Investing in rental properties vs s&p index fund

Do you like dealing with people?

My BIL has been in commercial real estate for 30 years or so. He owns buildings and leases them to businesses.

He’s never involved himself in residential real estate. If it was easy money, he probably would have done that. He has many commercial leases, but zero residential.

If you only have $80k to work with you’re not simply exchanging an asset for an asset. You’re going to be servicing debt on the mortgage you will need to cover the balance. Then the issue is not only does the investment have to outperform the S&P, it has to cover those maintenance and upkeep expenses too.

The S&P has been performing well and index funds have super cheap service fees. I don’t see a portfolio of 100% residential rentals beating that consistently over time. Ever.

If you want to diversify your portfolio to include real estate down the road, that’s another story, but I wouldn’t go all in on it.

Rising property taxes and insurance are killing rentals right now.

I know/have known several people that had rent houses.I want no part of it.

Real estate is local. Nobody can give good specific advice without more details.

There are different rental models. Are you focused on cash flow, long-term appreciation, long-term profit? Each can work or fail.

I got into real estate for long-term profit as a diversification from the stock market. I tried to not show any income from it during my high income years from my day job. I went into it with a long game in mind. I purchased most with 15 year mortgages and held each for,at least 20 years. My cash-flow was low, but that was never my goal. My paydays came when I sold them.

This model is very different for those needing cash-flow. Your local real estate market matters. They vary significantly.

The environment changes, too. Interest rates and home prices vary. You have to stay informed and adjust. Decisions in a 3% interest rate market are different than 9%. Decisions in a market of strong home value appreciation is different than flat or negative appreciation.

I would do it again to answer that question. I would also encourage you to learn about new residential construction. It is a model that you should only enter once you have a good bit of money, but is lucrative when done correctly.

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The S&P has been performing well and index funds have super cheap service fees. I don’t see a portfolio of 100% residential rentals beating that consistently over time. Ever.

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Promoting the s&p and low cost index funds is good advice. Your comment on rentals beating them over time is more true than false, but there are absolutely times where rental investments can beat the s&p and for many years. The real estate numbers in a long-term growth market are crazy good. And definitely better than the stock market. The problem is they are few and far between. Betting on them is similar to betting that Bitcoin will reach $100k. Both are realities. Predicting when they will happen is difficult and probably requires some luck.

I am a landlord. It sucks.

The costs of doing business the last five years have skyrocketed.

I would choose the stock market 24/7/365 right now.

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I think the advantage of real estate is the ability to leverage your money and make money with the banks money

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Exactly. I have owned commercial properties for over 20 years. A friend of mine and I initially each contributed $35K each and borrowed the rest to buy an old house used as an insurance office. Over the years we bought and sold to what became several million dollars worth of commercial real estate based on that initial investment. The rents have been enough to pay the notes, expenses, and a monthly disbursement of cash flow. Depreciation helps offset taxes. I’m retiring this year and simplifying my life so we have sold all but two Dollar Generals. We plan to sell those when the leases renew this year. There is certainly a huge risks with large maintenance expenses or the possibility of a lease not renewing. You need a large LOC handy and you will periodically have to use it for the unplanned expenses. I would recommend doing as I did and splitting ownership with someone else to lessen the risk and to be an extra set of eyes to evaluate decisions.

Specific to the question you asked. I don't invest in real estate unless my cash on cash return is at least 20%, but prefer 25%. You also make money with appreciation, depreciation, and debt service, but I look for the cash on cash return. If you are only getting 15% the juice is not worth the squeeze.

I have had long term rentals, mid term rentals, flips, and Airbnb. All have benefits and drawbacks. But SP 500 is up 21% a year over the last 3 and that takes zero phone calls, zero work, and almost no effort.