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