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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