I'm a CPA, investor, and tax advisor. I've spent over 30 years in business. Your content is very educational, but you have a gift for presenting it a fun, non-intimidating, but thorough manner. I share your content with my 22 and 25 year old children because, of course, they don't always listen to their Dad!!! LOL
It can potentially be way less profitable too. He himself admits that he got lucky. It also has more variance in how you do, since its location dependent whereas stocks represent the entire US economy or world. All that said, it seems obvious that stocks are superior. I’d say buy your owner occupied home, but put any excess capital in stocks.
@@The.Harsh.Truths It's tricky. People who bought rentals pre-covid are looking like geniuses now. I have friends who have made a couple million in appreciation alone, meanwhile I'm 100% in index funds and have not made millions in the last 5 years. The counter point is that it's a lot more work for them, and one friend had a house get basically gutted by a tenant. Copper wiring stolen, etc. Huge huge huge hassle, insurance companies involved, etc. The way the real estate market is in the US the probability is that rental properties will continue to beat index funds, but people always underestimate the work involved. There's nothing "passive" about it, even if you hire a property manager as you're still on the paperwork hook for approving repairs and such. Once you have enough rental properties people "retire" from their jobs and basically become full-time property managers themselves....that's not retirement! That's just a career change.
@@tmoore121 correct that’s not retirement. I’ve owned a rental property for 11yrs. I hate it. It isn’t just work, it’s the most painful work ever dealing with tenants and contractors and condo managers who are all trying to cheat you. As for your friends who made a lot in RE, for each of them, there are plenty of people who ate leveraged losses and had to file for bankruptcy. Risk is a double-edged sword. Don’t just cherry pick when people win big.
Real estate got a ROI of 1% to 3% in the last 30 50 years. Nowadays is probably negative equaty for most middle class families. Not takingg in account also that the disparity between property price and wages is ridiculous compared to the 60s and 80s and that its the only asset class type that havent suffered a correction. Nah Im good renting, taking the difference and paying those opportunity costs in other investments. I know a lot of people who have houses who entered retirement broke. Houses dont generate money. Simple as that. A home aint GDP. Waiting for a house to shoot up in value in 30 years is called faith and a hope strategy, it aint no rational investment.
@@ricardodelacrvz1400 Depends a lot on which market you're in, especially if you're talking about primary residence. My mortgage is less than market rent and will be paid off in 20 years, meaning I'll effectively have no rent and am currently investing the difference between my mortgage and rent into the market. And this is before discussing appreciation. Not all markets are the same, of course.
I have had the good fortune of knowing alot of people who have had similar experience. If I want to be in real estate I think I'll stick to reits myself
You are correct. Real estate investing is not passive if you manage properties. I put in an average of about 30-45 minutes a week per property or about 8-10 hours a week. I cash flow over $2,000 a month. My debt pay down is over $2,000 a month. Appreciation at only 3% a year is over $3,000 a month. Combined it is over $84,000 a year for 8-10 hours a week. Or over $150 an hour. This doesn’t even take into account the tax savings. It’s not passive, but it is a pretty good part time job. I could hire out much of the work and make it more passive as cash flow increases. It’s not for everyone, but it works for those who work.
As an lnvesting enthusiast, I often wonder how top level investors are able to become millionaires off investing. . I’ve been sitting on over $545K equity from a home sale and I’m not sure where to go from here, is it a good time to buy into stocks or do I wait for another opportunity?.
People dismiss the importance of advisors until they are burned by their own emotions. I remember a couple of summers ago, following my lengthy divorce, I needed a good boost to assist my business stay alive, so I looked for qualified consultants and came across someone with the highest qualifications. She has helped me raise my reserve from $275k to $850k, despite inflation.
Angela Lynn Schilling is who i work with and she is a hot topic even among financial elitist in California. Just browse, you’d find her, thank me later.
Great channel! I am a Real Estate investor myself, I recommend everyone to buy a couple of rentals and see how much their life changes. I have over 100 rental units and they will keep appreciating with time and renters pay down the mortgage. Nothing beats that.
I'm a realtor, and am very glad you talked about the cons that come with the pros of being a real estate investor. A lot of people don't realize the active work required when it comes to a property!!
Spot on content. I invest in both. Real estate investing described here is best case scenario. Dealing with rental properties can go side ways really fast with expensive property damage and being blind sided to lawsuits.
Yup you nailed it. A lot of people don’t learn about the hidden costs of real estate because most people publicize their gains and privatize their losses. This creates a false narrative around how easy it is to profit from real estate. It’s the same way that you’ll never meet a losing poker player, yet, it’s a negative-sum game after the dealer takes their rake.
For now index and stocks might be better options until the housing market stabilizes. I'm putting off taking out a mortgage for now and just focus on the stock market until the economic storm subsides, and since there is a bull run, the 100k I might have used for a down payment could make more some money in the stock market, but I'm not very familiar with stocks.
If you're not one who understands strategies to invest in the market, why not seek a financial advisor to help you grow your portfolio? You could make a lot from the market, but you may not grow, or even make a loss, if you're not well versed.
Having an investment advisor is the best way to go about the stock market right now. I’ve been in touch with a coach for a while now mostly and I made over 95% profit within a short time.
What do you mean with "until the housing market stabilises" and "until the economic storm subsides"? There is no property slump and no economic crisis. And we are just ahead of a Fed cutting cycle. Sound like you are making excuses for being under invested :)
Tae is correct as real estate property investments have a level of luck when going this direction. To me the ultimate issue I had with investment property were the renters. 1) You need to keep it rented or you are out of pocket on a payment which will take down your income quickly 2) There is the cost of management/maintenance if out of state. Are they trustworthy and truly looking after your best interests or nickel and diming you for every silly thing that they deem needs repair? 3) Bad renters, I have had two houses (in good neighborhoods) that I had to completely redo the inside in a period of 3 years. Carpet, paint, tile, etc., not inexpensive repairs. That is not an immediate tax write off as some people think, and instantly kills any rental profit you made On the other hand, my friend bought in the same area I did at the same time... he has had the same renters for twenty years with zero issues As he said, there is a level of luck
@@ClickBeetleTV You only tie up 10% of the down payment for the mortgage. And usually, the cheaper studio or one-bedroom flats are better. Since they're cheaper as well the down payment is not a huge number.
What I got from this is to be one of those savvy real estate investors. For example I’ve learned a strategy to buy real estate at 10-30% of the market value. With that much equity going in, your returns far far outweigh index funds or any amount of headaches you can deal with in real estate. Remember the money is made on the Buy in real estate, appreciation is just a bonus. It took me years to understand that quote!
Finally!!!! An actual honest individual… I give you much respect in your candor for explaining that real estate is not at all passive income and there are tons of variables/hidden costs… Not to mention your modesty in saying that you got lucky with the massive appreciation in todays market (which is a rarity) and may not appreciate as much in the future.
Managing money is different from accumulating wealth, and the lack of investment education in schools may explain why people struggle to maintain their financial gains. The examples you provided are relevant, and I personally benefited from the market crisis, as I embrace challenging times while others tend to avoid them. Well, at least my advisor does too, jokingly.
Investors should exercise caution with their exposure and exercise caution when considering new investments, particularly during periods of inflation. It is advisable to seek guidance from a professional or trusted advisor in order to navigate this recession and achieve potential high yields.
This is superb! Information, as a noob it gets quite difficult to handle all of this and staying informed is a major cause, how do you go about this are you a pro investor?
Through closely monitoring the performance of my portfolio, I have witnessed a remarkable growth of $483k in just the past two quarters. This experience has shed light on why experienced traders are able to generate substantial returns even in lesser-known markets. It is safe to say that this bold decision has been one of the most impactful choices I have made recently.
Thank you for being humble and honest! this is the first video I have watched of yours, when it comes to real estate the past 10 years EVERY investor has looked like a genius, and home appreciation has sky rocketed, naturally skewing the numbers. Thank you for admitting that :)
Great content! My experience: I have index ETFs and a few rentals that pretty much give me unlimited returns because of cash out refinances. But I'm self-employed. I find it really hard getting a loan. So, the amount of work getting loans (if you can't get a loan after buying with cash, your return will be terrible with RE), paperwork on tax seasons, city regulations, and the risks of putting your blind trust in property managers who could steal your money easily, make index ETFs more attractive to me. I still own those properties. But I'm not buying more. I need a peaceful retirement. It's just me
@@HarperPolo No I don't mind at all. There are no secrets. I've been holding VGT (a Tech/growth ETF). Will hold it for a long time. Not selling any. It did very good for a number of years, but It's been butchered this year, but 2022 is not a concern at all. My concern is that I don't know if these companies can continue to grow at the same pace forever. So, I'm starting to buy SCHD (a dividend ETF). Low p/e, great companies, increasingly high dividends. Playing it safe. Especially when you're getting closer to retirement. A little diversification is nice. What about you? What are you investing in?
@@andriartayudianto8918 Thanks for sharing. I started off a little all over the place, but I'm mostly on VYM and O for the monthly dividends. I didn't sell all the random tickers I bought, XOM, T, GPS, just holding. I have a few more decades before retirement.
Excellent video on the subject an love the example! Time and effort is the reason I stick to index fund investing. Index fund investing: 10-30 minutes and a handful of clicks. Real estate investing: Finding a property (takes days/weeks), working with a real estate agent, getting a mortgage, working with the bank, government paperwork, getting into debt, maintenance, homeowners insurance, yearly taxes, finding a renter, maintaining the renter, repairing things the renter may mess up, etc. etc. etc. - So much more work and hundreds, if not thousands of hours. If we took your example, is $2000 worth all that time and effort compared to a couple clicks on the computer? To me, it isn't.
Good comment; I read it twice. Real estate advantages are leverage, appreciation, monthly income, the biggest one is tax benefits. I started putting money in ETFs recently which I like. Believe it or not all the issues that you mentioned are dealt by a property management company and some people get excited about dealing with these things and learning about building repairs . 😊
@@lokeshk4642 yes but your property has to cash flow more now to pay for the property manager... also if it's so easy and they do it all, why do they need you?
@@lokeshk4642 You can use leverage in the stock market too, with margin trading. But of course got to really know what you're doing as you can easily loose your shirt.
A small critique: you are comparing leveraged investment (rental) with cash investment (index). I would love to see the end comparison jf you’d have invested 250k in index and 250k in a cash rental property (and include the asset appreciation)
@butucpaul88 the thing is no1 would purchase a rental property in straight cash that would be an awful business decision if you had 250k it would be much smarter to purchase 2 or potentially 3 rental properties if your income supports the 3rd of course. as much it is not realistic to compare them.
Hi Kim, could you please add CC to all of your videos? This will support the whole international community on your channel. Thank you for the super great content!
I keep forgetting to hit the like button. Your channel is gold. Especially for a begginer investor who needs a step approach to organize his/her money.
I'm not kidding when I say that the market crash and high inflation have me really stressed out and worried about retirement. I've been in the red for a while now and although people say these crisis has it perks, I'm losing my mind but I get it,Investing is a long-term game, so I just focus on the long run.
I can't focus on the long run when I should be retiring in 3years, you see l've got good companies in my portfolio and a good amount invested, but my profit has been stalling, does it mean this recession/unstable market doesn't provide any calculated risk opportunities to make profit?
There are a lot of strategies to make tongue wetting profit especially in a down market, but such sophisticated trades can only be carried out by proper market experts
I agree, I have been consistent with my profit regardless of the market conditions, I got into the market early 2019 and the constant downtrends and losses discouraged me so I sold off, got back in Dec 2020 this time with guidance from an investment adviser that was recommended by a popular economist on a popular forum, long story short, its been years now and l've gained over $850k following guidance from my investment adviser.
If that's the case, I'll suggest you look out for Financial Advisors like Olivia Maria Lucas who can help shape up your portfolio. Trying times are ahead, and good personal financial management will be very important to weather the storm.
Most folks are saving for retirement, so a better comparison would be 30 year returns on an S&P 500 index fund vs. long term real estate returns - eg for a REIT. Long term appreciation of real estate where I live is roughly 7 percent annually over the last 30 years. Yeah, it can double (and has) in 5 year periods, but it then it remains flat or decreases.
Great video Tae, keep up the awesome content. I will say you missed one of the most important benefits of owning rental real estate- all the tax benefits! Depreciation, etc.
Not to mention you don’t need a 20% downpayment. With good credit you can qualify for an FHA loan (min 3.5%) and a conventional loan (min 5%). Of course you have to do the math so you don’t buy too much house, but it’s possible.
Over the past 20 years, I did very well in the residential real estate game. Understand, it is a hands-on business and a part-time job and it is not for everyone. Keep inflation and capital gains taxes in mind when measuring the ROI on the market or real estate. Cheers!
One should note that with index you can average down or up over a period of time which means you will never buy at the top or bottom… with property, it’s one big chunk of money thrown in at one time, so you are either very right or very wrong…. I feel more comfortable spreading my capital over a lengthy period of time
Currently own 4 properties, and yes the appreciation over the last 4 years looks nice... but as you said, you can't really spend it. This appreciation will slow down in the near future, but that SHOULD also bring down home prices. Good luck man. (I started about 8 years ago)
Not to mention all the time sensitive work with being landlord.. water pipe issue? HVAC issue? better get on it. Want to be "passive"? Pay 1 month rent to an agent to show the place or do your own showings, pay a company 7% to collect rent for you/make calls to plumbers. With index funds, as long as you aren't retiring in the next few years, even if it tanks just let it sit, it'll eventually bounce back.
Your comparison was skewed by the fact that your real estate was a leveraged investment by virtue of a mortgage. If you took out a loan and bought an index fund your appreciation would likely be similar and a more fair comparison. You should remove any leverage factor in your investment comparison.
Exactly. Then in a downturn, you have LEVERAGED losses. I bought a $100k starter home by putting down $20k, and a few years later it was worth $50k so I was underwater by $30k. This happens way more than these real estate gurus will have you believe. It’s just that people don’t want to admit it because their peers will think they’re incompetent.
I think he mentioned that point? That’s one of the big differentiators between stocks and real estate. With real estate you can benefit (or get hurt) from all the leverage provided by a mortgage. It’s my belief that if you make sure your conservatively projected rental “cash on cash return” numbers work for you, you buy in a market with a growing population and job market, and you buy with the intention to hold for at least 10 years so that any real estate downturns will have had a chance to correct themselves, then you can mitigate a lot of your risk. It’s true, though, that all stock AND real estate investments have an element of risk.
But leverage is one of the biggest advantages of real estate and how it's typically purchased, as opposed to index funds. It's a real life comparison of how the investments were actually made.
The comparison isn't skewed, but he randomly throws the property appreciation into the mix which definitely confuses his message. He should have just focused on speaking about his equity appreciation and net operating income to make the comparison to his equity in index funds more clear. Index funds already contain leverage (even though you are not personally taking out a loan) because most companies already have some level of corporate debt. Taking a loan to buy an index fund would be comparable to taking a loan to buy a property with existing leverage that you intend to keep in addition to your purchase loan.
Tae - this is incredible info! Thank you so much for sharing your numbers and doing somewhat of an apples to apples comparison of your $50K stock vs real estate investments. I’ve never seen this done before on RU-vid and we’ve been wondering about this exact thing. Also, thanks for your openness about some of the real estate headaches. It’s easy to gloss right over those. Wishing you and your family a deeply happy, healthy, prosperous, creative and meaning-filled 2023! 🎉
Bought a rental property in 2021 for 230k. Now it is value at 320k according to Zillow. I financed 160k and the tenant paid for with positive cash flow. Not saying real estate is better. Just think you should diversify. I also own qqq, Nvidia, smh, and other stocks.
Real estate is levered. So your example was not apples to apples. You can lever up stocks as well just not as much as real estate. That’s the real kicker for real estate investing is that you can lever it up substantially vs any other asset class.
In my limited experience Real Estate is anything but passive! It's hard work and hands on. Don't get me wrong I do have 8 properties but the bulk of my wealth is in ETFs SCHD/VGT/VOO and SCHG the key is consistency no matter what!
Great presentation but... as an active real estate investor I would like to make a few points. You didn’t add in the tax benefits of depreciation on rentals, real estate investing really becomes profitable after some level of experience and mastery (e.g. your financial gains increase exponential after a certain point on the experience bell curve). For example I could make way more money today with the same 50k investment you mentioned than I could 4 years ago when I started. The reason is that real estate has several inflection points that you have some level of control of. You can get better at tweaking these inflection points to get better results as you gain experience. Location, the amount of money spent to acquire properties, cost of the property through better sourcing of off market deals, reno costs, short-term vs long-term renting, who manages property, additional sources of income from the propert such as renovating and renting a basement or maybe an adu, brrr strategy to grow exponentially, depreciation for taxes, refinancing loans, etc.
Great thoughts. Thanks for the video. For me, real estate is more appealing as opposed to index funds because there is a physical manifestation of my investment.
I have 35% of my capital investments in an IRA, 25% in index funds, and the balance spread across other investment accts totalling over $250k. I took a big hit in Q2, 2023. Right now i am just looking for ways to recover in 2024.
Consider hiring financial advisors, estate planners or tax experts. They can provide specialized knowledge and help you navigate complex financial decisions.
I think it is entirely unfair to call real estate passive income. You have to do a lot of work and spend more money than expected in order to keep up a property. Another point, can you handle it with your finances if you can't manage to find a tenant for several months?
Very very true. It is anything but passive income. Owning investment properties is like having another job and an added responsibility. Some properties are much more work than others.
There are many passive opportunities in real estate. Also true that some are time and money sucks! I’ve owned both types over the years. I’ve also invested in index funds over the years. From a wealth stand point, real estate outpaces the stock market by a large margin. Mostly because of leveraged appreciation. If one owned real estate in all cash, then I’d choose the stock market.
@@mtMage3 It may not be completely passive, but for the minimal amount of work that it takes I think it's well worth it (especially if you're in the wealth building phase of your life). I'd much rather manage a rental property, than work overtime at a 9-5 or pick up a side gig if I'm trying to get to FI early. Managing the properties has been pretty easy. Other than calling a plumber, fumigator, or cleaning crew when tenants move out, that's pretty much the extent of the work necessary granted you have good tenants and a home in working condition.
Now take into account if you had to sell to realize the gains from the home appreciation. You would probably lose out on a good chunk to taxes and fees, and may take over some months to close. I recognize real estate can me very profitable, but I'm too lazy for it lol
Thanks for sharing all this, I really like your content and especially the fact that you're such a grounded guy - eg sharing how you think you were lucky for getting the house appreciation. Most youtube influencers would make a clickbaity title, inviting people to be as amazing as they are. Keep up the great work!
I don't know if it's the same in the US. But in the UK we have get buy-to-let mortgages on rental properties. This requires a 25% deposit and higher interest rates.
Great video! One more thing you could have mentioned is how inflation reduces your mortgage over time. For the 5 year period in your example it woul be about 15% for the remaining amount.
Great video mate - for more advanced viewers we'd really love to see the two examples with different parameters - what if the the property didn't appreciate at all? What if the index fund had a different return rate?
Back in the 90s my father had 100k he had to invest and instead of putting it all into Apple, he bought a rental property. With the rental property, he roughly doubled his investment over 20-some odd years. If he had purchased Apple stock, he'd have 100 million today. I know there will probably never be another Apple, at least not anytime soon, but just goes to show how things can go sometimes.
I think a mistake that a lot of real estate investors make is counting the value appreciation of their properties as part of the return on their investments. You even said so in your video, that you don't know what your property is _actually worth_ until you try to sell it. Until then, you have nothing but ballpark estimates based on aggregators like Zillow, but we all know Zillow doesn't have any accountability, so their numbers could just as well be puffed up to make you feel better about the value of your property. The only hard numbers you can cite are the profit from the rent and the interest pay-down on the mortgage, since those are the returns that have been _actually realized_ and thus can be compared to the returns of the index fund investment. Any returns on the original property investment won't be realized until the property is sold.
Nice video! Would have been loved if you dug deeper into both of these investments on longer term. For example: 1. For RE, the longer you hold, the more debt payed down(by tenants), the more equity owned, more networth, more goes into your pocket from net income as your mortgage payments come down. 2. For RE, The crazy tax benefits: writing of your cars, meals, W2 incomes, depreciation & a lot more. The net profit shoots up if you talk taxes alone when you use RE to write off other stuff. 3. For index funds, how much will compounding earn in the long term. 4. For Index funds, The taxes when you sell & draw out money -> short term cap gains vs long term cap gains, etc I’m definitely more biased towards RE as I know a bit more about it than about Index funds. Would love to hear more on this from fine folks here!
I'm 48years old living in California , I'm hoping to retire at 50 if things keep going well for me . Bought my first house last month and I can't be more proud than I am. I'm glad i made great decisions about my finances that changed me forever but now I can't seem to make any other smart investment.
Real estate guy here. I love rentals and being deleveraged! Having no mortgages are awesome in a downturn like this! Buying 2 more sfrs and building an adu on each house are my next goals with 50% leverage. Then, giving each of my kids a house with the adu. 15yr mortgage.
Helpful video! I keep on investing in ETF’s because I feel real estate is too time consuming and stressful to maintain. Not just maintenance but unseen losses could take a big toll too. On my personal property i got flooded with no insurance help as my area is not considered as in the flood zone. $50 k out of my own pocket. If it was a rental, it would have wiped out my 2-3 years of profits. I am just too hesitant to get into it.
This is interesting, in our country it is the revers. You get protection against "all elements" in general, but they will not give against water if you are in the flood zone. This is why you cannot have a mortgage on a house in flood zone.
@@vojtablbosti747 Yes, here if you are not in flood zone it’s difficult to get flood insurance and if you get water damage, you are without one. Tornado, wind, hail are protected under regular home insurance. With world climate change we are getting a lot more rain since 2 years and I am trying to purchase a flood insurance.
Monthly cash flow, equity growth (through mortgage principal payments), leverage someone else’s money (with the associated risk), and appreciation over time are all elements that make real estate more attractive than mutual funds or stocks. The hassle is real, but doesn’t have to be overwhelming if the property is in good location, properly renovated, and it is managed well. It will attract good-quality tenants that will take of the properties. But the opposite is also true: if the owner is treating the RE business like a hobby, doesn’t care much, is not responsive and doesn’t maintain the properties, he or she will probably attract only crappy tenants that will be range from headache to nightmare. The benefits of RE are more tangible, more the direct result of the investor’s actions. One thing that this video doesn’t include is the -possible- tax benefits, if certain requirements are met. W2s and passive income from the rentals can be put together and-thanks to depreciation and other real estate deductions-the taxable income could be reduced considerably. In our case, this has been a bigger benefit than CF, equity growth or appreciation (which is market dependent).
I gife a property manager. I bought a single family residence in a good market. I also researched good property managers It is completely passive for me. Also this video does not discuss tax benefits. You pay little to no taxes in real estate. You pay capital gains on index investing.
Love the video my brother is on rental property I am on my index fund sp500 what I save in not owning a house I put 500 weekly on my sp500 max my Roth IRA and 6% 401k match I feel very good with my option and no dept
Great explanation! For rental property there are tax benefits and debt inflation eaten by the bank so it's actually even better but yup there is paperwork and there are other down sides too.
Isnt your comparison a bit "flawed" you are comparing leveraged and non leveraged investing the risk is quite different. Things look quite good in an up market what would have happened in a down market?
Market could go sideways for a decade, we just don't know. I'd rather have a mix of both to diversify. You also didn't mention that crowdsourcing , REITs, Fundrise, Here, and others available now or AirBNB.
Thanks for the video! What about putting some of your investments in a REIT like for example O stock or maybe an index REIT to reap the benefits of the real estate market without all the hassles that you mentioned in the video?
The stock market is always better if you're in the wealth accumulating phase. Most eventually transition into owing properties. Those 30% crashes every now and then are not healthy for the heart as we grow old, and need money for retirement
Capital value does fluctuate wildly, dividend is more stable… properties are not auctioned every second like stocks so you don’t feel the volatility… just look at the income prospective and you will feel more comfortable
I have done rental properties and I would highly recommend for most people to stay away from it. No one has ever become a billionaire owning rental houses. It's a lot of work and dose not scale. If you are contend with doing a lot of hands on work and not getting higher than just a millionaire. There are also a great many hidden costs involved in real-estate. Some are the thousands you will have pay in fees on top of the 20% down payment just to buy the place, then there is the tens of thousands it costs to sell it in fees, then you could have a tenet that could take up to six months to get the court to have a bad tenet physically removed and you will never see that rent, then you could have a tenet that does tens of thousands in damages and again they will never pay up. The only reason to get into rentals is to avoid having to pay the tens of thousands it costs of selling a house you just moved out of.
The return is also highly dependent upon the vehicle it is invested in. If your index fund is in an IRA it will be subject to ordinary tax rates when you sell, which are higher than capital gain tax rates if you sell real estate that you’ve owned for a long period of time.
Thanks for the video. Two months ago, I liquidated my Vanguard index funds and used the money to pay cash for a half million-dollar piece of income producing real estate. I hope I made the right decision.
"Hope" is not a good investment strategy. I'm sure you considered diversifying your RE holdings by using OPM (other people's money) and preserving more of your own capital while minimizing your personal liability through the ownership structure.
Not sure where you're getting the values for leverage in real estate. They require 25% minimum down payment for an investment property. For a higher value property that extra 5% can be significant.
My house has no been appreciating in value for the last 7 years, which effectively means it's gone down in value. Considering I have only one life to live, I don't see how real estate would be the best option. The index has been treating me just as it "promised" all this time.
Just hire a Property Manager for the rental properties. They’ll take a 2-3% cut and only call you if there are appliances or any major repairs requiring your approval. Easy as pie 🥧 .
which do you think is the best investment - to rent the house with airbnb? american stock market? buying a home (if you have enough home)? or what else could it be?
Question - assuming I am buying the home to live in and factor in the amount I would save in annual rent (19k per year), how would this impact the return comparisons?
The example doesn't include the depreciation that you can benefit from when coming taxes. When you do realize capital gains from index funds, you'll pay tax. BTW - I agree with you on balancing both.
Sometimes I’m wondering, what do you eventually do with your ETF returns? With real estate you buy off the home and own something fysical and highly needed. Cash is just cash.. what will you buy with it, a home? The market might have appreciated too much. The house prices doubled in a couple years, an ETF wouldn’t keep up.
On the RE analysis you forgot to consider the equity. Every monthly payment you do on the mortgage, you get a bigger slice of the house for your pocket.
Tae. I did what you did starting 2008/9. I now want to get out of the rentals but will be hit with a huge tax bill. Frankly I’m watching you and others at this stage of life to figure out the best plan when either my wife or I gets to benefit from stepped up basis. 😂😂😂. Always looking to cheat the tax man. lol.
Ben Graham said something that stood out to me, and I'm paraphrasing, but basically it's better to be a defensive investor with no knowledge than a defensive investor with a little knowledge. Attaining a return that's better than the market requires tremendous skill, knowledge, and effort; attempting to do so with just a little knowledge will actually harm you rather than help.
I suspect there are a significant number of people that do not pay tax on rental derived income, knowing at least a few personally. Not advocating for this, but tax evasion seems to be a pro of real estate.
I don’t look at it as investing I say “where can I park my cash so it makes me money?” A savings account is okay but A high yield savings account is better,.. but an index fund is even better than that.
Taxes are also something that should be considered. Selling your property will create a large gain in one year as opposed selling your index fund over time.
Real Estate is my best investment, but what people don’t understand is that when Tenants move out, it’s hands on renovating the place, that’s why I also invest in the stock market.
For a fair comparison, you really should take into account how much time goes into searching for/buying/managing the property. You could map this time to your hourly rate.
Na, you just need a better real estate agent. They will do most of the work for you, but you have to have an agent that knows REI, because buying a home or multi-family for renting is much different then buying one to reside in personally.
It is more realistic to assume a 2% appreciation over the long term than simply disregarding it altogether because the last couple years had anomalously high returns, as you expect real estate asset values to roughly track inflation. Assuming purchase price of $200k, that's another $6k per year, which brings the "expected" real estate return to $57k (114% or 16.4% annualized) vs index fund's $25k (50% or 8.4% annualized), which is a very significant gap. Also, you will have to pay capital gains eventually on that index fund, but the cashflow from the property is effectively tax free due to the house's depreciation (ie the tax benefit, not an actual decline in value). Also the rental property allows various tricks to be played with leverage and 1031 exchanges, while you can't leverage in a comparable way with index funds.
I really appreciate you admitting that you had no way to know the property would appreciate to the extent it did. One question I had: how *would* your ETF investment had done if you had applied the same amount of leverage to it that you did the house? My reason for asking is this. You took out a mortgage of some size to afford the house. Since you were able to pay the mortgage from the rental income, you levered up and got to enjoy this big return. Now, what would your net returns have been if you had taken out a loan of the same amount and used it to buy your Vanguard total-market fund? To me, this seems like a more fair comparison between the real estate investment and the index fund investment. Sure, your investment did 'only' 9%, but it was unlevered, whereas you used moderate leverage on your real estate investment (clearly not too much leverage, as you pulled a profit even before appreciation!).
The #1 thing I want to see is an apples-to-apples model of index fund investments to real estate with one key assumption: The real estate investment is fully paid off in cash (no liabilities on the asset). In this analysis, I want to see what increments of $200,000 invested in real estate yields in monthly revenue vs. $200,000 invested in index funds. What is the estimated monthly revenue for each, and what's the long-term gain in 5 year increments? I haven't been able to answer myself, but Tae might be able to help answer that ...
This was interesting and I did a quick and simple alculation. If you buy a 200k property and say rent it out for $1500/month x 12 months x20 years = $360k of rental income over 20 years for a pid off property, not including repairs, mainteance, etc. I then put 200k in a compound interest calculator (bankrate) at 7% without any other contribution, compounded yearly and the total at the end of 20 years is about $774,000. I guess, you would hope that your property appreciated an additional 300k over 20 years to break even which is very possible too. It's all about your level of risk....like the video says.
@@aiko3423 Nice, thanks for the calculations. If we translate the $1500/mo into an APR or dividend, that $1500/mo on a $200k principal is a 9.0% dividend. But it's not a clean $1,500/mo. You pay property taxes, repairs, insurance, and maybe property management. So, I'll suggest you get a net $900/mo off that $200k, which is closer to a 5.4% dividend. Then, you get ~5%/year raises or so to pace with inflation on your revenue, and the asset continues to appreciate at a rate likely similar to inflation. Definitely not arriving at an answer, but getting closer to how complex it really is.
Tae, excellent content. You've just gained a new sub. I know you talk a bit about the VTSAX index fund. What is your opinion on this as compared to its equivalent ETF (VTI). The cost of entry is lower, but from a performance perspective, do you think they are comparable?
Yes they are virtually the same. The rate of return year by year is virtually identical although some years they are off by fractions of a percent. Many like VTWAX for a total world fund. The ETF is VT I believe.
Hi, Tai - This is a great video! I retired early in 2021 because I was laid off from my 'sure thing' job for a college. They laid off hundreds of us and many of us were very close to retirement. I always planned to retire in France because though I'm an American, I don't have enough to live there, and my house had doubled in value in 7 years so the taxes were too much for me. I sold my house and moved and I'm happy in France. BUT - what do I do with the money I made from my house sale? I have a small retirement, but I need to invest this intelligently. This video has made me look into investment property, because in addition to the monthly income, the house would increase in value. I have decided to invest in a property in the UK. A company there buys and retrofits inexpensive houses that the average person can afford to rent. The rent is guaranteed at 8 % of the value of the property per year, and the company will do all management, repairs, and even pay the council taxes for 2%. This would leave me with 6%, plus I'd own the house and could sell it at any time after 3 years. After 3 yrs I'd earn 5% of the value in rents per year, which would increase with the local rent increases each year. Oh - and there are no property taxes in the UK! Income taxes would not be an issue as I wouldn not earn more than 12,000 pounds per year. I feel like this is a good investment, but I'm nervous too. Do the numbers seem to make sense? Can you think of anything I'm not considering? I've never done anything like this before, and I'm too old to start over if I make a mistake (61).
I admire you investigating and considering this investment I have a rental in the US, the laws and costs are turning against landlords and homeowners I’m watching closely The area I am in is still making a good profit
