Dividend Income VS Rental Income – Which Passive Income is Better?

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what is up YouTube family my name is
Mike the CPA and welcome back to money and life TV the channel people come to to
learn about finances investing taxes and more! If someone was to ask you what type
of income was better dividend income or rental income what would you tell them
how would you respond I can tell you one thing I would want in this video we're
gonna explore that question in great detail and by the end of it you may find
that you actually desire both we're about to dive into the video but I have
a quick favor to ask if you enjoy today's video let me know by dropping a
like leave a comment below and if you're brand new to the channel please consider
subscribing so you do not miss any of our future uploads what we're talking
about dividend income versus rental income we're actually talking about two
different types of asset classes how ok let's see how do I explain this are you
trying to say it's like trying to compare bananas and oranges
thanks schipper that's actually a really good analogy don't you mean apples and
oranges no apples I like bananas and oranges okay fine chipper bananas and
oranges it is it's a good analogy because comparing dividend income versus
rental income it's not a banana – banana comparison it's very much a banana –
orange comparison these are two very different asset classes with very
different attributes dividend income is primarily generated through owning paper
assets versus rental income that is generated through owning real assets
instead of thinking which one is better I would encourage you to really think
about which one is more suitable for the lifestyle you're trying to build I think
as we progress through this video that answer is gonna become clearer and
clearer as time progresses let's start off by talking about a subject people
love which is passive income both forms of income are very passive meaning you
receive money that you no longer have to trade your time for but one is more
passive than the other if you were to ask me if you want to know my opinion in
terms of which form of income is more passive dividend income really takes the
cake here in my opinion with dividends you simply invest in the company stock
or ETF or mutual fund or whatever and wait for the money to be deposited into
your bank account with ritalin come or real estate or income from real estate
you will eventually have a check hitting your bank account but there's a little
bit more to manage being a landlord is not always fun you may get a call in the
middle of the night saying that the toilet is clogged you may have to evict
someone who is damaging or not taking care of your property a lot of times
these are your own family members or friends it really sucks worse yet you
may have to deal with a renter who doesn't want to pay you and always seems
to have an excuse as to why they are late on their rent for some reason they
can't pay you because they're too busy flossing their cat's teeth or whatever
it is the hell they do now of course you can get a property manager involved to
help you manage the property but really if you want to maximize your profits
it's crucial that you're able to keep an eye on the property itself every once in
a while because no one is gonna care as much about your profits as you not even
the property manager just like anything else there are good and bad property
managers so unless you're monitoring the situation a little bit yourself you're
not gonna find out which one of the two you have so real estate can be awesome
rental income is great but a little more legwork is involved now let's compare
the two dividend income versus rental income when it comes to yields where can
you get the best yields for your money if you're looking for a higher yield on
your money this is where I think rental income begins to shine with rentals
depending on the type of property and the deal you get you may find yourself
with an average yield of anywhere from 5 even up to 10% or more on your money
dividend yields the yields aren't quite as attractive because the average
dividend yield is roughly running 2 to 3 percent on average so it's not a lot now
if you venture off into real estate investment trusts which are as a way you
can invest in the stock market into real estate by purchasing things known as
REITs a real estate investment trust you can get higher yields such as 4 or 5 6 7
% but generally speaking dividend yields are often lower than if you were to own
the physical real estate outright and renting it out to somebody in rural
landlord of course there are a few other ways to get higher dividend yields in
the stock market which was publicly traded partnerships and corporate
this is a question I often find people have this all right like if I if I
choose to go the dividend income investing route or the rental income or
real estate investing route which one is gonna make me the richest the fastest or
how or which asset class is going to allow me to to retire the soonest that's
what I really want to know although both asset classes can lead you to the same
goal real estate has been the more consistent victor in allowing people to
retire sooner and building wealth from what I have observed with the exception
being if you found the next Amazon stock of course if you were lucky enough to
invest in the Microsoft when it began or Amazon you could have made a killing
really quickly so there are some exceptions in terms of which one can
make you richer faster but I think in the long run just from what I've
observed definitely real estate is the way to go
you may have seen the shows where people quickly buy fix up and flip the
properties for huge gains you've probably heard of the stories of people
who buy and hold real estate and rent it out for a monthly cash flow and keep
repeating this process until their passive income exceeds their expenses so
those are just some of the ways to accumulate wealth with real estate like
I said there's many different avenues but those are just some of the ones I
want to mention now let's talk about dividend income now dividend income in
my opinion it is easier to build a passive income through dividends but it
takes longer and it takes a lot more capital money to invest so it's a slower
way to get rich so oftentimes if I post a video and dividend investing there's a
lot of people saying hey I'm gonna retire in the next five years well it's
like if you're starting from zero that's probably not going to happen
dividend income is a slow way to get rich it's very passive it's a great way
to make money and build a nice retirement income for you but it's not
gonna happen overnight it could take 20 30 40 years depending on upon how much
money you can invest each month or each quarters now if you say Mike well I
still really want to invest in the stock market I'm really not too keen on real
estate so is there is there any way to get you know richer faster in the stock
market besides dividends and I would say yes if you if you really want to be
efficient in terms of really swinging for the fences then instead of just
focusing on dividend income I would actually focus on growth based
and and that's gonna allow you to get higher
returns on your money now of course that's not guaranteed and so growth you
know you can grow your money you know 10 15 20 percent per year with the right
investment using a growth strategy but it's not guaranteed
so there's definitely pros and cons with investing for growth that many investors
like yourself might not feel comfortable with so it's it's finding the right
balance of what works for you and what you can stick with in the long run and
be successful with if you were to ask me at least with dividends you are getting
a portion of your investment back each year plus you still have a chance to
receive capital appreciation on top of that for example we're in what I'm
filming this this is August of 2019 some of my most successful investments this
year in 2019 have been dividend paying blue chip stocks even though some
because the market's been a little tipsy Turbie this year with all the trade wars
going on these interest rate fluctuations with the Fed getting
involved but there's like Procter & Gamble it's one of my best stocks this
year and I'm up over 20% this year alone whereas many of my tech stocks are tech
based ETFs that would be more growth focused aren't achieving or aren't
performing as well now let's take a moment to talk about taxes how is
dividend income tax how is real estate income taxed let's cover this real quick
so you guys get a good feel for what your tax situations can be from this
kind of income starting with dividend income it can be taxed at either the
marginal tax rates or capital gain rates depending on if it's a ordinary dividend
or qualified dividend I have separate videos on this I can link them below if
you'd like to check them out for most Americans their marginal tax
rate falls between ten up to twenty four percent that's where I find most
Americans fall in terms of the income scale whether they're single or whether
they do married filing joint so what this means from a tax perspective when
it comes to dividend income depending on their marginal tax rate for every dollar
of dividend income they earn they're either gonna pay ten cents up to twenty
four cents of every dollar good news is if those dividends are qualified
dividends then they get the SPECIAL capital gain
rate treatment which is a lower tax rate and for most Americans their capital
gain rates are only 0 to 15% so in other words they pay only out of every dollar
that only pays zero up to 15 cents per dollar on every tight R and every dollar
of dividend income earned real quickly how is rental income taxed I think
you're gonna find it's pretty straightforward you may have heard that
rental income has numerous tax advantages and it absolutely does but
I'm not gonna go into a sense of detail here we can save that for a whole nother
video that's a whole another course ok but your your rental income you're not
taxed on your gross rental income your tax on your net rental income which
means it's your the rent income minus all of your expenses so whatever that is
so if you let's say you make ten thousand dollars in rent you have six
thousand dollars in expenses which means your net profit or your net rental
income is four thousand well then you would pay taxes on four thousand dollars
of rental income at whatever your marginal tax rate is rental income does
not have any special capital gain rate treatment it's just taxed just like
ordinary income ordinary income you pay on the net rent you receive like which
is easier to keep track of taxes I want to know because the IRS Eagle in terms
of which one is easier to track for tax purposes hands down no questions asked
dividend income is by far the easiest to track for taxes and the reason it is is
because the brokerage company you're with whether it's Robin Hood
whether it's Ameritrade M one finance whatever maybe they're gonna send you a
statement in February of each year that totals all of your capital gain income
your dividend income etc all on one tax statement and that's you rental income a
lot different you actually have to keep track of all of your expenses associated
with the property you might have management fees depreciation you're
gonna have maybe repair supplies utilities there's all these different
expenses that can go into it that you want to keep track of having a property
manager helps because they can summarize a lot of those the income and expenses
on one but it doesn't mean it's going to
encompass everything you need so there's a lot more record-keeping involved with
rental real estate because it's more like running a business whereas with a
stock or with dividend income it's more like buying into a business and you're
just collecting the check real quickly let's talk about the risk associated
with dividend income and some of the risk associated with rental income with
dividend income there is always the potential that a company starts
underperforming or begins struggling financially
when this occurs what usually follows is a temporary reduction in dividend
payments or possibly cutting the dividends all together now Moore's most
recently I think we saw this with General Electric a lot of people held on
to that company stock for a long time just for the dividend but fundamentally
the company started to underperform and financially just started going south so
now we have General Electric stock which has plunged in value over the last few
years and virtually pays little to no dividend at this point so there's always
the business risk that the business may start failing financially and may need
to either temporarily reduce the dividend or completely cut it altogether
that's the risk I think with dividend income that's one of the risks and
rental income has its own risk as well I mean it's no cakewalk there's always the
risk that a tenant the your renter could leave and you might have trouble filling
the vacancy also there's the risk that that tenant could damage your property
when they leave I actually knew I actually knew a person whose property
whose rental property wasn't in the best area had very kind of shady renters not
the best renters unfortunately well one of the tenants when they had to go and
evict them they actually burnt down the entire house so real estate is
definitely not without risks so beyond you know just losing your tenant for the
chances of potential damages there's other expenses that might creep up as
well that might increase over time such as your insurance cost to insure your
home of course also property taxes can
increase over time which cuts into your net profits on your rental all right now
let's talk about which investment dividend income or rental income gives
you more control with dividend income unless you
a major shareholder of that company that owns more than a 50% stake you're
basically at the mercy of the company so you have no you virtually have no say
and how that company conducts its business with rental income there's a
lot more control in terms of what you can do to maximize your profitability
you can raise rents you can be more creative with improvements you make to
the property to extract higher rents you can manage your expenses or find ways
creative ways to reduce expenses to to you know to continually increase your
profits you can decide whether you want a property manager or don't want a
property manager there's a lot more control of what you have there you can
also do a 1031 exchange into a different property to avoid paying tax in the sell
so like I said with rentals a lot more legwork but also a lot more control in
my opinion all right guys real quickly just rapid fire mode now rapid fire time
I want to cover a couple of their factors with you guys regarding dividend
income and rental income I think these are just some other key takeaways or
things to know before making your decision of which one to invest in or
both the first one I mentioned is both dividend income and rental income can
increase over time dividends can continually increase their payouts and
you can continually increase rents and in many areas of the country both both
of the underlying assets have a chance to increase in value that's important
understand just because you have a dividend meal doesn't mean the stock
itself isn't rising the value could it could certainly appreciate and just like
with rentals just because you're receiving rental income doesn't mean the
value of your property isn't increasing at the same time so it just depends on
what the markets doing now is one safer than the other I think it really depends
on the sophistication level of the investor and how they manage the
investment I think both investments can be safe depending on how well you
understand them so as long as you know what the risks are and how to manage
those risks or mitigate the risk I think you'll be fine
it really comes the more experience you have with those kinds of investments I
think the better off you're gonna be one thing I forgot to mention was leverage
one nice thing about rental income or real estate is you can borrow from the
property to help you purchase other prease not something you can do with
dividend income of course with Vivid income and rental income both have tax
advantages on the dividend income side we have qualified dividends which are
tax at the lower capital gain rates which we discussed earlier in the video
and with real estate it has numerous actually real estate as one of the best
assets to own and one of the best in the world in terms of tax deductions bottom
line is real estate has crazy amounts of tax deductions available for the for a
real estate investor but it would just there's it's too broad of a category to
go in the detail here if you guys would like me to produce a video in the future
on tax deductions for real estate please let me know down in the comments below
I'd be happy to produce a video on that alright guys I have two awesome articles
for you to check out and I actually won some of the article I checked out before
making this video I'm gonna leave links below ones from seeking alpha and once
from in Zacks finance I think both articles are good I think you're gonna
get a lot out of them and they both explore the difference is that the pros
and cons of investing and dividend income versus investing and rental
income or investing in a real estate so check them out if you have time I'll
leave the links to those below alright ladies and gentlemen that is all the
information I have for you today I hope you got a lot out of this if you did let
me know by dropping a like and if this is your first time here I just want to
say welcome here on money and live TV our goal and mission is to help you
become fiscally fit and we do that by teaching finances investing taxes and
more on a regular basis alright everybody until then is always an honor
I am so honored that you guys spend time with me here on YouTube it means the
world to me I love interacting with you each and
every week so I'll see you in the comments take care everybody
have a great week live life on caged pace


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