Wednesday, September 17, 2014

Real estate investment vs. dividend stock investment

Both RE and dividend investments are good tools to accumulate passive income and asset appreciation.   They are both my favorite investment tools.

Both of them offer stable passive monthly income.  Stock passive income is achieved by monthly or quarterly dividend income; RE one is through monthly rental.

Both of them provide very good asset/principle appreciation potential.  Stock investment is via the invested company value upward potential, while RE investment is through house/land value appreciation.

Since both of them are doing well in asset appreciation, they are both excellent choices to hedge against inflation.  We expect inflation will shoot up high in the near future, so to adopt some proactive approaches are absolutely necessary. 

Some people prefer dividend income to rental income because: 1)  RE investment requires big amount of money up front for the down payment.  Usually down payment is 20-25% of the purchase price.  If the house is bought at $30K, down payment will be $6K, additional costs include closing cost, insurance, tax, and sometimes HOA. 2) Another obvious reason hindering most investors from RE investment is because it requires dealing with tenants.  No one likes to be bothered by a mid-night phone call from tenant to report a broken toilet.

These disadvantages aside, I prefer RE investment to dividend investment with the main reason of leverage

1) Real estate is a few places that you can only pay a fraction (around 20%) of the purchasing prices to get a house.  By using financing from banks, you can buy more properties, which will produce you much higher income than you could by paying in all cash. For example, if you had $150,000 to invest, you could buy a duplex for all cash (no loan) that produces $12,000 a year in income.  However, if you take the same $150,000 and use leverage, you can buy property valued at as much as $750,000.  If the bigger property generates $6,000 a month in income and you subtract the loan payment of $4,000, you would make $2,000 a month.  That is double what you would have made without using financing.

2) Another beauty of RE investment is, besides time value same as in stock investment, mortgage principle is paid quietly without consideration in regular ROI calculation.  For example, if a house's value is $300K.  You pay the down payment $60K and other fees $5K, with the total out of pocket money at $65K.  Let's say the house is rented out, and after deducting monthly mortgage, insurance, and tax, the monthly net return is $300.  The return rate is usually calculated to be 5.5% (=($300 x 12) / $65K).  However, from the first monthly payment, mortgage principle is paid around $300 (increasing monthly), which isn't included in the calculation.  If the amount is included, the actual return rate will be double at 11%.

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