Stop 401k and Purchase a Rental Property?

[Anonymous]

I have a rental property and I wouldn't recommend it. It just isn't a great investment compared to other investments, especially tax deferred investments like a 401K.

[Anonymous]

We have rental property and I hate the headache. Right now our tenant for example broke the list, so we have to look for new one. Next year we have to put new roof. The profit is really invisible.
Thinking about selling it and investing money someplace else.

[Anonymous]

Anonymous wrote:Is this a viable and sustainable option?

Currently 37yo (single income family) and have about $400k in retirement and $300k in home equity. My company invests 15% of my base salary into my retirement account each year from company profits. Also, I am provided dividends from company profits on a yearly basis (untouchable until I retire and usually around $50k to $100k, depending on company profits - this is not an investment account, money sits stagnant until I retire).

Should I stop my max contribution to my 401k ($18,500) and rely on company deposits for my retirement and purchase a rental property for supplemental income?

The tax deferred $18.5k you are putting in should provide plenty of supplemental income when the time comes. I wouldn't give up the tax advantaged space to buy a rental property. If you want to invest in a rental after maxing out, go for it.

[Anonymous]

I'll go the other way, in favor of a rental property, based on data rather than the emotion (it's such a hassle dealing with tenants).

If you are earning 5-10% return a year on your rental property, then it's a good investment. That is a healthy return that is going to be consistent and may increase over time as rents increase. Keep in mind that returns are impacted when stuff breaks (roof, appliances, etc).

The money you put in the stock market will return somewhere between 5-10%. Here is something that I just googled: For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%

The difference in having an investment property is that there is capital appreciation. In the right neighborhoods, there has been a ton of appreciation in the last 10 years.

Your tax treatment of a rental property is more favorable (e.g. depreciation), you get a leveraged return if you are borrowing from the bank (e.g. if the property increases by 5% a year, you get the full increase despite the fact that the bank loaned you 70% of the cost of the property), you learn business 101 basics (e.g. what to charge in rent, how valuable your time is vs your money, etc), in 30 years or less the property will be paid off by your tenant's money, the consistent returns will continue on regardless of your age and the property can be handed down to your kids, etc.

Lastly, if the stock market collapses, like it did in 2007, your stock portfolio will be significantly impacted. If the price of your real estate investment drops like it did in 2007, that does not mean that rents drop (it most instances).

Long story short, owning a property is a long term play with long term benefits. If you are in it to win it for the long term, then go with a rental property.

[Anonymous]

Anonymous wrote:I'll go the other way, in favor of a rental property, based on data rather than the emotion (it's such a hassle dealing with tenants).

If you are earning 5-10% return a year on your rental property, then it's a good investment. That is a healthy return that is going to be consistent and may increase over time as rents increase. Keep in mind that returns are impacted when stuff breaks (roof, appliances, etc).

The money you put in the stock market will return somewhere between 5-10%. Here is something that I just googled: For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%

The difference in having an investment property is that there is capital appreciation. In the right neighborhoods, there has been a ton of appreciation in the last 10 years.

Your tax treatment of a rental property is more favorable (e.g. depreciation), you get a leveraged return if you are borrowing from the bank (e.g. if the property increases by 5% a year, you get the full increase despite the fact that the bank loaned you 70% of the cost of the property), you learn business 101 basics (e.g. what to charge in rent, how valuable your time is vs your money, etc), in 30 years or less the property will be paid off by your tenant's money, the consistent returns will continue on regardless of your age and the property can be handed down to your kids, etc.

Lastly, if the stock market collapses, like it did in 2007, your stock portfolio will be significantly impacted. If the price of your real estate investment drops like it did in 2007, that does not mean that rents drop (it most instances).

Long story short, owning a property is a long term play with long term benefits. If you are in it to win it for the long term, then go with a rental property.

I am different poster.
Thanks for the break down.

How do you calculate total return a year? Do you include property value appreciation in it?

[Anonymous]

Anonymous wrote:

Anonymous wrote:I'll go the other way, in favor of a rental property, based on data rather than the emotion (it's such a hassle dealing with tenants).

If you are earning 5-10% return a year on your rental property, then it's a good investment. That is a healthy return that is going to be consistent and may increase over time as rents increase. Keep in mind that returns are impacted when stuff breaks (roof, appliances, etc).

The money you put in the stock market will return somewhere between 5-10%. Here is something that I just googled: For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%

The difference in having an investment property is that there is capital appreciation. In the right neighborhoods, there has been a ton of appreciation in the last 10 years.

Your tax treatment of a rental property is more favorable (e.g. depreciation), you get a leveraged return if you are borrowing from the bank (e.g. if the property increases by 5% a year, you get the full increase despite the fact that the bank loaned you 70% of the cost of the property), you learn business 101 basics (e.g. what to charge in rent, how valuable your time is vs your money, etc), in 30 years or less the property will be paid off by your tenant's money, the consistent returns will continue on regardless of your age and the property can be handed down to your kids, etc.

Lastly, if the stock market collapses, like it did in 2007, your stock portfolio will be significantly impacted. If the price of your real estate investment drops like it did in 2007, that does not mean that rents drop (it most instances).

Long story short, owning a property is a long term play with long term benefits. If you are in it to win it for the long term, then go with a rental property.

I am different poster.
Thanks for the break down.

How do you calculate total return a year? Do you include property value appreciation in it?

Instead of writing out how I calculate it, here is a good overview: https://www.wikihow.com/Figure-Cap-Rate

You should figure out what the cap rate is before you even think about putting in an offer on an investment property.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I'll go the other way, in favor of a rental property, based on data rather than the emotion (it's such a hassle dealing with tenants).

If you are earning 5-10% return a year on your rental property, then it's a good investment. That is a healthy return that is going to be consistent and may increase over time as rents increase. Keep in mind that returns are impacted when stuff breaks (roof, appliances, etc).

The money you put in the stock market will return somewhere between 5-10%. Here is something that I just googled: For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%

The difference in having an investment property is that there is capital appreciation. In the right neighborhoods, there has been a ton of appreciation in the last 10 years.

Your tax treatment of a rental property is more favorable (e.g. depreciation), you get a leveraged return if you are borrowing from the bank (e.g. if the property increases by 5% a year, you get the full increase despite the fact that the bank loaned you 70% of the cost of the property), you learn business 101 basics (e.g. what to charge in rent, how valuable your time is vs your money, etc), in 30 years or less the property will be paid off by your tenant's money, the consistent returns will continue on regardless of your age and the property can be handed down to your kids, etc.

Lastly, if the stock market collapses, like it did in 2007, your stock portfolio will be significantly impacted. If the price of your real estate investment drops like it did in 2007, that does not mean that rents drop (it most instances).

Long story short, owning a property is a long term play with long term benefits. If you are in it to win it for the long term, then go with a rental property.

I am different poster.
Thanks for the break down.

How do you calculate total return a year? Do you include property value appreciation in it?

Instead of writing out how I calculate it, here is a good overview: https://www.wikihow.com/Figure-Cap-Rate

You should figure out what the cap rate is before you even think about putting in an offer on an investment property.

Thank you!
The reason I am asking is because we already have a rental house( our first house we ever bought in different state and moved during times when market was upside down, hence couldn't sell it).
The mortgage is 1100 per month and we have a renter who covers it, but managing company takes $100 each month. So basically we are at the loss. However there is a small appreciation every year. We can't decide if we should sell this house or keep renting. And if we sell what to do with that equity money.

[Anonymous]

Anonymous wrote:I don’t think it is a good idea, and also, are you sure that the company contribution isn’t a match? In most plans they don’t contribute the maximum unless you also contribute a certain amount.

No match required, 15% of base salary is put into an investment account each year - money comes from company profit. I still max-out $18,500 on top of the 15%.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I'll go the other way, in favor of a rental property, based on data rather than the emotion (it's such a hassle dealing with tenants).

If you are earning 5-10% return a year on your rental property, then it's a good investment. That is a healthy return that is going to be consistent and may increase over time as rents increase. Keep in mind that returns are impacted when stuff breaks (roof, appliances, etc).

The money you put in the stock market will return somewhere between 5-10%. Here is something that I just googled: For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%

The difference in having an investment property is that there is capital appreciation. In the right neighborhoods, there has been a ton of appreciation in the last 10 years.

Your tax treatment of a rental property is more favorable (e.g. depreciation), you get a leveraged return if you are borrowing from the bank (e.g. if the property increases by 5% a year, you get the full increase despite the fact that the bank loaned you 70% of the cost of the property), you learn business 101 basics (e.g. what to charge in rent, how valuable your time is vs your money, etc), in 30 years or less the property will be paid off by your tenant's money, the consistent returns will continue on regardless of your age and the property can be handed down to your kids, etc.

Lastly, if the stock market collapses, like it did in 2007, your stock portfolio will be significantly impacted. If the price of your real estate investment drops like it did in 2007, that does not mean that rents drop (it most instances).

Long story short, owning a property is a long term play with long term benefits. If you are in it to win it for the long term, then go with a rental property.

I am different poster.
Thanks for the break down.

How do you calculate total return a year? Do you include property value appreciation in it?

Instead of writing out how I calculate it, here is a good overview: https://www.wikihow.com/Figure-Cap-Rate

You should figure out what the cap rate is before you even think about putting in an offer on an investment property.

OP here - this is awesome, thank you for taking the time to write this.

[Anonymous]

I own a townhome that is rented out. We don't make any money on that property. It pays the mortgage but costs us a lot in repairs or in between tenants. We're going to have to replace the carpets & roof within the next few years. I constantly debate whether to sell the home and put the money from the sale in a mutual fund or a CD just so that it will actually make us money. We've been riding it out for the past 5 years hoping the housing market will go back up but it's been pretty stagnant where we live. I just don't see it appreciating enough to where we come out ahead. Maybe after the mortgage is paid off but that's in about 15 more years. And I can't help but to wonder if that money is just better off elsewhere.

[Anonymous]

Anonymous wrote:Is this a viable and sustainable option?

Currently 37yo (single income family) and have about $400k in retirement and $300k in home equity. My company invests 15% of my base salary into my retirement account each year from company profits. Also, I am provided dividends from company profits on a yearly basis (untouchable until I retire and usually around $50k to $100k, depending on company profits - this is not an investment account, money sits stagnant until I retire).

Should I stop my max contribution to my 401k ($18,500) and rely on company deposits for my retirement and purchase a rental property for supplemental income?

No, not unless you spouse gets a job and starts contributing to the financial picture. You sound like you have a lot of people to support. If I were you I'd also be maxing out the IRA contributions. In today's world it takes two.

[Anonymous]

Anonymous wrote:I own a townhome that is rented out. We don't make any money on that property. It pays the mortgage but costs us a lot in repairs or in between tenants. We're going to have to replace the carpets & roof within the next few years. I constantly debate whether to sell the home and put the money from the sale in a mutual fund or a CD just so that it will actually make us money. We've been riding it out for the past 5 years hoping the housing market will go back up but it's been pretty stagnant where we live. I just don't see it appreciating enough to where we come out ahead. Maybe after the mortgage is paid off but that's in about 15 more years. And I can't help but to wonder if that money is just better off elsewhere.

We are in exact same boat. Debating if we should sell it in spring and use equity money for something else.

[Anonymous]

Anonymous wrote:I'll go the other way, in favor of a rental property, based on data rather than the emotion (it's such a hassle dealing with tenants).

If you are earning 5-10% return a year on your rental property, then it's a good investment. That is a healthy return that is going to be consistent and may increase over time as rents increase. Keep in mind that returns are impacted when stuff breaks (roof, appliances, etc).

The money you put in the stock market will return somewhere between 5-10%. Here is something that I just googled: For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%

The difference in having an investment property is that there is capital appreciation. In the right neighborhoods, there has been a ton of appreciation in the last 10 years.

Your tax treatment of a rental property is more favorable (e.g. depreciation), you get a leveraged return if you are borrowing from the bank (e.g. if the property increases by 5% a year, you get the full increase despite the fact that the bank loaned you 70% of the cost of the property), you learn business 101 basics (e.g. what to charge in rent, how valuable your time is vs your money, etc), in 30 years or less the property will be paid off by your tenant's money, the consistent returns will continue on regardless of your age and the property can be handed down to your kids, etc.

Lastly, if the stock market collapses, like it did in 2007, your stock portfolio will be significantly impacted. If the price of your real estate investment drops like it did in 2007, that does not mean that rents drop (it most instances).

Long story short, owning a property is a long term play with long term benefits. If you are in it to win it for the long term, then go with a rental property.

This is a good analysis, but I would point out that there are a couple of assumptions (1) that you are in a market where real estate is appreciating and (2) you are leveraging cash with bank financing. I inherited some rental property in an area where real estate had appreciated greatly, but that was slowing down. I ran the numbers and it really didn’t make sense to keep the rentals.. The income after expenses (insurance, maintenance, high property taxes) wasn’t that great. I couldn’t count on appreciation. The small amount of potential upside wasn’t worth dealing with tenants.

[Anonymous]

Pretty sure that folks who gobbled up rental properties in western Fairfax will do great, due to amazon’s arrival.

[Anonymous]

Landlord here. I thikn it comes down to the value of your time, and also the uncertainty of cashflow. Are you willing to put in the time to deal with repairs and issues that arise at odd hours? The hassle of finding a tenant? Evicting a tenant?

None of this is difficult to do, but it just takes time. If you have that time to spare, then it can work out well. If you don't, then a 401k or similar investment is easier -- just put your money in and no more work needed.

Also varies based on what you rent. I had a SFH in a good school district, but could _only_ find a tenant in summer since families were moving for the school, and no one is going to move mid school-year. So I got stuck when an active duty military family had to break lease early (it's required by allow it) in January because he got reassigned to another city. House sat empty for months, and I'd spend time every week posting up ads and showing it now and then also.

Or the time I had a tenant stop paying rent. I'd be at the courthouse 2x a month for almost half a year, filing paperwork and then showing up in court. You don't get to pick your court date -- they do -- and if you don't show up, your case is dropped. Once I had come back from a trip to Asia the night before and overslept my court date --- well, now the process had to restart and another 4 weeks to get a new court date.

So while it's important to look at the $$ side of things, also consider the time involved. Management companies will charge 10-25%, but it may be worth it.. or not.