Rental House or the Stock Market – Who Won So Far in 2016?

rental house or the stock marketLiz and I bought a rental house on November 30th, 2015. We fixed it up, had an open house, and landed some awesome renters that moved in on April 15th, 2016. We are now officially landlords (which still seems weird to say).

Related: How to Attract the Best Tenants for a Rental Property

So what’s the point? Why did Liz and I decide to dump $90,000 into a rental property instead of the stock market?

It’s pretty simple actually. We don’t trust the stock market at all.

The market goes up, tumbles down, it comes back again and thrives, and then all the sudden it’s down in the dirt again. Quite frankly, the market seems about as safe as jumping out of a plane with a 50 year old parachute; we might be completely safe and have the time of our lives…or we might die with nothing.

Yes, we still contribute funds to the stock market to diversify, but we’re not fully depending on them like 99% of the population!

The Rental House or the Stock Market?

So the real question is, which investment has been more profitable so far this year? Since April 15, 2016, how much did the stock market earn us vs. the rental property?

The Stock Market

At the beginning of May, my 401k account was worth $53,845.12. Thanks largely to a work bonus and matching contributions, the account jumped to $63,567.12 (Yay for our future old selves!! We’re making progress!). But how much of this increase was actually due to the market rising?

401k balance in May 2016

As you can see in the handy-dandy chart above, the actual investment return was $1,676.56. Over the course of six months, our $53,845 investment went up by 3.1%, or 6.2% annually. It’s not awesome, but also not terrible.

The Rental Property

So many people warned us that owning rentals would be awful. The renters weren’t going to pay, we were going to get sued, they were going to trash the place…blah blah blah. And so far, being land lords has been a dream come true. We took our time in the selection process, we did the background checks, and we stuck to our guns on the criteria we set. Not only has nothing been damaged, but we have already turned a profit.

Here are the main details of the rental so far this year:

  • Property investment = $90,000
  • Rental income per month = $1,200
  • Property Taxes = $3,100

Our renters are awesome and continue to pay their rent 2-3 days early every month. So far, they have paid us $7,200.

In July, we had to pay the property taxes…which amounted to (ugh…) $3,100. Our net income thus far is $4,100 on a $90,000 investment. This equates to a 4.5% return so far. BUT, if we incur no other expenses until next April, our yearly net income will grow to $11,300, a 12.5% annual return. Now THAT’s what I’m talking about!

The Take-Away

The purpose of this article isn’t to show that owning rental properties is always more profitable or that you should avoid the stock market because you’ll only earn 6% on your money. Heck, the stock market could jump tomorrow and put us up 15% by the end of the year! You just never know what it’s going to do!

Liz and I want to be responsible with our money. We want to put our kids through private school, help them with the cost of college, and we want to retire the fun way (ie. not on the SPAM only diet). To do this, we must invest wisely and DIVERSIFY, because sometimes the stock market tanks and other times it’s a rock star. To keep earning money through the peaks and valleys, we need to create other avenues of investments.

Related: Retirement Savings by Age – Are You On Track?

So how do we diversify our investments?

  • We put some into our 401k mutual funds
  • We buy real estate for rental income
  • We both have side-hustles that produce additional income

If you want to get ahead in this life, then you should really start thinking about something other than your one income. How could you use that money to earn more money? Where could you put it so you’ll earn 10% or more in returns? These are the types of questions you should asking yourself constantly.

Rental house or the stock market? Thankfully, they’re both winners!

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4 comments to Rental House or the Stock Market – Who Won So Far in 2016?

  • Funny…you posted this today. Hubby and I had this conversation yesterday. You are exactly right…Diversify, Diversify, Diversify!!! I was doing the math last night and the 401k is doing 11.35% for the year so far, which is great. Rental house is at about 4%. Rental house #2 is about the same. My interest and knowledge is in real estate and hubbys is investments, so we make a good team.

    • Hi FBB! I’m assuming that your 4% does not factor in the appreciation of the house value from year to year. I also assume that you have a fair amount of mortgage debt on them, which is killing your cash flow.

      My wife and I have decided to invest with cash only! It definitely takes longer to grow wealth, but our stress level is absolutely zero. Because we weren’t thinking about that mortgage payment each month, we took our time to find the right renters and the income has been truly passive! Investing with cash has been such a blessing!

      Thanks for the comment FBB. Definitely let me know if you have more questions! Congrats on deciding to invest heavily in your future!!

  • Sarah

    Hi, my question is related to income taxes, isn’t rental income taxes like a salary (I.e. Personal income)? We are in the 35% percentile on term of tax bracket, and every year we have to pay 35% taxes on our rental “profit” doesn’t that eat a very large portion of your rental profit? Investment gains are only taxed 15%, now I know that you might not get as much of a return on investment (might even lose money) but wouldn’t the income taxes, if you are in the 35% tax bracket due to your salary, eat so much of your rental profit that in the end you are not making much more or even less than profits from the stock market? Especially if you add maintenance, wear and tear etc. For the rental. Would love to here your opinion on how to get around the income high tax bracket for rental income. Or maybe rental income doesn’t make sense if you are already in a high tax bracket? Appreciates your input! Thanks!

    • Hi Sarah. Great questions!

      Yes, the rental is taxed at our income tax rate. Stock investment gains are taxed at a capital gains tax, which is typically 15%, but can be as high as 20% if you earn enough income. Also, keep in mind that if you’re investing through a tax deferred 401k, you’ll still need to pay taxes at the normal income tax rate when you start pulling the money out.

      The HUGE benefit of the rental property are the write-offs. Mileage, repair costs, and most importantly…DEPRECIATION!

      Our rental house is assessed at approximately $105,000. Depreciation is spread across 27.5 years, so every year I can deduct $3,818 off from our earned income! It’s completely artificial since we’re already writing off our repair costs. Instead of paying a 25% tax (our income rate) on a $10,000 gain, we’re effectively paying just 15.5%! 🙂

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