Many people dream of building a large investment portfolio that generates passive income. That portfolio can consist of different types of assets, from stocks to bonds to real estate.
That said, some people will tell you that real estate isn’t passive income in the classic sense. That’s because owning physical real estate takes work.
If you own rental properties, you have to maintain them, make sure your tenants are paying on time, address issues as they arise, and cover a host of expenses. The work may be worth the money, but it’s work nonetheless.
In this Reddit post, an investor who owns $1.1 million in rental properties wants to know if they should sell them and put their money into a portfolio of dividend stocks instead. The poster says that owning rental properties isn’t as passive as people might think.
Is the poster making a smart choice trading real estate for dividend stocks? That depends.
The upside of changing strategies
Owning real estate is a lot of work. One major benefit of investing in dividend stocks instead is that it’s truly passive. You need to keep tabs on your portfolio, but beyond that, there’s not all that much work to do.
Also, owning real estate can be risky. You might have an extended period of vacancies, an increase in property taxes, and costly expenses that eat into your income.
Plus, real estate is not a very liquid asset. Dividend stocks are very liquid, giving you more options.
The downside of changing strategies
Although it’s easy to see why the poster may be inclined to swap rental properties for dividend stocks, there are some drawbacks. First, the poster is earning $100,000 a year from their rental properties. Even with $1.1 million in investments, it’s hard to earn that much from dividend stocks.
The poster doesn’t say if their $100,000 a year in rental income is net of all expenses. They only say it’s net of property taxes.
Either way, earning $100,000 a year in dividends from $1.1 million in investments isn’t easy. With a 4% dividend yield, which is fairly generous, the poster is looking at $44,000.
This isn’t to say that the poster can’t get $100,000 in dividends per year. But they may need to take on a lot of risk in order to do so.
Plus, real estate investors have a lot of expenses they can deduct against their income. You can’t do that with dividend stocks.
Also, dividends are subject to taxes. Granted, so is rental income, but it’s another consideration.
Finally, real estate has a tendency to appreciate in value over time. Dividend stocks, by nature, may not experience the same level of growth because companies that pay dividends don’t necessarily invest as much capital back into their businesses.
What should the poster do?
You can make the argument that the poster should dump their real estate and put the money into dividend stocks, but you can also argue the opposite. That’s why the poster’s best bet is to sit down with a financial advisor and ask for guidance. An advisor can help them establish a smart investing strategy based on their:
- Income needs
- Risk tolerance
- Financial goals
- Desire to have truly passive income versus somewhat passive income
A financial advisor can also help the poster choose the right dividend stocks if that’s the route they end up taking.
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