Passive Income: Real Estate vs YieldMax
Many in the Discord have purchased YM funds with me for their ability to generate monthly payouts. I have answered this question a few times so figured it’d be best to just make a post about it.
Let’s start with the numbers first.
Comparing Real Estate Passive Income and YieldMax Funds - we’ll use MSTY in this example.
When it comes to generating passive income, real estate and high-yield funds like YieldMax (MSTY) are two compelling options. With recent MSTY yields exceeding 150%, how does it stack up against the stability and benefits of real estate? Let’s analyze both options.
Scenario Overview
1. Real Estate: A $200,000 duplex in New York, purchased with a $40,000 down payment (20%), generating $3,000/month in rental income.
2. YieldMax Fund (MSTY): A $40,000 investment at $33.23/share, yielding 159.66% annually.
Returns
Real Estate
Gross Monthly Rental Income: $3,000.
Monthly Mortgage Payment: $959.28 (30-year term, 6% APR).
Monthly Property Taxes: $233.33.
Monthly Operating Expenses: $1,200 (estimated at 40% of rental income).
Net Monthly Cash Flow: $607.39.
Annual Cash Flow: $7,288.68.
YieldMax Fund (MSTY)
Shares Purchased: 1,203.73 shares (at $33.23/share).
Total Annual Dividend: $63,864.70.
Monthly Dividend Income: $5,322.06.
Risks
1. Real Estate:
Market Risks: Property values can fluctuate with economic conditions.
Vacancy Risks: Periods without tenants reduce income.
Maintenance Costs: Repairs and unexpected expenses can impact returns.
2. YieldMax Fund (MSTY):
Market Volatility: Yields depend on equity performance and option strategies.
Sustainability of Yields: High payouts may not be consistent year over year.
Tax Implications
Real Estate
Rental Income: Taxable, but deductions for mortgage interest, property taxes, and depreciation can significantly reduce tax liability.
Depreciation: Allows a non-cash expense deduction over 27.5 years.
YieldMax MSTY
Distributions: Typically taxed as ordinary income, but some may be classified as return of capital, reducing immediate taxes but impacting long-term capital gains.
Pros and Cons
Real Estate
Pros:
Tangible asset with appreciation potential.
Tax advantages like depreciation and expense deductions.
Cons:
High upfront costs and active management required.
Risk of unpredictable expenses and market downturns.
YieldMax Fund (MSTY)
Pros:
Exceptional annual yield (159.66%).
Completely passive with high liquidity.
Cons:
Yields are subject to market and strategy risks.
Lack of asset appreciation or physical collateral.
Conclusion
In this scenario, MSTY provides a staggering monthly income of $5,322.06, far surpassing the $607.39 monthly cash flow from the duplex. However, MSTY's high yield comes with risks tied to market fluctuations and potential changes in payout strategies. Real estate offers a tangible asset, tax benefits, and long-term appreciation potential but requires active management and risk tolerance for operational challenges.
Investors must weigh their priorities: the higher but potentially less stable income of MSTY or the slower, steadier growth and control offered by real estate.
Let’s also factor in the meaning of passive income. Most don’t expect a long term rental to have a time investment for the owner but there are occasions where the landowner must be physically present. Evictions, repairs etc. MSTY is truly passive unless you’d like to manage your position, which you don’t have to.
Credit is another barrier to entry for the real estate. Your personal debt to income and tax returns also play a huge role. Meanwhile, anyone can buy a YieldMax Fund.
Some claim that the Net Asset Value of YM’s suffer from erosion (the dividend yield coming off the underlying price) and that they will all go to zero. Which isn’t entirely true. On a chart you can adjust for dividends and see that it is in just a steady climb upward.
Also, when owning rental property, do you care what the value of the building is if you don’t intend to sell? What matters most is the tenant paying the note when it’s due.
I’d look at YieldMax the same way.
I hope this helps. I own both and am preferring the MSTY way over traditional real estate. It’s liquid. I can change my mind. And it doesn’t require my presence.
…oh and New York can’t tell me I can’t sell. Where they can interfere and make an unpaying tenant stay.
