Rental Income or Mutual Fund Dividends? Which would you take

[OneforfreedomParticipant 930]

If you could invest your money in either/or of these two categories, which would you take?
Would you split your money between rental properties and mutual funds? if so, what percentage would you put into rental properties?

I’m of the inclination that real estate is a much better deal than mutual funds b/c mutual funds are highly susceptible to factors beyond my control- i.e. problems in china, greece, etc. whereas real estate depends just on having tenants.

I also think that if currencies fall/change (like if we switch back to gold standard), then you could be put in a difficult position stock market wise, but real estate is right there. It’s yours. It’s property. You just need to accept a new currency and you’re all set.

Plus in my opinion the ROI on real estate > ROI on mutual funds. Real estate w/ cap rate of 10% means a 10% ROI. Many mutual funds average 7-8% annual return, and even then, you have to keep in mind the safe withdrawal rate is 4%. Plus it requires a lot more capital to sustain you.

Example: 400,000 property of real estate @ 10% cap rate could give me 40K/year to live on. But 400,000 of mutual funds averaging 7% growth but 4% true growth (3% inflation) could give me only 16 K (4% of 400,000) a year.

Let me know your thoughts!

[QcummerParticipant 652]

you do realize you just answered your own question

[OneforfreedomParticipant 930]

Well it’s no secret that I favor real estate over mutual funds.
But 401(k), IRA, etc. is something that everyone keeps saying to go into. And you can’t buy real estate (no i don’t consider REITS to be real estate) through those vehicles.

So I’m just curious if it’s better to go all in on real estate or if it’s a good idea to split it with 401K/IRA, but then you’re held hostage to the market, but then again it’s diversification…

My HEART is saying go all in on real estate and make that your retirement plan. But I want to hear some success stories with that before I put all my eggs in that basket. Do you see my dilemma?

[QcummerParticipant 652]

If you have extra money, and you don’t know exactly what to do with it, then just give it to me. see my point?

[UmbreonParticipant 152]

The major downsides with property are taxes, dealing with regulations, and upkeep costs. There’s also climate change to deal with.

Typically you need to pay city tax (if in a city) plus state tax on your land with extra money added if there’s anything built on it. If what’s built on the land isn’t up to regulations you will have to fix it or the local government will fine you. Something like forgetting to mow the grass on a property can cost you big time! Some areas have special regulations as well as home owners associations to deal with, both of which restrict what you can do with the land and will cost extra money. If something is built on the land you’ll most likely also have to pay some sort of insurance (if the home owners’ association doesn’t cover it all). If something goes wrong, you must pay to fix it most of the time.

Unless you’re renting a place out the money can NOT be accessed without selling your land. It’s frozen in there. Selling the land isn’t fast (you need to find a buyer!) and there’s lots of legal paperwork to do. There may be fees involved in the sale and taxes will need to be paid on what you made. Keeping tenants requires understanding your state’s rental laws and dealing with bad tenants. This means evictions, court cases, liability, insurance, and lots of other legal junk that varies wildly depending on where you live.

Where I live, for example, a guy can move in, never pay, and get to live there for about eight months rent free before the cops can kick him out. This is because the owners must wait for the tenant to not pay, contact the tenant with warnings about non-payment, file with the court for eviction, go to court over the eviction, and then the tenant must be given time to move out. When the bad apple does move out you have to fix all the damage done (people can be ass holes!), redo the carpeting, clean everything, and repaint before you can rent the place again. You can try to sue them for repair costs, but good luck getting money out of them as you have to do the notice, court case, waiting thing again. From there they have at least a year before you can go to court again and ask for their wages to be garnished to repay you and there’s no guarantee the court will grant it instead of extending the time the other guy has before paying you or something. Oh, and you’ll have to ask them to pay you in the meantime which means finding and contacting people who don’t want to be found or contacted. You will have to pay all court costs and processing fees as well as eating the price of time spent chasing that money. All of this time and money was lost because one guy didn’t pay his rent.

Also, not all places are guaranteed to go up in value over the coming decades. San Francisco area, for example, is insanely over priced and I expect a bubble to happen there especially after the tech firms decide that living on a fault line is a bad idea and move on. The midwest is turning into a dust bowl so land anywhere near the nearly depleted Ogalla Aquifer is a bad idea. I’m sure more will present themselves with a little time and research.

A mutual fund’s downsides are that they are taxed and don’t gain as fast as property. They are, however, stable no matter where you live in the world. The point of a mutual fund is that it’s made up of a pool of investments that shift as the investing climate changes. Even if things look nasty again, they will remain stable if not gain just a little as long as we don’t see a second Great Depression.

Mutual funds don’t require manual upkeep and taxes are taken yearly based on overall gains and losses. A bad year can mean less or even no tax if your accountant is clever! Land and properties on the land are taxed twice a year and the tax is stable and.or increasing, always. It doesn’t matter if the year was good or bad- you have to pay those taxes. Mutual funds also don’t require much of any fees as fees tend to come off the top when buying your funds or they come from proceeds made by the mutual fund.

The money is locked up until the Mutual Fund is sold, however, it’s easy to sell part of the mutual fund if you want to cash out just a little and not much paperwork is involved with sales. Mutual funds do not require that you find a buyer when you sell some of them off. There may be sales fees involved in selling as well as taxes taken off.

Mutual funds aren’t perfect, but neither is buying land and renting property. If you want easy and low-risk and don’t mind slower returns, mutual funds are for you. If you are willing to risk getting screwed and can keep up with all the legal crap and repairs, renting things is another way to go. What works for Stealthy doesn’t work for everyone. Do what works for you!

Beauty fades, dumb is forever.

[whatpricehParticipant 12]

Debating this as well, I decided to actually jump into franchise. There is plenty of semi-functioning franchise that can provide better income then throwing money into dark pools and wall street algorithms.

Franchises should provide inflation protection.

that being set looking also into guaranteed annuity.

basically its a damn go for fail, commodities, land, franchies, mutuals aka annuities

[BeerParticipant 11832]

It depends on your situation really…they both have their pros and cons. Real estate for example, rental income is taxed at your income rate. If you have a six figure job and live in a state with state income, your talking 30%+ of your rental income gone before you even see it. On the other hand…if you are retired or making a living completely off rental income the tax rate won’t hurt so much. Plus if you want to sell the property down the road you are going to end up paying taxes and probably commission to an agent. Stocks, you’d just pay 15% capital gains rate.

Plus you have to take into account that real estate is every bit as risky as stocks. I bought a condo 8 years ago and the value of it is down 50%. If your area is near or above the highs before the last crash that could happen to you. If I rent it out I’d run the risk of someone not paying me rent, and it takes a few months of getting stiffed to get someone out. Just a property sitting empty is costing you money, you still have to pay taxes and insurance on it. If I wanted to rent out my condo I could very easily end deep in the red for the year if it sat empty for a couple months, then I got a tenant that paid for 6 months and decided to screw me until I could evict them. I’ve known people with rentals who had tenants who trashed the place…punched out sheet rock walls, broke pipes, broke appliances…and what are you going to do? You just had to evict them because they weren’t paying you, they obviously have no money and don’t care, are you going to spend even more money on lawyers trying to sue them for damages when they don’t have any money to pay you? Good luck with that.

Plus you have to actually put effort into rental investments, unless of course you want to pay a property manager and maintenance people, but then you end up eating away at your gross. The way I look at it is if I have to spend time showing the property and screening potential tenants, cleaning between tenants, potentially have to make an occasional visit to fix something, or maybe having to miss work for a court date…I’m putting my time into my investment and I might not even make any money off it that year. If I’m going to be putting time into something I’d rather just pick up some OT shifts at work and dump the money into stocks that require a minimal time investment if you are sticking with funds or just plan on buying and holding steady dividend payers as long term investments.

For me it just ends up I make a lot at work, so my rental income tax rate would suck…at least 34% with state tax included. Plus, I work 12 hour shifts…so an overtime or double time shift can gross me 750-1000 dollars…so if I’m putting time into a property why not just put it into work instead for a guaranteed return. Plus when I retire I want to have 0 responsibility and minimal stress. I want to be able to pack my s~~~ up and move to a different state if I want, and to travel whenever I get the urge…being tied down to an area because you have accumulated a bunch of properties or always having to worry about getting a call from a tenant or having to find new tenants, or getting p~~~ed/stressed because you got some tenant f~~~ing you…it just doesn’t fit into my long term plan.

You can make money either way…I know people that have done well with each investment type, and people that have failed hard at each type. Different strokes for different folks, if you want to get into real estate just make sure to do your research and crunch your numbers before taking the plunge.

[FunInTheSunParticipant 8288]

I’d rather own real estate. If I can’t find a tenant, I can at least do a little rehab and sell the property. I live in California and our population is growing. I don’t think I’ll have a problem finding tenants if I’m in a good location and the rent is reasonable. I’m planning to have rental properties 10 years from now.

"I saw that there comes a point, in the defeat of any man of virtue, when his own consent is needed for evil to win-and that no manner of injury done to him by others can succeed if he chooses to withhold his consent. I saw that I could put an end to your outrages by pronouncing a single word in my mind. I pronounced it. The word was ‘No.’" (Atlas Shrugged)

[RoyDalParticipant]

Oneforfreedom wrote:

If you could invest your money in either/or of these two categories, which would you take?
Would you split your money between rental properties and mutual funds? if so, what percentage would you put into rental properties?

They call it real estate for a reason, specifically because it is real. Mutual funds are nothing but pieces of paper, and they might have wonderfully fancy printing, but they are still little pieces of paper.

Society asks MGTOWs: Why are you not making more tax-slaves?

[Wandering MGHOWParticipant 551]

I have been wondering this question myself. I live in an area where property is extremely expensive. When doing simple math, you quickly realize that any money you would be making from rent would go straight to the mortgage. Trying to buy something without a mortgage will not get you very much. You might be able to buy a phone booth sized apartment in the ghetto for 200k. Yea, that’s how expensive stuff is over here. So with a 2k mortgage each month, and lets say only 2k in rent, that would mean you break even each month. BUT there’s more. You are not actually breaking even, because now you have to pay for repairs, property taxes, etc. and this is all assuming the tenant even paid their rent that month.

I have some cash saved up, and I always planned on buying real estate, but lately I feel I should abandon this idea and save my money for a place of my own. As for cash flow, I would invest the rest in dividends. It seems real estate is not an option here unless you have big money. It sucks and I’m really torn by this decision.

[MilkmanParticipant 7]

I chose real estate about a year ago. It’s the best investment I’ve made monetarily other than leaving the plantation.
First and foremost, you must look at it from a business POV.
One of the biggest factors one may face is location. But that’s not really a major critical constraint. I recommend buying where you will always have renters, like outside a military base.
Also, you must buy the property, not mortgage it. If you mortgage, you are investing in the banks and they are banking on you failing. So in reality you are investing against yourself.

I saved up. Then I saved some more. I now proudly own 6 properties outright. This is after a nasty divorce. I created an LLC that now owns the properties. I also have property management and property management plans. Like weekly lawn care, tile cleaning twice annually, HVAC maintained annually, etc. With all of that rolled into the rent. I also don’t provide any appliances (stove/range, fridge, etc)

What I am getting at is to treat it like a business. Franchises are ok. But to free yourself is something totally different.

[TaxGuyParticipant]

If you have to paint it or feed it, it’s not an investment it’s a job!!

Do you want sweat equity like Stealthy? Then go real estate. If you want to make your money work for you and do nothing but watch a bet go up or down, then mutual funds.

Or, try a Real Estate Investment Trust (REIT). You can invest in REIT’s on the open stock market. They have to pay out 90% of the earnings as dividends every year in exchange for being a tax free entity. That way you are invested in real estate in a passive way. You can choose to reinvest the dividends and every time you get one it will just automatically buy more shares, so you get the compounding effect.

BTW, on a completely personal note, I think real estate prices are too high in general. There was a demand bubble that burst because anyone who could fog a mirror got a loan. When that bubble burst it was replaced with an interest rate bubble. Eventually interest rates have to go up and when they do prices will come down. I guess you can bet that the Federal Reserve can walk the tight rope of increasing rates at the exact perfect rate that allows rates to rise while slowing letting the air out of the housing the bubble and not causing another recession.

Given their track record, that is not a bet I am willing to take.

Order the good wine

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