Just Starting Out - Rentals or Stocks?

[Joe C.]

I have a friend who invests heavily in the stock market and is very good at it. He has recently made the argument that it is easier, less stressful and financially better to take whatever money I was going to dump into fixing rentals and buying more and putting that money in even just an S&P 500 index fund (returning 10% on avg) and I would end up making more than I would on rental properties over a 20-30 year period.  He argued, in those years, roofs will need replaced, foundations fixed and thousands of dollars a year in upkeep, vacancies, etc. After running some numbers and taking a look at my own returns in the stock market, I'm actually having a hard time disagreeing with this arguement.  My original plan getting into rentals was to build a portfolio that would appreciate over time and would be paid off by renters.  I did not however, think about the bigger repairs that come with home ownership over 20-30 years. Rentals clear a couple hundred bucks a month but the repairs such as roofs or foundations (that I have to repair now in one of my rentals) far outweight those gains. What am I missing?

[Chris Seveney]

Dollar for dollar? Yes, you'll do better in the stock market. The difference is in real estate: you can leverage an asset. If you have $100,000, you're buying $100,000 in stock. If you have $100,000 in real estate, you are buying a $400,000 property.

When you look at historical numbers, both have pretty close to similar returns, and over a long run one does not have returns that far exceed the other. At the end of the day, you want a diverse portfolio that probably includes both, but it's more about what you prefer. For example, my wife is one who does all our stocks, and I do real estate.