Rental Property VS Stocks

Rental Property Vs Stocks Paying Dividends: What will Bring You Wealth?

You are thinking about investments and confused about what is the right investment for you to build wealth. Whether it is the dividend-paying stocks or is it the rental property to earn that monthly rental income? Well, If you are looking for a straight black and white answer between Rental Property Vs Stocks, then there is no such answer. But don’t worry, I got your back. I will try to give you all possible answers to understand exactly which investment is good for you. 

Rental Property Vs Stocks paying dividends, both present different investment opportunities and risks for an investor. Stocks help you earn completely passive returns but with a higher risk. The Rental Properties though are a safe haven and a great way to build individual wealth but is not everyone’s cup of tea. Your Success with Rentals depends upon a lot of factors. 

Calculating Average Returns of Stocks

Suppose you have $25,000 back in 1990 to invest. Let’s assume you take the route of investing in stocks and invested in an S&P 500 Index Fund. What is your portfolio worth after the 30 years if you have invested in a dividend-paying stock and reinvested all its profits?

Investing in Stocks
 I Have Used This Calculator 

The $25,000 invested in 1990 will become $375,750 in 2020. An annual return of about 9.454% causing your money to grow 15 times. To keep the numbers simple, I have not accounted for Management Fees, Dividend Taxes, Capital Gain Taxes, and Inflation. 

S&P 500
Graph Prepared By


Returns on S&P 500
I have Used this Calculator

Calculating Average Return on a Rental Property

There are a lot of numbers to be taken into consideration if you have to calculate the average return from a rental property. It is a simple calculation though. But I need you to pay close attention. After all, you will be taking a big investment decision after this. 

Let us suppose you have bought a Rental Property worth $125,000 in 1990 where you have put $25,000 as 20% down. And the rest $100,000 you have financed through a 30 Yr Fixed Mortgage at ARM of 5% (Average Rate). So now, let us do some maths. 

Property Value$125,000
Down Payment$25,000
Mortgage Payment (Annually)$6444
Gross Rent (Annually)$10800
Vacancy (5% Annually)$540
Property Ownership Costs (Misc.)$2500
Total Savings $1316 (Annually)

The above numbers clearly show that you were saving about $1316 every year. If we keep all these savings, this amount will become $473,760. After 30 years, your rental property is completely paid and you have $473,760 dollars in your hand. A Growth of 18 times on your invested money, 3 times more than what you got with stocks, and an annual return of 10.30%.  

Rental Property Returns

Do you know, this is just one part of the equation and the other part of this equation will simply blow your mind. You might already be impressed with the returns from a rental property. But here we just accounted for cash flow. What about the equity in the property which has also appreciated with time in these 30 years.  

Property Value Appreciation
Calculator Used

The above calculations depict the rental property that was $125,000 in 1990 is now worth $303,407 after 30 Years. Your $25,000 worth of investment in Rental Property has become more than $777,000 ($473,760 + $303,407) in a span of 30 Years. 

So, it means you should only invest in Rentals and not in Stocks??

Cons of Investing in Rental Property

The Returns from Rental Property surely beats the returns you get from the stocks. But as I said, rentals are not everyone’s cup of tea and hardly people invest in rental properties over the stocks. 

Even, if I ask you, I believe buying Rentals Properties is the last thing that has crossed your mind before reading this article.   

There is no doubt that Stocks are the first choice of anyone considering an investment at least for those who are beginners in this subject. And why not, stocks provide you completely passive returns whereas owning a rental property is a headache sometimes. Not everybody wants to deal with tenants and toilets. 

  • High Entry Barrier 

Real Estate does not come cheap. The entry barrier is on a higher side if you want to invest in a Rental Property as compared to stocks where you can even start with as low as $500. Though there are various no money down loan options available for investors but not everyone qualifies for them. 

  • Lacks Liquidity 

When you own a Rental Property, it is hard to sell it and it can take days and months to sell one, unlike the stocks. Though, I never bothered to sell my rental property ever.  There is no sense to sell a money tree. 

  • Income is not Always Guaranteed

A Rental Business has more to the equation rather than just collecting every month’s rent check. There are various things that can go south with a Rental Property. And you end up losing your income. 

  • Property Management

You need to manage your property and the tenants, unlike the stocks which give completely passive returns. However, you can always hire a Property Manager to do the task. Though, it is unlikely that the cash flow from your first property is able to sustain the cost of hiring a property manager. 

Should You Invest in Rental Over Stocks?

The above cons might seem like a problem to you. But let me tell you frankly, all these cons are manageable and not of a big deal breaker. I mean every business has its challenges, so does the Rental Business. Becoming a Landlord is not easy but it is not difficult either. 

If I have to tell you, I’m both a rental investor and a landlord. And owning rentals really helped me to get onto the path of financial independence. It sure is a bumpy ride but is never unsettling. You can feel otherwise until you know the real party trick with Rentals that actually helped me build wealth over the years. 

Rentals Vs stocks

So, here goes the party trick with the Rental Properties.

  • Leverage

The Beauty of owning Rentals is that you can use other people’s money to purchase a Rental Property. We call it to leverage in the technical terms and this means you obtain a mortgage of some sort to make a purchase. 

The benefit of leverage is that even if you have $25,000; you can still buy an asset worth $150,000. Now, you will not only get investment benefits on $25,000 but on the whole $150,000. You are not simply taking the appreciation benefits of $25,000 but on the complete value of the property even though initially you have just $25,000 in the deal.  

Read: Choosing the Right Mortgage Term- 15 Yr Vs 30 Yr?

  • Tax Benefits

Do you know what is even better than using leverage? The IRS allows you to take a deduction on the interest you pay on the leverage amount. You can actually reduce your taxable income to a very big extent. 

You are not required to pay taxes on that $10,800 you got in the form of rents from your rental property. From this $10,800, you can deduct your mortgage payments, and a lot more other expenses that you do on your rental property. Also, the IRS doesn’t even charge any capital gain tax on the appreciation of the rental property unless you sell your property. You are increasing your net worth every year (Property Appreciation) that too tax-free.   

Read: What Tax Deductions are allowed by the IRS for Rental Property Owners?

What About Investing in Stocks?

Now that you know, owning rentals has an edge over buying stocks. And, stocks can never match the returns and benefits, an investor can get from owning a rental property. So should you only invest in stocks when it is about Rentals Vs Stocks? 

Let me tell you even being a Rental Investor and a Landlord, 10% of wealth still comes from stocks. Yes, I do invest in stocks and you should do it too. Though, I do it for the sake of supplementing the savings from my Rental Income. 

Doing so helps me grow my portfolio of rental properties even bigger. One thing, I like to mention here is that I stay away from individual stocks and only invest in Index funds like an S&P 500.  

Why I Don`t Invest Heavily in Stocks?

I am a Rental Guy and my reasons for investing in stocks are simply for the purpose of diversification and supplementing my Rental income. I see Rentals as a clear recipe to build wealth. 

Stocks don’t impress me much and neither do they have the same potential as Rental Properties does. Also, there are some cons associated with investing in dividend-paying stocks and they are a complete deal-breaker for me. 

  • High Volatility

Stocks are highly volatile in nature. The prices of stocks move up and down so much that it can be nerve-wracking sometimes. Unless you are investing for a very long term, you stay at the risk of losing a lot of money. 

  • Taxation eats Most Profits

When you sell stocks, they are heavily taxed. You don’t get any tax advantage by investing in stocks like you do with rental properties. You have to pay capital taxes on the stocks and even the dividends you earn are also taxed no matter if you are reinvesting them in the same portfolio. An average investor pays anywhere about 10% to 37% depending upon the duration you hold the stocks. 

Put Stocks And Rental Properties Together to Work For Your Growth

→Buy A Rental Property using a Leverage

→Earn Cash Flow From it

→Save all the money and reinvest into the Stocks

→Pull out this reinvested money and the equity in your current Rental Property to fund your Next Rental Purchase. 

→Rent and Repeat. You will be able to grow your wealth in the next few years through the Snowball effect

Bonus Resources To Help You Build Wealth Through Rental Properties

The Bottom Line

When it comes to Rental Property Vs Stocks, Rental Property surely has an edge in terms of building wealth. But then you also can`t deny the ease of investing with stocks. A Smart Investor is one who knows how to use these both together to make a wealth empire. 

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