[Benjamin]

What is the benefit of investing in rental properties instead of or in addition to index fund investing? Using leverage and getting to FI faster?

I’ve thought about getting into rental properties in addition to index investing but it seems like a lot of work and risk upfront until you get some good deals and good tenants.

[Brian]

As a former landlord, my experience is that we would have been better off just putting the money into an index fund.

Sometimes you might get lucky with real estate if the property appreciates quickly, but the inverse is also true.

I’ve never had my index fund wake me up in the middle of the night with a plumbing emergency.

[Kyle]

Well I have just two doors… and we’ve had good tenants. We like the cash flow that we see NOW, The tax write offs that we see NOW, the debt pay down that we see NOW and the Appreciation that we see over TIME.

I also personally like the tangible asset.

[Greg]

Diversification and using borrowed money. But make no mistake, buying and running a rental property is another full time job.

Index funds are passive, rentals are not.

[Laura]

I have 3 and gosh, I am leaning towards selling all and dollar cost averaging index funds.

Let’s see, 1 is getting served a 3 day notice tomorrow, another property needs structural work, race against this upcoming rain season.

It’s a pain. “Property management”, yeah but I still have to hear from them. “Tax deduction”, um not if you’re a high income earner. Appreciation? Can 2020 come back again?

I’ve only grown 3-5% annually for each property.

Of course I’m jaded bc DCAing into brokerage is up 20% this year. So passive, so fun to watch the stairs going up on the chart

[Jenny]

Tax write offs, cash flow and depreciation for rental properties. Diversification.

I can live off the rental income without selling my stocks if I wanted to.

My kid can also inherit with step up basis.

If it goes well, the rents can pay for college and for my retirement.

[Endri]

Benefit is FI faster if you know what you’re doing and if you are handy, have some time on the side.

Downside, it is not passive, it involves risk,time, some labor, knowledge and skill.

If you have that, go ahead.

[Johanan]

Leverage, appreciation, depreciation, loan pay down, cash flow
It is work though, and not everyone is built to be a landlord.

[Scott]

Index fund=everyone pays the same price.
Rental properties=depending on knowledge, everyone pays different price

[Amy]

You’ll hit the $1M networth mark a lot faster and could potentially make enough of positive cash flow to cover living expenses and FIRE.

But be aware of the risks: tenants who don’t pay or trash your place; maintenance costs can run very high if you’re not handy and constantly need to hire contractors for minor repairs and buying/investing in the wrong property or neighborhood.

You should also be knowledgeable about running a real estate business, including marketing, screening tenants, filing taxes, maintenance and operations, eviction process and insurance.

[Frank]

Mo work in exchange for mo money.
May make a lot of sense if your regular income is lower but very little sense if it’s high and could be higher with more effort.

[David]

“Charlie says most people go broke for one of three reasons; Liquor, Ladies, or Leverage. He only added Liquor and Ladies because they start with “L”, it’s Leverage. – Warren Buffet.

Smart use of reasonable leverage can accelerate growth in good times.

Too much leverage can wipe you out.

[Dion]

Neither is better or worse than the other.
What matters is you invest in what excites you.
We are more likely to stick to a plan we are emotionally invested in.

One thing that made the choice for me was my time horizon.

I didn’t start thinking about money until I was 40 and wanted financial freedom in a decade.

Never made a lot of money. (69k was the highest in any year until the last two before I retired.)

Was a single dad with three kids. Laid off from law enforcement because the 2008 recession.

Found out about 89k in bad debt in my name I didn’t know about until the divorce.

So, I didn’t have the time for compound interest to do its thing.
I didn’t have the I come to invest a significant enough amount into stocks to have a recognizable impact.

So, I chose rentals.
I also house hacked.

I diversified in two specific ways since I am 100% in one asset class.

I retired after 12 years investing. I chose real estate because I’m lazy.

I didn’t want to work a couple more decades or chase income to have enough to invest.

What excites you?

(For those who care: $320k invested.

Cash flow each year after all expenses, PITI, and setting aside for repairs/vacancy, those future expenses, was $204k 2022/$234k 2023. Thanks to inflation.)

[Sarah]

Big difference. It’s active investing (rentals are hands on, can be a lot of work, can be costly, and can be a hassle) rather than passive investing (index funds).

[Josh]

I have 10 units. And it has absolutely excelorated my fire timeline. However I am hands on and self manage. Plus, I live in a low to medium cost of living area where I can cashflow on sub $200k houses in safe neighborhoods.

You have to want to do it and be into it.

If you want to be hands off, it will be hard to find turnkey deals that make sense.

If you can’t get 15% cash on cash first year return, the juice isn’t worth the squeeze IMHO

[Aaron]

For me I decided to have real estate focus because it wasn’t possible to hit my goals using stocks.

I hit the first baseline of financial freedom when I was 27 using real estate – left my w-2 – and have been able to keep growing towards fat fire in the y since then.

I don’t think I could have realistically done that using stocks.

A big variable in thinking about this comparison is what type of real estate investing we are talking about.

The stock centric fi people like to compare unleveraged standard real estate purchases to stocks and say the stocks out perform.

But if you are actually building a real estate portfolio and using something like the brrrr strategy the returns aren’t comparable at all.

I’m doing deals where I end up with no cash out of pocket ,50k in equity added, and have a rental rented for 1900 with a piti of 1100.

Then I get a 20-30knextea tax deduction to apply to my wife’s w-2 income and I have the principal pay down and appreciation going forward on my 0 cash out pocket up front investemnt.

The rub is it’s much more active than buying stocks and it took me years of learning to be able to do that deal.

So, imo if you are talking about a real high skill real estate strategy it crushes stocks as far as how quickly you can reach your goals and what goal you can reach.

But it’s a completely different thing you aren’t going to just peacefully accumulate a position and then sail into the sunset worry free.

So, the reason you would add real estate would be if you you feel that’s needed to hit your goals within your goal timeline and your willing to take on the extr work

[Wendy]

I think it depends on your situation.
Real estate can be risky and you can wind up with a lot of gray hair and stress. It’s not *passive*. It’s not 9-5 either but it’s for sure not 0 work even with a management company.

Real estate can also be a way to build wealth rather quickly. It’s tax advantaged.

It’s something concrete to put your money into which may help psychologically motivate either you or a partner to save.

It’s also nice psychologically to spend rent rather than withdraw from index funds.

If you make enough money that simply saving will get you where you want to be I’d probably recommend not investing in real estate. If that’s not the case, real estate can help.

If you’re going to invest in real estate or are thinking about it – Bigger Pockets.

Huge and amazing source of information. Good luck!

[Author]

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