Rental property course · Lesson 6 of 6
Compare the rental with what the same cash earns in an index fund.
A rental is one choice for your cash. An index fund is another. To choose, compare the two on the same basis: the return a year, after tax.
One figure for the whole deal
The internal rate of return, or IRR, combines all the cash into one return a year. It includes the $81,000 at the start, the cash flow and tax of each year, and the cash after the sale.
| 10 years, $81,000 invested | Index fund | Example House |
|---|---|---|
| Cash invested | $81,000 | $81,000 |
| Return before tax | 7% a year, assumed | 9.98% a year |
| Return after tax | 6.18% | 8.93% |
The model assumes 7% a year for the fund, with all tax paid at the end. That is generous to the fund, because a real fund pays some tax each year on its dividends. Even so, Example House returns more after tax.
What the return needs
| Value growth | Loan at 6% | Loan at 7% | Loan at 8% |
|---|---|---|---|
| 0% | 4.7% | 2.6% | 0.5% |
| 1% | 6.7% | 4.9% | 3.0% |
| 2% | 8.7% | 7.0% | 5.3% |
| 3% | 10.4% | 8.9% | 7.4% |
| 4% | 12.1% | 10.7% | 9.2% |
| 5% | 13.7% | 12.4% | 11.0% |
The base case is 3% growth and a 7% loan. Most of the return depends on the growth in value. If the house grows less than 1.59% a year, the fund wins.
What the figures leave out
- Time. Even with a manager, an owner makes decisions, approves repairs and handles problems.
- Concentration. $81,000 in one house in one town is less diversified than the same amount in an index fund.
- Access to cash. You can sell a fund in a day. A house takes months, and the costs of the sale are about 6%.
- Large repairs and vacancy. The model spreads them evenly. In real life they come at once.
A rental can be a good investment. Make the decision with your own figures, after tax, against the fund that you would buy in its place.
Key points
- Compare a rental and a fund by the return a year, after tax.
- Most of a leveraged rental’s return depends on growth in value. Test a lower growth rate.
- Include the time, the concentration and the access to cash in the decision.
Sources
- Kiplinger, IRS Updates Capital Gains Tax Thresholds for 2026, for the 15% band of $98,900 to $613,700 for married couples with a joint return.