Tenants over Dividends

by Mr. Cheap

The Moneygardener recently wrote an interesting post why he likes to invest in dividend paying stocks instead of investing in real estate (I’d link to the post, but I’ve been getting 404 errors from his site for the last 2 days). As someone who has invested in both, there’s truth to each point he makes (I agree with all of them), but there’s also another side to the issue.

Presented, for your consideration, some reasons why you might want to invest in real estate instead of equities (text in italics are the original points made by MoneyGardener):

No pesky rent cheques to cash. My dividends flow electronically into my brokerage account without hassle, fees, or paper (eco friendly too).

  • Pesky rent cheques to cash.  Dividends may trickle in (or be re-invested in your DRIP), but there’s nothing like walking to the bank with cold hard cash or a stack of cheques in hand

If given the choice I’d rather not receive phone calls at 4am from tenants with plumbing issues. To date I have not received one phone call from any of the companies that I own.

  • Given the choice, I’d like to have the opportunity to know about problems with my investment, have the chance to fix them, and to be able to plan to avoid them in the future.  With companies I buy common stock for, I don’t know about problems until the over-paid management team has already made short-sighted decisions to maximize the value of their stock options

Why chase people for rent cheques or listen to a hard luck story about why it’s late? Clorox (CLX) is never late with their quarterly dividend, and they don’t complain.
People break leases and decide to move out occasionally, taking your future monthly rent with them. Stocks never go away unless you want them to. They can also be acquired in which case their value spikes.

  • When a company cuts or suspends it dividend, there’s nothing I can do about it.  My entire investment can disappear, leaving me with no recourse, no future income AND the loss of my principal.  If a tenant doesn’t pay me, I have a wide range of options for collecting ranging from nagging him to evicting him.  Buildings rarely vanish, and even if its destroyed, the land its built on will still remain (along with a juicy insurance settlement).

I like the word ‘DIVIDEND’ better than the word ‘RENT’….it just sounds cooler and more profitable.

  • Rent sounds a lot cooler when you’re collecting it than when you’re paying it!

Owning stocks I can diversify across industries and geographies. Owning an 18 unit apartment building in Windsor, Ontario, I can not.

  • With real estate, I can learn the local market and exploit inefficiencies, buying property that no one else is interested in (and getting an appropriately good deal).  With the amount of information available to stock buyers, the market efficiently prices them, making it hard for me to get a good deal.  I will always have to bid against other people interested in buying.

My stocks do not require maintenance that involves getting my hands dirty or paying someone else to dirty theirs.

  • I can get my hands dirty, and increase the value of what I own by investing my labour in it.

Stocks are liquid. It would take me about 10 minutes to sell every stock that I own in an emergency. It could take years to sell real estate in a poor market.

  • Real estate is illiquid.  Because I’m not getting it appraised every 10 seconds of the day, I won’t get panicked when real estate prices go down.  I won’t even know about it unless I try to sell.  I can easily sit back and be a long term investor without distractions.

I don’t have to decide by what percentage to increase the rent, the companies that I own decide that for me.

  • I get to decide by what percentage to increase the rent, instead of companies deciding that for me.

Again, to reiterate, I’m a dividend investor (I don’t want the Dividend Addicts coming after me with pitchforks).  I like stable blue chips that regularly pay an increasing dividend.  I just don’t think that there’s an investment that’s absolutely better than others (or else everyone would just buy the better one).

And as a little bonus (so there’s no hard feelings from the Gardener), I’ll switch sides and gives three more points in favour of dividend investing:

  • When I invest in stocks my transaction costs are tiny (a fraction of a percent for a large buy).  With real estate, about 7% is paid in fees (legal + agents) every time it changes hands.  These expenses scale with the size of the purchase, whereas they are proportionately lower for stock transactions.
  • With real estate you have to check on your investments periodically, even for the best run properties with property management in place.  With stock, I can go and sail around the world, content that they’ll operate as well with me absent as they would if I was checking them every day.
  • Discount stock brokers rarely cheat clients, property management companies are notorious for underhanded behaviour.

What are your reasons for investing in real estate or dividend paying stock?

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{ 19 comments… read them below or add one }

1 Four Pillars

Excellent post.

There are definitely some pros and cons for both sides.

2 moneygardener

Well put, and thanks for the mention.

Google is apparently working on my site.. :(. The problem occured as I was switching over (losing the ‘blogspot’ handle and going dot com). I hope that the problem will be fixed very soon.

3 Nurseb911

I like having a share in the business and being compensated for the capital I provide. It’s something long term and when I do buy a house it’ll be a big part of my network anyways so I see stocks as an effect diversification tool.

4 Tom K

Interesting! I am just starting to learn a little bit about dividend investing and am finding that both of the criteria for choosing either a dividend paying stock or an income producing rental property are the same for the most part. I have been buying property for a while now and figure that I should start looking into stocks to diversify a bit. Here are some of the common things I found when choosing either:

Buy with a long term hold in mind
If you can buy at a discount (like the current market conditions)
Choose the market or sector carefully (obviously buying into growing markets)
The balance sheet needs to balance
The returns really show themselves after holding after three years
Youre buying a business

I am sure there are more. However some things still stick out and mostly it comes down to control and who has it. With rentals, I am in control of everything:

Choosing the type of financing and which bank
Choosing to manage myself or to hire it out to someone qualified
When and type of repairs or upgrades to do and who is going to do them
Who to rent the units to
Do I partner with someone or not
And not to mention land is not being made anymore (Only two places that I am aware of: Dubai you cant own the land there anyways because its leased to you and Hawaii but who wants to live on freshly created lava?).

So for the most part with rentals you have the choice on how much managing to take care of and with dividends the management is already in place. Now that I think of it it all comes down to voting and non-voting shares (again control and choice).

5 MoneyGrubbingLawyer

Great post, Mr. Cheap. My preference is for dividends over tenants simply because I have seen (and been involved in) way too many worst case landlord scenarios. The potential returns just don’t justify the downsides for me.

While an investment can disappear entirely, that is extremely rare without some warning signs, and equity in real estate can disappear just as quickly if the local real estate market collapses. And while you’ve got options to deal with tenants who don’t pay, as someone who has evicted a fair number of deadbeat renters I can assure you it’s difficult and expensive.

And telling people you have dividend income is certainly waaaay cooler than rent. It makes you sound like a real fancy-pants business man, not just a slum lord ;).

6 Al

Another upside to dividend investing over rental properties is that it takes a relatively small amount of money without going into debt. I can buy a stock for $3k which is fairly easy to save, but saving hundreds of thousands of dollars to buy a property is muuuuch harder.

7 Dividends Anonymous

Hey – thanks for the mention Cheap!

Dividend Addicts are a community of all dividend investors so we frown upon using pitch forks :).

I have confidence that you’ll see the dark side someday and you’ll become an addict as well 🙂

8 Sampson

I’m fairly new to both, but I’m also a proponent of both.

If as much work goes into screening potential tenants as with dividend stock picks, then many troubles can be avoided.

For me, the biggest advantage of real estate is stability, although it will theoretical post lower returns than the stock market, there’s something comforting in holding a tangible asset.

Re: cool factor, and accessibility (i.e. lower funds needed to be a dividend investor). – I think its pretty cool to tell someone that I own several high quality properties. I’d never buy an apartment building (those are the real slum lords), call me elitist, but I think its prestigious to hold a new condo in the hot part of town.

9 Jerry Hung

This is a fun read as well on Canadian Business forum (someone mentioned his/her dividends can cover the rent entirely)

“Rent, Buy Stocks and Don’t Own Your Own House”
http://forums.canadianbusiness.com/thread.jspa?threadID=15750&tstart=0

10 Canadian Capitalist

Fun discussion but I think this a bit like arguing about tastes? You say tom-ay-to, I say tom-ah-to… and both of us are right!

That said, I’m partial to stocks because I can barely take care of my own house and that’s a good enough reason *for me*. 🙂

11 Jerry

We did real estate because we wanted a roof over our heads. When we moved overseas we considered selling, but the market was in the toilet and we are renting it out instead. We have good people watching the house for us, so that helps. However, it is not a liquid asset, definitely, especially in this market. We have no insurance that we could sell this house anytime soon, so in this case stocks might have been a better bet… except that they would have taken a huge hit, as well. There are good reasons for both, and challenges with both!
Jerry

12 Thicken My Wallet

It comes down to choice. Some people love fixing stuff- even at 4 in the morning!

Me- I can’t hammer in a nail without a set of instructions so I am on the dividend side.

13 Shank

Here’s a link to some research performed on this very topic (real estate vs. REITs)…the answer may surprise you….and make you think twice.

http://strikershank.blogspot.com/2007/07/alternative-investments.html

14 Dividend Growth Investor

I prefer dividends over rentals. Of course when it comes to purchasing your own home I would always prefer that as it gives you more stability and a roof under your head.

Your entire real estate could dissapear even if it is insured – just ask people from New Orleans about their 2005 experience with Hurricanes.

15 telly

Like Cheap, my husband and I invest in both real estate (rental properties) and dividend stocks. Not surprisingly, both have had their days in the sun (and those days are not today!). The 1st 3-4 years of rental property ownership for us was a serious hayday, and no dividend stock or income fund could have rivaled it.

The 1st property was purchased with only $7,000 down (+ ~$2k fees). The 2nd property was purchased with only $12k + ~$2k in fees. Each property produced a *net cash flow* of $1k / mth ($24k / yr).

$24,000 / $23,000 = 104% / yr “RENT”

If we had purchased BMO shares (assuming today’s price ~$43) with that $23,000, we would have received ~$1500 in dividends the 1st year.

$1500 / $23,000 = 6.5% “DIVIDEND”

While there is a bigger PITA factor in owning rental property, it some cases, it can be made up in the way of profits. Just like buying stocks, you must do your due diligence before purchasing. Both real estate & financial markets are always changing too so again with both, your work does not stop after purchase.

16 hazzard

I’d be very interested to revisit this post today and see if anyone’s thoughts have changed considering the troubles both the stock market and real estate market have seen over the past year.

17 Mr. Cheap

Hazzard: I still pretty much on the same page as when I wrote this. I’ll post a comment on Moneygardener’s blog and see if his opinion has changed…

18 hazzard

Thanks. Do you take capital gains into account in this discussion? I’m thinking real estate gains going forward have to be considerably less than dividend stock potential. Particularly in a market like Calgary. I can’t see real estate doubling or tripling again here but equities could still conceivably do that. Would you concur?

19 Mr. Cheap

hazzard: I’d say that capital gains have already been priced into the markets. There’s no free lunch, if one approach was undeniably better than the other, everyone would invest in the superior market. Markets naturally balance to prevent this from happening.

I wouldn’t even make a guess at what either market is going to do. Real estate seldom doubles or triples in value (over the short term), but then it seldom drops to worthless either (such as Nortel or Washington Mutual).

I *would* say that Calgary real estate has been on a run in recent years, which makes it less likely to out-perform from a “reversion to mean” perspective. Someone smarter than I would have said the same thing about stocks in 2007 (and whether the correction is over or not is anyone’s guess).

One of the benefits of a diversified passive portfolio with a set asset allocation and periodic rebalancing is that you don’t have to predict the future…

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