13 reasons I prefer the stock market to the rental market.

 

1.     I’m lazy.  I’d rather sit back while the employees of over 3,600 U.S. companies do the work and earn money for me :)  I have to extend ZERO effort. 

2.     I don’t want to be a landlord.  I have a full time job already and would like to spend my free time, well...free!  I know I could hire a property management company but I tend to be a worrier and my mind would probably be on the rental property.  Plus, the 10% that a property management company would charge would eat into the profits.

3.     Our current home makes up about 25% of our net worth already.  For me, this is enough real estate for my portfolio.  Anymore would be taking on too much risk in one area.

4.     I really don’t like to be “leveraged.”  With another market crash like 2008, I wouldn’t sleep well at night knowing I have a 300k-500k loan that needs to be paid each month, plus my own home.  If my wife or I lost our jobs, and we couldn’t find a suitable renter, we’d still be on the hook for two mortgages.

5.     A costly repair, think about a flooded basement due to gutters being clogged by hail, would not be covered by homeowners insurance (without a flood policy).  This could mean no renters for six months with a $50k repair bill, all while you must pay the mortgage.  Other expensive repairs, likely not covered by insurance, include: backed up sewer, water main break under the driveway, tree removal, new roof, furnace/AC, painting the house, major appliances, etc.

6.     Bad tenants.  Hopefully, I’d be lucky but I have heard about occasional tenant nightmares.  Someone starts a meth lab or grow operation in the basement and then you have to gut the house.  Maybe insurance would cover this but it would still be a massive headache, not to mention the legal costs and time involved in removing the tenant.

7.     Making real estate transactions is expensive.  Buying and selling a home costs about 5%-6% of the value of the home.  This is about 30k on a 500k home.  Of course, you would probably only be on the hook for half of that, but it doesn’t cost me anything to buy or sell stocks.

8.     Liquidity problem.  If I decide I want to use half of my investment for a large purchase, I pretty much have to sell the house or take out a HELOC loan, that would need to be repaid, with interest.  Stocks are pretty liquid and if the market crashes, I can just sell some of my bonds.

9.     Travel/moving to a new location.  Our retirement plans include a lot of travel.  Being away from the rental property, for months at a time, could be problematic.  Again, I know that a property management company could take care of it but I’m a pretty hands-on person.  It is possible that we may relocate to another country, or part of this country, and I wouldn’t want to hold a property here if we are away.

10.  A housing crash could be devastating.  If the stock market crashes, I just need to turn off the news and wait a few years.  If the housing market crashes, I still need to find a renter, and be prepared to pay the mortgage(s).  Of course, the Fort Collins real estate market has done well historically but there is no guarantee that it will do so in the future.

11.  Historically, the stock market has had higher returns than real estate, including in Fort Collins.  Even if I look at my own home, we would have been better off putting our down payment into the S&P500 and renting instead of buying.  Of course, we love our home, so that wasn’t really even a consideration but still something to think about.  

12.  Tax advantages of 401(k) and Roth IRA are huge!  I can tightly control my tax bracket in a way that I could not with a rental property.  I can delay paying some taxes now and avoid other taxes altogether (earnings on a Roth IRA).  I can do Roth conversions on tax deferred money in our 401(k)s.

13.  The 20% down payment is prohibitive for me, and many others.  With stocks, if I have an extra thousand sitting around, I can invest it with a couple of clicks on my phone (i.e. Vanguard VTI).  Sure, I could save up for a few years and make a down payment but I would have to carefully consider the opportunity costs of that money being out of the market a few years.

Many have done well with rental properties.  I might be able to make slightly more leveraging rental properties.  However, a lot of big things would need to go well (i.e. buy the right property at the right price, keep it rented 100%, etc.) and many little bad things (costly repairs, bad tenants, etc.) would need to be avoided.  It just isn’t for me and that’s okay.