A first-time real estate investor buys a 4/3 rental property in Austin, Texas

Tim is a 35 year old man at a large tech company who worked his way to a product manager role, scrimped and saved, and has now accumulated a nice nest egg of savings.

He currently has 85% of his savings in a blue chip stock fund, 5% of her savings in bonds, and 10% in cash.

However, Tim wants to know whether he’s making the best returns out of his investments - and he’s checking out real estate as a way to diversify. Since Tim works fully remote and does not intend to live in a house, he’s investigating the returns of buying and renting a property.

Tim has his eyes on a 4 bedroom, 3 bath, 1900 square foot house in North Austin with an asking price of $605,000. He hopes it will one day be the house he can settle down in with a family.

We’ve created a TachiFigures Analysis to compare the returns from:

1. Buying and renting the 4/3 property

2. Investing the same amount into the bond market

3. Investing the same amount into the stock market

House purchase terms

• $605,000 purchase price with a $114 monthly HOA and a non-refundable $60,000 earnest money check that goes towards the down payment

• This means a $205K total down payment. Tim feels more comfortable with a lower monthly payment and a higher upfront down payment

• The appraisal came in at $550,000. Yes, the Austin housing market is inflated!

• Tim’s mortgage officer offered a $400,000 loan amount with a 4.75% interest rate

• 5% increase in housing prices per year, due to inflation and Austin’s property market

Rental and rental management terms

• MLS real estate listing suggest comps for his house rents at $2,500 per month

• Property manager fee is $175 per month

• Following the Square Footage Rule ( $1 per square foot for annual maintenance costs) suggests Tim’s 1900 square foot house will need $1,900 of annual maintenance costs, or ~$158 per month.

• $100 monthly landlord insurance

• 5% increase in rental prices per year, due to inflation and Austin’s property market

TachiFigures Assumptions

• 7% stock market rate of return

• 5% bond market rate of return

[Watch this video] for a walkthrough of the spreadsheet analysis below.

Note: Formatting in the spreadsheet follows the following standard: black = formula, blue = hardcoded, green = linked from another tab.

Download this spreadsheet

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The TachiFigures recommendation for Tim

Assuming a sale of the rental property in 30 years, this investor is comparing 3 sets of possible cash flows:

1. $2.7M through the rental property

2. $1.8M by investing the initial down payment (and house maintenance costs) into a 2% bond market

3. $3.0M by investing the initial down payment (and house maintenance costs) into a 7% equities market

#2 and #3 options are the opportunity costs for Tim of the investments he could make with the money he would have put into the rental property.

Since Tim already has a significant chunk of his net worth in the stock market already, the TachiFigures recommendation is to invest in the rental property.

That’s because this investment has a different risk profile, is subject to some distinct market risks than the stock or bond market, and could generate returns competitive to the equities market. A real estate property would accomplish Tim's intention of diversifying his investment portfolio.

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Are you wondering if you should diverge some of your market funds into a real estate property? Feel free to download the spreadsheet, edit the assumptions (blue font cells), and make any other adjustments to fit your own situation!