Homes for rent or stock investments? (Case Study)

Another beautiful day in retirement

During our recent discussion on inflation, a Badass reader stopped by and caught my eye by dropping the following wisdom in the comments section:

One final note if you’re worried about inflation: Hammer the TV and go for a walk in the woods. Trees get bigger every year unless you cut them down.”

That sentence was just one part of a great conversation that this gentleman named Aaron had contributed at the time, and I described him for sharing it. Little did I know he was about to beat me up with a case study request that hit the house in so many ways that I knew we had to cover it right away.

The crux of his question lies in the very essence of what “retirement” means.

By my own definition, you don’t have to stop working. but you are an act You have to build a level of freedom and wealth like the work you do entirely by choice, Instead of something you grit your teeth and deal with just because you need or want the money.

After all, the real purpose of the business is Create something that has meaning for you. Why do you want to leave it?

Aaron writes

Dear MMM,

I am a 47 year old contractor and I own a small remodeling company with five employees. My four children are now grown up. We live below our means in a beautiful home I built 16 years ago on 25 acres and we will never leave…we love it.

Plus, we own a beautiful 1860s log cabin/frame house that spent three years and tons of money salvaging/renovating, and now we’re renting it on Airbnb.

We’re selling two more homes: an ex that our youngest daughter will buy, and one that my crew and I are about to finish fixing..

Knowing myself, I would probably buy another broker with the money, or some other land…when the price and condition are right…but I’ve always been fascinated by the stock market.

We do not currently own stocks or index funds, nor do we have any debt. I recently reduced my working days to four days a week and am very happy with that at the moment.

But I did some arithmetic and if we sold Airbnb with the other two houses, we’d have a good chunk of money enough for me to retire mostly – I only work if I really feel like it.

So the stock market is down and it’s time to sell real estate and throw it in the VTI, right?

I’m a practical guy, so it seems odd to turn three houses I can see, touch and feel some numbers on a computer screen into a VTI format. I’m not sure if I wanted to do this, even if it made sense to my math brain.

What can I do besides stock or rental real estate with money to secure a 4% withdrawal rate at retirement?

—-

So maybe you can see why I can relate to Aaron’s question. As another 47-year-old carpenter who also appreciates handiwork, quiet woods, and making salty comments in response to the financial media’s lament, I can see exactly where he’s coming from.

On the other hand, so am I also Very comfortable with stock market investments as a source of long-term wealth and security, I have over three quarters of my life savings invested in index funds (the rest is my home, other local real estate and very small business with friends).

So maybe the main difference between me and Aaron is what I’m thinking about Homes and stocks are two versions of the same thing. They are both real, tangible, and productive assets, not gambling tools or numbers on a computer screen. If you understand this connection, you will be a better investor for life. Meanwhile, people who understand only one aspect or the other may become blind to what investing really means.

Real estate believers They often talk about the tangible nature of their investments. Their homes and apartments are already there, and they provide a service Living To the tenants that is a basic human need. In return for satisfying this need, the investor collects rent which is a real and sustainable source of income.

Your ownership of homes and apartments is guaranteed and protected by our legal system and financial institutions, which allows for trust. And the trust It is the foundation of society’s wealth.

But sometimes these people go too far and insist that real estate is the only real investment – that they become blind to the value of investing in other businesses through stock ownership. This blindness can lead to ‘tough millionaire syndrome’ – the man who owns 400 rental units and is always looking for the next deal, yet can never sit back and feel retired و, No matter how big the empire. Because for most people, real estate is considered a property active business Rather than a truly passive investment.

Believers in the stock market A different problem may develop: focus on stock prices rather than business ownership. When you hear people talk about the “200 day moving average,” “support level,” or “death cross pattern,” you can safely assume that they have this condition.

It’s the same thing that fuels price speculation on things like cryptocurrencies, meme stocks, and other volatile fads: they hope to outcome (Asset prices rise) without thinking about what creates the underlying asset the value (earnings).

Men's Deluxe Muscle Chest Batman Costume
Meme Stock/Crypto Trader

If there are no profits, it is of no value. The bet otherwise is like trying to get in shape by strapping on a muscular, padded Batman-style costume instead of doing the actual barbell exercises.

But just as importantly, the stock is also a secured part of real company ownership, which is protected by our legal system and financial institutions just like the title deed of your home. Although you can easily buy and sell stocks with a single click on your phone, the actual meaning of stock ownership is complex, old-fashioned, structured and that’s a good thing. You are partner, You have the right to receive company financial statements, attend shareholder meetings, vote on company initiatives, and even appoint and dismiss directors (or become one of them) using your voting rights.

With no trust in these institutions, including the democratic election system that allows us to keep everything, the idea of ​​owning is worthless. anythingA wealthy society cannot develop. Recording property data on the blockchain will not make any difference, as accurate recording is not the main issue.

What matters is that Humans need to trust each other, and act in a trustworthy manner In order to maintain all this prosperity. If you give up confidence and Fuck democracy Starting to spread mental viruses to encourage others to bicker and mistrust each other, all wealth begins to crumble.

However, as devotees of democracy, voting enthusiastically in every election, and even midterm, members of a rich society, I and I are resolutely towards the side of trust and cooperation, which is why our lives seem so prosperous these days.

To bring these two philosophies together, I encourage people to do so Think of each investment as just a different type of rental home. What value does a home (or company) provide to society, and what are its profits relative to the price you pay?

For example, earlier this year, some friends and I were discussing Rivian, the start-up of a hot new electric truck as it was about to roll out to the public.

2019-05-rivian-campkitchen-006
(Luxury electric van with slide-out camp kitchen. Rivian credit photo)

“Wow, that the R1T is a great car – every wealthy outdoorsy person wants one and all the valuations are glowing. So the IPO would probably be a good investment at $75 per share, right?”my friend said.

“I totally ok”, I replied, “It’s a great truck and see if they sell it in really useful form for a pickup someday, I’ll even buy one myself!”

But the real question is how much do you get from the company for $75, and when will the company get enough profits to justify the price? “

At this point, we could have tried to dig into the details: Rivian was issuing about 1 billion shares, which means you value the company at $75 billion. So you can try to guess how long the company will produce enough he won To justify the value of this company. This in turn depends on their gross margins, which they rely on quickly and efficiently to scale multiple plants and secure a flow of many thousands of custom components and batteries…

But, don’t be blessed with the power of Rivian’s infinite knowledge or psychic ability to predict the future of the auto industry. I am not qualified to speculate on the value of these shares. So, instead, I buy the entire index and get the great performance of a wide range of companies, without suffering the unique risks of focusing on a single stock.

And as it turns out, this has been a good philosophy if you look at the price of Rivian’s stock since its ill-fated IPO:

Buying hot shares in an IPO can make you look like a genius or an idiot — but he’s mostly out of luck either way.

What does this have to do with Aaron’s question?

Aaron knows how to spot a good deal on a home (which is like buying stock in a producing company), and has the very valuable skill of being able to refurbish it to create new value (which is like helping his new “company” upgrade its factory for better profits.)

But it should also be open to investing in other companies (through stock index funds) because they do the same thing in different ways. They will deliver a solid and consistent return over the coming decades. While a well-managed rental home can sometimes yield returns higher than the stock market, a stock never calls you on a Sunday night to say their water heater is leaking or to warn you that they need to end their lease early because they’ve got a new job at another country.

And Aaron still takes it a few more stairs – actively building new things and managing five employees – a meaningful hobby to be sure, but certainly not in line with my own idea of ​​retirement.

As he and I have learned at this age, building is fun but it also puts tremendous stress on the body. Rental homes are fun, but the shit can get old eventually, and sometimes you just want to sit down on a Sunday afternoon instead of making calls from your tenant or your property manager.

By contrast, investing in stocks is a really passive way to prepare yourself for the best kind of retirement: doing the work you love, but really don’t need the money.

What should I do with Aaron’s shoes?

I would keep the homes I like to live in, and sell the rest if I only managed them for the money. I’d like to throw a large portion of my surplus cash into sensible index funds through Financial company of my choicebeing satisfied with the fact that the stock is currently for sale.

And then I will continue to do construction projects side by side with wonderful friends just as I do now, only when it suits me. When evaluating a new project, rather than asking myself about the potential profit, I would ask, “Is this project so worthwhile that I would do it for Free?”

If yes, then go ahead and do it and celebrate the profits and use them to facilitate more generosity.

If the answer is no, then the project is “no” – you are just doing it to earn money, something you no longer need, because you have already reached financial independence. Leave the money in index funds and keep looking for a job that you really care about.

From what I’ve seen, valuable, fun, and worthwhile work is a limitless renewable resource and we both have it at least Another 47 years ahead of us.

Good luck Aaron!


In the comments: Are you a stockbroker or real estate loyalist, or are you hesitant and still thinking about it?

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