Reply to Why are people so obsessed with rental properties yielding positive cash flow?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]So we purchased several townhouses after the housing crash for around $250-300k, putting down about $60k on each house for 15 years mortgages.  We sped up by prepaying the last few years and have paid them off.  Those houses are zestimated around $450-480k now and we just increased our rent this year by around 10%, though still several hundreds below market.  Meanwhile, my portion of retirement portfolio just went down about 15%.  I'm not saying real estate should be a huge portion of your retirement, but it's good to diversify.  Our paid off rentals net us about $95k per year and more than enough to cover our basic retirement expenses without having to touch our 401k/iras, especially during market down turn.[/quote]

The loss of value in your retirement portfolio is irrelevant unless you are retired and getting ready to take money out it.[/quote]

It’s relevant to compare how much equity he has now in townhouses vs stocks growth , and how much “dividend” his RE brings vs stocks and bonds

Did you try to compare, PP?[/quote]

DP.  Not saying pp has a bad investment.  It meets my rule that real estate is worthwhile if you are using leverage, the rental income covers expenses AND you're buying in an appreciating market.  However, it's a good example of why it's hard to compete with the stock market.  I don't know how much OP paid in terms of interest and expenses over the years (i.e., the costs and benefits of leverage & costs of maintenance, taxes, etc), but $300,000 invested in 2008 at the DJIA would be worth $1.24 million in 2021 (even if you assume the last year was a wash, which it hasn't been in my case -- still up yoy).  Just to do very simple math, that's a difference of $760,000 in equity, and even if you assume the stock market never grows over 4% over time again (@$50,000 a year), you'd need to clear $95,000 (+$45,000) a year for 17 years to break even.  And, in the meantime, you've had to hassle with renters and home repairs, etc., and you're very exposed to the vagaries of one regional housing market. Personally, if I'd want to be diversified into real estate, I'd rather buy a REIT that holds a diverse portfolio and where I don't have to deal with tenants not paying their bills and maintenance.  Not to mention that there were lots of sad stories out there during covid about small landlords who lost their property because the government told their tenants they didn't have to pay their rent. You are at the mercy of one bad tenant that you can't evict, so it's not a risk-free investment.

I inherited several rental properties that were fully paid for. They were excellent investments for the original owner, because they bought in a booming real estate market, but between taxes, insurance and maintenance, the math just didn't pencil out on my end.  The $$ is invested in a mix of stocks, REITS and venture capital firms, and I'm not sorry, even after the latest moves in the market.[/quote]

Did you count for depreciation write offs? I purchased a rental property in 2009 with 150K equity for 800K. It was making around 70K/year, invested another 150K into improvements in 2015 and it started making 85k/year. It was fully paid off in 15 years and now is worth $1.6mm. I was writing off depreciation and all expenses and paid minimal taxes for many years. 
So it's like a pre-tax 401k but you get benefits/cash right away.

800k equity from depreciation
about 100K saved in taxes if not more
round 30K net income after mortgage servicing net each year and now around 70K net after it's paid off.

If you add up all above, I made more money vs your stocks relative my initial investment [/quote]

Depreciation isn't pure profit -- it lowers your basis, & you'd have to calculate whether the time value of the $$ you get from the depreciation deduction is higher than the capital gains tax you'll pay when you sell.  Which is another reason the rent needs to cover expenses, including depreciation.  If you're not a real estate professional, you can't deduct the depreciation against ordinary income.  I'm also not sure where you're getting the $100k "saved" in taxes? [/quote]

I am a real estate professional (licensed in my state), thus about 100K saved in federal income tax alone over several years. And I don't plan to sell and pay capital gain tax, even if I do sell. There are ways of immediate write offs same year, or 1031 exchanges. I am just expanding business for income generation and holding it like most people hold 401K. The only property I might sell is purchased from IRA so there won't be capital gain tax when I do sell it.

People pay capital gain on stocks as well. [/quote]

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