Investing and seeking out monthly cashflow can take you down two paths. For me, one of those two paths is earning monthly dividends and selling options to generate income. Another path is to purchase rental property and rent it out, thus earning that monthly cashflow from payments.
Today I’m going to discuss the latter: Rental Property
Rental Property: What’s Your Timeline?
The first question you want to ask yourself is “what’s your timeline?”
The purchase of a house will take some time, possible a few months from opening the case to closing out on the purchase. Once you do make the purchase, you then have the time spread between putting the house in the papers until getting your first tenant. After you get your tenant, things are generally smooth sailing from there in terms of monthly cashflow. However you do have to take into account maintenance and management.
If a pipe breaks or the AC unit is broken, that generally falls on you to get fixed. You may opt for a property management service to take care of all this for you as well as ensuring the tenant pays their monthly rent. I had to deal with a property manager when I rented out a townhouse and they always took care of maintenance.
If you manage to survive through that, congratulations! As long as you have a tenant occupying your property, you will earn consistent monthly income. Over the course of your mortgage, you’ll be slowly paying off your loans and thus increasing your assets and net worth. Slowly earning equity on your house.
The monthly cashflows will be lower risk too. Tenants don’t move in and out very quickly or very often either.
Rental Property vs Stock Market
How are rental properties better than the stock market?
- For one, the amount of risk you take in is lower since you’ll almost be guaranteed a monthly payment each month
- In the long run, rental income beats out a lot of capital gains income from stocks
- You have some tax benefits from writing off depreciation from your house. If you collect rental income and your house depreciates, you earn some of that income tax free (also known as phantom cashflow).
- The housing market generally rises over time. In a sense you’re owning a stock that pays high dividends and has historically good gains.
- Even if the market drops 60% like in 2008, you will still be receiving the same monthly rent payments from your tenant.
The cons of having rental property?
- Long-term investing
- Management and maintenance fees
- The amount of capital required up front is substantially larger
- Very illiquid. If you want to sell or find tenants, it generally takes some time. If the housing market is collapsing, you won’t be able to get rid of your house that quickly. FUD plays a role too.
I have a friend in Maryland whose parents own about 7 or so rental properties. In addition to that her dad is working a high paying salary job and is very well versed financially. Her school tuition is paid for completely from the rental property income. Talk about a taste of financial independence right there. With enough rental properties, you could have enough cashflow to act as income and support two generations of families.
Interesting! My wife and I are looking to invest in something lucrative. I get a free Fidelity account through my job, so I’ve been trying to learn the ins and outs of stocks. It’d be great if I could afford a rental property, it seems like easy money, even if it is a long term thing.
I wish I had invested in real estate when I was younger. Actually to this day I still want to buy houses and flip them or rent them. It’s coming up with the capital for that first purchase that scares me. Can you still write off everything you could in the past with the new tax laws this year? Great article
We have been looking into stocks, but we’ve also considered buying rental properties (once we’re ready). I appreciate how you broke this down, as it’s really something we’ve given a lot of thought to recently.
This is interesting. We’ve got money in the stock market, but hadn’t really ever considered rental properties. I think the maintenance would be a drawback for us.
I had never thought about the benefits of a rental property over stock. However, the headaches of dealing with bad tenants and maintenance issues is enough to make me hesitate.
Useful tips for people who have money to invest.
Rental properties you really do seem to be the way to go. But as someone else mentioned, it’s about coming up with the money for that first property. I live in Toronto and our real estate market is completely insane — buying a micro condo (i.e., small bachelors) costs $250,000. Crazy…
Ooooh what an interesting read! I actually never thought about comparing the two but have discussed with my boyfriend about investing in some stock soon. I don’t think renting out property would really fit our bill at the moment as we are not up for dealing with potentially bad renters, upkeeping maintenance, etc.
Interesting article. I’m not sure I’d want to invest in rental properties. Just because of bad tenants and then maintenance. There’s a lot of work involved with that and can be time consuming.
Real estate is absolutely where it’s at. I’ve been researching the purchase of empty lots in areas that aren’t developed yet…hold on them a fee years and hope the location pops…but that’s a bit more of a risk in some ways, and there’s no way of knowing when/if you can turn a profit.
My boss is a landlord for properties and I’ve seen a ton of things go wrong in regards to bad things tenants do for example keeping pigs in the garage, unpaid rent, indecent exposure, being slobs, etc… people are very unpredictable I’d rather take my chances with stocks
We had thought about the possibility of rentals a number of years ago, but c the maintenance and possibility of bad tenants definitely stopped us. Didn’t realize there were services out there that could take that on for us. Might be something to consider in the future. Thank you for breaking this down.
Owning your home and renting to others makes more financial sense to me. My landlords earn big on me. But as a person that travels often, I pay for someone else to deal with the maintenance. It’s a solid business if you’re a good landlord. Thanks for the article.
Very interesting and relevant I think one major difference between investing on a property and on stocks is , for stocks you can start with any amount you are comfortable with , but buying a property is a really huge and long term .commitment and not every one can afford it. For those who can, I agree with you , it is a fixed income every month . A strong back up for recessions !
I think the management and maintenance would be what turns me off from having rental properties. I’d rather take the risk in stocks than have to keep up with rentals.
smart real estate investment beats stocks any day anytime. I have always been a fan.
I love the idea of rental properties. It is something I am definitely looking at. But the start costs are crazy.
Thank you for the article. It really helped filled in some blank spots.
I have never thought about investments in this way before! I have never wanted to own a rental property but now I’m rethinking that!