A Definition of Investing
On a high-level, investing is simply buying income.
The less you pay for the investment income, the higher your return.
The more you pay for the investment income, the lower your return.
To illustrate this with a crazy example consider these two investment opportunities. Both investment opportunities were available when this article was written.
Asset Number One: APPLE stock
Let’s assume you have $50,000 to invest and you acquire 80 shares of Apple stock. This new asset would provide around $1,050 a year in dividend income. As of the time of this writing, Apple traded for $624 and paid $13.16 per share in annual dividends. This is a 2.10% dividend yield.
Asset Number Two: Single Family Home
Let’s assume you have $50,000 to invest and you acquire this single family home. The asking price for the home is $43,000. Let’s assume you negotiate this price down to $40,000 and put another $10,000 into sprucing up the home. Your total investment would be $50,000.
Once spruced up, you rent the home to a nice family for $850 per month. After subtracting taxes and insurance of $250 each month, you’re net income is $600 per month. On an annual basis, this monthly income would provide $7,200 to your family assuming the home was occupied by a paying tenant for the entire year.
Which asset would you acquire if you had $50,000 to invest?
If kept, both assets would provide income to your family for life. One would be completely passive. You would simply get dividend checks each year and not have to lift a finger. Your $50,000 investment in this asset would return $1,050 or 2.10% each year.
The other asset would require work on your part to manage the rental property. In most months, this work would be simply depositing your rent check. In other months, you may have a repair or two to handle. Once in a while, you would have a vacant home to spruce up and re-rent. Your $50,000 investment in this asset would return $7,500 or 14.4% each year.
Before making your decision, consider this…
To generate the same level of annual income from APPLE stock as you would receive from the single family home, you would need to invest $357,142 and acquire 572 shares. 572 shares of Apple stock would provide $7,527 of annual income with a $13.16 dividend per share.
Sure, the income from APPLE would be completely passive, which is incredibly attractive.
Are you willing to pay $307,142 more to have a completely passive investment? Or would it be worth it to save $307,142 by managing one single-family home?
Investing is buying income. How much are you willing to pay for the amount of income you need on an annual basis?
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