Investing vs. Renting
If you have money sitting on the bank depreciating due to inflation, you may want to put it to work. Two ways or doing this are by investing into stocks or buying property and renting it. This posts compares which method is more profitable and requires less work.
I am not a financial advisor, but let us say you have $200K and you are looking to invest it.
You could invest that money into stocks like the S&P 500, which has had an average annual return of 10%. In other words, you could make $20K in your first year of investment. If it is a bad year for the market and you only make 5%, that is still $10K.
If you hold your stock for a full year and you make less than $518.9K per year, you will pay in 15% capital gains taxes1 on the $20K profit you made after you sold your stock.
That means you will pay $3K in capital gains taxes and have $17K for yourself.
Now, let us compare that to landlording. Let us say that you buy a $200K home in Houston and rent it for 1% of its total value2, meaning $2K per month.
After one year you would make $24K from rent and $7.6K from the house appreciating 3.8%3. In other words, you could make $31.6K in your first year of landlording, but you must subtract the expenses:
| Expense | Math | Total |
|---|---|---|
| property taxes | $200K * 0.0184 | $3.6K |
| maintenance | $200K * 0.0255 | $5.0K |
| property management | $24K * 0.106 | $2.4K |
| insurance | $5K | $5.0K |
| total expenses | $3.6K + $5.0K + $2.4K + $5.0K | $16.0K |
At the end of the year you will be left with $31.6K - $16K = $15.6K.
You can decide not to hire a property management company and save $2.4K7, but you will have to spend time and money on advertising and finding suitable tenants. You may also have to handle midnight emergency calls.
Also, if you do not pay the house in full, you will pay mortgage interests:
You will pay about $231K in interests for a 30-year $200,000 mortgage at a 6% interest rate.
You will pay about $103K in interests for a 15-year $200,000 mortgage at a 6% interest rate.
Besides that, you will have to pay income taxes8 on the $24K you made from rent and maybe pay capital gains9 taxes when you decide to sell the property.
In conclusion, landlording will require you to do a lot more work than investing into stocks, but the returns on investments will be fairly similar.
If you forget about your stocks for 10 years and then find them, you will be exhilarated to see your gains. If you forget about your rental home for 10 years and then find it, it will be a delapidated ruin entrapped in a miniature jungle where druggies and paranormal hunters go for fun.
Do not buy a home because it is a liability and you will need to sell your home if you need money. Invest your money into stocks because it is easier and provides more flexibility. If you need a place to live consider the following options:
- squatting an abandoned house
- digging and living in a deep burrow like a rabbit
- living in a tent
- living in a cave
- living in a car
- living with a relative like your parents
If you sell a stock within one year of purchasing it, the gain is considered a short-term capital gain and is taxed at your regular income tax rate, but if you hold a stock for more than one year before selling it, the gain is considered a long-term capital gain and is taxed at a lower rate, which can be 0%, 15%, or 20% depending on your income bracket. ↩︎
As a rule of thumb, you can rent a house at 1% of its value. ↩︎
The average annual house appreciation in Houston is 3.8%. ↩︎
The Texas annual property tax is 1.8% of the total property value. ↩︎
The cost of maintenance and repairs is about 1% to 4% of the property value. I picked 2.5% because it is the average. ↩︎
Property management companies charge between 8% and 12% of the monthly rent, so here I picked 10% because it is the average. ↩︎
Property management companies only cover the price of advertisements and finding tenants. Most expenses like repairs, insurance, taxes, etc., must still be payed separately. ↩︎
Rental income is taxed at s regular income rate. ↩︎
Capital gains for property are beyond my tax knowledge, but it seems capital gains taxes are affected by your marital status, how long you have owned the property, and your income level. If you are married, you own the property for more than a year, and you do not make a lot of money, you should pay less in capital gains tax. ↩︎