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Over the past few months, I've grown curious about the best use of money I've budgeted for investments. I've slowly, over the past year, put small amounts of money into the stock market and have grown comfortable easing into investing through that single route. But I did want to learn more about alternative investment options, even ones that seemed like more work, if they might reap a bigger reward than the market.
The idea of buying a rental property had cropped up several times over the years. I'd heard it was possible to generate high returns if you did it right (picked a good location, were able to keep a long-term tenant, had the time to manage the property, etc.). It seemed like a known way for people to make passive income and also put their money in an investment property that potentially came with less risks than the stock market.
Was this a strategy I could use to make extra cash over putting my money in the stock market? I talked to a handful of financial experts to learn more about why buying a rental property could be a better idea than investing in the market.
One of the first perks I felt excited by was the idea of passive monthly income that comes from renting out a property. Justin Nabity, a financial planner, told me that buying a rental property ensured a steady stream of cash in the form of rent.
This is especially true if you buy a place in cash (without having to take a mortgage) and all you have to pay on the property are things like taxes, utilities, and maintenance fees, which can all be factored into the price of rent.
While it can be argued that investing in a rental property comes with more hands-on work and stress than investing in the market, Nabity says it can be a less-risky option.
For one thing, there's always the possibility of renting out your property to earn income (though that's never guaranteed — your tenant might be unable or refuse to pay, or you might not be able to find a renter in the first place), and there's a good chance your property will increase in value over time (though, again, that's not guaranteed).
Ultimately, Nabity says a rental property can be a "safety net" compared to the "volatile and unpredictable" stock market.
As a rookie investor, navigating which stocks to pick and which companies to invest in can be difficult and done without much certainty.
Jason Hull, a financial planner, says that in the stock market, you are picking how well other people will run a company. With real estate, you have more control over your assets because you can pick your tenants (based on stability, likelihood to pay, and willingness to take care of the house), negotiate rates for repairs, and more. Hull says this is a level of control you won't have with stock market investments.
A big thing I didn't think about or even realize are the tax and retirement advantages that can come along with investing in a rental property.
"Because of depreciation and the ability to expense other costs, real estate is tax efficient. It's possible to both defer taxes, via depreciation, and potentially avoid taxes through 1031 exchanges and estate tax planning," Hull says. "There are typically expenses associated with running a business, like cellphone expenses, that can be deducted from taxes when you have rental properties, but you cannot do the same with investing in the stock market. Check with your tax advisor before taking those deductions to ensure you are accounting for them correctly."
A big perk of investing in a rental property over the stock market is the fact that you have an asset you can look at, touch, and feel, and even live in if you need to.
Ryan Cullen, a financial advisor, reminded me of the benefits of that.
"Real estate is a tangible asset and has utility while meeting one of our basic human needs (shelter), while the stock market is much more intangible," Cullen says.
Learning all of this from financial experts made me take the idea of buying a rental property in the future more seriously. Of course, nothing is guaranteed — and that includes rental income. I know that what I've described here is a best-case scenario. But as someone who likes to have control over their assets and doesn't want to take on too much risk, it seems like a good option for growing my financial portfolio.