Dividend Stocks Vs. Rental Properties

Dividend Stocks Vs. Rental Properties Returns

Since Real Estate is just one of the 11 capital markets sectors ( See https://en.wikipedia.org/wiki/Global_Industry_Classification_Standard#Classification ) lets compare RE investing to stocks investing since this is a  frequently asked  question.

While there is no standard list or category of asset classes, widely it’s accepted that there are 5 types of asset classes

  • Fixed Income
  • Equity
  • Real Estate
  • Commodities
  • Cash
601010Equity Real Estate Investment Trusts (REITs)60101010Diversified REITs
60101020Industrial REITs
60101030Hotel & Resort REITs
60101040Office REITs
60101050Health Care REITs
60101060Residential REITs
60101070Retail REITs
60101080Specialized REITs
601020Real Estate Management & Development60102010Diversified Real Estate Activities
60102020Real Estate Operating Companies
60102030Real Estate Development
60102040Real Estate Services

Bonds, Equity  stocks and rental properties can both be excellent vehicles for building wealth.   Both investments provide a steady stream of cash flow but one will require a more active role in managing than the other. Dividend shareholders only need to sit back and wait for the corporation to make a payment. Rental properties  require a much more active management than purchasing equity stocks ( Example SEP / 401K )

Tangible Asset

For investors who feel more comfortable buying assets they can see and touch, rental properties have a distinct advantage over dividend shares. Shares of a corporation — although they do represent ownership in the corporation — really comes down to  a contract between the investor and the company paying a dividend ( a share of a company’s profits  )

Liquidity

Dividend stocks, bonds can be quickly and easily converted to cash without losing substantial amounts of value  (the cost is just the transaction fee). Rental properties, by contrast, are not liquid. It could take months to sell a residential or even years to sell a commercial rental property. The cost of buying and selling costs of rental real estate are quite substantial compared with the costs of transactions in the market. If the owner of a rental property needed to sell it quickly in order to raise cash, he might need to drop the price below market value to attract a buyer.

Control

The owner of a dividend stock has no say in how the company is run. In fact, the company’s board of directors could even decide to reduce or even eliminate a company’s dividend payment. Rental property owners, however, have more control over their investments. Landlords can decide to whom they want to rent and when to raise the rent and how to  control costs. Rental property owners have the freedom to make management decisions that can add value to an investment in a way that is not possible for owners of dividend stocks.

Leverage and risk

Generally speaking rental properties are usually bought with borrowed money. Using borrowed money for rental property is a form of leverage that can increase an investor’s return. If an investor buys a $100,000 rental property with only $20,000 as a down payment and collects $8,000 in net rent the first year  has made an 40 percent return on his $20,000 investment. Using borrowed money to buy dividend stocks, investor could make more than 6% easily but he could also have a negative returns and using derivatives that  will allow for high amount of leverage will also increase the risk a great deal, so much that it becomes gambling.  Carlos Ghosn  (now escaped in  Lebanon)  has just been re-arrested because in 2008 supposedly “transferred 1.85 billion yen (£13.1m Pound) of trading losses from a personal asset management company to Nissan”.  That shows how easy is to loose money in the Stock Market. My feeling is that real estate presents a  safer investment when using leverage.

BONDS vs Real Estate

Which is Better investment tool?

Well most probably depends on who you ask to.  My answer is both.   One of the basic principle of investing is that you can lower the risk maintaining the same returns with diversification of investments.  So allocating investments among various financial instruments, industries, and Real Estate reduces the overall risk since real estate has low correlation with the Stock Market. How much you should have in Real Estate?  Well that variate from person to person, many people have anyway some savings in the form or SEP / 501k  since a retirement account has a valuable tax advantages ( ask your accountant) so adding some real estate to the retirement assets is to my opinion a good idea. 

A Self Directed IRA could finance your real estate investments and qualify for retirement tax advantages but it is subject to rules and regulation so you should ask your accountant.

Paolo
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