http://forum.mrmoneymustache.com/investor-alley/discussion-unless-you're-retired-dividends-are-an-inefficent-drag-on-portfolio/I suppose the main draw is the same reason why the average Joe extols the idea of owning a rental property.
The easy to grasp concept of cash flow generating investments is easier to get your head around than the idea of a growth stock portfolio with no distributions.
We have begun the process of looking for a new primary residence to rent out our current home. With the intention that we will eventually rent out the new one and buy a 3rd. Comments like the above, and even Warren Buffet has said that over the long term investing in the stock market will have better returns. So I played around with the math on investing a $20,000 downpayment/lump sum for 15 years and 30 years. The comment above irritated me a bit, as the immediate cash flow is not the only benefit my brain can grasp. So I wasted a piece of printer paper on the following. PLEASE correct me if I'm wrong so I can see any errors and make adjustments.
AssumptionsInvestment: $20,000 downpayment or lump sum investment
Term: 15 years (the approximate time when this single investment would turn over and be liquidated for future plans)
Modest: I have assumed very modest numbers here as to not get carried away with expecting unreal returns. Specifically, Rental Price is a bit lower than what we think we can get in our market; Home Value Appreciation is essentially set to inflation.
Inflation: I do not account for 1) raising rent, 2) property taxes, or 3) insurance increasing with inflation, and simply assume that if 2 or 3 go up that I will eventually be able to increase the income from the rent.
$20,000 Lump Sum Investment in 100% EquitiesInterest Rate 7%
15 Years
Growth: $35,180
Total Value: $55,180
Investable difference if we stay put*$338/month @ 7% for 15 years
Growth: $45,471
Total Value: $105,231
*assume that we'd be investing this in the market anyway, but let's add it for fun
Rental #1180 Months/15 Years
Rent: $1100
Mortgage Payment: $525
Rental Income: $575
Principal Paid (by renter) During Term: $32,388
Income During Term: $103,500
Home Appreciation @ 3.5%: $94,548
Total Value: $230,336
New Primary ResidencePrice: $175,000
Down: $20,000
Mortgage: $155,000
Monthly PITI: $857
Difference in Old vs New: $332
Second ResidenceEquity Paid During Term: $56,291
Home Appreciation @ 3.5%: $118,886
Home Value: $293,186
Total Growth: $175,177
Investable Rental Income$575-332
$243/month @ 7% for 15 years
Growth: $33,281
Total Value: $77,021
-------------RESULT-------------
Stock MarketLump Sum Investment: $55,180
Invested Monthly Mortgage Difference: $105,231
Total: $160,411Real Estate/RentalRental - Income, Equity, Appreciation: $230,336
Primary - Equity, Appreciation: $175,177
Invested Rental Income: $77,021
Total: $482,534So, we are not only considering cash flow; we are considering income, appreciation, and boosting our monthly investable cash. The difference of return on $20,000 here is MASSIVE! Our ability to turn our home into a cash cow is a combination of perfect timing and luck, but we'll eventually want to buy a 3rd and rent out #2. The cash flow on that will be less, but I think equity, appreciation, and investing even with moderate growth and return beats 7% interest in the stock market. I also love the idea and feel very comfortable with being diversified in more than stocks and like the idea of a renter chasing down our debt. I feel like this is taking total advantage of allowing a dollar to earn more dollars.