Concrete example of how long term rentals beat stocks

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Concrete example of how long term rentals beat stocks

David Yee
Member since 2022 · 68 posts · 16 votes

Hello,

I've started pricing out rental properties on Redfin using a spreadsheet I downloaded from the files section here at Bigger Pockets. Something I'm still not understanding is how long term rentals actually beat the stock market. For example, this is my math on a potential property:

$100k property:

- cash outlay = $25k down + $15k for closing costs, repairs, etc. = $40k

- $85k loan to account for improvement

Assuming 7% Cash on Cash Return, I would accrue $2,800 in cash flow at the end of year 1. Assuming I sell the rental and am able to cover the closing costs, repairs, etc. with appreciation, it seems I would walk away with $42,800.  

If I bought and sold stock with the same cash investment and return, I would receive $42,800 at the end of year 1 just like in the rental example above.

I realize I should hold rental properties for longer periods of time, but I'm not sure how the rental scenario beats the S&P 500. 

Can someone please provide an example with concrete numbers that show how the 4 dimensions of long term rental properties beat the stock market? 

Thank you!!!

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y

I'm on my cell phone so forgive me for using a dated, low priced example.

in 2004 I purchased a townhome for $67,500. Things were looser back then, so I only invested $7,000. I held that property for 8 years and use the cash flow for improvements over the years. When I sold the property in 2012, I cashed out $78,000 and I had over $5,000 in my bank account. If my math is correct, that's a 985% return or 33% annual. And that does not include the other benefits of owning real estate.

since 2016, I have invested in 33 rentals and a small storage facility. I have a relative that has invested in the stock market since the seventies. Our portfolios were worth about the same a year and a half ago, but he has since lost about 25% value in the past year while my value and cash flow has increased. His annual dividends are about $50,000 while mine are easily three times that. And the real kicker? He's afraid to pull money out because of the taxes while I'm enjoying tax shelters that enable me to make over half a million dollars in one year and pay almost nothing in taxes.

I've read opinions that the stock market and real estate are comparable, but that doesn't jive with what I've experienced in the real world.

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  • Lance Antonio
    Member since 2022 · 14 posts · 8 votes
    4y

    this sounds like it'd become a tax game from there on and nothing is better then cashflow, but from my understanding if your gonna be getting into rentals, id think more 5-10 year return. meaning appreciation and depreciation depending on what your plan is. i cant compare the 2 as i dont understand stocks as well, but i do know my money into stocks, i aint touching it for awhile. just my 2cents haha 

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    Figure out the returns you’d need in the stock market to match rental property returns and assume I’m no genius. 

    In the last 11 years I’ve used $305k of my own money as down payments

    I bought a total of $1.8 million in real estate. 

    Today I have $3.8 million in equity and my cashflow after all expenses including full management is $177,500/year. 

    So if you had $305k to put in the stock market today could you turn it in to stocks worth $3.8 million with dividends of $177,500/year? If so, then you should manage other peoples money for a living and take only a percent. 

    Ps. The equity was 100% tax free as there have been no sales. The income is only 1/3rd taxable because of $50k in depreciation. 

    Time is the magic formula. I’m not sure I made $10k the first year. With 5% down you’re getting 20x appreciation, even with 20% down you’re getting 5x. If you break even on the rental for 5 years and get just 4% annual appreciation you’ll be killing it. You’ve made 100%, or 400%. Add some rent inflation and you’re on your way. 

    You can EASILY retire with $2million in real estate equity at any age. There is zero chance I’d recommend a 50 year old retire with $2million in stocks. YMMV and GL either way. 

    3Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y
    Quote from @David Yee:

    Hello,

    I've started pricing out rental properties on Redfin using a spreadsheet I downloaded from the files section here at Bigger Pockets. Something I'm still not understanding is how long term rentals actually beat the stock market. For example, this is my math on a potential property:

    $100k property:

    - cash outlay = $25k down + $15k for closing costs, repairs, etc. = $40k

    - $85k loan to account for improvement

    Assuming 7% Cash on Cash Return, I would accrue $2,800 in cash flow at the end of year 1. Assuming I sell the rental and am able to cover the closing costs, repairs, etc. with appreciation, it seems I would walk away with $42,800.  

    If I bought and sold stock with the same cash investment and return, I would receive $42,800 at the end of year 1 just like in the rental example above.

    I realize I should hold rental properties for longer periods of time, but I'm not sure how the rental scenario beats the S&P 500. 

    Can someone please provide an example with concrete numbers that show how the 4 dimensions of long term rental properties beat the stock market? 

    Thank you!!!

    If you read online, they will all say stocks have performed better than real estate over any period of time (which one year in any analysis and considering that long term would blow up any argument anyone makes BTW). But these numbers are based on unlevered real estate. What is not accounted for in those numbers is real estate is typically leveraged. Once you throw in leverage, the returns are very similar. There are also many pros and cons to each, including control, liquidity etc. 

    Saying one is better than the other is like saying your arms are better than your legs and vice versa. Anyone can argue which is better but the truth is its best to have both, and when investing its the same, you want to have both in your portfolio 

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  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes
    4y

    You aren't taking into account principal paydown and appreciation. Cash flow is only on part of the equation. 

    Think about it this way. If you're property ONLY appreciates 2% on average each year that is a 5% rate of return ($2k / $40k) you aren't counting in addition to cash flow. Now make a similar assumption for the debt you are paying down.

    Not to mention in a few years, you can likely refi and redeploy capital. 

    1Reply
  • Scott Mac
    Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
    4y

    Increase in value over time, loan pay down by renter, depreciation can shelter some income.

    No margin call, no "Gambling" on picking one stock over the other--Roulette.

    Banks will lend to you to buy real estate--but not to buy stocks--(if stocks were superior--it would be the other way around).

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y

    I'm on my cell phone so forgive me for using a dated, low priced example.

    in 2004 I purchased a townhome for $67,500. Things were looser back then, so I only invested $7,000. I held that property for 8 years and use the cash flow for improvements over the years. When I sold the property in 2012, I cashed out $78,000 and I had over $5,000 in my bank account. If my math is correct, that's a 985% return or 33% annual. And that does not include the other benefits of owning real estate.

    since 2016, I have invested in 33 rentals and a small storage facility. I have a relative that has invested in the stock market since the seventies. Our portfolios were worth about the same a year and a half ago, but he has since lost about 25% value in the past year while my value and cash flow has increased. His annual dividends are about $50,000 while mine are easily three times that. And the real kicker? He's afraid to pull money out because of the taxes while I'm enjoying tax shelters that enable me to make over half a million dollars in one year and pay almost nothing in taxes.

    I've read opinions that the stock market and real estate are comparable, but that doesn't jive with what I've experienced in the real world.

    The DIY Landlord Book4.7248 Reviews
    WebsiteView Page
    6Reply
  • David Yee
    OP
    Member since 2022 · 68 posts · 16 votes
    4y
    Quote from @Alexander Szikla:

    You aren't taking into account principal paydown and appreciation. Cash flow is only on part of the equation. 

    Think about it this way. If you're property ONLY appreciates 2% on average each year that is a 5% rate of return ($2k / $40k) you aren't counting in addition to cash flow. Now make a similar assumption for the debt you are paying down.

    Not to mention in a few years, you can likely refi and redeploy capital. 

    Thank you Alexander! You are correct. I was ignoring some of the 4 dimensions of RE investing that seem to relate to equity. Based on what you said this is the mathematical breakdown I came up with if I sell the home after 10 years of ownership. Perhaps I'm missing some of the advantages of equity though. 

    Total Equity after 10 years assuming 2% appreciation = Value of home     - remaining mortgage  

       => $121,899 - $64,207 = $57,692. This is the amount of money I walk away with from the sale.

    Cash flow I accumulated was: COC ROI * cash outlay * 10 years

       => .07 * $40,000 * 10 = $28,000

    Total amount of money I've accumulated at end of 10 years is:    

       => $57,692 + $28,000 = $85,692

    This is compared to the value of my investment after 10 years if I had put the original $40,000 in the stock market: $78,686.

    Thanks again for your insight!





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  • David Yee
    OP
    Member since 2022 · 68 posts · 16 votes
    4y
    Quote from @Bill B.:

    Figure out the returns you’d need in the stock market to match rental property returns and assume I’m no genius. 

    In the last 11 years I’ve used $305k of my own money as down payments

    I bought a total of $1.8 million in real estate. 

    Today I have $3.8 million in equity and my cashflow after all expenses including full management is $177,500/year. 

    So if you had $305k to put in the stock market today could you turn it in to stocks worth $3.8 million with dividends of $177,500/year? If so, then you should manage other peoples money for a living and take only a percent. 

    Ps. The equity was 100% tax free as there have been no sales. The income is only 1/3rd taxable because of $50k in depreciation. 

    Time is the magic formula. I’m not sure I made $10k the first year. With 5% down you’re getting 20x appreciation, even with 20% down you’re getting 5x. If you break even on the rental for 5 years and get just 4% annual appreciation you’ll be killing it. You’ve made 100%, or 400%. Add some rent inflation and you’re on your way. 

    You can EASILY retire with $2million in real estate equity at any age. There is zero chance I’d recommend a 50 year old retire with $2million in stocks. YMMV and GL either way. 

     Wow! These numbers are really impressive. Way better than the stock market.

    You mentioned that even if I break even on the rental I'd still be doing great. How is the appreciation useful since it is not putting money "in my pocket" as Robert Kiyosaki would say? Do you use the equity for new investments? Any resources you think are useful would be great.

    Thank you so much for your time!

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    How is stock appreciation useful if it’s not putting cash in your pocket?

    Real estate appreciation can be cash in your pocket anytime you want. Banks love to lend on real estate. 

    0Reply
  • David Yee
    OP
    Member since 2022 · 68 posts · 16 votes
    4y
    Quote from @Bill B.:

    How is stock appreciation useful if it’s not putting cash in your pocket?

    Real estate appreciation can be cash in your pocket anytime you want. Banks love to lend on real estate. 

     You are correct @Bill B.. I was not taking equity into account. I'll read up more on this subject. Thank you so much for your time and knowledge! 

    1Reply
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