Oftentimes when people think of investments, they immediately think of stocks, bonds, or other similar financial securities. In actuality, though there are countless other types of investments that could be made (buying a rental, farmland, a business, etc.).
When reviewing these other investment options, I find it helpful to review four different considerations - the impact on taxes, cash flow, net assets, and comparing that investment to investing in the stock market.
Rentals are a common investment people make that doesn’t fit the traditional financial securities mold. There are several moving pieces to consider when reviewing rental properties. Below is a snapshot of the sheet I use when looking at rentals.
Taxes primarily matter because they impact cash flow and the overall benefit of an investment. For example, your Roth increasing $10,000 is "worth more" than your rental property increasing $10,000 because the Roth growth will likely be tax-free while the rental property growth will likely not be tax-free when sold.
Cash flow is an important consideration as even if something is an amazing investment you may not have the cash flow required to make the investment. Also, it can help show what the exposure is. For example, do you have enough outside cash flow to keep the property afloat if it was not rented for several months?
The third consideration is net assets. Typically when people make a financial investment this is what they are concerned with. How does making this investment actually impact my net assets? Growing net assets should not be our ultimate life goal but oftentimes growing net assets can help us reach goals.
The final consideration is what if I did something else with the money. This is essentially calculating opportunity cost. Even if your rental increases net assets by $100K if you could have increased net assets by $300K doing something else, it probably was not a good investment.
It can be difficult to analyze investment opportunities outside of the stock market but with diligent analysis, it is possible to make an informed decision.
If you would like an editable copy of the spreadsheet I took a snapshot of above, please send me an email to let me know.
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Thank you for reading!
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