Hey everyone pretty soon I will do an income expense report of Jan 2015… Which is before I decided to start this blog, but I feel it will provide a good contrast to what I am trying to achieve compared to what I was doing. But in this post I will be exploring the decision to use capital towards rental income or dividend income.
We will start with dividend income…
Investing in dividend generating stocks is pretty much as passive as it gets for income generating assets. Returns can be astronomical or they can be dismal (as can be the case with rentals). To me what stands out the most is, beyond the research to determine if a stock is a good candidate for my idle cash, the amount of work to be done after the initial investment is quite small to what can be said about a rental property. Another thing that jumps out to me is stocks are generally much easier to get started in than rental assets. Open an account invest some money and boom youre on your way… I made it sound real easy eh?? If you choose to own a rental property you either A) need to be capable of doing much of the work yourself to start, or B) find a killer deal so that you can pay a managing company to do it for you. Ive been in construction my whole life and my family owns an HVAC business so naturally I fall into the A) category.
Now lets talk about leverage. It is possible to acquire leverage in both instances, however, in my opinion, I feel as though leverage in a rental income property is much safer than using leverage in stocks. Considering I fall into the A) category I am confident that I have complete control over the success of my rental property… In my mind anything less than success is not possible as long as I am in control. Back to leverage. My father taught me some lessons when I was younger about leverage… Being that he also owns a heating oil company I trust his advice. He told me that the best way to earn a greatest return on your money… is to use someone else’s money. And then I had to sit through the lecture of how dangerous leverage can be and blah blah blah… you know the story.
Using leverage in stocks is a little bit different… You can pick the greatest of the greatest companies… but there is still a bit of control that one possesses to make it and option for me… The greatest companies have throughout their lifetime, missed on earnings, revenue, profits… gone bankrupt.. that’s not to say that cant happen with rentals… but with my skill set and willingness to bleed for my success.. its not really an option.
With all of this to think about I bought a 3 unit apartment for my first acquisition. $130,000 was the agreed upon price… I was able to haggle it down due to a roof that needed to be rebuilt as well as a porch and 3 furnaces that needed to be replaced… As such I could do all the work myself and not have to finance it over 30 years. The next step was acquiring a loan. Taking into account leverage I went the FHA route. Even though I had enough money to do 20% down like a conventional mortgage.. my rate of return on 3.5% is huge. My down payment was $4550 and closing costs were in the $8000 range, taking me around $12.5k and an interest rate of 4.5%.
Ive owned the building for a year now and two of the units have stay fully rented while I renovate the third. After the third unit comes online I will be clearing $700 a month in positive cash flow. Now this is where the power of leverage comes in.. I invested 12.5k and I will be clearing $8400 a year! Of course there are other expenses but I have those managed pretty well.
If you are looking for a stock to return this to you per year in income you would need to first leverage up to 130k and find a stocks paying 6.5% in dividends… which out of the quality stocks I have my eye on wont return that for a few years until growth catches it up.
For me in my life right now the rental property makes sense to me I feel I can get a much better rate of return that I can in the stock market… but the time ive spent working on the apartment is what has drawn me to dividend growth stocks… after a few more rental properties I plan on plowing most of the cash flow from them directly into stocks. Im willing to accept a little less return for magnitudes less of work.
Let me know your guys thoughts and what you would do!