A common question that I’ve been asked numerous times over the last few years is why should anyone consider buying rental properties? Why not just invest in stocks, mutual funds, ETFs, etc.? It seems like it’s a lot less work and lower risk!
The reason is that rental properties can easily and consistently bring in 10-15% cash-on-cash return on investment, and an additional 20-30% after all vacancy, expenses, management & mortgage expenses have been accounted for. The caveat is that it requires some due diligence and work to ensure that you remain patient and buy the right properties (recommended reads: How to Perform a Cashflow Analysis | The Difference Between a Successful and Failed Investment).
Even if you disregard the benefits noted above, the main reason rentals are the fastest way to financial independence is the power of leverage. For example, you can purchase a $100K rental property with only $20K down, but you’ll still earn investment returns on the $100K asset. A $5K return on a $100K asset gives you a 5% return, which doesn’t sound too impressive until you consider the fact that you actually only invested $20K, meaning you’re looking at a 25% return on investment from that $5K return after only one year! Best of all, these returns will repeat year after year! These returns also exclude consideration for the cash-on-cash return mentioned above!
Another huge advantage that cannot be understated is the tax advantages that real estate provides. Both the U.S and Canadian tax codes are extremely generous towards real estate investors. Real estate is very easy to write off in many ways as an expense, regardless of how much income it generates. A good investor with a knowledgeable accountant can easily and legally operate at an on-paper loss, when in reality could be banking tens or hundreds of thousands of dollars. In certain scenarios, you can even offset taxes from other streams of income, like your day job, using this on-paper loss.
Although investing in real estate requires some hands-on work, at least initially. it completely embarasses the historical average ROI that the stock market has delivered annually. Take a look at how much I’ve earned with the first property I purchased (recommended read: How Can I Make Money In Real Estate?). Having owned this triplex for a little more than 5 years I’ve enjoyed a ROI of 226.3% to date. My initial investment of $69.9K has earned me an additional ~$158K in increased net worth! In addition, each and every year that I continue to hold this investment my net worth will increase at a rate of $25K-35K on average. Which stock market investments can consistently return $25K+ annually on an initial investment of $69.9K?
‘Nuff said. The proof is in the pudding.