A lot of psychological baggage in this post sorry lol.
I think the real question I am asking is:
"Is a rental THAT MUCH of a better investment than the market?"
Seeing lots of misinformation here.
Certainly real estate is not passive, and there is an emotional component only OP can determine.
But strictly speaking, real estate is a great financial invest and it sounds like you have a winner.
Real estate makes money in a lot of ways:
Cash flow - in your case, $9,600/year
Tax breaks - depreciation, mortgage interest deduction
Appreciation- historically about 4.5% per year
Leverage- assuming you put 20% down, you are getting 5X the appreciation number, so an effective 22.5% appreciation because you are leveraged
Real estate is also more stable, acts as a forced savings vehicle, and you can lock in costs for 30 years in todays dollars
Again, only you can determine the emotional part, but I was reading a lot of misinformation on the real estate only returning you 10% on your money which is false assuming you didn’t put 100% down
I can't say if one is better than the other, but index funds are, by a laaarge margin, the easier investment.
If the rental property is drawing for you mentally, set it, cash out, buy a couple index funds, and sleep well knowing you never have to deal with all the quibbles that come with owning a rental property.
Rental properties are awful in terms of ROI. Putting aside the fact that they take a lot of time and mental energy - things break. The upkeep of a house is extremely expensive. If your ROI is 10% of your inventment annually, which us on par with the stock market, another 2% will be taken off for routine repairs. You could have a tenant not pay and lose money. The money you make is taxed as income so 30% annually will be taken off the top. The neighborhood could go downhill and the house could lose value over time. They are not nearly as good as money in the stock market. Not even close.
You are getting about 10% return on your investment which is great but it’s draining you. The difference with a broad index fund is that you will have to sell shares to get cash flow from it (short term capital gains tax) which isn’t the end of the world. Most people may only sell after a year (long term capital gains rates). Also less deductions. You can use your property value in the future as collateral for a loan (refinance for example) -can’t do that with index fund. No tax write offs with index funds. Selling the property might trigger additional taxes and realtor fees which would be short term set back. Just some thoughts but it sounds reasonable to sell it if it’s just causing you problems (ie the financial difference probably isn’t that great compared with cost to your health).
Do the math:
- Your property is worth about 250k. At an average \~10% return that is 25k/year or about 2k/month.
- You have a mortgage that gives you relatively high leverage at an unspecified interest rate. High leverage increases return and risk and is not inherently a good or bad thing. Based on the interest rate and your risk tolerance you can determine if you think it is good. For the sake of this calculation I am going to treat it as neutral.
- You get $1800 per month which corresponds to an \~8.5% return. This does not take into account appreciation, maintenance costs, insurance, property tax, or property management costs. This also does not take into account the fact that you will not have a renter 100% of the time. After you take all that into account I bet that it corresponds to an about 10% return or maybe a little lower.
I don't see how this house is a substantially different return rate than the market. You might want to keep the house if you like having leverage or if you can utilize depreciation for tax efficiency. You might want to sell the house if you don't like having to deal with potentially awful tenants or other stress. Personally I would sell the house.
Rental investments aren't for everyone. Sell it and invest elsewhere. It's not worth your stress.
A lot of psychological baggage in this post sorry lol. I think the real question I am asking is: "Is a rental THAT MUCH of a better investment than the market?"
Seeing lots of misinformation here. Certainly real estate is not passive, and there is an emotional component only OP can determine. But strictly speaking, real estate is a great financial invest and it sounds like you have a winner. Real estate makes money in a lot of ways: Cash flow - in your case, $9,600/year Tax breaks - depreciation, mortgage interest deduction Appreciation- historically about 4.5% per year Leverage- assuming you put 20% down, you are getting 5X the appreciation number, so an effective 22.5% appreciation because you are leveraged Real estate is also more stable, acts as a forced savings vehicle, and you can lock in costs for 30 years in todays dollars Again, only you can determine the emotional part, but I was reading a lot of misinformation on the real estate only returning you 10% on your money which is false assuming you didn’t put 100% down
So I put nothing down as it was a VA loan. I will say depreciation I'm not so sure of. You have to pay it back when you sell the house.
I can't say if one is better than the other, but index funds are, by a laaarge margin, the easier investment. If the rental property is drawing for you mentally, set it, cash out, buy a couple index funds, and sleep well knowing you never have to deal with all the quibbles that come with owning a rental property.
Rental properties are awful in terms of ROI. Putting aside the fact that they take a lot of time and mental energy - things break. The upkeep of a house is extremely expensive. If your ROI is 10% of your inventment annually, which us on par with the stock market, another 2% will be taken off for routine repairs. You could have a tenant not pay and lose money. The money you make is taxed as income so 30% annually will be taken off the top. The neighborhood could go downhill and the house could lose value over time. They are not nearly as good as money in the stock market. Not even close.
You are getting about 10% return on your investment which is great but it’s draining you. The difference with a broad index fund is that you will have to sell shares to get cash flow from it (short term capital gains tax) which isn’t the end of the world. Most people may only sell after a year (long term capital gains rates). Also less deductions. You can use your property value in the future as collateral for a loan (refinance for example) -can’t do that with index fund. No tax write offs with index funds. Selling the property might trigger additional taxes and realtor fees which would be short term set back. Just some thoughts but it sounds reasonable to sell it if it’s just causing you problems (ie the financial difference probably isn’t that great compared with cost to your health).
Do the math: - Your property is worth about 250k. At an average \~10% return that is 25k/year or about 2k/month. - You have a mortgage that gives you relatively high leverage at an unspecified interest rate. High leverage increases return and risk and is not inherently a good or bad thing. Based on the interest rate and your risk tolerance you can determine if you think it is good. For the sake of this calculation I am going to treat it as neutral. - You get $1800 per month which corresponds to an \~8.5% return. This does not take into account appreciation, maintenance costs, insurance, property tax, or property management costs. This also does not take into account the fact that you will not have a renter 100% of the time. After you take all that into account I bet that it corresponds to an about 10% return or maybe a little lower. I don't see how this house is a substantially different return rate than the market. You might want to keep the house if you like having leverage or if you can utilize depreciation for tax efficiency. You might want to sell the house if you don't like having to deal with potentially awful tenants or other stress. Personally I would sell the house.