Is it better to invest in a rental property or a stock index?

Imagine that you, as an individual, have EUR 200 000 available and want to invest it comfortably. Conveniently means to deposit, not worry and earn. In principle, you have two options. Buy a property, rent it out and enjoy the increase in its market value (and possibly sell it in the future) or invest passively in financial instruments. Which asset is more profitable?

Since my business is not capital intensive and I don’t exactly need to invest in new machinery, after I paid off my mortgage I also faced this dilemma. As a lay consumer of passive investment options, I gave it some thought, enriched my thinking with some tax considerations and made a decision.

If you bought an apartment in Bratislava at the end of March 2018 for €200,000, rented it out for 12 months and sold it after a year, you would have made. If we assume that the rent after deducting costs (e.g. utilities, management, etc.) is EUR 500, you would earn EUR 14 000 (profit from renting and selling). Of course, this also needs to be taxed and “accounted for”. You tax the rent (without trade) and the sale of the flat at 19%-25%. When you sell the flat, you still pay health levies at 14%. You could have a net profit of around EUR 10 000. Yes, you don’t have to sell the flat. You can wait 5 years to have the profit from the sale exempt from taxes and levies.

What financial instrument does it compare to? It has always been presented to me that an actively managed mutual fund is the right solution for building a brighter tomorrow. However, not only with the classic product headache called investment life insurance, which has been offered indiscriminately by financial intermediaries here for several years, you are far from achieving the promised geometric growths. Even with standard mutual funds (100% equities), it seemed to me that such an index as the S&P 500 was somehow growing faster than the value of my portfolio.

Whether active management (fund managers systematically analyzing the companies and sectors in which they invest) produces statistically higher returns than an ETF fund (a set of, for example, stocks that replicate an index (e.g., the S&P 500)) should be the subject of analysis. In any case, active management should absolutely beat the index, as active management fees are multiples higher. Moreover, mutual fund income is taxable. So the challenge for mutual fund managers is not only to beat the index on the fee differential, but in many cases on the tax liability as well. Thus, the performance of manager-managed portfolios must outperform by at least 19% and by about 25% after including estimated fees. Anyone can easily Google whether this is indeed the case for each fund offered.

If you put that €200,000 into an ETF fund with a 1% annual management fee and with stock titles replicating the Dow Jones index, you would have earned €15,900 over the same period, even after deducting the fee. In addition, the sale of such shares is exempt from income tax and levies.

If you compare other years, assuming the same variables and assuming the stock index in question does not generate dividend income, in March 2019 you would have these earnings:

In every year observed, you would have earned more on the stock index even after deducting the 1% management fee. In addition, the table in question does not include the tax and levy burden, which only applies to investing in property. It also does not take into account the time you spend “owning and renting” the property (e.g.: remodeling, tenant, paying bills, etc.) as well as the likely downtime between tenants. All of this makes investing in property even less attractive.

There is an argument that the stock market is volatile, can fall significantly and an investor can lose most of their investment. Of course, this is possible. But even if such a situation arises, the property market will not remain untouched. In other words, if the financial world falls, the whole world falls. And if the whole world falls, so will the property market. However, one cyclical, non-apocalyptic experience has taught us that the real estate market is less volatile even to the downside and reacts differently than the stock market. The Dow Jones index’s low in March 2009 was about 50-55% of its pre-crisis high. For real estate in Bratislava it was up to about 80%.

Today’s time brings not only in business a lot of possibilities what to devote your working and leisure time to. On the other hand, this abundance of options can trap a person in a trap in which he can get stuck. Not only can we get stuck with a multitude of responsibilities that are increasing faster than those that have been successfully completed, but also with a multitude of projects, functions, foreign languages that we cannot successfully complete, perform and learn. And that’s also why (not only because of excel) minimalism won for me. I put my money in a stock index and don’t solve anything. Even though I use a pretty decent human outsourcer, I personally don’t want to deal with furnishing the apartment, the reasons why the tenant couldn’t pay last month’s rent, or whether it’s better to fix the washing machine or buy a new one. That takes time and focus. I apply this approach in our consultancy. We primarily focus on narrowly dynamic and young companies in connection with the legal, tax and accounting set-up of their business, including cross-border expansions. We therefore do not focus on family, criminal or employment law. I don’t want to budget the cost of utilities, I’d rather read the latest court decision and be a better tax lawyer. Unless you’re a genius, you can’t learn 4 languages fantastically. You’ll fall into the trap of not even knowing English properly.