Author Topic: Down Payment on a Rental VS Investing in Taxable Accounts - Hypothetical  (Read 2024 times)

9ft5wt

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So, let's say that I've got $50,000 that I can either invest in a taxable account or use as a down payment on my first rental home. This is Baltimore City, btw, and an overly simplified situation.

If I'm placing the down payment, I have a nice safety margin in 'oh-shit' money and mortgage for both the rental and my current home, which is nearby.

In a taxable account, $50,000 @ 7% for 15 years comes out to roughly $138,000.

For the rental, the $50,000 is transformed (over 15 years of the rent covering and completing the mortgage) into a $1000/month net for me, (after maintenance costs, taxes, etc) which is equivalent to 4% of $300,000 in a taxable account.

It seems that the rental unit will generate significantly more cash for me to use in my retirement than investing the $50,000 in a taxable account.

I feel like I'm missing something. Am I even remotely close to reality in this approximation?

Thanks!

arebelspy

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Re: Down Payment on a Rental VS Investing in Taxable Accounts - Hypothetical
« Reply #1 on: December 10, 2014, 08:28:18 AM »
You'll need to provide much more information on the rental numbers.

But yes, it's certainly possible a rental can yield more.

(Especially on paper when your comparison handicaps one (by comparing it to a 4% WR) and not the other.)

Your rental will rent for ~2k/mo.? (Assuming you'll net 1k/mo. after the mortgage is paid off, and the 50% rule)?

If so, that's a great deal, it hits the 4% rule.  If not, I'm skeptical your numbers are accurate.

Run the actual numbers.  :)
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9ft5wt

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Re: Down Payment on a Rental VS Investing in Taxable Accounts - Hypothetical
« Reply #2 on: December 10, 2014, 11:14:08 AM »
Thanks Arebelspy. Can you point me to other threads or resources where I can learn more about real-estate math?

NumberCruncher

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Re: Down Payment on a Rental VS Investing in Taxable Accounts - Hypothetical
« Reply #3 on: December 10, 2014, 11:28:34 AM »
Thanks Arebelspy. Can you point me to other threads or resources where I can learn more about real-estate math?

He might have more places to look, but biggerpockets is a good place to learn some basics:
http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

50% rule: http://www.biggerpockets.com/renewsblog/2013/06/14/50-percent-rule/


Bobberth

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Re: Down Payment on a Rental VS Investing in Taxable Accounts - Hypothetical
« Reply #4 on: December 10, 2014, 01:35:21 PM »
Buying a rental=running a business.  Mutual funds=investment.  So don't forget you're running a business with a rental property.  Even if you do hire a manager to run things, you still have decisions to make, manage your PM, make upgrades and repairs etc.  Mutual funds pay dividends and there is nothing to do-no missed rent payment, no toilets that get clogged, no evictions etc.

waltworks

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Re: Down Payment on a Rental VS Investing in Taxable Accounts - Hypothetical
« Reply #5 on: December 11, 2014, 12:51:28 PM »
If your rent isn't 1% of the purchase price or higher, you will almost certainly not beat index fund/stock returns once all the overhead/maintenance, transaction costs, and cost of your time/effort is accounted for.

As A-spy said, post the complete numbers. There's a sticky at the top of the forum on how to do it.

-W