Important decision: Rental real estate vs stocks

OP

Member since 2016 · 14 posts · 6 votes

I am leaning to sell just one. I have tenants in and could not have sold it. You are correct, I would be trading tenant risk for market risk. SP500 is down 17% this year. Perhaps this spring would not be the worst time to get in. The truth is that we do not know what will happen the RE or stock markets in the short run. Can we assume that stocks will continue outperforming in the long run?

If I was to keep the house and get new tenants, these tenants would be paying down 1K of my mortgage every month, which seems good, but with the house being worth 320K, that's less than 4% ROI. 4% plus appreciation, if any.

Leo R.

Investor · Member since 2021 · 591 posts · 695 votes

...there's probably no "right" answer, and of course nobody knows what the markets (stocks or real estate) will do in the future...but, here are a few considerations:

-what's the grade of the property/neighborhood? ...if it's an A/B property in an A/B area, I'd be more hesitant to sell it. If it's C or lower, I'd be more motivated to sell.

-what's the property's appreciation history, and what's the forecast for future appreciation? (based on factors such as neighborhood, local employment outlook, population, current & future supply vs. demand, etc., etc.)

-what types of tenants does the property attract, how easy is it to find tenants, and how much hassle is it to manage? ...these factors would affect my decision...

-you didn't mention specific cashflow data, but it sounds like it's not cashflowing well...if that's the case, I'd be more motivated to sell... but if it is cashflowing well, then obv. I'd be more hesitant to sell..

-There's a good chance that we'll be in a pretty rough market to sell a property by Spring (in fact, we're already in a much poorer seller's market than we were 6-10 months ago)...although trying to "time the market" is often a fool's errand, I'd be hesitant to sell a property that's cashflowing well in this market...

-You'll want to outline and quantify all of the returns the property provides (or doesn't provide) other than just appreciation and cashflow. For instance, tax benefits, opportunity to force appreciation via value add, etc...

-You mentioned you started buying properties 15 years ago...which makes me assume you bought when rates were at historical lows...which makes me wonder why you used 15 yr mortgages? If you had gone with 30 yr mortgages, that might have completely changed the cashflow picture...regardless of what you decide to do, are there any useful lessons there regarding debt/cashflow?

-speaking of lessons learned, 15 years of real estate investing & property management no doubt taught you many valuable lessons--presumably you can use that knowledge to get good returns in more real estate deals, but that knowledge is of little or no use to your ability to succeed with stocks (i.e.; your knowledge of how to screen tenants won't help you in the S&P). ...personally, I focus more of my investing efforts in real estate than stocks because I have a much better understanding of real estate than stocks--this is because I have far more experience in real estate than stocks (plus, I think the basics of RE are just easier to understand for most people than stocks)...

-One of the most fundamental rules of investing is diversification--if you're currently 100% in RE, then perhaps diversifying some of that into stocks would be a good move...

...hopefully that helps.

Good luck out there!

3 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Why not sell one and reinvest it in another property worth 5 times what you pay for it. With 15 year mortgages and holding for 10 years, you have probably lost more money than you could ever gain in SP500

7 Reply

OP

Member since 2016 · 14 posts · 6 votes

Here are the details of the property in question:

- Purchased about 6 years ago for 215K. Now worth 330K.

- 15-year mortgage at 3.37%

- Property located in a good suburban area with great schools.

- Currently leased for $2100. I could probably get $2200. My monthly mortgage payment is $2,033 + flood insurance (1K) and HOA ($600/year). My income and other properties effectively subsidize this one.

- Property falls under the 2-out-of-5-years rule, - we would not have to pay taxes on this property.

Jacob St. MartinPro Member

Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes

First, I would assume that these properties have been cash flowing. Have you factored in all of the money you have made from cash flow? Did you reinvest any of that cash flow into real estate or stocks? If so that money has also been growing over time. You also mentioned that you did not put 145 down when you purchased. I am assuming you put 20% down which would be $29k. Based on the SP500 growth that you have listed here that 29k would only be 100k now. You cannot use leverage on stocks like you can with real estate which is why it is so powerful. Even if you only put 5% or 20% down on a property, you still benefit from 100% of the appreciation. If you factor in all of these things you made way, way more money in real estate.

Now the question of how to move forward is a different. The SP500 is going to be more passive than owning your own rental properties but as we have seen real estate is usually a more powerful tool for wealth building. If you don't mind the work involved with managing my advice would be to either sell or cash out refi and buy several more properties with that money. Now you will be benefiting from the appreciation from 2 or 3 properties for every one that you own now. If you look at your return on equity right now it is probably pretty low so you will want to mobilize that equity as much as you can in some way.

If you don't want to be an active investor anymore you have a couple of options. Stocks is one option but is definitely not the way I would go because it doesn't have the powerful tools of leverage and cash flow like real estate. If you want to be hands off I would recommend investing in a syndication or being the cash partner in a smaller partnership. Both will offer you better returns than the S&P normally will and you will still benefit from things like depreciation and you should get a nice cashout when the partner or syndicator eventually sells. If you are interested, someone I have partnered with is doing a capital raise for a multifamily syndication or I am looking for cash partners for STRs. Feel free to reach out if you are interested in either. Regardless, I hope that this helps you and hope that you continue to be successful in your wealth building journey!

3 Reply

Brad S.

Investor · Pasadena, CA · Member since 2017 · 613 posts · 523 votes

I'm not a stock guy, so can't offer much insight there, but I don't you see you taking leverage into account.

You mentioned you put 5% down, since you couldn't afford to pay $145k cash. So, using your #'s provided and not accounting for costs, cashflow, etc, here's how it would've looked:

Stocks
$145k invested to get $500k = 245% gain

Your House
$7,250 invested to get $135k in equity = 1,762% gain

**********************
Now, if you had $145k and split it into 20% or 25% down payments, this is what it would've looked like:

20% down
$29k down, 5 houses, $135k equity each house = $675k gain, 366% gain

25% down
$36,250 down, 4 houses, $135k equity each house = $540k gain, 272% gain

and of course you have costs, maintenance, etc., but you also have depreciation, equity paydown by tenants, tax benefits (1031 deferral), and you own a bundle of commodities as an inflation hedge, cashflow, etc, etc.

13 Reply

Allen Wu

Rental Property Investor · Member since 2021 · 335 posts · 193 votes

Quote from @Marek Kucharski:

My wife and I have three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely. Of course, this was no bed of roses: we put a lot of work into these - roof leaks, flooded floors, painting, clogged toilets, annoying tenants - you name it.

Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example:
- The first house was purchased in 2013 for $145K. That house is now worth $280K.
- If I was to invest $145K in SP500 in 2013, I would have about $500K

I know that the past is not the prologue, but I also know that historically housing trails the SP500. That said, in 2013, we were fresh out of grad school and did not have $145K to invest in the market. So, buying a house with 5% down was the only option. Today, we could sell one house or more and invest a larger sum for the long haul.

We have tenants moving out in the spring and we are considering selling. The house in question happens to be a house we lived in recently and we could sell it and not pay taxes on the sale. Do you think we should pull the trigger and put the money into the market? Thank you for your advice.

Relevant details:

- Household income about $250K, which means that we cannot deduct rental losses

- All houses have 15-year mortgages , which means that they do not cash flow well. We are either in the red or breaking even depending on luck in a given your. Tenants are paying off our mortgage.

- We could also sell, invest the money, and buy another rental (re-leverage)

Everyone here will be Real estate bias. You ask Boglehead, they will be stock bias.
I’ll make this super simple. Why not both? I’m in both stocks and real estate. Good to diversify.

2 Reply

Andres Manco

Investor · New Orleans Louisiana · Member since 2022 · 9 posts · 3 votes

I am a new realstate investor, only have a duplex where I live and pay really cheap since the other unit pays most of mortgage and a fix and another house I am under contract right now for a fix a flip.

I also invest long term in the Stock market.

I would recommend different options:

1- Selling the house since you dont get any profit monthly and find couple houses that you can rent and actually get some extra income there. Its something that you already know how to manage. Just look into better deals so you don't just break even.

2- buy one house and invest the rest in the Stock market, just not the S&P500. If you really want to make money just do a little more research and focus on a few companies that really feel confident of their growth.
"If I was to invest $145K in SP500 in 2013, I would have about $500K"
If you were to invest that in Teslta or Apple or many others in 2013, you would be multi millionaire.

I like option number two for now because of the current stock market.

Everything is really low and in couple years everything could/should be flying.

Wish you the best.

OP

Member since 2016 · 14 posts · 6 votes

What Andres suggested was on my mind for a while now. I just find the current real estate market more challenging - it is much more difficult to make the numbers work - at least in my local area.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Quote from @Marek Kucharski:

Here are the details of the property in question:

- Purchased about 6 years ago for 215K. Now worth 330K.

- 15-year mortgage at 3.37%

- Property located in a good suburban area with great schools.

- Currently leased for $2100. I could probably get $2200. My monthly mortgage payment is $2,033 + flood insurance (1K) and HOA ($600/year). My income and other properties effectively subsidize this one.

- Property falls under the 2-out-of-5-years rule, - we would not have to pay taxes on this property.

Everything you stated above tells me to sell, sell, sell. You're losing money big time. Negative cash flow and you are using other properties to compensate for the negative CF? Why? Would you work at a 2nd job, and pay your employer of that job for that privilege, because you enough money in your main job to cover the payments to the employer of the losing job? That's what your doing here.

6 Reply

OP

Member since 2016 · 14 posts · 6 votes

Thank you Joe, this is precisely the type of advice I am looking for.

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Marek Kucharski:

My wife and I have three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely. Of course, this was no bed of roses: we put a lot of work into these - roof leaks, flooded floors, painting, clogged toilets, annoying tenants - you name it.

Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example:
- The first house was purchased in 2013 for $145K. That house is now worth $280K.
- If I was to invest $145K in SP500 in 2013, I would have about $500K

I know that the past is not the prologue, but I also know that historically housing trails the SP500. That said, in 2013, we were fresh out of grad school and did not have $145K to invest in the market. So, buying a house with 5% down was the only option. Today, we could sell one house or more and invest a larger sum for the long haul.

We have tenants moving out in the spring and we are considering selling. The house in question happens to be a house we lived in recently and we could sell it and not pay taxes on the sale. Do you think we should pull the trigger and put the money into the market? Thank you for your advice.

Relevant details:

- Household income about $250K, which means that we cannot deduct rental losses

- All houses have 15-year mortgages , which means that they do not cash flow well. We are either in the red or breaking even depending on luck in a given your. Tenants are paying off our mortgage.

- We could also sell, invest the money, and buy another rental (re-leverage)

The next decade (2022-2032) IRR in real estate is 99% guaranteed would be lower than the era of QE in 2010-2020. If IRR is 15% in prev. decade I think it will be cut by half.

However,IRR for S&P could still be higher than 20% for this decade.

I agree with your plan and I actually going to that route as well, reason is becoz index and bond is way way way too cheap right now so it has room to expand. Real estate not so much, but it wouldnt crash either too.

OP

Member since 2016 · 14 posts · 6 votes

Quote from @Brad S.:

I'm not a stock guy, so can't offer much insight there, but I don't you see you taking leverage into account.

You mentioned you put 5% down, since you couldn't afford to pay $145k cash. So, using your #'s provided and not accounting for costs, cashflow, etc, here's how it would've looked:

Stocks
$145k invested to get $500k = 245% gain

Your House
$7,250 invested to get $135k in equity = 1,762% gain

**********************
Now, if you had $145k and split it into 20% or 25% down payments, this is what it would've looked like:

20% down
$29k down, 5 houses, $135k equity each house = $675k gain, 366% gain

25% down
$36,250 down, 4 houses, $135k equity each house = $540k gain, 272% gain

and of course you have costs, maintenance, etc., but you also have depreciation, equity paydown by tenants, tax benefits (1031 deferral), and you own a bundle of commodities as an inflation hedge, cashflow, etc, etc.

Thank you so much. Great analysis - very helpful.

Mark S.

Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes

@Marek Kucharski Real estate has had a heck of a run up and equities have gotten hit pretty hard. But that doesn’t mean one will perform better than the other the next 10 years. Many analysts are forecasting equity returns of only 5-7% the next decade. But there are also opinions that real estate will continue to soften next year. My point? No one really knows which will perform better. Which is why balancing things out and having some of each is a great long term strategy. You may miss a stretch where one strategy would have been a home run, but you also protect against being 100% wrong. Great example of why diversification like this works is this year. Equities are down big, real estate values generally have been depressed, but farmland has run up appreciably. No one can accurately forecast which sector is going to perform best on a year-to-year basis. I am not claiming to be an expert on this but have 20+ years experience in all three sectors and it has allowed be to remain comfortable personally with all the ups and downs.

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Mark S.:

@Marek Kucharski Real estate has had a heck of a run up and equities have gotten hit pretty hard. But that doesn’t mean one will perform better than the other the next 10 years. Many analysts are forecasting equity returns of only 5-7% the next decade. But there are also opinions that real estate will continue to soften next year. My point? No one really knows which will perform better. Which is why balancing things out and having some of each is a great long term strategy. You may miss a stretch where one strategy would have been a home run, but you also protect against being 100% wrong. Great example of why diversification like this works is this year. Equities are down big, real estate values generally have been depressed, but farmland has run up appreciably. No one can accurately forecast which sector is going to perform best on a year-to-year basis. I am not claiming to be an expert on this but have 20+ years experience in all three sectors and it has allowed be to remain comfortable personally with all the ups and downs.

the way you see this problem is to understand the difference between two asset class. Real estate is relatively low volatility while stock is higher volatility, so when see an index that's off -40% from ATH we know there's quite a good of discount component there, good thing about real estate is low volatility and leverage, but the cons are surprise from maintenance. However, even at its worst time, RE performance would never be as bad as stock market. This creates interesting phenomenon where, if you buy stock index in a relatively good discount, it may perform well better compare to real estate. The problem with stock is if you buy at the wrong time, then you may be wiped out due to margin call. RE doesn't have that problem.

Overall, stock market at this conjencture (12/11/2022) has more reward/risk ratio rather than real estate investment.

In fact, in the last 300 years, today is the best time to buy US gov bonds.

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

How much did you actually spend when you bought the home (plus repair costs)? That is the number you should compare with stocks, not $145K. If you bought it with 5% down, you got it for under $10K.

What about selling and buying another place that cash flows better and getting a longer (25 year) mortgage? I don't know stocks.

Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

You can't touch stocks, you can't cash flow with stocks, you can't creative finance and charge an interest rate of 8% to live in a stock. Real estate will always be the better option, even if the market crasher you can maintain monthly. Stocks are a pure gamble

5 Reply

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Eliott Elias:

You can't touch stocks, you can't cash flow with stocks, you can't creative finance and charge an interest rate of 8% to live in a stock. Real estate will always be the better option, even if the market crasher you can maintain monthly. Stocks are a pure gamble

True I can't touch stock. There's creative financing using options and/or future, it's just more complicated.

I can cash flow with stock using dividend stock,REIT,or even BDC/CLO investment that yields 10%. A preferable safer stock yield investment is 5%.

Stock market is not a gamble for those who understand how the economy works.

If the market crash, it's the best time to buy an index because when it rebounds, it rebound so fast that's faster than real estate appreciation.

Truth is you have to invest at vehicle that you understand.

2 Reply

Mark S.

Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes

@Carlos Ptriawan I don’t recall any reference in this discussion to buying on margin, so I don’t think that point is particularly relevant here. I do agree with your comments on volatility and leverage of course. And I do understand the different asset classes quite well, having many years of experience in both institutional and individual asset management. My point was simply that no one can predict the future in any of them and depending on an individual’s risk tolerance and goals, diversification across asset classes can be an excellent strategy for many investors.

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Mark S.:

@Carlos Ptriawan I don’t recall any reference in this discussion to buying on margin, so I don’t think that point is particularly relevant here. I do agree with your comments on volatility and leverage of course. And I do understand the different asset classes quite well, having many years of experience in both institutional and individual asset management. My point was simply that no one can predict the future in any of them and depending on an individual’s risk tolerance and goals, diversification across asset classes can be an excellent strategy for many investors.

wrong.

both of real estate and stock market index is correlated to .......... money supply in distribution.

Mark S.

Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes

@Carlos Ptriawan Yes ok well everyone is entitled to his or her opinion. Signing off - this is getting silly.

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Mark S.:

@Carlos Ptriawan Yes ok well everyone is entitled to his or her opinion. Signing off - this is getting silly.

This is not opinion.

This is like saying 2+3 > 4.

When folks don't understand this, they don't want to learn.

Bud Gaffney

Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes

@Marek Kucharski real estate.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Quote from @Carlos Ptriawan:

Quote from @Marek Kucharski:

My wife and I have three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely. Of course, this was no bed of roses: we put a lot of work into these - roof leaks, flooded floors, painting, clogged toilets, annoying tenants - you name it.

Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example:
- The first house was purchased in 2013 for $145K. That house is now worth $280K.
- If I was to invest $145K in SP500 in 2013, I would have about $500K

I know that the past is not the prologue, but I also know that historically housing trails the SP500. That said, in 2013, we were fresh out of grad school and did not have $145K to invest in the market. So, buying a house with 5% down was the only option. Today, we could sell one house or more and invest a larger sum for the long haul.

We have tenants moving out in the spring and we are considering selling. The house in question happens to be a house we lived in recently and we could sell it and not pay taxes on the sale. Do you think we should pull the trigger and put the money into the market? Thank you for your advice.

Relevant details:

- Household income about $250K, which means that we cannot deduct rental losses

- All houses have 15-year mortgages , which means that they do not cash flow well. We are either in the red or breaking even depending on luck in a given your. Tenants are paying off our mortgage.

- We could also sell, invest the money, and buy another rental (re-leverage)

The next decade (2022-2032) IRR in real estate is 99% guaranteed would be lower than the era of QE in 2010-2020. If IRR is 15% in prev. decade I think it will be cut by half.

However,IRR for S&P could still be higher than 20% for this decade.

I agree with your plan and I actually going to that route as well, reason is becoz index and bond is way way way too cheap right now so it has room to expand. Real estate not so much, but it wouldnt crash either too.

A 10% return in REI is much better than a 20% return in the Stock Market. Using percentages to make decisions regarding REI is at best misleading,...and most likely a lie