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Investing in dividend stocks is an awesome way to generate ongoing income. I chose real estate as my vehicle and today we’ll talk a bit about the pros and cons of going this route.
While many areas in the U.S. are still recovering from the devastating crash, here in Canada things are much more stable. Although there’s the constant talk of an adjustment, we’d be looking at probably a 20% correction at most.
I love real estate because you can generate immediate cash-flow via rental income as well as watch your asset appreciate over time. As long as you have a long enough time horizon for selling, you’re pretty much guaranteed to make money on your home, at least in terms of selling it for more than you paid for it.
Some would argue that if you live in your home it’s a liability instead of an asset, and this can certainly be true, but so far hasn’t been my experience. I recently did a quick tally of the repairs and maintenance we’ve put into our home in the last 4 years and was shocked to see it came to about $20,000. There were no major repairs involved, but that did include finishing our basement, which we now rent out for a fantastic monthly rate.
You Make Money When You Buy, Not When You Sell
If you’re looking for a rental property or at least a house you can live in and rent out, you have to approach your purchase as a business decision. Falling in love with the garden in the back and paying 20K over market value for the privilege is romantic, but bad business.
Consider the structure, wiring, foundation, etc. when evaluating. Cosmetic upgrades like re-doing a bathroom are cheap and child’s play compared to repairing a faulty foundation or replacing a leaky roof.
You’ve heard that you should buy the cheapest house on a street. It’s easy to add some upgrades to quickly bring the value up to the street average, but buying your dream home on the same street will make it much harder to generate a solid return.
Pros And Cons Of Renting
With the income you receive, you can pay off your mortgage faster or use the money to invest in something else (like dividend stocks). This really is having your money make more money and is a step in the right direction for living the good life.
Always be careful with tenants, as a bad one can easily wipe out every dollar they’ve given you. Damaging property, either intentionally or unintentionally, or simply not paying will cause you no end of headaches and lost time and money. You CANNOT slack off when choosing tenants.
Low Interest Rates
Take advantage of historically low interest rates right now. In Ontario mortgage rates are right around 3%. Check out MortgageRates.ca for the best rates and other calculators to help you figure out what you can afford.
Readers, what’s your take. Do you make money from rental income? What’s been the pros and cons?
I think the answer to this ultimately comes down to sticking with what you know, and in my case that’s dividend income from stocks. I think there is potential to generate reasonable cash flow from a rental property, you do take a chance with the quality of the tenant and needing to make running repairs. Having said that, I know people who have done quite well with cash flow positive rentals from day one.
Me personally- I love the ease with which I can enter and exit a stock and take part in an ongoing dividend stream with minimal transaction costs- property doesn’t allow you to do that with the same flexibility in my view.
Hello Integrator,
Yes you’re right, owning property is much less flexible. You can’t beat the cost of $4.95 to buy a great dividend stock. But as we saw in 2008 to 2009, having all your eggs in the stock market can be kinda stressful.
Rental income, if done well, is another layer of diversification IMO. If you are already paying a mortgage, then why not add another layer of income? 😉
Cheers!
The whole concept of rental property seems like a dream investment with other people paying your mortgage, but for me there are too many negative aspects involved.
Renters- 90% of renters rent because they have no other choice. If they choose not to pay the rent it takes months and expensive court costs to get them out. Lord only knows what they do in there as well. Meth lab anyone?
Mortgage- unless your rich to begin with, coming up with a down payment can be painful. $50,000 for a down payment can buy you quite a lot of dividend stocks. Also having a mortgage means more legal and financial liability then opening up a trading account.
Maintenance- I don’t get calls from my dividends at 3am telling me the furnance is broken. Unless you can afford the added cost of a maintenance service, I hope you are a handy person. You might as well buy mutual funds instead of dividend stocks.
Hey Steve, yes renting can be expensive with maintenance costs etc. and an added nightmare if you have the wrong tenant(s). However if you are already paying a mortgage anyway, then IMO the extra rental income is a bonus to help pay down the mortgage faster.
In our case we have great tenants, so we have been very lucky. But they are moving later next year. So we will see what happens then. 😉
Cheers!
Ninja,
Interestingly I made a post today about Canadian real estate companies. Great minds think alike? What you’re doing with a tenant in your basement can make a lot of sense – since you have to pay housing costs anyway, why not share it with someone? But in terms of a pure rental property, I’d much rather own shares in a dividend paying company like Killiam, and let them deal with the renters and maintenance (they have 20,000+ tenants, so they’re good at it!)
Completely agree, a basket of REITs takes out all the hassles of dealing with rental properties directly! You guys have brought up some good points here. 🙂
Cheers
Great post! I’d like to point out that in my point of view leveraging is one of the reasons (or *the* reason) owning a rental property beats most other forms of investment.
This is a very helpful post you have written DN. I do not understand Real Estate at all, which is why I never considered investing in rental real estate ( besides a few REITs I own). I never really liked the idea of putting so much money in one asset, and having complete lack of diversification if anything happened to the property or to that market. I do know people that are living off rental real estate though…So if it doesn’t work for me, doesn’t mean can’t work for you.
Though I agree with DGI that buying real estate can lock a sizable chunk of your wealth in one large and relatively illiquid asset, it remains that with real estate, you can deduct a whole bunch of fees. For instance, you can deduct mortgage interests, repairs, city taxes, etc. So, when done correctly, you can buy real estate with other people’s money (e.g. money from the bank) and pay for it with other people’s money.
You can also buy dividend stocks on margin (with other peoples money), and deduct interest.
The key point in this article is “if you have a long enough time horizon”. My wife and I own four rental properties (a total of 11 apartments), and have seen great capital appreciation – plus mortgage pay down – in the four years we’ve owned them. But the capital appreciation has been the result of lucky timing. If we bought the same buildings in the early 1990s they wouldn’t have appreciated at all in four years (because real estate prices in many Canadian markets in the early- to mid-1990s hardly budged). Then there’s the possibility that values will fall in the next few years, wiping out the appreciation.
But we plan to hold onto our properties for the long term – 20 or 30 years. With that kind of time horizon, it’s more likely that things will turn out well.
Great article!
Moe
P.S. the points that commenters make about the time required for maintenance, looking after tenants, etc is true. You have to be a “people person” or have a property manager. Otherwise you’ll have being a real estate investor. Fortunately, my wife is a people person!
And for those who don’t wish to deal with the hassles of being a landlord, there are REITs ofcourse!
Moneycone, absolutely!
We have a duplex we rent and are dividend investing. Just before we retired, we spent a load of money on a new roof, fence, carpet, water heater, outside painting. However, touch wood, it’s now making some money.
Shelley, I dig the hammer and pink hardhat. 🙂 Yes the investment in your property will pay off, since its rental income, and you get to write off the renovations and costs. Combined with your dividend paying stocks – multiple revenue streams is the way to go!
Cheers
I have been wanting to get into real estate investing for you yields. After conducting my own due diligence I know that it is very possible to receive 10% or more yields from the moment you purchase the property. For a stock investory I understand that type of yield on my investment clearly.
My main problem is financing a real estate deal in my area. Houses in my area typically sell for approximately $600k so a 20% down payment is about $120k. That’s a nice hefty chunk of change. Of course I could look in an area that is better suited for my budget but as you pointed out I would have to hire out the rennovations and acquiring of tenants. I know there are good property management companies but having talked to friends who invested in long distance real estate the results haven’t been stellar.
Hopefully one day when I’m no longer working 9-5 I can travel to potential cities and get a feel for market and possibly make my first real estate investment.
Marvin, if you buy a house in Pheonix or Tuscon, I’ll rent it from you during the Canadian winter months. 🙂
Cheers