# Stocks vs Rental



## Mortgage u/w (Feb 6, 2014)

I have a rental which gives me a return of just over $600 per month - that's after mortgage, taxes and insurance expenses. My ROI is basically 100% because I refinanced a year after purchasing it and recuperated my downpayment. If I were to sell the rental today, I would profit about $120k net.

I am trying to weigh the pros and cons if I should stick with the rental or sell and invest the profits. If one would assume a 6% investment return, it pretty much works out to the same $600/month I am currently receiving from the rental - minus the headaches of managing and maintaining a property and tenants.

One can argue the rental will increase in value - but so can the investments. Rental income can increase as much as decrease - but so can investments. 

The main advantage I can see with the rental is it is paying itself off and eventually my monthly cash flow and equity will be much higher. But at what cost along the way? I currently pay a high tax bracket on the profits and it will only be higher once the rental is paid off. 

Is there an optimal solution? Opinions? Advice?


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## liquidfinance (Jan 28, 2011)

Mortgage u/w said:


> The main advantage I can see with the rental is it is paying itself off and eventually my monthly cash flow and equity will be much higher. But at what cost along the way? I currently pay a high tax bracket on the profits and it will only be higher once the rental is paid off.



The same can also be said for stocks assuming you buy those with a history of consistently increased earnings and dividends. 

The main thing is if you can stomach the volatility of the markets?


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## Just a Guy (Mar 27, 2012)

If your property is financed 100%, then your ROI is technically infinite not 6%. None of your money has been invested. ROI is return on investment so you take profits/invested amount, $600/0. If you sell, you'll need to claim capital gains on $60,000, so you'll have closer to $90,000 to invest not $120,000, so your ROI will probably be less than 6%. 

Next, your also forgetting that, with these interest rates, about half your mortgage payments are going towards principle...did you factor that into your profit calculation?

Rents generally keep up with inflation, so do property values, so you have a pretty secure investment. Also, as the principle gets paid down, your ROI increases, but since it's already infinite, let's say your cash flow. When the mortgage is paid off, the interest portion comes to you.

Finally, remember that the expenses are being paid by someone else. While technically true with stocks, you would be risking the profits you made from real estate, as opposed to the current situation where you are risking the banks money...plus you could leverage the $120k in equity you've built up to invest elsewhere...like stocks or another rental. 

In your case, it's a no-brainier, keep the rental.


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## Edgar (Mar 24, 2014)

Ask yourself if you are risk-averse, or risk-loving.

If you prefer the steady flow of income, keep the rental. If you want to put it into the market and hope that you make a larger gain, while also realizing that you could lose income as a result, obviously investing is the way to go. IMO, rental wins.


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## gardner (Feb 13, 2014)

The ways I would evaluate this would be:

(1) what does your overall investment portfolio look like, including this RE holding? Is it weighted completely to RE, or is it balanced by other holdings? If you are heavily weighted in RE, I would consider diversifying. You can get RE exposure with a REIT with less hassles than owning a home.
(2) what is the yield you are getting on this RE? If it cost you 200K then 600/month is a yield of 3.6% You can get that type of yield from many places. If the yield is lower than alternatives, consider diversifying.


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## Just a Guy (Mar 27, 2012)

gardner said:


> (2) what is the yield you are getting on this RE? If it cost you 200K then 600/month is a yield of 3.6% You can get that type of yield from many places. If the yield is lower than alternatives, consider diversifying.


The difference is, the 200k isn't his money, it's borrowed, he earns money on money that isn't his...the only way this can be done in stocks is by having a margin account.

Second, if you're invested in stocks, they are still stocks, not really diversified. When stocks crash, they generally all crash, even REITs. No one cares they are "real estate". 

Finally, if you own multiple units, there are some great tax advantages which can increase your returns. Something the owners of REITs don't benefit from, but something which makes REIT managers probably very wealthy.


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## hboy43 (May 10, 2009)

Hi:

Well, I have a different no brainer.

Over the very long term, stocks have returned more than RE. I would hope that this is undisputed accepted fact, but I doubt it is in some places. So I made the decision that stocks are the place to be in general. 

Next question, are stocks the place to be at this specific time? Is there some transient condition that would make RE have better prospects than stocks right now? I would argue the opposite. Over the last 10 years, I suspect RE has done better than stocks. I don't actually know, I will leave it to someone else to quote some figures. I do know that the TSX is still under it's record in 2007, some 7 years later whereas Toronto and Vancouver RE are around a double in that time.

You will find this debate going back to the beginnings of investing time here and elsewhere. It is really a religious issue, one group never manages to convince the other and it just goes round and round. I suspect that leveraged RE vs unleveraged stocks is about a wash. This I think is the fundamental basis for this issue never being settled. The reality is that almost all RE is highly leveraged and almost all stocks are paid for in cash and both these situations have lead to about the same return on investment (but not capital employed). 

In the end, you have to decide for yourself on which side of the fence you sit. Personally I have had a rental house and would not ever go back to being a landlord. It is not that it ended badly, it is just that stocks have done so much better with so much less work and worry. It works for me as I am both lazy (well not really, but why sign up for work that you don't have to?), and I can sleep at night in a stock crash.

hboy43


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## Mortgage u/w (Feb 6, 2014)

gardner said:


> The ways I would evaluate this would be:
> 
> (1) what does your overall investment portfolio look like, including this RE holding? Is it weighted completely to RE, or is it balanced by other holdings? If you are heavily weighted in RE, I would consider diversifying. You can get RE exposure with a REIT with less hassles than owning a home.
> (2) what is the yield you are getting on this RE? If it cost you 200K then 600/month is a yield of 3.6% You can get that type of yield from many places. If the yield is lower than alternatives, consider diversifying.


As I mentioned, my initial investment has been recouperated already so the purchase price was fully financed. I'm sitting on 30% equity right now and my monthly return is positive. The rental is only a small percentage of my overall portfolio so I don't need to diversify.

As for yield, even before I recouped my inital down payment, my yield was 12%. Had it been only 3.6% I would have panicked a little. LOL. Not sure how to calculate a yield now that my down payment is back in my pocket.

I can see the benefits of the rental....will be on my fifth year owning it and has been profitable since. I guess I'm just overanalysing potential drawbacks in the future - repairs or bad tenants vs a low maintenance investment portfolio.


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## Potato (Apr 3, 2009)

He worded it weirdly, there's ~$120k of equity in the rental, it is not all borrowed -- it's (paper) profits on past appreciation.

Unfortunately it's tough to say what to do because not all the numbers are there. Getting 6% on the $120k might be really risky if that's just a thin slice of equity on a $2M property -- a loan that size could easily turn the whole thing into a money-losing operation if interest rates rise.


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## Just a Guy (Mar 27, 2012)

Hboy,

You may notice, from my past entries, that I don't preach real estate when it's a bad return...in fact, most of the time I discourage people from doing it because their numbers say it's a bad idea.

I too invest in stocks, plus I own companies of my own, as well as real estate that is truly diversified, unlike people who just buy stocks.

I believe that numbers don't lie, in this case his real estate is very safe and more profitable than most situations.

Now, he may benefit by selling his single place and buying multiple doors with the equity but, since he didn't supply hard numbers, it's impossible to say for sure.


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## the-royal-mail (Dec 11, 2009)

I prefer the stock investing method for the simple reason that it minimizes liability and phone calls and bills to repair leaky faucets and roof. Getting out is as easy as clicking the SELL button on a website and paying $10 commissions vs all the middlemen involved in RE.


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## donald (Apr 18, 2011)

The one argument in favor of a rental(general)is one doesn't have to be as intelligent i would argue.
Stock investing is way more cerebral.
People always say i 'don't want to fix toilets and have tenants ect' but in order to have the same capital base at work in a portf the same as a rental(like the case of the op)and yield incl one might have example:20 stocks @ 10k each=200k(and won't come near the leverage re can offer)
I have been investing solo for 3 yrs and if i am forth right it does take up a lot of time(on a ongoing bias-even if you do have 'set and forget'
You can make a hell of a lot of mistakes in re and it no doubt would be stressful but it's not like managing a solid/growing portf is exactly a walk in the park
One thing about Re is i know a few re investors(grandpa friend(s) and one of my father's-they are both millionaires from this(lucky time maybe in cdn re)but you would be hard pressed to know that many millionaires who are controlling stock portf(only old money or highly educated people)
These gentleman actually built a operational business in re(employed people/bank partner ect)and built companies........does not really work that way with stock investing(highly individual)and you can't leverage the same dollars and you can't leverage people in the operation on your own terms like re.

The ez of clicking the sell or buy button might be the worst thing about stocks(and them being highly liquid all the time)


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## Just a Guy (Mar 27, 2012)

If you don't know what you are doing, anything is risky.

If you do know what you are doing, you can usually mitigate the risks and be successful. 

How many posts do we read on this forum from people who are about to, or have lost their shirts in business, real estate or stocks and bonds? 

Those who are successful in an area see it as safe, some people are successful in multiple areas.

Your personal success is ultimately up to you and no one else. No one area is better or worse than any other...it depends on the decisions you make in those areas of investing. 

The one thing I find in investing is I usually question myself at some point. In real estate, it usually comes at the end of a lease...should I sell and cash out, or rent for cash flow...but the same happens with my stocks, or after a bad day with my business...

That's why I always look at the numbers...they are honest.

In the OP's case, he's not in a losing situation either way...and the numbers say holding is safe and profitable. Of course, the numbers don't take into consideration the emotional side...bad tenants, market flux, etc. 

That being said, I've seen more mistakes happen because of emotions than I have from running the numbers.


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## Mortgage u/w (Feb 6, 2014)

Just a Guy said:


> Now, he may benefit by selling his single place and buying multiple doors with the equity but, since he didn't supply hard numbers, it's impossible to say for sure.


What kind of 'hard numbers' would you need?


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## MorningCoffee (May 8, 2013)

Mortgage u/w said:


> The main advantage I can see with the rental is it is paying itself off and eventually my monthly cash flow and equity will be much higher. But at what cost along the way? I currently pay a high tax bracket on the profits and it will only be higher once the rental is paid off.


^this. Making more money is a good thing. Making less, but paying less tax, is not better.
I'm with _Just a Guy_ on this one. I would keep the rental. You are getting infinite returns since it uses none of your own money. 

If you have unused rrsp or tfsa room, you can funnel your cash flow into those accounts for tax sheltered growth. If you were looking to invest in a taxable account, you could possibly borrow against the property to invest. You have lots of options. You can do stocks *and *the rental.


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## Just a Guy (Mar 27, 2012)

Mortgage u/w said:


> What kind of 'hard numbers' would you need?


Well, you said it's appreciated by 120k, so I imagine you paid more than that for it, but you never say the total price. To me, your ROI is probably too low...I try to keep my rentals at no more than 100k/door unless there is a good reason.

To me it seems like you should refinance at least and get another property. Increase your cash flow, use some of that $120k of equity as a down payment...but I'm not positive as you never said the value of the property.

You could possibly have a second unit at no cost generating more money for yourself total.


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## Mortgage u/w (Feb 6, 2014)

The property contains 3 units. I paid it just under $300k and its current value is around $425k. Mortgage balance is $275k. Like I initially mentioned, I recouperated my initial down payment so there is currently none of my own money on the line. Net profit per year is apx $7500 (after all expenses). 

In order to use the equity for DP on another property, I would only be able to finance 80% of its current value. So would be apx $65k vs if I sold, I would have at least double that.

But in all honesty, I do not think I would be looking for another rental....I would rather take the equity and invest elsewhere.


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## Just a Guy (Mar 27, 2012)

Yeah, I'd refinance and invest the 65k elsewhere...

You could write off the interest, your tenants would cover your mistakes (if any), and 65k would make a good down payment on at least two more doors or a good basis for a stock portfolio...other than that, there's nothing wrong with what your doing.

You're in a win-win situation.

Why would you consider selling and be on the hook for all of the 120k? You're already generating a steady, fairly secure, return that has way more security than the market. If you make a mistake the 120 is gone, no way to recoup, in your current system you lose your 65k, you'll get it back in time.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> The difference is, the 200k isn't his money, it's borrowed, he earns money on money that isn't his...the only way this can be done in stocks is by having a margin account.


Actually ... it's whatever let's one borrow the amount ... the lender is anticipating making money and doesn't care whether the loan is margin, a HELOC or a plain loan.




Just a Guy said:


> Second, if you're invested in stocks, they are still stocks, not really diversified. When stocks crash, they generally all crash, even REITs. No one cares they are "real estate".


Depends on what one defines as a "crash" ... investors cared when trusts were assessed higher taxes and REITs weren't.

Then too, if one is worried about the investment, it's a lot easier to liquidate or shift stocks than RE.




Just a Guy said:


> Finally, if you own multiple units, there are some great tax advantages which can increase your returns. Something the owners of REITs don't benefit from, but something which makes REIT managers probably very wealthy.


I'll have to check this out ... but on the flip side, if the REIT is paying a high percentage of RoC, there's no taxes to pay on the RoC until the ACB is negative. Then it's a capital gain instead of plain old income.

As usual ... YMMV for what you want.


Cheers


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## Eclectic12 (Oct 20, 2010)

donald said:


> The one argument in favor of a rental(general)is one doesn't have to be as intelligent i would argue.
> 
> Stock investing is way more cerebral ...
> 
> I have been investing solo for 3 yrs and if i am forth right it does take up a lot of time(on a ongoing bias-even if you do have 'set and forget' ...


They both are work.

As for the "set and forget" taking a lot of time, I'd suggest it's truly not "set and forget" if it is taking time. The versions I've read require revisiting the setup once or twice a year and ignoring the market otherwise. 

The guy who hired a management company for his properties was spending more time than that talking the management company alone.




donald said:


> You can make a hell of a lot of mistakes in re and it no doubt would be stressful but it's not like managing a solid/growing portf is exactly a walk in the park ...


They are both work and both risky.




donald said:


> One thing about Re is i know a few re investors(grandpa friend(s) and one of my father's-they are both millionaires from this(lucky time maybe in cdn re)but you would be hard pressed to know that many millionaires who are controlling stock portf(only old money or highly educated people) ...


Let's see ... a kid born in a Norther Quebec mining town that stopped education in high school to work in the mines and moves to SWO ... nope, there's no way I can classify him as "old money" or "highly educated" yet when he died thirty years ago, he was a millionaire without any RE. 

Then there was also sixteen year old who had moved mostly out of stocks as she didn't like prices before the dot-com crash ... she was close to a million before.

Then there's:
http://www.huffingtonpost.com/2014/01/31/margaret-southern_n_4703680.html
http://www.dailymail.co.uk/news/art...e-twins-lived-modestly-sitting-gold-mine.html
http://www.celebritynetworth.com/ar...30-year-housekeeper-died-a-multi-millionaire/
http://articles.baltimoresun.com/1995-12-27/news/1995361008_1_swindells-mrs-shrewd


Cheers


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## Just a Guy (Mar 27, 2012)

The difference between a margin account and getting a loan against property is significant. Property almost always has some value, whereas a margin account can go right down to zero...and pretty quick if you're not looking.

I also like how, with your quotes, you try and turn my argument around...I've often said there are benefits to investing in stocks, real estate and businesses, but you have to do it right. There is no "one stop" investment to be successful in.

In THIS case, his real estate investment is safe, secure, and making him better money. In MANY other cases, I've told people to walk away, sell, avoid whatever...

My point was that the stock market isn't as diversified as most people think. The collapse of the TSX can and has affected the REITs...when it hasn't touched housing prices.

The fact that real estate isn't as liquid I see as a positive...it forces people to be smart investors, it generally is hard on speculators. 

I don't mind it when people point out the other side of a discussion, but please don't try and change the general point of a position by selective quoting.


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## the-royal-mail (Dec 11, 2009)

OK so right now if the value is $425 and you take away the 275 you owe that leaves you with 150 in your pocket. 5% RE fees for selling will cost you one year's worth of income. If you invest the remainder and are able to pick some stocks to get yourself a 6% return that will leave you with roughly $8000 in income per year, about $500 more than you make right now. Either way you have risk, either with stock equity or with bad tenants that come and go and leaky roofs etc. I think you need to consider the pros and cons and decide yourself. If it was me (since I prefer cash in hand) I would want to sell now and collect the income and sleep easy at night knowing my phone won't ring with tenant problems. That peace of mind would be worth it for me to go to the hassle and expense of selling. Not a big fan of RE.


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## OurBigFatWallet (Jan 20, 2014)

I'm in a similar situation in that I've considered buying another rental. I ran the numbers and decided against it simply because our TFSAs aren't maxed out, so the returns within the TFSA are a bigger priority right now. If I had both the RRSP and TFSA maxed out then I'd definitely look at another rental but for now it's too low of a priority


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## Just a Guy (Mar 27, 2012)

You ignored the refinance $65,000, invest at 6% and earn another $3900/yr. while the tenants pay off the loan and you deduct the interest that would account for $1950. Plus be more diversified.


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## donald (Apr 18, 2011)

A few things elec that are reasons i think(generally)as to why stocks are more risky than Re(leaving vacant/developing raw land ect out of it ha lol,i learned this)
-It is human nature to look @ one's holdings(i would call out everyone who is a diy investor non couch potato on this,and bet we all look everyday? and naturally the wheels can start turning if one pays 2 much attention not only about perhaps company specifics but broad market events ect,were all susceptible to this esp ''we'' as amateur's(pro's incl though)things can change on a dime in the market with stocks(snc taught me this lesson when that scandal broke and i am not ashamed to admit i sold out of fear even though it was part of my long term holdings at the time,i learned though through that,i won't even go into the sexy growth stocks like we all know of)
-With a portf that is say 250k+ even one has to:read/plan maybe a few buys a years(lots)--maybe look a few times a year @ adding to positions via dividends,same study involved--Maybe 10% of a portf is short-term trading(which is more study and maybe different study ie:trend following ect
It takes a lot of time to do this study(and lets face it,this is $ so there is always a touch of trepidation or second guessing or would of should of ect
-Buffett him self cautions the diy crowd all the time(prob pro incl also in this!)about not looking at stocks every,day/week/mth maybe yr because he knows as well as all of us do how emotions can effect things-he used the example of someone who had a farm saying of course that man would not look at his values everyday ect and act irrational,wouldn't even been a though but that is the problem with the capital markets----i remember a bunch of posts on cmf when fb went public and than dropped and people fretting(media also)and everybody saying how dumb the public was(if you are one of those people in real time that **** can get 2 u)but look,present day now,was it a bad buy?maybe not
-The RE example i was talking about was a guy i grow up with that got several rentals(like a dozen i think/paid for)passed onto him to run,out of high school and to this day he is still running it and has acquired more.....now imagine if instead of RE his dad left him with the equivalent amt of capital invested(with debt/margin incl)in stocks ie:3 million dollar portf with a 100+ holdings----i would bet!he would be a td waterhouse soo fast he would not give it a second thought!
-You ever noticed amateur stock investors who are rich(like your examples)are always considered eccentric?how come re investors are not?It is because stock investing takes a special sort of aptitude few have(like these stories you have posted)


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## Mortgage u/w (Feb 6, 2014)

the-royal-mail said:


> OK so right now if the value is $425 and you take away the 275 you owe that leaves you with 150 in your pocket. 5% RE fees for selling will cost you one year's worth of income. If you invest the remainder and are able to pick some stocks to get yourself a 6% return that will leave you with roughly $8000 in income per year, about $500 more than you make right now. Either way you have risk, either with stock equity or with bad tenants that come and go and leaky roofs etc. I think you need to consider the pros and cons and decide yourself. If it was me (since I prefer cash in hand) I would want to sell now and collect the income and sleep easy at night knowing my phone won't ring with tenant problems. That peace of mind would be worth it for me to go to the hassle and expense of selling. Not a big fan of RE.


I think the biggest driver in my decision is the peace of mind. There is obviously more physical work in owning RE than stocks. BUT, the numbers don't lie and clearly, in my situation, the RE is more profitable. If I were to sell, I would only be removing the physical aspect but then, I'd also be giving up solid returns. 

I agree with Just a Guy, I could leverage the remaining equity and generate more income - either with another rental or simply invest in stocks. 

I think I will stick with my RE a while longer. If I can find another profitable rental, I'd be tempted to buy...but the lack of time to manage it holds me back. Needless to say, there are not many rentals out there that are profitable anymore. For some reason, rents did not follow the housing price market. At best, you break even - and IMO, that's not an investment anymore.


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## Pluto (Sep 12, 2013)

I think sticking with the RE right now is a good move. I'm a big fan of leverage, but not at any time. I think borrowing to buy stocks right now would be a bad move that could unravel a good thing. 

What concerns me is we are all riding the wave of easy money. What happens when the music stops? Assets deflate, at least temporarily. We need to have a plan on how to ride out the storm, and take advantage of whatever bargains may present themselves. 

Enjoy the ride of easy money, but keep in mind that when the economic skies are clear blue, and we are nearly there, its the last stage of the joy ride. Economic fall and winter are next. I think that in two years or less, you will be very happy you stuck with the RE, and didn't borrow to buy stocks right now. Wait until the inevitable crash and burn, then see if you can borrow against the house to buy some stock.


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## hboy43 (May 10, 2009)

Mortgage u/w said:


> I think the biggest driver in my decision is the peace of mind. There is obviously more physical work in owning RE than stocks. BUT, the numbers don't lie and clearly, in my situation, the RE is more profitable. If I were to sell, I would only be removing the physical aspect but then, I'd also be giving up solid returns.


snipped from further up ...
"The property contains 3 units. I paid it just under $300k and its current value is around $425k. Mortgage balance is $275k. Like I initially mentioned, I recouperated my initial down payment so there is currently none of my own money on the line. Net profit per year is apx $7500 (after all expenses). "

So you have equity of $150K, leverage $275K, asset $425K. I don't see how the conclusion "RE is more profitable" follows. $7500 on $150K equity is 5%. You can also get dividend stocks that yield about 5%. In both cases capital gain going forward is unknown. Which non lying numbers am I missing?

hboy43


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## Just a Guy (Mar 27, 2012)

Well, I'm not sure if he included the fact that half of his mortgage payment, at today's interest rates, is paying down the principle...most people count the entire mortgage payment as an expense, when half is really profit.

Then there's the fact that the real estate generated the 150k in equity out of an investment of a total investment of $0.

Next we could look at the additional income that can be generated by investing the $65,000 out of refinancing...tax deductible interest.

The original mortgage is also tax deductible. 

Then there's the fact that all these returns will continue to be generated from somebody else's money, tax differed.

I could probably think of a few others...


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## Mortgage u/w (Feb 6, 2014)

hboy43 said:


> snipped from further up ...
> "The property contains 3 units. I paid it just under $300k and its current value is around $425k. Mortgage balance is $275k. Like I initially mentioned, I recouperated my initial down payment so there is currently none of my own money on the line. Net profit per year is apx $7500 (after all expenses). "
> 
> So you have equity of $150K, leverage $275K, asset $425K. I don't see how the conclusion "RE is more profitable" follows. $7500 on $150K equity is 5%. You can also get dividend stocks that yield about 5%. In both cases capital gain going forward is unknown. Which non lying numbers am I missing?
> ...


I think you missed quite a few......JAG resumed it pretty well.


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## hboy43 (May 10, 2009)

Just a Guy said:


> Well, I'm not sure if he included the fact that half of his mortgage payment, at today's interest rates, is paying down the principle...most people count the entire mortgage payment as an expense, when half is really profit.
> 
> Then there's the fact that the real estate generated the 150k in equity out of an investment of a total investment of $0.
> 
> ...


1. He sounds smart enough to get his taxes right and report the correct figure.
2. No he didn't, and anyhow however you want to interpret the withdrawing of that cash, it is in the past. Today he has equity of $150K in the asset.
3. That would be a separate issue. He could borrow money anywhere and buy stocks.
4. Same as 1.
5. Same as 2.

Let's hear the others.

hboy43


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## Charlie (May 20, 2011)

my math:

Selling at $425K would trigger $25K selling costs and about $25K cap gains tax. So he nets $100K after mortgage to invest.

At 5% div yield (seems high) that's $5K per year.

vs $7200/yr cash flow currently plus principal paydown. (the principal amount isn't just a tax calculation -- it's a reduction of debt/increase to equity). So guess at $5K/yr?

On an income only basis (excluding appreciation or depreciation) he's ahead of the game by about $7K by renting. Slightly worse given unfavorable tax treatments.

So weigh that against management hassle, real estate risks (repairs/tenants/market/interest/etc) and make the call....

I think JAG's right. In this situation, real estate may compare favourably to stocks. Subject to one's feelings on prospects for each market and stomach for property management.


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## Synergy (Mar 18, 2013)

^ A rental property is going to need some $ for maintenance, this should be estimated and included within the calculations. Once you get a final figure you then can determine whether the extra time, hassle, etc. is worthwhile. I don't see why the OP can't do both. Keep the rental and use the cash flow and his yearly salary or income to build an investment portfolio. It doesn't really matter which one you start with. Personally I'm happy building an investment portfolio, utilizing REIT's and owning a home to get some real estate exposure. In the future I haven't ruled out investing in residential (rental properties) or commercial (rental property, car wash, storage facility, etc.) real estate. Partly for the experience and partly for the potential future reward.


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## Just a Guy (Mar 27, 2012)

Hboy43, you obviously don't want to see...

For example #5, if he sells, he triggers capital gains which cuts down on the amount of money he can invest later after the sale, if he doesn't sell, it's earning power can be tapped by refinancing and no taxes are triggered.

Also, you can't get a margin account anywhere near the leverage of real estate. 

So, since you obviously don't like real estate, I'm fine with you staying out of it. It's hard enough to find profitable places these days, so I'm glad you'll stay in stocks...means less competition. I hope you continue to convince many others that this is a terrible field to invest in.


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## hboy43 (May 10, 2009)

Just a Guy said:


> Hboy43, you obviously don't want to see...
> 
> For example #5, if he sells, he triggers capital gains which cuts down on the amount of money he can invest later after the sale, if he doesn't sell, it's earning power can be tapped by refinancing and no taxes are triggered.
> 
> ...


You are right, I don't like RE. I think stocks in general are better and have said why in other places. But I did not come here proclaiming this, I merely asked for some justification of the assertions here. I have yet to be convinced. Might be because I won't see, might be because you have not convinced me.

I frankly don't know what to do about "I can leverage up to the eyeballs in RE therefor RE is a better place to invest" argument. I probably have no traction until/if/when RE starts falling.

I agree with the new point you raised, the capital gains tax. I had neglected to consider that.

I repeat a key question: what is the capital gain going forward for both this house and the alternative investment stocks. Until you know this, you don't know which is the better return. You/OP/somebody has said RE is better in this situation, in fact "numbers don't lie", which implies you know the answer. Please share.

I think you are saying all 5 of my refutations are false and that I am unable and or unwilling to understand why, so no point putting in the effort? I am biased and obstinate. OK let's assume that I am monumentally stupid. I invite you to clearly and in great detail present the numbers as to how this all works. 

Not for me, for others tuning in. Pretend I was never here. This is a truth that you hold and I would think that you would want to proudly proclaim it. I have many times gone on like a windbag when I thought I had insight. Step up, it is your turn. Do it as a public service for new investors.

You are of coarse free to decline. What I ask of you is much work, probably a half day. Likely easier to just say "you obviously don't want to see..." But if you are unwilling to robustly defend your assertions, then perhaps you can see why someone might not just accept "numbers don't lie".

hboy43


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## Just a Guy (Mar 27, 2012)

Contrary to what some on this board think, I'm not a novel writer. 

That being said, I think I've provided an outline that anyone with a bit of common sense can sit down with a pencil and paper and figure out the details themselves to their own satisfaction. To be fair, I really don't care if people like real estate investing or not, as I've said in the past I invest in many different ways, I've seen both success and failure in all of them...none of them have ever proven to be better or worse if you know what you are doing.

That being said, I can almost guarantee failure in any of them if the "investor" doesn't understand what they are doing. 

Frankly, you seem to be asking...write out my own homework, in enough detail that I understand and can profit by it without me having to do anything. Sorry, I don't even do that for my kids...

I suggest you pick up a couple of books on real estate and then sit down and try to understand what they are saying, don't just look for holes in the discussion, try to comprehend what is being said...there is a big difference. 

Heck, to me this discussion alone outlines enough information that if you sit down and try to understand what's being said, (it may not be properly stated I'll give you that) you should be able to understand or at least come up with intelligent questions instead of trying to poke holes in the whole idea because you don't understand or it wasn't stated well. 

I'm more than willing to clarify a point, or even several, but I've got no idea how to even start with you...I can't teach someone who won't think and wants things spoon fed to them.


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## Hawkdog (Oct 26, 2012)

Synergy said:


> ^ A rental property is going to need some $ for maintenance, this should be estimated and included within the calculations. Once you get a final figure you then can determine whether the extra time, hassle, etc. is worthwhile. I don't see why the OP can't do both. Keep the rental and use the cash flow and his yearly salary or income to build an investment portfolio. It doesn't really matter which one you start with. Personally I'm happy building an investment portfolio, utilizing REIT's and owning a home to get some real estate exposure. In the future I haven't ruled out investing in residential (rental properties) or commercial (rental property, car wash, storage facility, etc.) real estate. Partly for the experience and partly for the potential future reward.


Can you not write off the those expenses on your tax return? including a portion of the mortgage interest? invest the tax return - diversify.

Where a rental really shines is when its a daily/weekly rental.


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## amitdi (May 31, 2012)

Mortgage u/w said:


> As I mentioned, my initial investment has been recouperated already so the purchase price was fully financed. I'm sitting on 30% equity right now and my monthly return is positive. The rental is only a small percentage of my overall portfolio so I don't need to diversify.
> 
> As for yield, even before I recouped my inital down payment, my yield was 12%. Had it been only 3.6% I would have panicked a little. LOL. Not sure how to calculate a yield now that my down payment is back in my pocket.
> 
> I can see the benefits of the rental....will be on my fifth year owning it and has been profitable since. I guess I'm just overanalysing potential drawbacks in the future - repairs or bad tenants vs a low maintenance investment portfolio.


My 2 cents - 
There are no-brainers on each side, then there are conclusions slightly here and there. So before you even get into the numbers - like someone said, ask your self - 
if you are risk-averse, or risk-loving
how much hassle you can handle 3,5,7 yrs down the line? Like you said - repairs or bad tenants vs a low maintenance investment portfolio

To answer "Not sure how to calculate a yield now" - 
Take the net amount you will receive after you sell your property. This is the amount with which you can buy stocks (lets keep commissions aside for a while). You can get dividends, appreciation based on this amount. So use this amount while doing your realestate yield calculations, not your cost or down payment. Comparing apples to apples. This way the yields accurately reflect the $ amount/yr. That is what matters in the end.


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## llagebs (Feb 24, 2014)

Just a Guy said:


> Well, I'm not sure if he included the fact that half of his mortgage payment, at today's interest rates, is paying down the principle...*most people count the entire mortgage payment as an expense, when half is really profit.*


It always bothers me when people claim mortgage principal repayments are "profit", or worst of all "savings". At best, you can call it "equity" which is NOT profit, cash or savings. You can't spend equity. Equity has *no value* until it's converted to cash by selling the underlying asset. Equity can also appear or vanish out of thin air (think fluctuating RE prices). Equity is an intangible concept, nothing more.

A mortgage is just a loan. If someone borrowed $10,000 to go on vacation, would you call their principal repayments "profit"?

You didn't say this, but elsewhere I've seen people deduct principal repayments when doing buy vs rent calculations in an attempt to skew the numbers. For example, $1000/mo to rent vs $400 taxes/maintenance and $1200 mortgage payment to buy... hmm, much cheaper to rent. But wait! Half the mortgage payment is principal repayment, which is like depositing money into a savings account, so your ownership costs are actually just $1000. Same as rent! This is obviously bogus math - if you use a 0% interest rate then you discount ALL mortgage payments, which is absurd. For example, if a mortgage payment would be $2600 @ 0% with taxes/maintenance of $400 for a total of $3000, you would say that since $2600 goes towards principal repayment, your ownership costs are $400 which is way cheaper than renting for $1000. Renting is for losers! This ignores reality where it would still cost you $3000/mo to buy vs $1000/mo to rent. In fact, you could pay INFINITE mortgage payments at 0% and still appear better off than renting. Really, eh?

Sorry, pet peeve. The entire mortgage payment is an expense.


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## Just a Guy (Mar 27, 2012)

But with rentals, as the original poster actually did, you can refinance and pull out equity to invest and use. Plus, you could sell the rental...something much more difficult to do with a principle residence. If you own the rental for 20 years, and renters have paid it off...it still has some value does it not? I agree with you that the exact value is unknown until you sell it or refinance it, but it's certainly not the same as a vacation.


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## marina628 (Dec 14, 2010)

i will never rent and it has nothing to do with the financial side of things , just that I want to decorate and garden as I wish without having somebody tell me I can't do x,y,z.I can't ever see myself being happy in a condo/apartment either because I like my space too much.


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## Mortgage u/w (Feb 6, 2014)

llagebs said:


> It always bothers me when people claim mortgage principal repayments are "profit", or worst of all "savings". At best, you can call it "equity" which is NOT profit, cash or savings. You can't spend equity. Equity has *no value* until it's converted to cash by selling the underlying asset. Equity can also appear or vanish out of thin air (think fluctuating RE prices). Equity is an intangible concept, nothing more.
> 
> A mortgage is just a loan. If someone borrowed $10,000 to go on vacation, would you call their principal repayments "profit"?
> 
> Sorry, pet peeve. The entire mortgage payment is an expense.


I can't say I entirely agree with your analogy....True, the principal repayment is not and should not be treated as cash or savings. But it IS profit or in better terms; EQUITY. Equity can be converted to cash or savings by selling or refinancing. Your $10k loan for a vacation cannot be converted. And just like equity can vanish due to fluctuating prices, the same is true for stocks that can equally vanish in thin air. Difference is, better to see equity vanish rather than your capital.

One investment is not better than the other (RE vs Stocks). The "return" of your investment is what counts.


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## MRT (Apr 8, 2013)

Mortgage u/w said:


> ...
> One investment is not better than the other (RE vs Stocks). The "return" of your investment is what counts.


well...the level of risk associated with each does count too


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## chaudi (Sep 10, 2009)

A rental is a small business. Stock investing is more like playing the casino.


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## Synergy (Mar 18, 2013)

chaudi said:


> A rental is a small business. Stock investing is more like playing the casino.


The odds of succeeding as a small business owner aren't likely much better than the odds you get in the stock market. I'd place my bets on the stock market. The average person would likely do better in the stock market then trying to run a small business. Many small businesses fail miserably within their first year, especially if they're trying to do it as a "side job".


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## chaudi (Sep 10, 2009)

In either case it is illusion. When you fail you be shattered and say ba that rental business is terrible or the stock market has downgraded, but when you succeed you will say i am so great stock picker or businessman. An illusion of going somewhere or getting somewhere.


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## Just a Guy (Mar 27, 2012)

Having done all three, I think it depends on the person. If you buy smart, and screen your tenants, running a rental is probably the easiest of the three. No matter how much research you do, the stock market is manipulated and works on it's own, there is very little you can control, so you are along for the ride. Running a business has a lot more things to worry about.


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## Synergy (Mar 18, 2013)

chaudi said:


> In either case it is illusion. When you fail you be shattered and say ba that rental business is terrible or the stock market has downgraded, but when you succeed you will say i am so great stock picker or businessman. An illusion of going somewhere or getting somewhere.


No, I look at stats and I don't fall prey to post hoc ergo propter hoc.


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## gt_23 (Jan 18, 2014)

Mortgage u/w said:


> I have a rental which gives me a return of just over $600 per month - that's after mortgage, taxes and insurance expenses. My ROI is basically 100% because I refinanced a year after purchasing it and recuperated my downpayment. If I were to sell the rental today, I would profit about $120k net.
> 
> I am trying to weigh the pros and cons if I should stick with the rental or sell and invest the profits. If one would assume a 6% investment return, it pretty much works out to the same $600/month I am currently receiving from the rental - minus the headaches of managing and maintaining a property and tenants.
> 
> ...


I don't think it should be either or...you didn't mentioned the obvious benefit of diversification that keeping the rental, and building up your financial capital (perhaps using the rental net income), would give you. Also, the RE should be a pretty good hedge in a high inflation/low growth environment in the future.


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## gt_23 (Jan 18, 2014)

Just a Guy said:


> If your property is financed 100%, then your ROI is technically infinite not 6%. None of your money has been invested. ROI is return on investment so you take profits/invested amount, $600/0. If you sell, you'll need to claim capital gains on $60,000, so you'll have closer to $90,000 to invest not $120,000, so your ROI will probably be less than 6%.
> 
> Next, your also forgetting that, with these interest rates, about half your mortgage payments are going towards principle...did you factor that into your profit calculation?
> 
> ...


ROI is a useless metric. ROE/C is key in this case.


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