Real Estate vs Equities
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Real Estate vs Equities
I had dinner the other night with a good buddy to catch up on life. He's home from overseas work looking to buy real estate. He began to talk about how he didn't believe in the US Stock market and was instead, planning to supplement his retirement by buying real estate. I was getting pretty nervous in the conversation, thinking, surely he also has a 401k/RothIRA and/or 403b, but he doesn't. That's how much he doesn't believe in investing in markets.
Isn't using real estate as your primary means of investment return much lower (1%) than the stock market (7-8%)? How good or bad of an idea is this? I was trying to convince him otherwise, to at least have some reserve in a tax advantaged account... I know you can make a lot of money in real estate, but I think I'll sleep well knowing that my index funds won't be calling me in the middle of the night to report a broken AC or roof leak...
Isn't using real estate as your primary means of investment return much lower (1%) than the stock market (7-8%)? How good or bad of an idea is this? I was trying to convince him otherwise, to at least have some reserve in a tax advantaged account... I know you can make a lot of money in real estate, but I think I'll sleep well knowing that my index funds won't be calling me in the middle of the night to report a broken AC or roof leak...
Re: Real Estate vs Equities
All I can say is that my parents are very long on real estate in terms of their allocation of overall holdings. The last recession did them no favors and hindesight being 20/20 would not do it again if given the chance.
Re: Real Estate vs Equities
It's not a horrible idea, it just requires a lot more work than passive investing. I don't believe it's accurate to say real estate has a much lower return than equities. In the long run, I'd expect them to more or less even out.
- danwhite77
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Re: Real Estate vs Equities
I second much of what KyleAAA said. It's not for me, but for people willing to put in the time to learn a market and then as a landlord, they can be successful enough at it. I think the key is to buy in a real estate market that has some chance to appreciate in the future (Palo Alto, NYC, SoCal, etc.). I think the people that are most commonly successful in real estate investments usually have some sort of "angle." By that, I mean that they're real estate agents (so it's their job to know the market), or builders/contractors (so they can fix anything), etc.KyleAAA wrote:It's not a horrible idea, it just requires a lot more work than passive investing. I don't believe it's accurate to say real estate has a much lower return than equities. In the long run, I'd expect them to more or less even out.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
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Re: Real Estate vs Equities
For some people, owning something tangible like real estate is important. I recently traded some real estate I lost interest in for more liquid assets but I'm still looking for more real estate in the right place at the right price. The timing of the recent deal (luck) is making me look like a stock market genius so far
Re: Real Estate vs Equities
My perspective and experience is different than most of those posting on this site, because we netted considerably higher ROI on our real estate than we ever have on the market (though I won’t complain about either)!
The biggest difference (besides the ROI) IMHO is (1) you have to recognize that it is not as liquid as are mutual funds/stock market, and (2) that it does take more effort (though it was never that big a deal or that difficult (and we rented houses in VA when living in HI and CA and vice versa (without using property managers—but, we rented only to active duty military). The most important thing when buying realty (again IMHO) is location, location, location.
And, like anything thing else, real estate is cyclical…and I wouldn’t buy when everything is at all time highs unless you are in it for the really long haul-—if I was 20-30 years younger I would be jumping into certain markets now. Now that I am in my 60s--I will stick to easy, more liquid assets.
Regards,
Sally
The biggest difference (besides the ROI) IMHO is (1) you have to recognize that it is not as liquid as are mutual funds/stock market, and (2) that it does take more effort (though it was never that big a deal or that difficult (and we rented houses in VA when living in HI and CA and vice versa (without using property managers—but, we rented only to active duty military). The most important thing when buying realty (again IMHO) is location, location, location.
And, like anything thing else, real estate is cyclical…and I wouldn’t buy when everything is at all time highs unless you are in it for the really long haul-—if I was 20-30 years younger I would be jumping into certain markets now. Now that I am in my 60s--I will stick to easy, more liquid assets.
Regards,
Sally
Re: Real Estate vs Equities
The overall return on real estate has historically kept up with inflation - about 2-3% - though of course the last decade has been an anomoly on the long term slowly increasing RE returns chart. Regardless, these returns assume you are purchasing real estate in cash, and they don't include any cash flow from investment property. If you are using leverage to buy real estate, and/or if your investment throws off cash flow, then your actual return can be significantly higher than those figures would indicate.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Real Estate vs Equities
We don't know whether we are looking at debt to fund the real estate, which would then be a specialist situation.
Assuming that debt is not involved, real estate adds another Asset Class with a positive real yield to rebalance into and out of dependent on holdings and valuations, assuming we are not happy with the arms length approach of REITs.
Several small properties well located within walking distance of work/shops are one approach. Do not agree with 'it just requires a lot more work'. Well chosen properties do add some work but that work comes in occasional bursts, but not 'a lot more work'.
Yields in UK at present are about 4% real (have in the past exceeded 10% real). No other Asset Class comes to mind that offers a higher real yield at present.
Put all available funds in Real Estate? Absolutely not! Stocks, Bonds and Cash have at least an equal role.
Assuming that debt is not involved, real estate adds another Asset Class with a positive real yield to rebalance into and out of dependent on holdings and valuations, assuming we are not happy with the arms length approach of REITs.
Several small properties well located within walking distance of work/shops are one approach. Do not agree with 'it just requires a lot more work'. Well chosen properties do add some work but that work comes in occasional bursts, but not 'a lot more work'.
Yields in UK at present are about 4% real (have in the past exceeded 10% real). No other Asset Class comes to mind that offers a higher real yield at present.
Put all available funds in Real Estate? Absolutely not! Stocks, Bonds and Cash have at least an equal role.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
- White Coat Investor
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Re: Real Estate vs Equities
IMHO too many on this forum are real estate Debbie Downers. Real estate is certainly a viable investment and over the long run should provide returns similar to the stock market. I think the best way to do things is to DIVERSIFY, having some money in real estate, some in stocks, some in bonds etc.
Although real estate may only appreciate at 0-1% real or so, that's only a small part of the return. It also has a yield (rents) and many tax benefits (like depreciation). It is also relatively easily and safely leveraged.
The main downside is that it requires more expertise than just buying a few index funds and it requires a lot more time, even if you're hiring someone else to do the managing. Here's a blog article about it I wrote a while back:
http://whitecoatinvestor.com/how-to-mak ... al-estate/
The only problem I have with your friend's plan is that he isn't diversifying into stocks. Since it is very easy to invest in stocks, and there are lots of tax benefits through Roth IRAs, 401Ks etc, I see no reason a real estate investor can't put some percentage of his money there.
Although real estate may only appreciate at 0-1% real or so, that's only a small part of the return. It also has a yield (rents) and many tax benefits (like depreciation). It is also relatively easily and safely leveraged.
The main downside is that it requires more expertise than just buying a few index funds and it requires a lot more time, even if you're hiring someone else to do the managing. Here's a blog article about it I wrote a while back:
http://whitecoatinvestor.com/how-to-mak ... al-estate/
The only problem I have with your friend's plan is that he isn't diversifying into stocks. Since it is very easy to invest in stocks, and there are lots of tax benefits through Roth IRAs, 401Ks etc, I see no reason a real estate investor can't put some percentage of his money there.
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4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
- Clearly_Irrational
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Re: Real Estate vs Equities
The total return on leveraged real estate is actually higher than a stock and bond portfolio. This is mainly due to three factors 1) It's less liquid 2) It's more concentrated risk 3) It's less passive.
Not having any money in the capital markets is probably silly since you're missing out on a major source of gains. On the other hand, having all of your money in the capital markets seems equally foolish to me. I recommend doing both.
Not having any money in the capital markets is probably silly since you're missing out on a major source of gains. On the other hand, having all of your money in the capital markets seems equally foolish to me. I recommend doing both.
Re: Real Estate vs Equities
So your friend is planning to buy some kind of commercial real estate property, not a REIT or some other indirect means of investing in the US (?) real estate market?
Over the course of 40 years of investing I've had experience with residential and commercial real estate and I did all right, but it is fraught with risk, especially for non-professionals. You can get a great cash flow with what appears to be a stable tenant, but if the lease runs out or the tenant has problems, you are in trouble. Your cash flow reverses, and if you have a mortgage on the property, you can get in trouble fast. Commercial properties often take months, years even, to find good tenants, and the landlord often has to pay for improvements to get the tenant in. I had to put a lot of money (about one year's net profit) into improvements before the tenant would renew the lease a couple of years ago. I inherited some commercial property in 1995 and rolled it over twice doing 1031 exchanges. The legal fees and sales commissions are high (5-6% for the latter), and sales take a long time. I put this property, which has a strong tenant and 9 years on the lease, up for sale in March and three sales have fallen through for one reason or another. I'm expecting to sell it in December. Taxes involve the usual capital gains but also a 25% tax on recapture of depreciation. All said, I would prefer a liquid investment in stocks and bonds. For the individual investor I think it makes more sense. That's one reason I'm selling.
Over the course of 40 years of investing I've had experience with residential and commercial real estate and I did all right, but it is fraught with risk, especially for non-professionals. You can get a great cash flow with what appears to be a stable tenant, but if the lease runs out or the tenant has problems, you are in trouble. Your cash flow reverses, and if you have a mortgage on the property, you can get in trouble fast. Commercial properties often take months, years even, to find good tenants, and the landlord often has to pay for improvements to get the tenant in. I had to put a lot of money (about one year's net profit) into improvements before the tenant would renew the lease a couple of years ago. I inherited some commercial property in 1995 and rolled it over twice doing 1031 exchanges. The legal fees and sales commissions are high (5-6% for the latter), and sales take a long time. I put this property, which has a strong tenant and 9 years on the lease, up for sale in March and three sales have fallen through for one reason or another. I'm expecting to sell it in December. Taxes involve the usual capital gains but also a 25% tax on recapture of depreciation. All said, I would prefer a liquid investment in stocks and bonds. For the individual investor I think it makes more sense. That's one reason I'm selling.
Re: Real Estate vs Equities
I am involved in rental real estate but would not have all of my money in any one field. I also would not feel the need to convince someone else not to do so. Discussing the merits of diversification, liquidity, and historical returns is helpful and healthy but every person then needs to make their own choices as none of us knows what will happen next. Wall St. has given people plenty of reason to doubt the integrity of the system and to know the disadvantages for the small investor. For me, I would still not go all in on any one asset class but to each his own. Leverage is a powerful lure for some real estate investors but it is a two edged sword, as was recently re-revealed to real estate investors.
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- Clearly_Irrational
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Re: Real Estate vs Equities
I would agree with you on commercial real estate, it's best left to the professionals. Residential real estate, while it's certainly not trouble free, seems more reasonable.Don46 wrote:All said, I would prefer a liquid investment in stocks and bonds. For the individual investor I think it makes more sense. That's one reason I'm selling.
- convert949
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Re: Real Estate vs Equities
IMHO, real estate is different (direct investment, residential or commercial) in that it is more like a business than an investment.
Regards to all,
Bob
Regards to all,
Bob
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Re: Real Estate vs Equities
Nothing wrong with real estate.
Just understand there is a reason folks in real estate get rich (at times and not others) and that is from taking increased risk that a stock investor doesn't. They take on leverage, illiquidity, self managerial costs+ headaces, etc... Just like anything else in investing there are "no free lunches".
Talmud had a great idea not business OR land, but how about both. Diversification of the two balance each others drawbacks.
Good luck.
Just understand there is a reason folks in real estate get rich (at times and not others) and that is from taking increased risk that a stock investor doesn't. They take on leverage, illiquidity, self managerial costs+ headaces, etc... Just like anything else in investing there are "no free lunches".
Talmud had a great idea not business OR land, but how about both. Diversification of the two balance each others drawbacks.
Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle
Re: Real Estate vs Equities
And, like a business, owning a few houses, apartments, some retail space, or whatever, is highly concentrated rather than diversified and accordingly risky.convert949 wrote:IMHO, real estate is different (direct investment, residential or commercial) in that it is more like a business than an investment.
Regards to all,
Bob
That does not mean it is a bad idea to own real estate, whether residential or commercial; it is just different from investing in stocks and bonds. It isn't a bad idea to own and run a business either, but that also is different from owning stocks and bonds.