Owning rental property is too risky. I'll keep buying stocks instead.
For at least six months now, I've thought hard about buying a small house across the street from me as a rental property.
But no matter how much I run through the numbers, it just doesn't add up.
In theory, I like the idea.
You buy a property, rent it out for more than you're paying the bank and hopefully make a little additional money.
At a minimum, the tenant is paying the mortgage for you, so you're getting the property for free or nearly so.
Over time, the house is paid off, and you either continue renting it or sell it and bank the proceeds.
But I still prefer stocks, because I think their benefits far outweigh the downside of real estate.
Here are 5 reasons why:
Reason 1. A home isn't a liquid asset.
In this time of economic uncertainty, cash is power. I'm talking about liquid assets. This includes stocks, bonds and CDs.
Real estate is the most illiquid of assets and, in my eyes, the least powerful because it's tough to quickly turn it to cash.
Are we going to fall off that "fiscal cliff" we keep hearing about? Are we facing an extended global recession? Will the recent housing market gains reverse themselves?
With real estate, you can't always react to market conditions; you have to live with them. Although stocks carry considerable risk, I like that I can get in and out of the market in seconds.
Reason 2. With liquidity comes flexibility.
Should a business opportunity or some other unique investment arise, I can tap my stocks. I can sell off a few shares or my entire portfolio in minutes for less than $100 in trading fees.
Try doing that with real estate.
If you want to cash out, you might have to wait for a tenant's lease to expire, and then you could wait months, or even years, to find a buyer for the property.
And even then you'll pay closing costs in the thousands.
I don't need to find a buyer for my stocks. I can sell at any time and do anything I want with that money.
Reason 3. Stocks are cheap ...
Real estate can be expensive to own, even at today's low interest rates.
Even if you pay cash, you've got insurance, property taxes and maintenance. And I know from owning my own house that things can break and go terribly wrong.
At most, it costs me a couple hundred dollars a year in trading fees to maintain my portfolio. I also don't have those other expenses, and I certainly don't have to worry about a pipe breaking or a tenant wrecking the place.
While it costs you virtually nothing to own a $250,000 stock portfolio, it can cost thousands of dollars a year to own a $250,000 home. And that doesn't even include interest.
Reason 4. … And they don't create debt.
While taking out a mortgage might be considered "good debt," I really don't like the idea of having another $150,000 hanging over my head.
Certainly not for an asset that I'm going to turn over to someone else to live in.
The advantage is that the tenants would be paying that debt, and you would get the tremendous power of leverage.
In theory, if you put down $20,000 on a $200,000 property and its value increases by 10%, you've doubled your return on investment.
But it doesn't work like that in practice, because your expenses eat away almost all of those gains, at least in the short term.
Reason 5. There are bigger tax advantages.
When you own property, the big tax advantage is that you can deduct the interest and taxes if it surpasses your standard deduction.
Tax advantages might help a bit, but they're more like icing on the cake than an actual reason to buy real estate.
Spending $10,000 on interest and property tax payments to save $2,500 in income taxes doesn't make much sense in my book. You're still out $7,500 on interest.
Then there's real estate's advantage when it comes to today's low capital gains rates. Those rates are the same for stocks that are held for more than a year.
I can get an even bigger tax advantage with the portion of my portfolio that I hold in my Roth IRA.
I'll be able to have all of that money, including the dividends and capital gains I earned, tax-free if I wait until age 62 to touch them.
I'm not denying the risks with stocks. We all know how volatile the past few years have been.
I have zero control over the market, but I can control how I respond to it. You just cannot do that with real estate.