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Your Brother-in-Law Says the S&P Beat Your Rental. Did He Count Everything?
•Martin Maxwell•Season 1•Episode 177
Since August 2021 the S&P 500 is up about 70%. The typical American home is up about 19%. At the dinner table, that settles it: you should have bought the index.
It's the wrong comparison. A rental earns four ways, and a price chart shows one of them — without the loan that bought the house. Count all four on a typical 2021 rental and the index still comes out ahead, but by a fraction of what the price chart suggests. Then run the same math by city, and the gap between two metros dwarfs the gap between stocks and houses.
In this episode of the 5-Minute PRIME Podcast, host Martin Maxwell counts everything the price comparison leaves out — cash flow, principal paydown, appreciation on leverage and tax — and shows where the index still wins.
Tune in to learn:
The four-part count — cash flow, principal paydown, appreciation on leverage and tax, run on a typical house bought in August 2021 with 25% down: the total return on the cash actually put in.
Where the index still wins — about 11 points after a sale at the homebuyer rate, closer to 20 at an investor rate, more with dividends. Not 51.
Why leverage cuts both ways — the same purchase more than doubled the owner's cash in Hartford and lost 82% of it in Austin.
The comparison that matters now — what your equity earns where it sits at today's rates, its return on equity, not what 2021 would have done.
Have you ever counted all four parts of what your rental earned? And if you had to argue about something at dinner, would it be stocks versus houses, or the city you bought in?
The goal was never to beat an index. It was to reach the number that funds your life. The Magic Number comes from Chapter 2 of Real Estate Investing Simplified (rei.pm/books).
Subscribe now to count the return your rental actually made.
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Welcome to the 5-Minute Prime Podcast. Quick actionable tips to master personal finance and real estate investing. In just five minutes a day, we'll help you build wealth and achieve financial freedom. Hey Prime Investors, Martin Maxwell here. Welcome back to the 5-Minute Prime Podcast.
Picture this. It's a holiday dinner, and your brother-in-law has been waiting all year for this moment. He leans over and says it. Since 2021, the SP 500 is up about 70%. Your rental? The typical house is up 19. You should have just bought the index. And the annoying part is, both of those numbers are real. The SP 500 went from about 4523 at the end of August 2021 to about 76.86 five years later. Roughly 70%. And the typical American home went from about $309,000 to about $369,000. So he's right about the numbers. He's just comparing the wrong ones. He took one part of what a rental does, without the loan that bought it, and held it up against the whole index. A rental makes money four ways. Today we count all four, and you'll see where he wins, where he doesn't, and why the answer depends less on stocks versus houses than on where you bought.
Let's use the typical house. Bought in August 2021 for about $309,000. 25% down, a 30-year fixed at 2.84%, the average home buyer rate that month, and 3% in closing costs. An investor loan cost a little more. Hold that thought, because it only helps his side. Cash out of your pocket, about $86,600. Part one is cash flow. Use the 50% rule. Half the rent going to taxes, insurance, repairs, vacancy and management, and the typical rent for each of those 60 months. After the mortgage payment, that house roughly broke even. Minus about $3,000 over five years. Call it a wash. But a wash is doing more work than it sounds like. For five years, somebody else paid almost all of your mortgage. The index never paid anybody's mortgage. That's why the next two parts exist at all. Part two is principal paydown. Every payment, your tenant bought down a slice of the loan. Over five years, about $26,000. That's real money, and it never shows up on the price chart your brother-in-law is looking at. Part three is appreciation. And here's the part he's missing. The house went up 19%, sure. About $59,000. But you didn't put $309,000 in. You put $86,600 in. That's leverage. Add it up and take back the closing costs you'll never see again. About $73,000 of gain on $86,600. 85%. On paper, the rental beat the index. And notice what inflation did along the way. Prices across the whole economy rose about 22% over those five years. So the house's price actually fell behind inflation. Your equity didn't, because the loan was fixed. You pay it back in fixed dollars, and those dollars are worth less every year. That's leverage working for you without you lifting a finger.
But on paper isn't fair either. If you actually sold, you'd pay roughly 6% to get out. Take that off, and you're at about 51,000, 59%, just under 10% a year. The same 86,600 in the index? About 60,600. 70%, about 11 a year. And that's before his dividends, which only make his side bigger. So nationally, after a sale, your brother-in-law still wins. By about 11 points before his dividends. And I gave the rental every break to get there. Use a typical investor rate, half a point or more above that home buyer rate, and his lead grows to closer to 20 points. Add his dividends, and it's bigger still. That's the honest answer. Counted properly, the typical rental came in behind the index, just nowhere near the 51 points he started with. And let me give him one more point, because it's a fair one. The index never called him at 2 in the morning about a water heater. Your rental did, or your property manager did, and you paid for it either way. If the gap is 20 points or so, ask yourself what your time was worth over those five years. The goal was never to beat an index, it was to reach the number that funds your life. In the book, I call that your magic number. What you spend in a year times 25. Part 4 is tax, and I'm not going to pretend it fits in five minutes. Depreciation can shelter rental income while you hold. Then the sale brings recapture and capital gains, and how much depends on your situation. So that's a conversation for your CPA. His index has its own tax bill too. We walked through the recapture side on the site this week. For most owners, it moves the number more than it changes the shape.
Now here's where the comparison stops being about stocks versus real estate. Run the exact same math in Hartford, Connecticut. Same purchase month, same 25% down. Prices up 42%. After a sale, your cash more than doubled. Up 141%, roughly 19% a year. The index never came close. Now run it in Austin. Prices down 15% over the same five years. After expenses, the rent didn't cover the mortgage, so you fed that house every month, about $40,000 over five years. Sell today, and you'd be down 82% of the cash you put in. Same index, same 70% sitting on the other side. Leverage cuts both ways. That's the part a price chart hides. So the spread between Hartford and Austin is more than 200 points. The spread between the typical rental and the index was around 20, maybe more with his dividends. If you're going to argue about something at dinner, argue about the metro. I've made the case before that a national average can't tell you what your own city will do. This is that, measured in your own dollars. And if you're the Austin owner listening to this, don't panic. Nothing here says sell. It's what the last five years did, that's all. What you do next is a different question, with today's numbers, not 2021's. Because one more thing changed. That 2.84% loan is gone. In early October, the 30-year averaged 7.4%. Leverage at 7.4 works a lot harder against you than leverage under 3. So forget the scoreboard. The question in front of you is what this equity earns where it sits today compared with what it would earn somewhere else.
So here's your challenge for tonight. Pull up your own rental and write down three numbers. The cash you put in at closing, the cash flow you've actually collected after everything, and what you'd walk away with if you sold today. The value, minus 6% to sell, minus what you still owe. Add the last two, take away the cash you put in, and divide by the cash you put in. Your principal paydown is already in there, inside what you still owe. That's your real return. The first year total return idea we've built before, stretched over every year you've owned it. Then put the same cash into the index on the same day and see who wins. If you're way ahead, the question is whether that equity is still earning its keep. If you're behind, the question is whether you're behind because of the market or because of the metro. Either way, today's scenario on the site walks the next step, the exit triangle. Sell, hold, or exchange, with the tax cost of moving the money counted in. And your brother in law? He wasn't wrong. He just only counted one of the four. I'm Martin Maxwell. This has been the Five Minute Prime Podcast. I'll see you next episode.
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