know what you think!

[MOD EDIT: Spam link removed]
« Last Edit: May 19, 2021, 08:38:09 AM by arebelspy »

Simpleton

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Re: Rental Properties vs Stock Market
« Reply #1 on: May 17, 2021, 07:54:56 PM »
Let me know what you think!

As someone with 1 current single family home rental, my experience is that maintenance costs would be MUCH higher than that. Perhaps my experience is an outlier?

I would generally assume ~3% of the home value per year (higher for LCOL areas and lower in areas where the home cost is more about the land). 1% most years, and occasionally you need to do a roof or replace a kitchen, or renovate a bathroom etc.

My assumption would just about wipe out your cashflow but not your profit.

I'm interested to hear how accurate your numbers are from people who have large numbers or properties.

The other contention I have is that you have adjusted up the value of the home after 30 years in line with 3% inflation, but you have not done the same for stocks.
« Last Edit: May 17, 2021, 07:59:15 PM by Simpleton »

markram

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Re: Rental Properties vs Stock Market
« Reply #2 on: May 17, 2021, 08:19:56 PM »
Let me know what you think!

As someone with 1 current single family home rental, my experience is that maintenance costs would be MUCH higher than that. Perhaps my experience is an outlier?

I would generally assume ~3% of the home value per year (higher for LCOL areas and lower in areas where the home cost is more about the land). 1% most years, and occasionally you need to do a roof or replace a kitchen, or renovate a bathroom etc.

My assumption would just about wipe out your cashflow but not your profit.

I'm interested to hear how accurate your numbers are from people who have large numbers or properties.

The other contention I have is that you have adjusted up the value of the home after 30 years in line with 3% inflation, but you have not done the same for stocks.

What was the state of your home when you bought it? What year was it built?

This home was built in the 70s and was in rent-ready condition when I bought it. So far the only maintenance I've done is stuff like painting the house in between tenants to make it rent-ready. If anything those numbers seemed like very conservative estimates to me.

Unless I'm wrong, the 8% average annual growth in stocks should already include the 3% of inflation, correct? I got these figures from looking at the Dow Jones or S&P 500 yearly numbers and estimating the impact of dividends, but it's possible I underestimated a bit. Either way, even at 10% or 11% it underperforms my numbers for Rental Properties (although it would be much closer). Plus, if the market is giving higher returns than I estimated, you also get to take advantage when you reinvest your rental earnings into the market.

ChpBstrd

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Re: Rental Properties vs Stock Market
« Reply #3 on: May 17, 2021, 09:03:42 PM »
Cash flows will be lumpy.

One year, you are going to have to replace the roof for about $6,000, and if you neglect that there will be another $3k in wood/sheetrock/insulation/paint repairs coming at you. Another year the $1,000 water heater, the $8,000 HVAC, the $4000 sewer line, etc. will go out. This is all if you are lucky and don't have termite, foundation, rotted bathroom floor, or burst water line issues. You can have a profitable year where you handily beat the stock market, but it will be because none of these big expenses happened that particular year. However, within the span of one decade, you will encounter at least half of these items.

To get a realistic long-term rate of return, I suggest switching from cash accounting to accrual accounting. Depreciate the roof, mechanical systems, plumbing systems, and electrical systems, as well as factoring in a bath and kitchen remodel every 25 years or so (less time if it's already old). Arrive at an average ammual cost to provide housing for someone by factoring in the predictable expenses.

Additionally, in my LCOL area, property managers charge 10% AFTER the entire first month's rent. If you can find 8% I'd ask how they can do a good job so cheaply vs. just sitting back and hoping to intercept the occasional rent check. Remember, from the property manager's point of view, their time is better spent getting additional clients rather than hassling tenants for rent or dealing with code enforcement issues, whereas you would hope they'd spend their time taking care of these things. It's a conflict of interest, and a low-baller is almost certainly an absentee PM.

Finally, I would assume one month of vacancy per year (8.4% vacancy rate, not 5%). People rent so they can move from place to place, and even if you get a long-term tenant, the four-month eviction, cleanup, and remod process on the next tenant will put you back on the trend line.

I ran the numbers this way in my LCOL area and roughly matched what I could expect from the stock market - just with a whole lot more work. I hold some REIT preferred stocks that yield over 6% and it's hard for me to sell those to make a down payment on a time-sucking project that might yield 8% if I'm lucky.

markram

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Re: Rental Properties vs Stock Market
« Reply #4 on: May 17, 2021, 09:17:39 PM »
Cash flows will be lumpy.

One year, you are going to have to replace the roof for about $6,000, and if you neglect that there will be another $3k in wood/sheetrock/insulation/paint repairs coming at you. Another year the $1,000 water heater, the $8,000 HVAC, the $4000 sewer line, etc. will go out. This is all if you are lucky and don't have termite, foundation, rotted bathroom floor, or burst water line issues. You can have a profitable year where you handily beat the stock market, but it will be because none of these big expenses happened that particular year. However, within the span of one decade, you will encounter at least half of these items.

To get a realistic long-term rate of return, I suggest switching from cash accounting to accrual accounting. Depreciate the roof, mechanical systems, plumbing systems, and electrical systems, as well as factoring in a bath and kitchen remodel every 25 years or so (less time if it's already old). Arrive at an average ammual cost to provide housing for someone by factoring in the predictable expenses.

Additionally, in my LCOL area, property managers charge 10% AFTER the entire first month's rent. If you can find 8% I'd ask how they can do a good job so cheaply vs. just sitting back and hoping to intercept the occasional rent check. Remember, from the property manager's point of view, their time is better spent getting additional clients rather than hassling tenants for rent or dealing with code enforcement issues, whereas you would hope they'd spend their time taking care of these things. It's a conflict of interest, and a low-baller is almost certainly an absentee PM.

Finally, I would assume one month of vacancy per year (8.4% vacancy rate, not 5%). People rent so they can move from place to place, and even if you get a long-term tenant, the four-month eviction, cleanup, and remod process on the next tenant will put you back on the trend line.

I ran the numbers this way in my LCOL area and roughly matched what I could expect from the stock market - just with a whole lot more work. I hold some REIT preferred stocks that yield over 6% and it's hard for me to sell those to make a down payment on a time-sucking project that might yield 8% if I'm lucky.

What I lay out with reserve accounts is in many ways similar to accrual accounting - it serves the same purpose to help make cash flow more consistent anyways. So, as long as my reserve estimates are correct, cash flow will more or less be equal every month.

Roofstock (the site I bought the house through) negotiates a deal with many Property Managers to get their rates down from the standard 10% to 8%. They're able to do this because of the volume they can offer. As for the first month's rent, that would be covered in the leasing fees section - in my case, it was only 65% of the first month's rent, and only when there's a new tenant moving in, so a $20/month reserve account has been more than sufficient.

Vacancy rates vary wildly with the area - with this specific example, 5% seems a bit conservative tbh. The winter months are the only time it's tough to find tenants - every other time of year you can get tenants in within a matter of weeks. So, as long as I plan for the leases to expire sometime other than the winter I should be fine.

Obviously, every property is different. This was basically just meant as a case study to show how much potential rental properties can have, but it wasn't meant to say that every property is like this. However, I don't think this property is an outlier by any means - in my experience, it isn't TOO difficult to find properties with similar stats.

vand

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Re: Rental Properties vs Stock Market
« Reply #5 on: May 18, 2021, 02:44:32 AM »
Agree that you can make more in property... but only IF you employ leverage.

So comparing a leveraged RE investment model to an accumulation stock market model is like comparing apples with porcupines.

Paper Chaser

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Re: Rental Properties vs Stock Market
« Reply #6 on: May 18, 2021, 04:59:03 AM »
"Click this link and read this advertisement I wrote!" I'm going to ignore the fact that this is really just an elaborate, borderline spammy advertisement and look at the numbers for a minute.

I think what you've actually shown, is not that real estate can outperform stocks, it's that leverage is powerful. Because your rental property has a mortgage, you're essentially comparing a $21k initial investment in the stock market with an $85k investment in real estate. Leverage isn't unique to real estate. If you took the same $21k cash and leveraged that into $85k in equities for an actual apples to apples comparison, the calculator that you used shows a return of $855,326 after 30 years for stocks (8% annual return, 0 additional money added). You'd have to subtract debt repayments from that, but margin rates are similar to mortgage rates, so the debt repayment should be about the same as your rental. It's still going to outperform your rental property that's not quite meeting the 1% rule. And with the stock investment you didn't have to do any work, screen any tenants, complicate your taxes, or concentrate your risk into a single asset (unless you choose an individual stock).

theoverlook

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Re: Rental Properties vs Stock Market
« Reply #7 on: May 18, 2021, 08:09:37 AM »
30 year average S&P 500 return with dividends reinvested is 10.4%.

Leverage cuts both ways on all investments; with or without tenants you have to make those mortgage payments. And you have to keep paying taxes, upkeep, etc, whether or not you have a paying tenant. Risk adjusted return is pretty similar between rental real estate and the stock market.

OMG, I just clicked the link. You're obviously getting affiliate income from Roofstock or something, the entire blog post is an unveiled ad for Roofstock.

cool7hand

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Re: Rental Properties vs Stock Market
« Reply #8 on: May 18, 2021, 09:35:43 AM »

OMG, I just clicked the link. You're obviously getting affiliate income from Roofstock or something, the entire blog post is an unveiled ad for Roofstock.

Agreed. What tripe!

markram

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Re: Rental Properties vs Stock Market
« Reply #9 on: May 18, 2021, 09:42:41 AM »
30 year average S&P 500 return with dividends reinvested is 10.4%.

Leverage cuts both ways on all investments; with or without tenants you have to make those mortgage payments. And you have to keep paying taxes, upkeep, etc, whether or not you have a paying tenant. Risk adjusted return is pretty similar between rental real estate and the stock market.

OMG, I just clicked the link. You're obviously getting affiliate income from Roofstock or something, the entire blog post is an unveiled ad for Roofstock.

Sorry if it seemed that way. The idea behind the post was to document exactly what I did with my first property and compare it to the returns in the stock market. Since I used Roofstock, I obviously had to include that information, especially since it was relevant to how I made some of my assumptions.

Using 10% returns on the stock market brings the stock total up to about $326,437 after taxes in 30 years, up from $186,316. This total is still lower than the $555,537 total I came up with for rental properties, albeit it's definitely closer.

HOWEVER, the strategy I laid out for rental properties involves reinvesting your returns into the stock market, which means if the stock market offers higher returns you get to take advantage. Using the same 10% returns, the rental property path will leave you with an amazing $690,917.80 after 30 years if all else stays the same. So double the stock return instead of triple, but still significantly more.

The idea is that by getting an initial cash flow return of 10-15%, taking advantage of leverage to build up equity, making money from appreciation, receiving tax benefits like depreciation, and reinvesting returns/reserve accounts into the market, this strategy SHOULD beat out the market even if the market offers ridiculous returns.

In fact, you got me curious about how high the stock market returns had to be to beat this out, so I checked what happens at 15% returns. And the Rental Property strategy STILL won! (Although it was REALLY close).

markram

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Re: Rental Properties vs Stock Market
« Reply #10 on: May 18, 2021, 09:45:14 AM »
"Click this link and read this advertisement I wrote!" I'm going to ignore the fact that this is really just an elaborate, borderline spammy advertisement and look at the numbers for a minute.

I think what you've actually shown, is not that real estate can outperform stocks, it's that leverage is powerful. Because your rental property has a mortgage, you're essentially comparing a $21k initial investment in the stock market with an $85k investment in real estate. Leverage isn't unique to real estate. If you took the same $21k cash and leveraged that into $85k in equities for an actual apples to apples comparison, the calculator that you used shows a return of $855,326 after 30 years for stocks (8% annual return, 0 additional money added). You'd have to subtract debt repayments from that, but margin rates are similar to mortgage rates, so the debt repayment should be about the same as your rental. It's still going to outperform your rental property that's not quite meeting the 1% rule. And with the stock investment you didn't have to do any work, screen any tenants, complicate your taxes, or concentrate your risk into a single asset (unless you choose an individual stock).

The problem is that margin calls exist, and over a long time horizon like 30 years there's virtually 0 chance you won't get margin called at some point. Being margin called resets your total cash available to a much lower amount, and ruins your returns, which is why buying stocks on margin can never be a long term play.

And I really don't think Rental Property investing is as hard as most people think - assuming you have a good property manager, of course.

JLee

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Re: Rental Properties vs Stock Market
« Reply #11 on: May 18, 2021, 09:47:04 AM »
$85k house and $600 property taxes with $825/mo rent?

lol, this is wildly regional.

bacchi

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Re: Rental Properties vs Stock Market
« Reply #12 on: May 18, 2021, 09:51:41 AM »
$85k house and $600 property taxes with $825/mo rent?

lol, this is wildly regional.

A unicorn in the wild.

ChpBstrd

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Re: Rental Properties vs Stock Market
« Reply #13 on: May 18, 2021, 09:53:40 AM »
$85k house and $600 property taxes with $825/mo rent?

lol, this is wildly regional.

A unicorn in the wild.

Not really. Welcome to the non-urban Deep South, where 1% rule properties are all over the place. Check Zillow if you don’t believe me.

Simpleton

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Re: Rental Properties vs Stock Market
« Reply #14 on: May 18, 2021, 10:11:38 AM »
What was the state of your home when you bought it? What year was it built?

The state of my home was normal when we started renting it. Built in the 1980's.

In our first year, tree roots from a tree in the front yard penetrated the main drain that connects the home to the city sewer. Over $10,000 out of pocket to dig up the yard, replace, plumber, insurance deductible for sewage filled basement. Our second year a tree branch fell on the shed in the back yard - $2000 to replace - that is not even touching the house!

your accrual is shy of $1000 per year. That will not even cover the bathroom/kitchen renos if you choose to complete those once every FIFTY years. Perhaps if you do it yourself - but not to hire someone. You do not need to do any manual labor to own stocks!

I just dont think its possible to keep costs this low.

markram

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Re: Rental Properties vs Stock Market
« Reply #15 on: May 18, 2021, 10:17:30 AM »
$85k house and $600 property taxes with $825/mo rent?

lol, this is wildly regional.


True, but with the internet you can buy houses anywhere, even if you don't live there.

This house is in Alabama. I live in New York. So where you live doesn't matter, all that matters is if you can find good deals (and a deal like this really isn't that uncommon).

markram

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Re: Rental Properties vs Stock Market
« Reply #16 on: May 18, 2021, 10:18:32 AM »
$85k house and $600 property taxes with $825/mo rent?

lol, this is wildly regional.

A unicorn in the wild.

Not really. Welcome to the non-urban Deep South, where 1% rule properties are all over the place. Check Zillow if you don’t believe me.


Yup, this is true. Go on Zillow, Realtor, Roofstock, or any other source and start looking at some high cash flowing houses. They exist, many with better numbers than the one profiled in the post.
Not really. Welcome to the non-urban Deep South, where 1% rule properties are all over the place. Check Zillow if you don’t believe me.
« Last Edit: May 18, 2021, 10:22:08 AM by markram »

markram

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Re: Rental Properties vs Stock Market
« Reply #17 on: May 18, 2021, 10:24:37 AM »
What was the state of your home when you bought it? What year was it built?

The state of my home was normal when we started renting it. Built in the 1980's.

In our first year, tree roots from a tree in the front yard penetrated the main drain that connects the home to the city sewer. Over $10,000 out of pocket to dig up the yard, replace, plumber, insurance deductible for sewage filled basement. Our second year a tree branch fell on the shed in the back yard - $2000 to replace - that is not even touching the house!

your accrual is shy of $1000 per year. That will not even cover the bathroom/kitchen renos if you choose to complete those once every FIFTY years. Perhaps if you do it yourself - but not to hire someone. You do not need to do any manual labor to own stocks!

I just dont think its possible to keep costs this low.

Where is this house located? Because those costs sound extremely high for places with houses that cost $85,000.

For example, a full kitchen remodel would cost about $5k for this house, not the $50k that you're implying.

And $2,000 to fix the roof of the shed sounds extremely high as well. Something similar happened to another property I have (in Chicago, but a lower end part of Chicago where the houses are about $100k) and the cost was under $1,000 to fix.

Maybe these things are just super regional?

ChpBstrd

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Re: Rental Properties vs Stock Market
« Reply #18 on: May 18, 2021, 10:40:10 AM »
What was the state of your home when you bought it? What year was it built?

The state of my home was normal when we started renting it. Built in the 1980's.

In our first year, tree roots from a tree in the front yard penetrated the main drain that connects the home to the city sewer. Over $10,000 out of pocket to dig up the yard, replace, plumber, insurance deductible for sewage filled basement. Our second year a tree branch fell on the shed in the back yard - $2000 to replace - that is not even touching the house!

your accrual is shy of $1000 per year. That will not even cover the bathroom/kitchen renos if you choose to complete those once every FIFTY years. Perhaps if you do it yourself - but not to hire someone. You do not need to do any manual labor to own stocks!

I just dont think its possible to keep costs this low.

Where is this house located? Because those costs sound extremely high for places with houses that cost $85,000.

For example, a full kitchen remodel would cost about $5k for this house, not the $50k that you're implying.

And $2,000 to fix the roof of the shed sounds extremely high as well. Something similar happened to another property I have (in Chicago, but a lower end part of Chicago where the houses are about $100k) and the cost was under $1,000 to fix.

Maybe these things are just super regional?

I think there are some higher labor costs in HCOL areas vs LCOL areas, but overall a new water heater or a piece of plywood costs about the same wherever you go. Contractors will astonish you with their sky-high quotes wherever you go.

There’s no region where weird things don’t go wrong. Up north, ice dams can tear apart a roof and frozen ground can wreck foundations. Down south, high humidity can lead to mold outbreaks if your tenants leave the AC off for a single weekend while traveling, or you can just get termites. Out west, there is radon and unaffordable fire insurance. The lowest-maintenance homes are the poured-concrete bunkers common in places like Mexico and Brazil, but these are unsuitable for temperate climates and even those landlords have to remodel, rewrite, and replumb.

Paper Chaser

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Re: Rental Properties vs Stock Market
« Reply #19 on: May 18, 2021, 10:44:01 AM »
OMG, I just clicked the link. You're obviously getting affiliate income from Roofstock or something, the entire blog post is an unveiled ad for Roofstock.

Sorry if it seemed that way. The idea behind the post was to document exactly what I did with my first property and compare it to the returns in the stock market. Since I used Roofstock, I obviously had to include that information, especially since it was relevant to how I made some of my assumptions.

You mentioned that site 18 times by name, and included embedded links and ads for the same site. That's more than just an innocent passing reference to a site you found helpful.

Your only previous post on this forum was about ways to increase traffic to your affiliate marketing website:

https://forum.mrmoneymustache.com/entrepreneurship/how-to-grow-my-business-119870/msg2761794/#msg2761794

It just feels like your motivations here are less about contributing to the community and more about trying to profit off of the community. Just my $0.02.


As for the spreadsheet, it's certainly possible for a good Real Estate investment to outperform an average stock market investment as you've done. That shouldn't be a surprise to anybody around here. Plenty of posters here have retired off of well purchased investment properties. It's also possible for a good stock investment to outperform an average Real Estate investment. Or an average stock investment. If you really wanted to determine if RE or equities were the better asset class you'd need to compare them with equal amounts of leverage, and you'd need to compare average RE returns to average stock returns. Otherwise there's not much new here. You're showing an example where you found a ~1% property, used leverage, and then hoped for a solid property manager and low CapEx, vacancy, and tax rates with some positive appreciation along the way etc. That's just the RE investment property playbook. Glad it's working out for you thus far, and hope that it continues
« Last Edit: May 18, 2021, 10:54:57 AM by Paper Chaser »

markram

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Re: Rental Properties vs Stock Market
« Reply #20 on: May 18, 2021, 10:54:16 AM »
OMG, I just clicked the link. You're obviously getting affiliate income from Roofstock or something, the entire blog post is an unveiled ad for Roofstock.

Sorry if it seemed that way. The idea behind the post was to document exactly what I did with my first property and compare it to the returns in the stock market. Since I used Roofstock, I obviously had to include that information, especially since it was relevant to how I made some of my assumptions.

You mentioned that site 18 times by name, and included embedded links and ads for the same site. That's more than just an innocent passing reference to a site you found helpful.

Your only previous post on this forum was about ways to increase traffic to your affiliate marketing website:

https://forum.mrmoneymustache.com/entrepreneurship/how-to-grow-my-business-119870/msg2761794/#msg2761794

It just feels like you're motivations here are less about contributing to the community and more about trying to profit off of the community. Just my $0.02.


As for the spreadsheet, it's certainly possible for a good Real Estate investment to outperform an average stock market investment as you've done. That shouldn't be a surprise to anybody around here. It's also possible for a good stock investment to outperform an average Real Estate investment. Or an average stock investment. If you really wanted to determine if RE or equities were the better asset class you'd need to compare them with equal amounts of leverage, and you'd need to compare average RE returns to average stock returns. Otherwise there's not much new here. You're showing an example where you found a 1% property, used leverage, and then hoped for a solid property manager and low CapEx, vacancy, and tax rates with some positive appreciation etc.

All that's fair, and it definitely makes sense you'd think that way. Going forward I'm planning on being much more active in this community, so I'll try to make sure it's in ways that are simply helpful instead of appearing spammy in any way.

The goal of this was pretty much what you described: to compare an average rental property vs average stock returns. Buying stocks with leverage is tough long term due to margin calls happening whenever you hit a bear market (which will happen over a 30-year timeframe), so I think a more fair comparison is no leverage stocks vs leveraged Real Estate (the standard way to invest in each asset class).

In my experience, a house with numbers like mine isn't too hard to find - there are tons of houses with better specs on the market right now. And unlike when you buy a single stock to try to outperform the market, you aren't predicting anything crazy here - I assume market rates for appreciation and rent increases, so the only thing unique about my property is the current price, rent rate, tax rate, etc., none of which require any predicting on my part.

markram

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Re: Rental Properties vs Stock Market
« Reply #21 on: May 18, 2021, 10:56:40 AM »
What was the state of your home when you bought it? What year was it built?

The state of my home was normal when we started renting it. Built in the 1980's.

In our first year, tree roots from a tree in the front yard penetrated the main drain that connects the home to the city sewer. Over $10,000 out of pocket to dig up the yard, replace, plumber, insurance deductible for sewage filled basement. Our second year a tree branch fell on the shed in the back yard - $2000 to replace - that is not even touching the house!

your accrual is shy of $1000 per year. That will not even cover the bathroom/kitchen renos if you choose to complete those once every FIFTY years. Perhaps if you do it yourself - but not to hire someone. You do not need to do any manual labor to own stocks!

I just dont think its possible to keep costs this low.

Where is this house located? Because those costs sound extremely high for places with houses that cost $85,000.

For example, a full kitchen remodel would cost about $5k for this house, not the $50k that you're implying.

And $2,000 to fix the roof of the shed sounds extremely high as well. Something similar happened to another property I have (in Chicago, but a lower end part of Chicago where the houses are about $100k) and the cost was under $1,000 to fix.

Maybe these things are just super regional?

I think there are some higher labor costs in HCOL areas vs LCOL areas, but overall a new water heater or a piece of plywood costs about the same wherever you go. Contractors will astonish you with their sky-high quotes wherever you go.

There’s no region where weird things don’t go wrong. Up north, ice dams can tear apart a roof and frozen ground can wreck foundations. Down south, high humidity can lead to mold outbreaks if your tenants leave the AC off for a single weekend while traveling, or you can just get termites. Out west, there is radon and unaffordable fire insurance. The lowest-maintenance homes are the poured-concrete bunkers common in places like Mexico and Brazil, but these are unsuitable for temperate climates and even those landlords have to remodel, rewrite, and replumb.

So do you think that my maintenance/repair estimates are too low then? So far they've been high estimates, but it's true that I haven't had any huge expenses yet, so maybe they'll end up being too low once 30 years are up. Admittedly this is the weakest part of my model, since they include the most variance, so if my assumptions are off it could definitely affect the comparison.

theoverlook

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Re: Rental Properties vs Stock Market
« Reply #22 on: May 18, 2021, 11:19:18 AM »
So the biggest issue is you're comparing actual historical returns from the stock market with projected future returns from real estate. As we know, no plan survives contact with the enemy, and projections are good and all but not as good as data. It's not practical to compare your 30 year returns with residential RE, obviously, since you don't have them. I wonder if there's publicly available data on that anywhere?

yachi

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Re: Rental Properties vs Stock Market
« Reply #23 on: May 18, 2021, 11:21:06 AM »
I didn't get much of a "case study" experience.  You don't say how many years you held the property, and what types of repairs it needed.  I've done some real estate investing too. I bought a property in bad shape, fixed it up, and rented it out for 3 years.  At the end of those years it needed a lot of repairs that were covered by insurance.  I had it fixed up and sold it.  I made decent money, but it was more stressful than investing in stocks.  A huge part of real estate investing is having access to cheap 30-year borrowing and that really juices up the returns.

You kind of gloss over the stock investing part too though.  As others have pointed out, stocks have returned more than 8% when you include dividends.  Some sources say they return 10% after inflation.  You don't have access to cheap 30-year rates when buying stocks, but buying stocks on margin isn't the only way to leverage investments.  I'm sitting on 29% yearly returns over the last 10 years in my IRA account using options.  That's not a typical stock market return and it's been very lumpy, so I'm not going to go out and use it as a comparison against real estate.  For me, it's been easier to deal with emotions from stocks going up and down than real estate.   But I don't want to point to my returns and say they represent a reason people should invest in stocks instead of real estate.  I've found that people that invest in one vs. the other think so differently that it's difficult to be successful in both.

Simpleton

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Re: Rental Properties vs Stock Market
« Reply #24 on: May 18, 2021, 12:14:05 PM »
For example, a full kitchen remodel would cost about $5k for this house, not the $50k that you're implying.

I am Canadian. Maybe this is different in the US but there is just no way you are getting ANY kitchen remodel for $5k here unless you are doing the work yourself and doing a limited-scope job. If you are doing the work yourself it is certainly not an apples to apples comparison with the stock market.

Over the course of 50 years which was the timeframe I was using, essentially every mechanical/water rooms will need to be redone. I wasn't referencing 50k just for kitchen, but as an estimate of getting kitchen and all bathrooms done.

I'm sure piping and electrical all needs to be torn out twice a century as well, not to mention roof and foundation repairs which will easily run you over 1k per year on average.

This is all before we get to any of the common small stuff like supplied appliances, fans, hvac, water heaters, ac, windows, doors, carpets or flooring, paint, fences etc.

I think my 3% may be on the high side (I tend to be conservative), but I am sure home maintenance costs are more than $90 per month... in ANY home.



« Last Edit: May 18, 2021, 12:19:15 PM by Simpleton »

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Re: Rental Properties vs Stock Market
« Reply #25 on: May 18, 2021, 12:26:00 PM »
I'm not clicking the link since this is a spam post, but my first question would be: did you spend more than zero hours on being a landlord? If so then it's more work than my stock portfolio, so not a fair comparison.

Also had to laugh at $85k house:D That was our down payment! Here it's more like maybe $250k, renting for $1500. Sure it's cheap where nobody wants to live.. And yes you could buy where you don't live, but then you have to spend time learning that market, traveling to viewings, at least a few visit to deal with the property.. etcetc. Sure it's work that will make you money, but again not comparable to a passive portfolio.

markram

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Re: Rental Properties vs Stock Market
« Reply #26 on: May 18, 2021, 12:37:24 PM »
I'm not clicking the link since this is a spam post, but my first question would be: did you spend more than zero hours on being a landlord? If so then it's more work than my stock portfolio, so not a fair comparison.

Also had to laugh at $85k house:D That was our down payment! Here it's more like maybe $250k, renting for $1500. Sure it's cheap where nobody wants to live.. And yes you could buy where you don't live, but then you have to spend time learning that market, traveling to viewings, at least a few visit to deal with the property.. etcetc. Sure it's work that will make you money, but again not comparable to a passive portfolio.

I did spend some time during the closing process, but honestly, after that it's literally like 5-10 hours of work per YEAR. So yes, more than your stock portfolio, but if the returns are significantly more I think it's worth it for many people.

I live in NYC and bought in Alabama. I've never been to Alabama, don't know anything about the Alabama market, never been to the property... I can get away with that by worrying about cash flow instead of appreciation, getting a good property inspection and appraisal during closing, and most importantly, finding a good property manager.

Simpleton

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Re: Rental Properties vs Stock Market
« Reply #27 on: May 18, 2021, 12:54:31 PM »
Additionally, in my LCOL area, property managers charge 10% AFTER the entire first month's rent. If you can find 8%

This is proof that everything is localized. I felt his maintenance costs were high, but my property manager only charges 5%. $300 to find a tenant. No other fees.

Scandium

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Re: Rental Properties vs Stock Market
« Reply #28 on: May 18, 2021, 01:28:48 PM »
I'm not clicking the link since this is a spam post, but my first question would be: did you spend more than zero hours on being a landlord? If so then it's more work than my stock portfolio, so not a fair comparison.

Also had to laugh at $85k house:D That was our down payment! Here it's more like maybe $250k, renting for $1500. Sure it's cheap where nobody wants to live.. And yes you could buy where you don't live, but then you have to spend time learning that market, traveling to viewings, at least a few visit to deal with the property.. etcetc. Sure it's work that will make you money, but again not comparable to a passive portfolio.

I did spend some time during the closing process, but honestly, after that it's literally like 5-10 hours of work per YEAR. So yes, more than your stock portfolio, but if the returns are significantly more I think it's worth it for many people.

I live in NYC and bought in Alabama. I've never been to Alabama, don't know anything about the Alabama market, never been to the property... I can get away with that by worrying about cash flow instead of appreciation, getting a good property inspection and appraisal during closing, and most importantly, finding a good property manager.

Ok, so you were lucky. In many places buying a $85k house, even if the building is sound, will be an area where nobody wants to live, you're renters will be... "problematic", if at all. And you might struggle to resell. Good for you I guess, but I'm not taking the chance on dropping tens of thousands to own a house in an area I know nothing about! I close to baltimore, yes there are $50k homes for sale there..

Rental properties (can) earn more than stocks because
  • knowledge of local market
  • leverage
  • work! searching for deals, maintenance, management, etc
  • risk. local crash, major maintenance/damage, vacancy..

This is all fair, and pays to whoever takes it on. But for me I've decided it's not worth it. I'll dispute the numbers I've seen you post here, it certainly not the norm in any research I've done. Actually, I've probably spent your 5-10 hours researching rentals near my area and around! And the numbers never work out for the risk involved when I consider all options.  E.g. 0.5% rent, $5k/pa maintenance. $10k roof replacements..

Telecaster

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Re: Rental Properties vs Stock Market
« Reply #29 on: May 18, 2021, 01:54:14 PM »
"Click this link and read this advertisement I wrote!" I'm going to ignore the fact that this is really just an elaborate, borderline spammy advertisement and look at the numbers for a minute.

I think what you've actually shown, is not that real estate can outperform stocks, it's that leverage is powerful. Because your rental property has a mortgage, you're essentially comparing a $21k initial investment in the stock market with an $85k investment in real estate. Leverage isn't unique to real estate. If you took the same $21k cash and leveraged that into $85k in equities for an actual apples to apples comparison, the calculator that you used shows a return of $855,326 after 30 years for stocks (8% annual return, 0 additional money added). You'd have to subtract debt repayments from that, but margin rates are similar to mortgage rates, so the debt repayment should be about the same as your rental. It's still going to outperform your rental property that's not quite meeting the 1% rule. And with the stock investment you didn't have to do any work, screen any tenants, complicate your taxes, or concentrate your risk into a single asset (unless you choose an individual stock).

I think it is reasonable the way he did it.  Real estate is usually bought with leverage.  Stocks usually aren't.  So that's the way most people would approach it.

I'm not sure how good those 1% properties are though.  My observation is they are usually located in dying towns, at least these days.  Maybe I haven't looked hard enough.  But it seems like there is a reason why they are so cheap compared to everything else.

Re:  Kitchen renno.   No way can you do a kitchen for $5K.   And there's why I think the maintence rules of thumb break down.  Maintenance doesn't necessarily scale with cost.  Appliances, countertops, flooring, etc. will all be about the same price where ever you go.  The roof is going to cost about the same regardless if the house is in Seattle or Walla Walla.  Same with the exterior paint, HVAC, etc.

The only way to do it with any reasonable accuracy is to create reserve tables.  For example, you take the estimated roof square footage.  Three tab shingles (for example) typically last 20 years, make a guess for the existing age, plug in your SF cost estimate for the year when the replacement should occur and you are off the races.    Do the same for exterior paint, HVAC, carpet, and every other system.  It is easier than it sounds.  The number will still be wrong, but it will be closer to reasonable. 


Edit: spelling and clarity
« Last Edit: May 18, 2021, 05:22:26 PM by Telecaster »

Simpleton

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Re: Rental Properties vs Stock Market
« Reply #30 on: May 18, 2021, 04:20:54 PM »
The only way to do it with any reasonable accuracy is to create reserve tables.  For example, you take the estimated roof square footable.  Three tab shingles (for example) typically last 20 years, make a guess for the existing age, plug in your SF cost estimate, and you are off the races.

Yes It would be great if anyone had data on average rates by sq ft or something similar.

Telecaster

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Re: Rental Properties vs Stock Market
« Reply #31 on: May 18, 2021, 05:11:44 PM »
The only way to do it with any reasonable accuracy is to create reserve tables.  For example, you take the estimated roof square footable.  Three tab shingles (for example) typically last 20 years, make a guess for the existing age, plug in your SF cost estimate, and you are off the races.

Yes It would be great if anyone had data on average rates by sq ft or something similar.

RS Means publishes these types of numbers, which should be available at your local library.  RS Means can go as deep as you like (cost by region, construction type, etc.).   Fannie Mae and Freddie Mac have standard numbers they use that are a lot simpler,  but you might have to dig pretty deep on the web to find them. 

pnw_guy

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Re: Rental Properties vs Stock Market
« Reply #32 on: May 20, 2021, 09:03:47 PM »
Cash flows will be lumpy.

One year, you are going to have to replace the roof for about $6,000, and if you neglect that there will be another $3k in wood/sheetrock/insulation/paint repairs coming at you. Another year the $1,000 water heater, the $8,000 HVAC, the $4000 sewer line, etc. will go out. This is all if you are lucky and don't have termite, foundation, rotted bathroom floor, or burst water line issues. You can have a profitable year where you handily beat the stock market, but it will be because none of these big expenses happened that particular year. However, within the span of one decade, you will encounter at least half of these items.

To get a realistic long-term rate of return, I suggest switching from cash accounting to accrual accounting. Depreciate the roof, mechanical systems, plumbing systems, and electrical systems, as well as factoring in a bath and kitchen remodel every 25 years or so (less time if it's already old). Arrive at an average ammual cost to provide housing for someone by factoring in the predictable expenses.

Additionally, in my LCOL area, property managers charge 10% AFTER the entire first month's rent. If you can find 8% I'd ask how they can do a good job so cheaply vs. just sitting back and hoping to intercept the occasional rent check. Remember, from the property manager's point of view, their time is better spent getting additional clients rather than hassling tenants for rent or dealing with code enforcement issues, whereas you would hope they'd spend their time taking care of these things. It's a conflict of interest, and a low-baller is almost certainly an absentee PM.

Finally, I would assume one month of vacancy per year (8.4% vacancy rate, not 5%). People rent so they can move from place to place, and even if you get a long-term tenant, the four-month eviction, cleanup, and remod process on the next tenant will put you back on the trend line.

I ran the numbers this way in my LCOL area and roughly matched what I could expect from the stock market - just with a whole lot more work. I hold some REIT preferred stocks that yield over 6% and it's hard for me to sell those to make a down payment on a time-sucking project that might yield 8% if I'm lucky.

I personally always was interested in real estate because I thought it could offer super gains to the stock market and be a diversifier. However, I must say that I don't know what the correlation is generally between rents and the stock market. But, it's interesting to think about the fact that the returns might be the same after subtracting out the leverage aspect. Would this mean though that the risk adjusted returns are the same? Or does the idea of risk adjustment apply less to real estate? I mean, it's gotta be less risky given that lenders give people access to 6 figures of leverage for a home even though they'd never consider doing so for a business etc.


pnw_guy

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Re: Rental Properties vs Stock Market
« Reply #33 on: May 20, 2021, 09:05:20 PM »
$85k house and $600 property taxes with $825/mo rent?

lol, this is wildly regional.

A unicorn in the wild.

Not really. Welcome to the non-urban Deep South, where 1% rule properties are all over the place. Check Zillow if you don’t believe me.


Yup, this is true. Go on Zillow, Realtor, Roofstock, or any other source and start looking at some high cash flowing houses. They exist, many with better numbers than the one profiled in the post.
Not really. Welcome to the non-urban Deep South, where 1% rule properties are all over the place. Check Zillow if you don’t believe me.

In a sizable city (> 100K)? I've looked at a couple of listings in some cities in the Deep South but I don't see 1% properties scrolling through Zillow....

ChpBstrd

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Re: Rental Properties vs Stock Market
« Reply #34 on: May 20, 2021, 10:24:11 PM »
$85k house and $600 property taxes with $825/mo rent?

lol, this is wildly regional.

A unicorn in the wild.

Not really. Welcome to the non-urban Deep South, where 1% rule properties are all over the place. Check Zillow if you don’t believe me.


Yup, this is true. Go on Zillow, Realtor, Roofstock, or any other source and start looking at some high cash flowing houses. They exist, many with better numbers than the one profiled in the post.
Not really. Welcome to the non-urban Deep South, where 1% rule properties are all over the place. Check Zillow if you don’t believe me.

In a sizable city (> 100K)? I've looked at a couple of listings in some cities in the Deep South but I don't see 1% properties scrolling through Zillow....

You might be looking at the trendy places like Nashville or Atlanta or Austin. You need to look in places like Memphis TN, Jackson MS, Little Rock AR, Monroe LA, etc. and - most importantly - their suburbs.

Here's a duplex in Fayetteville, NC for $129k.
https://www.zillow.com/homedetails/3026-Wedgewood-Dr-Fayetteville-NC-28301/80881181_zpid/

And here's a big 3/2 duplex in Albany, GA for $127k.
https://www.zillow.com/homedetails/313-Station-Crossing-Dr-Albany-GA-31721/76414259_zpid/

It doesn't pass the 100k population rule, but here's a four-flex apartment building in Longview, TX for $175k. I think you can get more than (175/4=) $438/mo for most 2/1 apartments.
https://www.zillow.com/homedetails/505-Tammy-Lynn-Dr-Longview-TX-75604/50797524_zpid/

Paper Chaser

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Re: Rental Properties vs Stock Market
« Reply #35 on: May 21, 2021, 05:07:26 AM »
Cash flows will be lumpy.

One year, you are going to have to replace the roof for about $6,000, and if you neglect that there will be another $3k in wood/sheetrock/insulation/paint repairs coming at you. Another year the $1,000 water heater, the $8,000 HVAC, the $4000 sewer line, etc. will go out. This is all if you are lucky and don't have termite, foundation, rotted bathroom floor, or burst water line issues. You can have a profitable year where you handily beat the stock market, but it will be because none of these big expenses happened that particular year. However, within the span of one decade, you will encounter at least half of these items.

To get a realistic long-term rate of return, I suggest switching from cash accounting to accrual accounting. Depreciate the roof, mechanical systems, plumbing systems, and electrical systems, as well as factoring in a bath and kitchen remodel every 25 years or so (less time if it's already old). Arrive at an average ammual cost to provide housing for someone by factoring in the predictable expenses.

Additionally, in my LCOL area, property managers charge 10% AFTER the entire first month's rent. If you can find 8% I'd ask how they can do a good job so cheaply vs. just sitting back and hoping to intercept the occasional rent check. Remember, from the property manager's point of view, their time is better spent getting additional clients rather than hassling tenants for rent or dealing with code enforcement issues, whereas you would hope they'd spend their time taking care of these things. It's a conflict of interest, and a low-baller is almost certainly an absentee PM.

Finally, I would assume one month of vacancy per year (8.4% vacancy rate, not 5%). People rent so they can move from place to place, and even if you get a long-term tenant, the four-month eviction, cleanup, and remod process on the next tenant will put you back on the trend line.

I ran the numbers this way in my LCOL area and roughly matched what I could expect from the stock market - just with a whole lot more work. I hold some REIT preferred stocks that yield over 6% and it's hard for me to sell those to make a down payment on a time-sucking project that might yield 8% if I'm lucky.

I personally always was interested in real estate because I thought it could offer super gains to the stock market and be a diversifier. However, I must say that I don't know what the correlation is generally between rents and the stock market. But, it's interesting to think about the fact that the returns might be the same after subtracting out the leverage aspect. Would this mean though that the risk adjusted returns are the same? Or does the idea of risk adjustment apply less to real estate? I mean, it's gotta be less risky given that lenders give people access to 6 figures of leverage for a home even though they'd never consider doing so for a business etc.

From a lenders perspective, a property has more collateral. Even if things go bad, they're likely to have an asset with some value and a likely buyer. That's not necessarily true for other types of investment. With real estate There's basically a "floor" greater than zero to how much they can lose in the worst case. So there is probably less downside risk in that regard.

But, from an owner/investors perspective, investing in a single property represents a concentration of risk compared to a diversified stock investment. You're putting all your eggs into one proverbial basket that's subject to natural disasters, economic changes in the location, one bad tenant that wrecks the place after a lengthy eviction process, etc. Its been compared to investing in a single company stock. There's more risk, but potential for greater outcomes too.

So saying "My specific rental beats an average stock market return" is a lot like saying "my investment in Company ABC has outperformed an average market return." My answer to claims like that is usually "Good! It damn well better outperform average market returns given the increased risk you're taking on, otherwise what are you doing?" The real question is are the potential increased gains worth the additional effort, and was this a lucky one-off, or is this repeatable?
« Last Edit: May 21, 2021, 05:12:11 AM by Paper Chaser »

pnw_guy

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Re: Rental Properties vs Stock Market
« Reply #36 on: May 23, 2021, 11:26:06 AM »
Cash flows will be lumpy.

One year, you are going to have to replace the roof for about $6,000, and if you neglect that there will be another $3k in wood/sheetrock/insulation/paint repairs coming at you. Another year the $1,000 water heater, the $8,000 HVAC, the $4000 sewer line, etc. will go out. This is all if you are lucky and don't have termite, foundation, rotted bathroom floor, or burst water line issues. You can have a profitable year where you handily beat the stock market, but it will be because none of these big expenses happened that particular year. However, within the span of one decade, you will encounter at least half of these items.

To get a realistic long-term rate of return, I suggest switching from cash accounting to accrual accounting. Depreciate the roof, mechanical systems, plumbing systems, and electrical systems, as well as factoring in a bath and kitchen remodel every 25 years or so (less time if it's already old). Arrive at an average ammual cost to provide housing for someone by factoring in the predictable expenses.

Additionally, in my LCOL area, property managers charge 10% AFTER the entire first month's rent. If you can find 8% I'd ask how they can do a good job so cheaply vs. just sitting back and hoping to intercept the occasional rent check. Remember, from the property manager's point of view, their time is better spent getting additional clients rather than hassling tenants for rent or dealing with code enforcement issues, whereas you would hope they'd spend their time taking care of these things. It's a conflict of interest, and a low-baller is almost certainly an absentee PM.

Finally, I would assume one month of vacancy per year (8.4% vacancy rate, not 5%). People rent so they can move from place to place, and even if you get a long-term tenant, the four-month eviction, cleanup, and remod process on the next tenant will put you back on the trend line.

I ran the numbers this way in my LCOL area and roughly matched what I could expect from the stock market - just with a whole lot more work. I hold some REIT preferred stocks that yield over 6% and it's hard for me to sell those to make a down payment on a time-sucking project that might yield 8% if I'm lucky.

I personally always was interested in real estate because I thought it could offer super gains to the stock market and be a diversifier. However, I must say that I don't know what the correlation is generally between rents and the stock market. But, it's interesting to think about the fact that the returns might be the same after subtracting out the leverage aspect. Would this mean though that the risk adjusted returns are the same? Or does the idea of risk adjustment apply less to real estate? I mean, it's gotta be less risky given that lenders give people access to 6 figures of leverage for a home even though they'd never consider doing so for a business etc.

From a lenders perspective, a property has more collateral. Even if things go bad, they're likely to have an asset with some value and a likely buyer. That's not necessarily true for other types of investment. With real estate There's basically a "floor" greater than zero to how much they can lose in the worst case. So there is probably less downside risk in that regard.

But, from an owner/investors perspective, investing in a single property represents a concentration of risk compared to a diversified stock investment. You're putting all your eggs into one proverbial basket that's subject to natural disasters, economic changes in the location, one bad tenant that wrecks the place after a lengthy eviction process, etc. Its been compared to investing in a single company stock. There's more risk, but potential for greater outcomes too.

So saying "My specific rental beats an average stock market return" is a lot like saying "my investment in Company ABC has outperformed an average market return." My answer to claims like that is usually "Good! It damn well better outperform average market returns given the increased risk you're taking on, otherwise what are you doing?" The real question is are the potential increased gains worth the additional effort, and was this a lucky one-off, or is this repeatable?

I don't know if this makes sense but right now we're kind of thinking about it in terms of our willingness to take risk. As you mention, a rental is analogous to buying an individual stock. It's risky and one should be rewarded for taking on this risk. Our thinking is that we have a high household income with very good saving habits. Therefore, we can probably reach our FIRE goals in a relatively short time frame by just plain index fund investing (even if we assume very low real returns). Thus, if we can reach our goals using a more passive and less risky approach, why take on the risk of buying rentals? The only reason I can think of is that doing so would increase the chances of us generating massive amounts of wealth for future generations, but that's not a priority for us.

bacchi

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Re: Rental Properties vs Stock Market
« Reply #37 on: May 23, 2021, 11:52:24 AM »
Are you sure those pass the 1% rule?

You might be looking at the trendy places like Nashville or Atlanta or Austin. You need to look in places like Memphis TN, Jackson MS, Little Rock AR, Monroe LA, etc. and - most importantly - their suburbs.

Here's a duplex in Fayetteville, NC for $129k.
https://www.zillow.com/homedetails/3026-Wedgewood-Dr-Fayetteville-NC-28301/80881181_zpid/

Rent estimate is $950.

Quote
And here's a big 3/2 duplex in Albany, GA for $127k.
https://www.zillow.com/homedetails/313-Station-Crossing-Dr-Albany-GA-31721/76414259_zpid/

Rent estimate is $795.

Quote
It doesn't pass the 100k population rule, but here's a four-flex apartment building in Longview, TX for $175k. I think you can get more than (175/4=) $438/mo for most 2/1 apartments.
https://www.zillow.com/homedetails/505-Tammy-Lynn-Dr-Longview-TX-75604/50797524_zpid/

Rent estimate is $1500.


I thought maybe it was per unit but there is no way a 2/1 in that 4plex, in that area, is going for $1500 per.


Edit: The Albany duplex:
« Last Edit: May 23, 2021, 12:11:53 PM by bacchi »

Telecaster

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Re: Rental Properties vs Stock Market
« Reply #38 on: May 23, 2021, 12:55:37 PM »
I don't know if this makes sense but right now we're kind of thinking about it in terms of our willingness to take risk. As you mention, a rental is analogous to buying an individual stock. It's risky and one should be rewarded for taking on this risk. Our thinking is that we have a high household income with very good saving habits. Therefore, we can probably reach our FIRE goals in a relatively short time frame by just plain index fund investing (even if we assume very low real returns). Thus, if we can reach our goals using a more passive and less risky approach, why take on the risk of buying rentals? The only reason I can think of is that doing so would increase the chances of us generating massive amounts of wealth for future generations, but that's not a priority for us.

Owning a rental is like owning a stock, only with the rental you are the CEO of the company and so theoretically have more control over the trajectory.  But like all analogies, the rental as a stock analogy breaks down if you go very far with it.   They are pretty dissimilar investments.  For example, houses are not very liquid, but the returns are mostly in the form of cash being thrown off every month (or should, at least).  Opposite for stocks (although there is some cash from dividends).  Just different things.






Paper Chaser

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Re: Rental Properties vs Stock Market
« Reply #39 on: May 24, 2021, 06:19:05 AM »
I don't know if this makes sense but right now we're kind of thinking about it in terms of our willingness to take risk. As you mention, a rental is analogous to buying an individual stock. It's risky and one should be rewarded for taking on this risk. Our thinking is that we have a high household income with very good saving habits. Therefore, we can probably reach our FIRE goals in a relatively short time frame by just plain index fund investing (even if we assume very low real returns). Thus, if we can reach our goals using a more passive and less risky approach, why take on the risk of buying rentals? The only reason I can think of is that doing so would increase the chances of us generating massive amounts of wealth for future generations, but that's not a priority for us.

I think this is the way that a lot of people on this board think in the current environment. Many posters here have done very well for themselves with real estate. The vast majority of them were buying properties from 2008-2013 when purchase prices were much lower, and therefore returns were higher. Values of asset classes change over time, and it's not always a good deal to buy or sell a given asset. The key is not to buy a given asset, it's to be able to recognize a good deal when you find one, and there are times when good deals are common and times when they aren't. We're currently in a time when good deals are a lot less common than they were a decade ago, and the deals that are considered "good" these days were "great" deals back then.

ChpBstrd

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Re: Rental Properties vs Stock Market
« Reply #40 on: May 24, 2021, 09:17:59 AM »
Are you sure those pass the 1% rule?

You might be looking at the trendy places like Nashville or Atlanta or Austin. You need to look in places like Memphis TN, Jackson MS, Little Rock AR, Monroe LA, etc. and - most importantly - their suburbs.

Here's a duplex in Fayetteville, NC for $129k.
https://www.zillow.com/homedetails/3026-Wedgewood-Dr-Fayetteville-NC-28301/80881181_zpid/

Rent estimate is $950.

Quote
And here's a big 3/2 duplex in Albany, GA for $127k.
https://www.zillow.com/homedetails/313-Station-Crossing-Dr-Albany-GA-31721/76414259_zpid/

Rent estimate is $795.

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It doesn't pass the 100k population rule, but here's a four-flex apartment building in Longview, TX for $175k. I think you can get more than (175/4=) $438/mo for most 2/1 apartments.
https://www.zillow.com/homedetails/505-Tammy-Lynn-Dr-Longview-TX-75604/50797524_zpid/

Rent estimate is $1500.


I thought maybe it was per unit but there is no way a 2/1 in that 4plex, in that area, is going for $1500 per.


Edit: The Albany duplex:

Yep. Zillow's rent estimate is per unit, so don't forget to double for the duplexes and 4x for the four-plexes.

It seems to be calculating the Longview apartment building's rent as a SFH based on square footage instead of as an apartment building because whoever posted it didn't enter something right. I looked around and 500-600/mo would not be expensive for a ratty 2/1 in that area. A recently remodeled 2/1 is posted for $785/mo.

JLee

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Re: Rental Properties vs Stock Market
« Reply #41 on: May 24, 2021, 10:28:03 AM »
Are you sure those pass the 1% rule?

You might be looking at the trendy places like Nashville or Atlanta or Austin. You need to look in places like Memphis TN, Jackson MS, Little Rock AR, Monroe LA, etc. and - most importantly - their suburbs.

Here's a duplex in Fayetteville, NC for $129k.
https://www.zillow.com/homedetails/3026-Wedgewood-Dr-Fayetteville-NC-28301/80881181_zpid/

Rent estimate is $950.

Quote
And here's a big 3/2 duplex in Albany, GA for $127k.
https://www.zillow.com/homedetails/313-Station-Crossing-Dr-Albany-GA-31721/76414259_zpid/

Rent estimate is $795.

Quote
It doesn't pass the 100k population rule, but here's a four-flex apartment building in Longview, TX for $175k. I think you can get more than (175/4=) $438/mo for most 2/1 apartments.
https://www.zillow.com/homedetails/505-Tammy-Lynn-Dr-Longview-TX-75604/50797524_zpid/

Rent estimate is $1500.


I thought maybe it was per unit but there is no way a 2/1 in that 4plex, in that area, is going for $1500 per.


Edit: The Albany duplex:

Yep. Zillow's rent estimate is per unit, so don't forget to double for the duplexes and 4x for the four-plexes.

It seems to be calculating the Longview apartment building's rent as a SFH based on square footage instead of as an apartment building because whoever posted it didn't enter something right. I looked around and 500-600/mo would not be expensive for a ratty 2/1 in that area. A recently remodeled 2/1 is posted for $785/mo.

Are Zillow's rent estimates remotely accurate? They're way off around me (example).

Paper Chaser

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Re: Rental Properties vs Stock Market
« Reply #42 on: May 24, 2021, 10:38:17 AM »
I plugged the Fayetteville property into Rentometer and got a median rent of $944/mo for a 1/1 in that zip code, so if Zillow's rent estimate is way off, they're not the only one.

bacchi

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Re: Rental Properties vs Stock Market
« Reply #43 on: May 24, 2021, 10:49:50 AM »
Are you sure those pass the 1% rule?

You might be looking at the trendy places like Nashville or Atlanta or Austin. You need to look in places like Memphis TN, Jackson MS, Little Rock AR, Monroe LA, etc. and - most importantly - their suburbs.

Here's a duplex in Fayetteville, NC for $129k.
https://www.zillow.com/homedetails/3026-Wedgewood-Dr-Fayetteville-NC-28301/80881181_zpid/

Rent estimate is $950.

Quote
And here's a big 3/2 duplex in Albany, GA for $127k.
https://www.zillow.com/homedetails/313-Station-Crossing-Dr-Albany-GA-31721/76414259_zpid/

Rent estimate is $795.

Quote
It doesn't pass the 100k population rule, but here's a four-flex apartment building in Longview, TX for $175k. I think you can get more than (175/4=) $438/mo for most 2/1 apartments.
https://www.zillow.com/homedetails/505-Tammy-Lynn-Dr-Longview-TX-75604/50797524_zpid/

Rent estimate is $1500.


I thought maybe it was per unit but there is no way a 2/1 in that 4plex, in that area, is going for $1500 per.


Edit: The Albany duplex:

Yep. Zillow's rent estimate is per unit, so don't forget to double for the duplexes and 4x for the four-plexes.

It seems to be calculating the Longview apartment building's rent as a SFH based on square footage instead of as an apartment building because whoever posted it didn't enter something right. I looked around and 500-600/mo would not be expensive for a ratty 2/1 in that area. A recently remodeled 2/1 is posted for $785/mo.

Look at the street view for that 4plex. It's on the same street as two dozen identical buildings in similar shape. The vacancy rate -- and hassle factor -- would be very high and 1% is a dream.

Same with the Albany property. The landlord either needs to live locally -- to take care of problems -- or be prepared to pay a premium to a management company.

The Fayetteville is the only property that might meet 1% but it's ~1400 square feet. It's not renting for $950/side. Could it rent for $650 per? Probably but it's not a slam dunk.


Only one of these properties would be worth a look and there's no way I'd buy it from afar.

bacchi

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Re: Rental Properties vs Stock Market
« Reply #44 on: May 24, 2021, 11:03:31 AM »
I plugged the Fayetteville property into Rentometer and got a median rent of $944/mo for a 1/1 in that zip code, so if Zillow's rent estimate is way off, they're not the only one.

Apartments.com shows a 3 bed house just west for $895 and a 2 bed SFH (slightly larger) for $850. There's a 2/2 SFH, 1100 feet, across the highway for $795.

There are some "$827-$1239" 2 bed apartments to the west, near the lake, but they're at least Class B+.

catccc

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Re: Rental Properties vs Stock Market
« Reply #45 on: June 10, 2021, 08:09:11 AM »
I don't know if this makes sense but right now we're kind of thinking about it in terms of our willingness to take risk. As you mention, a rental is analogous to buying an individual stock. It's risky and one should be rewarded for taking on this risk. Our thinking is that we have a high household income with very good saving habits. Therefore, we can probably reach our FIRE goals in a relatively short time frame by just plain index fund investing (even if we assume very low real returns). Thus, if we can reach our goals using a more passive and less risky approach, why take on the risk of buying rentals? The only reason I can think of is that doing so would increase the chances of us generating massive amounts of wealth for future generations, but that's not a priority for us.

Owning a rental is like owning a stock, only with the rental you are the CEO of the company and so theoretically have more control over the trajectory.  But like all analogies, the rental as a stock analogy breaks down if you go very far with it.   They are pretty dissimilar investments.  For example, houses are not very liquid, but the returns are mostly in the form of cash being thrown off every month (or should, at least).  Opposite for stocks (although there is some cash from dividends).  Just different things.

Thank you, both of these statements sum up how I feel.  Over the years, I have gone through phases of thinking a lot about RE investing/landlording.  But like pnw_guy, we are at FI doing things the "easy" way (index investing), and it is going really well.  (Current annual spending $55K, current NW $1.8M, so we are technically FI, but we won't RE until our NW is at least $2M.)  We are heavy in equities and that is the risk I'm comfortable with... why complicate things, especially so close to FIRE?  Maybe if our portfolio gets hella huge when we are RE and I'm bored, I'll revisit RE investing.  Until then, we'll just keep on keeping on.

hodedofome

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Re: Rental Properties vs Stock Market
« Reply #46 on: June 10, 2021, 09:39:49 AM »
Buying 1 rental property and comparing it to the returns of an index fund is apples to oranges. Compare a REIT index fund to the S&P 500 and they are much more similar over the long term.

I can compare the returns of 1 rental property to AMZN over the past 20 years, and AMZN comes out on top. So what?

 

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