Invest in Real Estate or Stocks?

[maat55]

Jim, returns on investment can be much higher than 3 an 4% when you add up equity, appreciation, cashflow and tax deductions, but to get all these returns you have to be very savy in the business.

Using OPM, can give good returns, but comes with a great deal of risk. To lessen the risk, you will get lower returns by putting up more money. I would equate buying real estate with OPM to buying stocks on margin.

[LivingAlmostLarge]

I dunno maat, you have to add in maintenance, problems collecting rent, etc.

I know my BIL had a toilet fall in their house over Christmas break and flood the unit! The landlord had to pay for putting them up, pay for repairs, replace all their stuff, etc. HOLY COW!

And then as soon as their lease was over he sold. He said he was getting out. It was in San Diego so the appreciation was great, but he had just lost most of it in the accident.

A leaking pipe lead to a rotting floor and the toilet fell through! Imagine if someone had been Sitting on the crapper OR worse yet below the crapper when it fell! One toilet fell on the toilet on the 1st floor! OMG.

If it had killed one of the tenants or injured them seriously, I cannot imagine how much of a settlement they would get. This is the USA. Where you sue everyone!

I'd bet at least a million! But that's a risk you take with real estate.

Another friend had a rental property in New England burn down because the fireplace was 1880s and the chimney caught on fire and burned down. The renters were doing only what they were allowed to do, but structurally the house was old and poorly made.

Now the insurance company won't pay up, he has to settle with the tenants for their stuff, where to "live" temporarily, etc. It's a huge headache. By the way it wasn't to the ground but half the house and they tenants were HOME sleeping. Imagine if they had died! He'd have been up the creek.

Yes two worse case scenarios but for some reason they happen.

[jIM_Ohio]

Jim, returns on investment can be much higher than 3 an 4% when you add up equity, appreciation, cashflow and tax deductions, but to get all these returns you have to be very savy in the business.

Using OPM, can give good returns, but comes with a great deal of risk. To lessen the risk, you will get lower returns by putting up more money. I would equate buying real estate with OPM to buying stocks on margin.

Maat- even if you own the rental units 100%, you can owe more than the property is worth/ LAL mentioned liability, property taxes would be another- meaning they have an annual cost over time which could be more than property value. For example (a morbid one, but an example) whoever owns the property of the WTC is paying taxes on it now and will be for a while and the land can generate that person no income right now.

Would you value the tax deductions as part of the return calculation? I went back and forth on this. My house reduces my taxes right now, but at same time it is costing me quite a bit to get those savings (I'd rather not pay $100 to get $25 back, but if I have to pay the $100, you better believe I will ask for the $25 back). Renting might be more (pay $100 to get $75 back), I am not sure if all costs could be recouped or not- if you know for a fact you can, I stand corrected.

Rental money counts on income- this gets taxed
You can deduct mortage payment as a business expense (I will include property taxes here too)
You can depreciate the property each year to lower tax liability (meaning 100k property can have 4k depreciated for example per year- over 25 years the whole property would then be depreciated)

When you sell the propery you are taxes on the 4k per year you depreciated (so the tax is a wash- save 4k now, pay 4k later). Check me on this- this is the part I don't fully know. In my example if you sold the 100k property 25 years later you would have depreciated the properties value to 0, so the entire 100k is considered a gain (and is taxed).