by Shai Angel
Which passive income source rent income or dividend income is preferable?
It most likely depends on who you ask. It is advisable to stay in the real estate market, according to real estate professionals and investors. Investors in the stock market, private equity, and money managers will advise you to invest in companies in order to benefit from capital gains and dividend income. There is another way to enjoy the best of both worlds, so don’t worry. Let’s examine the benefits and drawbacks of each passive income and then we will present how you can enjoy from both types of passive income.
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Rent Income: 5 Benefits and 5 Drawbacks
5 Benefits
- Steady Income
Assuming the property is regularly occupied, rental income generates a stable and reliable cash flow.
- Appreciation Potential
Real estate can improve in value over time, which could result in higher rental income as well as an increase in property value.
- Tax Benefits
Tax benefits for property owners may include deductions for mortgage interest, property taxes, and other costs associated with property management.
- Diversification
Adding real estate to an investing portfolio can help diversify it and lower overall risk.
- Leverage
Borrowing money can be used to buy real estate, giving investors the opportunity to leverage their capital and possibly increase returns.
5 Drawbacks
- Vacancy risks
There may be times when rental properties are vacant, which could result in a loss of rental revenue and possible financial hardship.
- Maintenance Costs
The upkeep and repair of a property is the responsibility of the owner, and these expenses might be unforeseen and occasionally significant.
- Interest rate risks
Interest rate changes have an effect on mortgage rates, which can have an effect on how profitable real estate projects are, particularly if they are financed.
- Liquidity
Compared to other investment types, real estate is typically less liquid, which makes it more difficult to immediately convert to cash when needed.
- Management challenges
Tenant problems, upkeep of the property, and other management difficulties can all be part of property management, which can be time-consuming.
Dividend Income: 5 Benefits and 5 Drawbacks.
5 Benefits
- Stable income stream
Income-oriented investors find well-established companies appealing because they can offer a steady and predictable income source as dividend.
- Potential for income growth
Some businesses gradually raise their dividend payouts, giving investors the chance to grow their income and stay up with inflation.
- Ownership stake
Having dividend-paying shares entitles you to ownership in the business as well as the ability to vote at shareholder meetings.
- Long term wealth accumulation
One can eventually compound their wealth by using dividend reinvestment plans to reinvest dividends.
- Historical stability
During market downturns, dividend-paying stocks—especially those from well-established corporations with a track record of timely payments—have frequently shown resiliency.
5 Drawbacks
- Market price sensitivity
Changes in interest rates, the state of the economy, and market sentiment can affect the market price of a dividend-paying stock and, ultimately, the total return.
- Dividend cuts
Businesses may reduce or stop paying dividends, particularly during economic uncertainty or hardship. For investors, this may mean an abrupt drop in income.
- Dependency on company performance
The ability of the business to make profits and give them to shareholders determines dividend income. Dividends may be lowered or withdrawn as a result of poor corporate performance.
- Market Volatility
Even though dividend-paying companies are frequently thought to be less volatile than non-dividend-paying equities, market volatility can nevertheless have an impact on them and potentially affect portfolio values.
- Opportunity costs
Purchasing dividend-paying stocks could mean forgoing the possible gains from growth companies, which usually reinvest profits into the business rather than distributing them as dividends.
So what if an investor would like to have a combination of both sources of income? Is it possible? Well, it is through investing in REITs – Real Estate investment funds. REIT is a business that owns, manages, or funds income-producing real estate in various property sectors. The purpose of REITs is to give investors an alternative to directly owning and managing properties when making real estate investments. They were developed to democratize real estate investing and open it up to more types of investors. The main source of revenue for Real Estate Investment Trusts (REITs) is the rent tenants pay for the properties they own. By law, they must pay dividends to shareholders representing a sizeable amount of their income—typically at least 90%.
You can choose any path of passive income between rent and dividend income. I recommend that you choose the one that you are most familiar with and understand its financials. Nonetheless, you can own both sources of assets and enjoy both kinds of passive income, or you can invest in an asset that combines the two, a REIT.
Shai Angel, CPA, the author, earned a master’s degree in law, a bachelor’s degree in accounting and economics, and a certificate in director training. He has previously held senior financial positions in well-known businesses. In his years of working in the financial industry, he has participated in the capital market and actively learned about “Value Investing” from some of the most prominent investors in the world, including Warren Buffett, Peter Linz, Monish Fabray, and others. He has also applied their investment strategies.
