Which is Safer: Rental Houses or Stock Investments? (a Case Study)

Another fine day in Retirement

During our recent discussion on Inflation, a Badass reader stopped by and caught my attention by dropping the following block of wisdom into the comments section: 

A final note if you are worried about inflation: sledgehammer 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 piece of a sizable rant that this gentleman named Aaron contributed at the time, and I applauded him for sharing it. Little did I know he was about to hit me with a case study request that struck home in so many ways that I knew we had to cover it right away. 

At the root of his question is the core of what it means to “Retire”.

According to my own definition, you don’t have to stop working. But you do have to build up a level of freedom and wealth such that the work you do is entirely by choice, rather than something you grit your teeth and crank through just because you need or want the money.

After all, the real purpose of work is to create something that is meaningful to you. Why would you ever want to quit that?

Aaron Writes

Dear MMM,

I’m a 47 year old contractor with a small remodeling business with five employees. My four kids are now grown. We live below our means in a nice house I built 16 years ago on 25 acres we will never leave…we love it.

In addition, we own a beautiful 1860s log cabin/ timber frame home we spent three years and tons of money rescuing/renovating and now rent out on Airbnb.

We are in the process of selling two other houses: one former home that our youngest daughter will be purchasing, and a second one that  my crew and I are almost done fixing up.

Knowing myself, I will likely buy another fixer with the money, or some more land…when the price and condition is correct… but I have also always been fascinated by the stock market.

We do not currently own stocks or index funds, and we have no debt. I recently cut my workdays down to four a week, and am pretty happy with that for now.

But, I did some math and if we sold the Airbnb with the other two houses, we’d have a chunk of cash big enough for me to mostly retire – working only if I really felt like it.

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

I’m a hands-on guy so it seems strange to turn three houses I can see, touch and feel into some numbers on a computer screen in the form of VTI. Not sure if I want to do that, even if it makes sense to my math brain.

What else besides stocks or rental real estate could I do with the money to secure a 4% withdrawal rate in retirement?


So you can probably see why I can relate to Aaron’s question. As another 47-year-old carpenter who also values manual labor, peaceful forests and throwing out salty comments in response to the whiny laments of the financial media, I can see exactly where he’s coming from.

On the other hand, I am also very comfortable with stock market investments as a source of long-term wealth and security, and I have more than three quarters of my life savings invested in index funds (the remainder just being my house and other local real estate and very small business ventures with friends).

 So perhaps the main difference between Aaron and myself is that I think of houses and stocks as being two versions of the same thing. They are both real, concrete, productive assets rather than gambling instruments or numbers on a computer screen. If you understand this connection, you will become a better lifetime investor. Meanwhile, people who understand only one side or the other may become blind to what investing really means.

The Real Estate faithful will often talk about the concrete nature of their investments. Their houses and apartments really exist, and they provide the service of housing to their tenants which is an essential human need. In exchange for meeting this need, the investor collects rent which is a genuine and sustainable source of income.

And your ownership of the houses and apartments is guaranteed and protected by our legal system and financial institutions, something which allows trust. And trust is the foundation of a society’s wealth.

But sometimes these people will go too far and insist that real estate is the only true investment – becoming blind to the value of investing in other businesses via stock ownership. This blindness can lead to “crusty multimillionaire landlord syndrome” – the guy who owns 400 rental units and is always looking for the next deal, yet can never truly sit back and feel retired, no matter how big the empire grows. Because for most people, real estate ownership is an active business rather than a truly passive investment.

The Stock Market Faithful may develop a different problem: a focus on stock prices rather than business ownership. When you hear people talk about the “200 day moving average” or “support level” or “death cross pattern”, you can safely assume they suffer from this condition.

And it’s the same thing that powers price speculation on things like cryptocoins, meme stocks and other volatile fads: they are hoping for an outcome (rising asset prices) without considering the thing that actually creates the underlying value (earnings). 

Deluxe Muscle Chest Batman Costume for Men
Meme Stock / Crypto Trader

If there are no earnings, there is no value. Betting otherwise is like trying to get in shape by strapping on a fake Batman-style padded muscle costume instead of doing the actual barbell exercises. 

But equally important, a stock is also a guaranteed slice of ownership of a real business, protected by our legal system and financial institutions just like the deed to your house. Although you can easily buy and sell stocks with a single tap on your phone, the actual meaning of stock ownership is complex and old-fashioned and regulated and that’s a good thing. You are a shareholder, entitled to receive company financial statements, attend shareholder meetings, vote on company initiatives, and even hire and fire board members (or become one yourself) using your voting rights.

With no trust in these institutions, including the democratic election system that allows us to keep everything going, there is no value to the idea of owning anything, and a wealthy society cannot develop. Recording the ownership data onto blockchain won’t make any difference, because accurate recording is not the core issue.

What matters is that humans need to trust each other, and behave in a trustworthy way in order to keep all this prosperity going. If you give up on trust and fuck with democracy and start spreading mental viruses to encourage others to bicker and mistrust each other, all forms of wealth start to crumble.

However, as democracy-loving, enthusiastically-voting-in-every-election-even-the-midterms members of a rich society, you and I Iean firmly towards the side of trust and cooperation, which is why our lives are looking so prosperous these days.

To bring these two philosophies together, I encourage people to think of every investment as just a different type of rental house. What value does the house (or company) deliver to society, and what are its earnings relative to the price you are paying? 

For example, earlier this year some friends and I were discussing Rivian, the hot new electric truck startup as it was about to go public. 

(Fancy electric truck with slide-out camp kitchen. Image credit Rivian)

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

“I agree absolutely”, I replied, “it’s a cool truck and heck if they sell it in the actually-useful format of a VAN someday, I’d even buy one myself!”

But the real question is how much of the company are you getting for that $75, and when will the company have enough profits to justify the price?”

At this point we could have tried to dive deeper into the details: Rivian was issuing about one billion shares, meaning you’re valuing the company at $75 billion. So you could try to take a guess at how long until the company produces enough profit to justify this company value.  Which in turn depends on their gross margins, which depend on quickly and efficiently they can scale up multiple factories and secure a stream of several thousand custom components and batteries…

But, not being blessed with the power of infinite knowledge of Rivian or a psychic ability to foresee the future of the automotive industry. I’m not qualified to speculate on the value of these shares. So instead I just buy the whole index and get the great performance of a wide blend of companies, without suffering the unique risks of concentrating in one individual stock. 

And as it turned out, that was a good philosophy if you look at Rivian’s stock price since that fateful IPO:

Buying a hot stock at IPO can make you look like a genius or a fool – but it’s mostly luck either way.

So what does this have to do with Aaron’s question?

Aaron knows how to spot a good deal on a house (which is like buying shares in a productive company), and he has the incredibly valuable skill of being able to renovate them to create new value (which is like helping his new “company” upgrade its factory to deliver even better earnings.)

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

And Aaron is taking it a few staircases further still – actively building new stuff and managing five employees – a meaningful pastime to be sure, but definitely not in line with my own idea of retirement.

As he and I have both learned at this age, construction is fun but it also places a massive strain on the body. Rental houses are fun, but shit can get old eventually and sometimes you just want to sit back on a Sunday afternoon rather than fielding calls from your tenant or your property manager. 

In contrast, stock investment is a truly passive way to set yourself up for the best kind of retirement: one where you do the work you love, but you really don’t need the money.

So what would I do in Aaron’s shoes?

I’d keep the houses that I love to live in, and sell the rest if I’m only managing them for the money. I would dump a huge chunk of surplus cash into the sensible index funds through the financial firm of my choice, feeling extra good about the fact that stocks are currently on sale. 

And then I’d keep doing construction projects alongside great friends just as I do now, only when it suits me. When evaluating a new project, instead of asking myself about the potential profit, I would ask, “Is this project so worthwhile that I would do it for free?”

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

If the answer is no, the project is a no – you’d be taking it on just to make money, which is something you no longer need, because you have already arrived at financial independence. Leave the money in index funds and keep searching for work that you really care about. 

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

Good luck Aaron!

In the Comments: Are you a Stock Market or Real Estate Faithful, or Undecided and still figuring it out?

  • Fuzz July 15, 2022, 10:55 am

    I dunno. There are plenty of roads to FIRE. I actually like what the contractor’s doing. He had plenty of cash flow since he doesn’t have any debt. If he can live on the cash flow from the real estate, he can basically retire right now and ignore the stock market.

    It’s hard to say what his tax picture is, but real estate defers taxes. If he sells now, then what he nets out after a sale and transaction costs is a lot less than his equity in the property. So you could have 500K in equity or 400K in the stock market. Plus he gets depreciation and cash flow if he keeps the real estate.

    For maximizing the return, he’d want to leverage the real estate. For minimizing volatility, he’d want to sell some real estate and buy stocks and bonds. For sleeping well at night, he may be best (1) doing what he understands and (2) remaining in a local real estate market where he plausibly has an edge.

    Can he cashflow another rental or two? If he had 5-6 rentals and his cash flow covered his monthly expenses, why not just retire at that point and ignore the market?

  • Dylan August 10, 2022, 12:00 am

    2 things: Depreciation and Leverage

    It’s worth noting the outsized tax benefits of real estate depreciation (for better or worse), which you can write off against your cash flow and potentially pay very little (or nothing) for the monthly cash flow money you earn. If you’re making less than 40k a year, then maybe this doesn’t matter as you get 0% long term cap gains with the stock market, but depends on your situation.

    Then there’s leverage. Buying a house (with a mortgage) means that the appreciation gain you earn is on money you have never even spent in the first place! It’s much riskier to get this kind of loan on stocks, and is generally recommended against.

    MMM clearly stated the stock market benefits, including how you don’t have to do much (no mortgage application and no tax forms to claim depreciation!), but because of these real estate benefits I’d say it’s nice to diversify and do both if you can.

  • Rob S September 5, 2022, 4:13 am

    Hello to all from the UK.

    This question constantly crops up on my mind, not which is “safer” but which will be the “better” investment. It’s such a close match up I truly understand the points from both sides.

    In my younger days – early 20s I was an avid real estate investor, buy to let mortgages and leveraging for high returns. The government legislation has grown substantially for landlords in the UK, but the recent market conditions have seen a somewhat renaissance for the housing sector where previously a lot of landlords have exited for numerous years now. Rents are strong and price growth continues to be strong. I would estimate that any return on a lump sum invested to be about 5% rental return, 5% price growth. This factors in for some expenses such as agent fees, repairs etc. Tax is heavier for property disposals – capital gains.

    Shares on the other hand are a lot more hands off, I believe they return probably equal share growth if invested globally, but less dividend return. There are however more tax breaks, you are able to save for retirement in shares tax free for example very easily with platforms ready to get you going in a matter of minutes.

    In my own life, having a family has shifted my own time priorities and while it’s hard to let go for the real estate gradually over time. I just find that the value of my time with my family too valuable to miss up on. I’m overall happier to invest in the markets, diversify and sit back and enjoy my time left on this earth.

    Both investment vehicles are fantastic, I personally think real estate is “better” for growing your wealth, because of the fact you can leverage and it utilises your own time and energy as well. But once you’ve gone so far, wealth can’t outweight the value of your time as many fellow readers and MMM seem to agree on.

  • Paul September 26, 2022, 6:10 am

    Was anyone in the s&p 500 in 2008?

    Seeing your savings drop 50% and waiting 5 years to see it at the same point must be difficult.
    How can they defend that loss of 5 years of investment time?

    Now with the recession it seems that we are going the same way.
    Would you be willing to lose another 50% and 5 years of your time?
    And if in those 5 years you needed the money?

    • Mr. Money Mustache September 26, 2022, 9:09 pm

      As a person who retired in 2005, I sure was “in the S&P” in 2008! (as well as the late 1990s, the 2000-2001 tech crash, and all the time since then)

      The secret is that short term fluctuations like this (even 10 years is a short time) mean nothing over the course of your investing career. If you are already fully retired and living ONLY off of stocks: The dividend yields typically drop less than the sticker prices of the stocks, and the 4% rule takes into account these very typical bear markets. On the other hand, if you’re still earning income and thus in accumulation mode, the drops in the stock market actually accelerate your wealth accrual – they are just a sale on stocks.

      As for the current “recession”, where we have all-time record economic output and employment levels: we may or may not see some economic contraction and/or further sales on stocks in the next few years. But absolutely nobody can correctly predict what will happen, so you might as well hold on to your stocks just as with all past economic cycles.

      One thing you can control? Your spending. Drive less, bike more, learn more skills and have a great life. You will forget that money even exists.

  • Lesley Kelly November 4, 2022, 11:34 am

    Hi! So all of this info is making me rethink my decision. I have $135k in stocks, one property I paid cash for with a renter and another property I have a renter in, that I have a 310k mortgage on. I am about to put 110k into that mortgage to bring the payment down and eventually pay off the loan in 5 years.
    Is it better to use that 110k to bring down the loan or put it into stocks? I plan to put 50% of my money to stocks and 50% into paying off the real estate over the next 5 years.
    I am 50 I plan to retire in 5-10 years. I thought the rental income would be good to have to retire, and my stocks would grow enough to have some money too. I only started investing 4 years ago so I am late to the game. I didn’t think my stocks would grow enough in 5-10 years so I thought I would need the rental income.
    But now reading this, maybe investing in the real estate is not good and selling it and investing in stocks is better?

    • Mr. Money Mustache November 4, 2022, 5:37 pm

      Hi Lesley, this is a good and really common question. First of all congratulations on already having some rentals on the go!

      Second, the answer really depends on the interest rate. If you have mortgages that are from any time before the present (November 2022), they probably have nice low, locked-in interest rates. In fact, the rate may even be lower than today’s inflation rates, which makes it truly free money.

      Meanwhile, the stock market has dropped, which means stocks are ON SALE, meaning expected returns are higher over the long run because you are buying at a lower cost basis.

      So in general for my own finances, I prioritize stock investing in conditions like these, then you let the mortgages pay themselves off slowly at the default amortization rate. And you can always sell small amounts of shares over the coming years whenever you need extra infusions of cash.

  • Joe C December 2, 2022, 1:26 am

    Low cost index funds are great for hands-off investing, but I think individual stocks are underrated and not that hard to learn if interested. With an index, you get the bottom half of the batting order as well. Why not just pick out the All Stars?
    Apple, Microsoft, Google, Exxon, Amazon, JNK, REITs, etc. Buy and hold, collect dividends and buy some more on the dips. Portfolio is less than 5 companies, so come voting time it’s easy to do as I know them well and am not scattered all over the place. Have done well, averaged 14.7% annually for 15 years or so (last time I bothered to calculate). If only I had started with a bigger principle or was able to continue to contribute. Moved countries so couldn’t add to USA ROTH, now investing through work mutual/index funds and returns are in the 6-8% range…1/2 of individual stocks portfolio!
    Another good thing of having a small number of individual companies, is that it really helps filter out the daily noise. Inflation, market ups or downs – you get to focus on news and earnings just for your companies. iPhones still selling? Amazon Cloud Services still raking it in?

    Paying off my residence in 6 years, kids moved out so thinking of getting a roommate (or renting out the whole shebang if possible), and get into the real estate/renting portion of income.

    Here your advice will come in handy, man😁

    Anyways, thanks MMM for another quality post!

  • Kyle February 14, 2023, 11:57 pm

    Hello! Assuming that the wealth of our great nation continues to grow for the next few lifetimes seems possible. But, is there a chance that a prolonged economic collapse could potentially ruin ones ability to consistently earn 4% returns on index fund investments? And maybe even devalue the investments to a point of no recovery? As the fate of the index fund largely relies on the overall health of the economy. I’m a somewhat paranoid person, but I also feel that this is somewhat possible. Some people would say this is a doomsday situation where money wouldn’t matter at that point, or that this sort of thing would never happen. But, being a realist and pragmatic, I like to think about every possibility and how to prepare. Anyway, to circumvent the loss of a large portion of the value of ones savings and investments in a catastrophe would you recommend a store of value like gold? Let me know what your opinions are on this. Cheers!

    • Mr. Money Mustache February 15, 2023, 12:49 pm

      I would definitely never own any unproductive “make-believe” assets like gold, pieces of art, or NFT/crypto type stuff myself. Why? Because it’s not actually doing anything – the value depends only upon its status in the imaginations of other human beings.

      Instead, when I want to diversify beyond ownership of businesses, I focus on things like owning my own house (with no mortgage), as well as tools that allow me to be productive regardless of the economy: in my case housebuilding tools, bikes, a reliable car/van and nontangible assets like a variety of skills and close friendships.

      The best part is that these are all things that make life better whether we are in the ultimate economic boom OR the most unexpected economic depression. And they passed a nice little test during the 2020 Covid era as well: my friends and I still had plenty of fun, healthy things to do and access to each other, even while the rest of the world was fretting about whether or not we would come through it all okay. And thankfully we did, better than ever!

  • Doug May 23, 2023, 11:53 am

    Question for you as a landlord. What requirements do you place on your tenants? What all do you cover? I have a friend with rental properties. His deal is that the renter is responsible for the first $50 of any repair. Cuts down on those phone calls. What’s your opinion on this?


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