Author Topic: VTSAX better than rental properties?  (Read 3390 times)

GettingSomewhere

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VTSAX better than rental properties?
« on: November 04, 2019, 12:31:04 AM »
I have the bulk of my investments in VTSAX (80%). The rest is VBTLX (US bond) and VTIAX (foreign stock).
I own 2 residential rental properties and my intent was to roll the income generated from them into another. And then roll those 3 into another, and so on. I never really set a hard goal, but I was thinking 10 single family homes would be good.
So these 2 houses have been generating monthly checks and Iíve just been putting it into VGSLX (vanguards real estate index fund) with the intent to sell the REIT when I got enough money for house 3. I chose to put it in an REIT because I was curious to try out a REIT plus it felt good putting my rental income toward more ďpropertyĒ. Well I have enough money in the REIT to buy house 3, but now Iím reconsidering. I used to actively manage them, but now pay a property manager so that I can go about my day and not worry about the properties. But even so, there are still things that come up.
Another thing to consider is I think my REIT has outperformed the rental properties (%wise). And it is ZERO work. No calls ever. No worrying about rotting siding, crappy tenants, when I am going to have to pay for a new AC. If I want to sell itís one click. If I want to buy more itís one click. No signing paperwork ever.
So I guess my question is this.... I had always thought eventually I would own 10 rental properties....so assuming I donít want to manage these properties, should I just buy more index funds instead? Seems so much easier. Like way easier... Iíd love thoughts from those who have been through this. Thank you!

Andy R

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Re: VTSAX better than rental properties?
« Reply #1 on: November 04, 2019, 04:11:18 AM »
REITs are not representative of directly owned residential property.

Firstly, REITs are invest much more in commercial property which moves more in line with the business cycle than the residential propety cycle.

Secondly, since REITs are listed, the price moves with the stock market than with residential property.

As a result they are much more highly correlated with the stock market than with residential property.

REITs are also highly leveraged and as a result when the shit hits the fan, they get hit very hard as shown during the 2008 crisis where the broader market dropped 50% from peak to trough, yet REITs dropped about 70%. Do you really want the equivalent of 10 rental properties in REITs? The common amount mentioned is a max of 10% of your equities in REITs and no more. It was 20% before 2008 and people knew what could really go wrong and how badly.

As to REITs out performing your rentals - if you are looking at 10 years or less, it is mostly just noise.

chasesfish

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Re: VTSAX better than rental properties?
« Reply #2 on: November 04, 2019, 05:27:16 AM »
Personally I think rental property is highly dependent on your ability to find and buy at the right price up front.   From 2009 - 2013, almost every smaller house listed was "at the right price" in hindsight. 

I've wanted to buy a rental property for the last five years, but I haven't lived in an area where I can find the right return for the risk and haven't felt like putting in the effort to search for an out of market property.   

GettingSomewhere

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Re: VTSAX better than rental properties?
« Reply #3 on: November 04, 2019, 07:10:43 AM »
Andy: Not the answer I was hoping for, lol. I wanted you to say, ďyes, take the easy route!Ē But your reply makes a lot of sense. Yes I was only looking at the return of my REIT and my physical property over the last 4 years. So youíre right there, noise.
Are there any residential focused REITs that are good? Probably should just continue trying to get 10 rental properties.
Chasesfish: I bought both my rental properties at stellar deals luckily. They kind of fell into my lap. One was a friend of a friends, it was their parents old house. Parents had moved to a nursing home but didnít want to sell so it sat vacant for 5 years.  Parents passed away so the heirs just wanted it gone, it was an all off market deal. Other house was just in bad shape, terrible tenants who didnít take care of it, and an out of state owner who didnít want to mess with it. It had been listed but then was taken off the market. I have a buddy whoís a real estate agent who told me they would probably still sell. I bought it, sunk $25k into it, made it a really nice rental. Now itís worth about 100k more than I paid.
I got lucky on hearing about these 2. Hopefully that continues to happen.
Thanks for your help!

bwall

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Re: VTSAX better than rental properties?
« Reply #4 on: November 04, 2019, 07:39:45 AM »
The short answer: It depends.

As others have said; it depends on the local RE deal you can find, your ability to rehab and manage it (or at a minimum find a good manager), your ability to find good tenants, market conditions (both the stock market and the RE market), wider economic conditions, etc.

Ultimately, you won't know for sure until it's too late. I accumulated six rentals and ended up selling them all because I couldn't manage them well. Now I prefer to invest in the stock market. YMMV.

Car Jack

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Re: VTSAX better than rental properties?
« Reply #5 on: November 04, 2019, 08:51:23 AM »
I did a cursory look at VGSLX and on only first glance of this fund of funds, it looks good.  If I were thinking of buying it, I'd dig deeper and look at every major REIT that is being invested in.  Why?  I've investigated REITs in the past and many have virtually nothing to do with real estate and invest instead in credit default swaps. 

That said, if you want less work, invest in funds.  If you want no work, sell all the rentals and invest in funds.  Both ways can earn you money but owning mutual funds or ETFs allows you to literally ignore them and do zero work.  Even with a manager, I don't think you can ever say that for real estate.  At tax time, the funds are simple.  You already know the advantages real estate gives you and the work you need to put in.  Decide what you want to do.  Neither is the wrong answer.

chasesfish

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Re: VTSAX better than rental properties?
« Reply #6 on: November 04, 2019, 09:27:08 AM »
By the way, I do something in between owning rental properties and owning the REIT index.  I research and buy individual REITs.  I'm also price disciplined in the purchases.  Its been good to me

bwall

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Re: VTSAX better than rental properties?
« Reply #7 on: November 04, 2019, 10:59:11 AM »
By the way, I do something in between owning rental properties and owning the REIT index.  I research and buy individual REITs. I'm also price disciplined in the purchases.  Its been good to me

+1.

You make your money when you buy. Price discipline is a huge factor in deal picking.

thejordanburnett

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Re: VTSAX better than rental properties?
« Reply #8 on: November 06, 2019, 05:07:53 AM »
So I guess my question is this.... I had always thought eventually I would own 10 rental properties....so assuming I donít want to manage these properties, should I just buy more index funds instead? Seems so much easier. Like way easier... Iíd love thoughts from those who have been through this. Thank you!

They are two different investment classes, really. Index funds are truly passive (i.e. require zero maintenance whatsoever except for rebalancing, and VERY minimal effort at tax time unless you're doing some manual tax loss harvesting.)

If you don't want to manage the properties (or pay someone to do it), then you should just buy more index funds.

However, we're in a bit of an unprecedented rally on the index fund side (for both REITs and Equities/Bonds).

So, even though the index funds have been outperforming your physical rentals up to this point, many people would agree that will not be the case over the next several years (although no one truly knows).

Really, it all comes down to overall asset allocation and how active of an investor you want to be.

Personally, I took a middle of the road approach and invested in a multifamily syndication. I get the tax benefits (depreciation, 1031 exchange, etc.) of a physical rental, but have zero day-to-day obligations to it. It's also "less risky" than a single family home since no individual tenant leaving impacts the overall revenue significantly.

Of course, my cash-on-cash return is diluted because a syndication takes a fee up front for putting the deal together and a continued cut of the revenue.

But, personally, I'm a passive investor--I'd rather add more dollars to my portfolio doing the job I love than take on a job I would not love (being a landlord) for a few additional points.

BTDretire

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Re: VTSAX better than rental properties?
« Reply #9 on: November 06, 2019, 07:22:23 AM »
Why is "VTSAX better than rental properties?"
With VTSAX I don't have to pull 28 sanitary pads out of a 4" cast iron sewer pipe in 28* weather with snow blowing in my face.
 With VTSAX, I can just set in my easy chair and sing "Fly me to the moon"

 Which brings me to something I learned a couple years ago.
A local radio station had an hour of Frank Sinatra only.
I was a little young for Frank and never paid any attention.
 But after listening while walking, that guy had a voice.
Take a listen to Frank and 'Fly me to the moon'.
https://www.youtube.com/watch?v=qQzdAsjWGPg

shinn497

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Re: VTSAX better than rental properties?
« Reply #10 on: November 06, 2019, 10:16:37 PM »
My take on invsting is that from, a pure returns stake, it is probably not much better than indexing. There is a lot of risk. And it involves a lot of effort. The only reason people do it is to get the feeling of something tangible and to have a semblance of control. But hey I am solidly in 100% equity land so maybe that is a rationalization.

SwordGuy

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Re: VTSAX better than rental properties?
« Reply #11 on: November 06, 2019, 11:18:18 PM »
I'm very glad we invested in actual rental property when the property costs were still down.   

Four our first 3 properties, we got twice the FIRE income for the same amount of investments compared to the 4% rule.   Rental properties really acted as a FIRE accelerant for us.    This far into a boom cycle good rental property deals are much harder to come by.   

Villanelle

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Re: VTSAX better than rental properties?
« Reply #12 on: November 07, 2019, 09:03:22 AM »
If you don't want to do the work, eventually buying 10 rental properties seems like a bad idea. 

It seems like there is some middle ground.

I would start by determinign how much of my AA I wanted in real estate of all forms.  Let's say I settled on 20%.  Then within that, How much do I want in REITs (indexed or individual) vs. real residential property?  Then I'd make choices that would reflect those numbers.

For me, unless my net worth was into 8 figures, owning 10 residential properties--especially in the same local market--would make my portfolio way too RE heavy.  But putting the money into REITs wouldn't solve that problem. 

trollwithamustache

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Re: VTSAX better than rental properties?
« Reply #13 on: November 07, 2019, 09:45:36 AM »
This may be an unpopular opinion, but rental properties can be a lot of work. For the right type of person, its easy/straightforward/plundering the toilet at midnight on a Tuesday to avoid a plumbers bill isn't a big deal.  plus as others have noted, you can't buy any old property... there needs to be some discipline and a system of analyzing them.

Chris @ Saturday Financial

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Re: VTSAX better than rental properties?
« Reply #14 on: November 07, 2019, 10:02:49 AM »
A completely different option I've been considering is participating in a real estate syndication as a passive investor / limited partner. I just started a new thread about it today, and I'm hoping to hear from a few mustachians who have gone that route before.

In short, a real estate syndication is a partnership formed to own a large property such as an apartment building via an LLC or an LP. If you invest as a passive investor, then it's just as passive as owning a REIT. But with a syndication you directly own a portion of one property via the LLC. You get the same tax benefits as owning a SFH rental with a property manager.


« Last Edit: November 07, 2019, 10:19:39 AM by Chris @ Saturday Financial »

BECABECA

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Re: VTSAX better than rental properties?
« Reply #15 on: November 07, 2019, 10:17:12 AM »
I owned a rental property for a while early into my FI journey. It was a ton of work, but at that point in my career I didnít have a good way to make good side hustle money so the sweat equity of doing all the fixes to the rental property and managing it all was a good payoff for me, and paid better than my similar down payment investment could have paid in index funds. But that was because owning index funds didnít open a new avenue of side hustle work outside of my day job.

Once I was further along in my career, and it was no longer worth it to take vacation time to do upgrades to the rental property, and once I offloaded the day to day management to a property management company, I quickly realized that my equity in the rental property could make me more if it was instead invested in index funds. So I sold it and I have a truly passive income stream now.

So I am of the opinion that if you are early in your career, willing to do the bulk of maintenance and property management, and donít think you have a way to make a similar hourly rate at an easier or more enjoyable side hustle, then a rental property can be a better investment than index funds. But it still has a lot more risk than index funds, so you also have to be pretty good at picking properties, selecting good tenants, and keeping a property in good repair on the cheap. If any of those criteria arenít there, then itís much better to just invest in index funds. I would skip REITs altogether if you own your own house, since thatíll give you plenty of real estate exposure relative to your portfolio.

pdxvandal

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Re: VTSAX better than rental properties?
« Reply #16 on: November 07, 2019, 11:23:52 AM »
I've been a landlord on two different properties for about 3.5 years total. These were homes I initially lived in, then moved out of and kept them as short-term rentals until I figured out what I wanted to do with them.

I've been very fortunate with real estate as far as buying and selling at the right times and in the mostly-hot PNW market. However, with my current situation, I'm much happier NOT being a landlord and just owning VTSAX. My fund has gone up $5k in the last year without raising a hammer or taking late-night phone calls because the garbage disposal doesn't work (because the tenants unknowingly dumped a handful of pea gravel into it). I agree though it's a good way to build wealth early and think owning any property -- whether as a rental or primary -- is great early-retirement diversification.

nsmall

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Re: VTSAX better than rental properties?
« Reply #17 on: November 08, 2019, 10:56:29 PM »
I made way more money in the past 6 years with real estate than I would of VTSAX. It obviously has a ton to do with your local market.

 I sold three homes in the past 12 months though as it was to much time, stress, and commitment to manage them.  I am more happy, was able to buy a lot of VTSAX and hope to sell my last rental in 2020. 

Way down the road, if there is a significant price drop in real estate, I don't think I will be interested in buying properties again.  I think my main problem was/is I managed them and I am not a stingy manager as I say yes often to tenants.

How about 50% real estate properties and 50% index non real estate funds?


Mrs. Healthywealth

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Re: VTSAX better than rental properties?
« Reply #18 on: November 09, 2019, 08:31:42 AM »
I have both VTSAX and VGSLX. Been keeping an eye on them weekly for a year because i wanted to see how in sync they were with each other. Iíve noticed when VTSAX goes up, VGSLX goes down and vice versa.  Iíve had VGSLX for several years now, but recently was thinking of getting rental properties too. A REIT wonít provide the same deductions and other benefits as a rental, but for now it seems to provide diversification. Its only 8-10% of overall portfolio. Holding off on buying rentals for now. Financial samurai wrote an article on how now is a great time to buy real estate in certain areas. He states most readers agreed with him.

SwordGuy

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Re: VTSAX better than rental properties?
« Reply #19 on: November 09, 2019, 03:22:04 PM »
I have 5 properties rented and do very little work on them.  That's why I hired a property management firm.   They take their cut, they do the hard work, and we make money.

Now, we put a lot of work into the properties getting them ready to rent out and that's not for everyone.   But that's not a requirement for a successful rental business either!   

It's perfectly possible to buy properties that are nearly rent ready, hire out the work to fix them up, and then hand them over to a property manager.

MustacheAndaHalf

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Re: VTSAX better than rental properties?
« Reply #20 on: November 12, 2019, 10:27:36 AM »
Rental or ETF might not be a binary decision - it may vary with time and prices.  Right now you'd rather not expend the effort, and prices are too high.  So the ETF route is easier, and more diversified.  If you have an itch to handle more rental properties, and find a bargain,  then you might reconsider.

Have you thought about just saying "ETFs for this quarter, I'll reconsider next quarter"?

ChpBstrd

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Re: VTSAX better than rental properties?
« Reply #21 on: November 14, 2019, 12:10:43 PM »
To compare apples to apples, calculate an expected ROI from the physical RE and compare that to the yield of the REIT plus the earnings from a part time gig where you plow all earnings into the REIT.

In my market, the people who are landlords are either covering the costs of a house waiting for its elderly owner to die or they are people with no better employment prospects.