Yet Another Real Estate vs Stock Market Thread
Yet Another Real Estate vs Stock Market Thread
I'm trying to wrap my brain around the appeal of Real Estate investing. I've run some numbers to compare Real Estate vs Stock Market Investing. The returns seem about equal. Is this evaluation "in the ballpark"? It seems that they are pretty similar in returns, why waste your time with all the extra hassle of Real Estate Investing?!
These numbers are for someone supplementing their 300k income by purchasing a 600k rental property vs investing the same amount in the stock market. Note that it does not include state taxes!
$600,000 Investment
RENTAL PROPERTY
$7,000 rental property income
$84,000 rental property income per year
$14,545 depreciation (assuming 400k building worth)
$69,455 depreciation deducted from income
$14,732 Taxes after deducting all expenses (edit)
33% marginal tax rate (not even including State Taxes)
$22,920 taxes on rental property income
1% repairs
$6,000 repairs
1.05% property taxes
$6,300 property taxes
9% management company fees (% of rental income)
$7,560 management company fees
0.42% insurance ($35/100k)
$2,520 insurance
3% vacancy (% of rental income)
$2,520 vacancy
3% capital expenses (new roof, new driveway, etc, % of rental income)
$2,520 capital expenses (new roof, new driveway, etc)
$32,272 total expenses (edit)
$51,728 NOI
STOCK MARKET
7.5% Stock Market Return (S&P 500 average last 20 years)
$45,000 Average Annual Gains
15% Capital Gains Tax
$38,250 Average Annual Gain
Both in $30,000 range. Though Stocks seem to edge out. EDIT: After deducting ALL the expenses, perhaps Real Estate wins by ~$10,000+
Perhaps the appeal for Real Estate is related to tangible assets, monthly income / replacement income / ability to leverage more easily. Whereas for the stock market to make sense, one has to reinvest the dividends and hold for several decades to have a stronger chance at averaging a 7.5% return.
Thoughts?
These numbers are for someone supplementing their 300k income by purchasing a 600k rental property vs investing the same amount in the stock market. Note that it does not include state taxes!
$600,000 Investment
RENTAL PROPERTY
$7,000 rental property income
$84,000 rental property income per year
$14,545 depreciation (assuming 400k building worth)
$69,455 depreciation deducted from income
$14,732 Taxes after deducting all expenses (edit)
33% marginal tax rate (not even including State Taxes)
$22,920 taxes on rental property income
1% repairs
$6,000 repairs
1.05% property taxes
$6,300 property taxes
9% management company fees (% of rental income)
$7,560 management company fees
0.42% insurance ($35/100k)
$2,520 insurance
3% vacancy (% of rental income)
$2,520 vacancy
3% capital expenses (new roof, new driveway, etc, % of rental income)
$2,520 capital expenses (new roof, new driveway, etc)
$32,272 total expenses (edit)
$51,728 NOI
STOCK MARKET
7.5% Stock Market Return (S&P 500 average last 20 years)
$45,000 Average Annual Gains
15% Capital Gains Tax
$38,250 Average Annual Gain
Both in $30,000 range. Though Stocks seem to edge out. EDIT: After deducting ALL the expenses, perhaps Real Estate wins by ~$10,000+
Perhaps the appeal for Real Estate is related to tangible assets, monthly income / replacement income / ability to leverage more easily. Whereas for the stock market to make sense, one has to reinvest the dividends and hold for several decades to have a stronger chance at averaging a 7.5% return.
Thoughts?
Last edited by BAM! on Mon May 22, 2017 6:01 pm, edited 1 time in total.
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Re: Yet Another Real Estate vs Stock Market Thread
You can't really compare them.BAM! wrote:I'm trying to wrap my brain around the appeal of Real Estate investing. I've run some numbers to compare Real Estate vs Stock Market Investing. The returns seem about equal. Is this evaluation "in the ballpark"? It seems that they are pretty similar in returns, why waste your time with all the extra hassle of Real Estate Investing?!
These numbers are for someone supplementing their 300k income by purchasing a 600k rental property vs investing the same amount in the stock market. Note that it does not include state taxes!
$600,000 Investment
RENTAL PROPERTY
$7,000 rental property income
$84,000 rental property income per year
$14,545 depreciation (assuming 400k building worth)
$69,455 depreciation deducted from income
33% marginal tax rate (not even including State Taxes)
$22,920 taxes on rental property income
1% repairs
$6,000 repairs
1.05% property taxes
$6,300 property taxes
9% management company fees (% of rental income)
$7,560 management company fees
0.42% insurance ($35/100k)
$2,520 insurance
3% vacancy (% of rental income)
$2,520 vacancy
3% capital expenses (new roof, new driveway, etc, % of rental income)
$2,520 capital expenses (new roof, new driveway, etc)
$50,340 total expenses
$33,660 NOI
STOCK MARKET
7.5% Stock Market Return (S&P 500 average last 20 years)
$45,000 Average Annual Gains
15% Capital Gains Tax
$38,250 Average Annual Gain
Both in $30,000 range. Though Stocks seem to edge out.
Perhaps the appeal for Real Estate is related to tangible assets, monthly income / replacement income / ability to leverage more easily. Whereas for the stock market to make sense, one has to reinvest the dividends and hold for several decades to have a stronger chance at averaging a 7.5% return.
Thoughts?
RE has this very specific risk associated with any property. Is it the right city, the right location in that city, are their fundamental issues with the house or building? That unit in a building can be bad (upstairs has an overflow you have the damage, etc.).
RE in the sense of owning property is a *business* and because of leverage (Other Peoples Money) it can be a slow way to get rich. But you can get rich. But you have to treat it like a business. It is not (always) a passive investment. Some people here have made a lot of money with it, some swear they would never do it again due to the hassles.
Stock investing is as diversified as you can get. You can basically own the world stock market. Now the risks of this are very clear: recurrent bear markets and crashes which can devastate your wealth. There are certainly periods in history (like the 1930s, like Japan since 1990) where "recovery" took decades if it came at all (but that's also true of RE).
The investment most similar to stock market investing is owning a REIT index fund (if you want to be pedantic, owning REITs that invest only in residential RE). The pluses and minuses of that have been well hashed out here-- some respected authors (Burton Malkiel, David Swensen) suggest 20% weightings in REITs for the individual investor.
If you buy residential units at cap rates (Net Operating Income/ Value), true cap rates (ie all costs included), of 6% or above*, then I can see the diversification advantage in terms of income. Even if the stock market crashes, unless you get very unlucky in your city, you will find renters. But it's a lot of work (at least in the beginning) to get that diversified income. Also since you will buy leveraged, that won't be income into your bank account-- it will go to paying interest and repayment of debt plus other expenses.
* someone here critiqued that number and said that you need way above that. 6% where I live is stretching it (London, UK)-- central London property is down around 2%. You can get higher numbers with northern cities, social housing tenants etc.
Re: Yet Another Real Estate vs Stock Market Thread
FWIW, 20 years ago you could have gotten into long term bonds and achieved the same result as investing in the stock market with far less volatility.BAM! wrote:...
Perhaps the appeal for Real Estate is related to tangible assets, monthly income / replacement income / ability to leverage more easily. Whereas for the stock market to make sense, one has to reinvest the dividends and hold for several decades to have a stronger chance at averaging a 7.5% return.
Thoughts?
Real Estate would have been a far better investment than stocks or bonds starting from then.
Nobody really know what the situation is going to be going forward. I'm certain that current bonds will not be returning what they did over the last 20 years (at least not unless we have a very sudden and dramatic change in interest rates).
Personally, I think real estate has been too hot, but I've been thinking that for several years now. Many feel that way about the broad stock market as well.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Yet Another Real Estate vs Stock Market Thread
Would RE have been so much better an investment?JoMoney wrote:FWIW, 20 years ago you could have gotten into long term bonds and achieved the same result as investing in the stock market with far less volatility.BAM! wrote:...
Perhaps the appeal for Real Estate is related to tangible assets, monthly income / replacement income / ability to leverage more easily. Whereas for the stock market to make sense, one has to reinvest the dividends and hold for several decades to have a stronger chance at averaging a 7.5% return.
Thoughts?
Real Estate would have been a far better investment than stocks or bonds starting from then.
It depends where, doesn't it? And there's no way of buying a "US average residential RE performance? i.e. you cannot really trade the indices? So you have to buy specific properties, and that might or might not have been a good investment.
Evidence suggests the RE market is skewed. Luxury properties, such as condos in Manhattan and Miami, are getting built. Single family dwellings at the upper end. Conversely there is supply shortage at the lower end: family homes (1st or 2nd, say). In addition, a lot of Private Equity investors (and individuals) have gone into the SF home for rental market-- for a lot of reasons that has high costs, Sam Zell (who made part of his fortune in residential apartment buildings) said that he couldn't see the economics. That combination of new demand and limited supply (banks not lending to developers, small developers went broke in the crash) has driven prices up.Nobody really know what the situation is going to be going forward. I'm certain that current bonds will not be returning what they did over the last 20 years (at least not unless we have a very sudden and dramatic change in interest rates).
Personally, I think real estate has been too hot, but I've been thinking that for several years now. Many feel that way about the broad stock market as well.
As always, it is market by market. The SF or greater NYC prices make sense in terms of the economic recovery in those Metropolitan areas, and the limited supply (probably ditto for SoCal). But you also see plenty of evidence of bubble behaviour. What, Dear Lord, is happening in Miami? (answer: Latin American & European money plus a general perception of it being a "hip" place, sort of a Malibu of the East Coast -- is this sustainable).
Commercial RE I think has been driven by falling interest rates as well as rising demand. Big structural issues particularly around retail-- one UK retailer of children's clothing and toys is cutting its retail stores by more than 50%, so much of the business has gone online. That's going to happen across the piste, maybe less with food retail (although online groceries is big here) but the survivor malls will be the high end ones, or those that can operate as a "destination" for whatever reason (for example I saw a piece on Bloomberg, a Chicago area mall that repositioned itself as a family destination for Hispanics, who in many ways demographically resemble America 1950s say, rather than America 21st century).
Offices? I am not close to it but the market treats high quality offices as bond proxies, and that may turn out to be a mistake given structural changes. Employment is still rising, though, so that should be good news (but we've downsized our desk space per employee by about 40% in 3 years).
Distribution centres and internet hosting centres are clearly growth businesses. I am not close to the technology on the latter, at what point that becomes "overspaced".
There has probably been a structural shift towards renting over ownership, so multi unit apartment buildings are probably a winner. That said, the valuations are perhaps caught in the bubble we mention above.
I will say this. Toronto, Vancouver, Sydney, Melbourne, Auckland are all in just incredible bubbles. And (the first 2 at any rate) will blow. Blow impressively (and painfully).
Re: Yet Another Real Estate vs Stock Market Thread
Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
But even in your example, the RE number is a real return while the stock market return is nominal.
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Re: Yet Another Real Estate vs Stock Market Thread
I'll assume the money is the same.
We'll take you into the future on a random day. At 3:00am, the phone rings with an irate tenant because the heat/noise/bugs/neighbors are a problem and needs you there to fix this right now.
I'm an index investor. It's the same morning, 3:00am. I'm sleeping.
There's the biggest difference to me. Real estate is not a passive investment. Personally, I'd rather just get a part time job that I could quit anytime without concern if you want more money.
We'll take you into the future on a random day. At 3:00am, the phone rings with an irate tenant because the heat/noise/bugs/neighbors are a problem and needs you there to fix this right now.
I'm an index investor. It's the same morning, 3:00am. I'm sleeping.
There's the biggest difference to me. Real estate is not a passive investment. Personally, I'd rather just get a part time job that I could quit anytime without concern if you want more money.
Bogle: Smart Beta is stupid
Re: Yet Another Real Estate vs Stock Market Thread
People with $600,000 in cash who want to invest in real estate don't buy a $600,000 property.BAM! wrote:These numbers are for someone supplementing their 300k income by purchasing a 600k rental property vs investing the same amount in the stock market.
They buy 5 or 10 $600,000 properties.
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Re: Yet Another Real Estate vs Stock Market Thread
You forgot inflation on leverage. Let's say you've put down $150k/25%. 2% inflation appreciation on $600k assets would nominally gain $12k/yr. $12k gain on $150k is a nominal gain of 8% on top of the rent. The mortgage interest will be something like $17k/yr the first year (30yr fixed @4%), but that's a tax deductible expense (drops after-tax costs to ~$11k) and drops to $13k gross/$9k after-tax in year 10.$600,000 Investment
RENTAL PROPERTY
$7,000 rental property income --> good gross rent-to-purchase price, a bit optimistic these days
$84,000 rental property income per year
$14,545 depreciation (assuming 400k building worth)
$69,455 depreciation deducted from income --> don't forget recapture
33% marginal tax rate (not even including State Taxes)
$22,920 taxes on rental property income
1% repairs
$6,000 repairs
1.05% property taxes
$6,300 property taxes
9% management company fees (% of rental income) --> a mistake; do you own work
$7,560 management company fees
0.42% insurance ($35/100k)
$2,520 insurance
3% vacancy (% of rental income)
$2,520 vacancy
3% capital expenses (new roof, new driveway, etc, % of rental income)
$2,520 capital expenses (new roof, new driveway, etc)
$50,340 total expenses --> without checking all your math, remember to deduct all expenses
$33,660 NOI
Also, the 9% PM is stupid. You wouldn't accept those fees in your MFs/ETFs. Why accept in your RE? Sweat equity
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Re: Yet Another Real Estate vs Stock Market Thread
Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
Re: Yet Another Real Estate vs Stock Market Thread
Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
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Re: Yet Another Real Estate vs Stock Market Thread
Us: Received an unexpected inheritance, to which we applied to a rental condo. Cash purchase, seller wanted out and we wanted in. Seattle. Oct2015.BAMI wrote:I'm trying to wrap my brain around the appeal of Real Estate investing. I've run some numbers to compare Real Estate vs Stock Market Investing. The returns seem about equal. Is this evaluation "in the ballpark"? It seems that they are pretty similar in returns, why waste your time with all the extra hassle of Real Estate Investing?!
It was a diversification move. The purchase and income extraordinary to our retirement needs. We are now 67/70. We are using the rental income rather than using income from deferred annuities and Discretionary buckets. We will allow this rental or equivalent to be passed on to our heirs in a step-up and in the meantime use the depreciation schedule and expenses to modify our retirement taxes. We are using the travel expense allowance to visit our son who is the manager and who lives in Seattle. We in Oregon.
The Discretionary acct has a total return of +20% for 2016 and 3x since 2012 when I started active trading. For 2017, I will be lucky to have 0% return since I am heavy cash and rethinking our Risk.
RE is dependent on location and your time horizon.
We also have a small parcel of agriculture land that has been very difficult to market and has been a money pit for 35 years.
see notes below.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: Yet Another Real Estate vs Stock Market Thread
The major difference is RE pricing is very inefficient relative to stocks. Owners sell even properties with favorable fundamentals for a variety of reasons: tired of being landlords; inherited properties; geographical moves; or just simply liquidating. There are few buyers, commonly only 1 or 2 serious ones. This leads to price-to-rent divergences. Add in the complexity of leverage and taxes: for the owner who paid off the mortgage and a fully depreciated and high marginal taxes, the ROI maybe unattractive compared to alternative investments; in contrast the buyer who will leverage 3-to-1 and lots of expenses/depreciation to go, the ROI maybe superior to alternative investments. One investment, two people different people, two different results.avalpert wrote:Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
Large equities have thousands and thousands of trades honing in on a consensuses price. Totally different beasts.
Re: Yet Another Real Estate vs Stock Market Thread
I would just point out the Buffet, among many others, might disagree with the distinction you are making. I would also point out that, when looked at closely, you will find that lot's of those people who think they are among the few who are great at spotting these opportunities both in stocks and real estate, tend to not have the financial results to back it up.DVMResident wrote:The major difference is RE pricing is very inefficient relative to stocks. Owners sell even properties with favorable fundamentals for a variety of reasons: tired of being landlords; inherited properties; geographical moves; or just simply liquidating. There are few buyers, commonly only 1 or 2 serious ones. This leads to price-to-rent divergences. Add in the complexity of leverage and taxes: for the owner who paid off the mortgage and a fully depreciated and high marginal taxes, the ROI maybe unattractive compared to alternative investments; in contrast the buyer who will leverage 3-to-1 and lots of expenses/depreciation to go, the ROI maybe superior to alternative investments. One investment, two people different people, two different results.avalpert wrote:Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
Large equities have thousands and thousands of trades honing in on a consensuses price. Totally different beasts.
Re: Yet Another Real Estate vs Stock Market Thread
What I think also plays a big part, is that those people who think they are among the few who are great at spotting these opportunities both in stocks and real estate, can't accept the role luck played in their good fortune. Over the past couple of decades, most mom and pop landlords in the bay area, southern California, NYC, etc. fared pretty well. I don't think they are all shrewd, savvy, visionaries. I think a rising tide lifts all boats.avalpert wrote:I would just point out the Buffet, among many others, might disagree with the distinction you are making. I would also point out that, when looked at closely, you will find that lot's of those people who think they are among the few who are great at spotting these opportunities both in stocks and real estate, tend to not have the financial results to back it up.DVMResident wrote:The major difference is RE pricing is very inefficient relative to stocks. Owners sell even properties with favorable fundamentals for a variety of reasons: tired of being landlords; inherited properties; geographical moves; or just simply liquidating. There are few buyers, commonly only 1 or 2 serious ones. This leads to price-to-rent divergences. Add in the complexity of leverage and taxes: for the owner who paid off the mortgage and a fully depreciated and high marginal taxes, the ROI maybe unattractive compared to alternative investments; in contrast the buyer who will leverage 3-to-1 and lots of expenses/depreciation to go, the ROI maybe superior to alternative investments. One investment, two people different people, two different results.avalpert wrote:Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
Large equities have thousands and thousands of trades honing in on a consensuses price. Totally different beasts.
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Re: Yet Another Real Estate vs Stock Market Thread
assuming unleveraged real estate not bought at a discount and with a 7% return, similar to a SP500 index fund...
i'm going to give a rough estimate of an example (please BH's do not hammer at any inaccuracies, it is JUST an example).
RE as an asset class generally produces more cash flow per dollar invested.
The SP500 index fund will yield 5% growth + 2% dividends.
RE may yield ~2% growth and ~5% dividends.
This cash flow is what allows people to *need less* in RE investments than they do with an index fund following the 3% rule (perpetual income) to yield the same amount of financial independence.
There are a lot of other things like the tax deductions, depreciation, leveraging, etc. that are tangential to this.
For me, while in the accumulation phase, we invest our taxable money in leveraged RE to increase our growth rate in a tax efficient fashion. In our FI phase, it will help replace our cash flow in a tax efficient fashion.
In the meanwhile, we still invest in index funds in our qualified accounts.
i'm going to give a rough estimate of an example (please BH's do not hammer at any inaccuracies, it is JUST an example).
RE as an asset class generally produces more cash flow per dollar invested.
The SP500 index fund will yield 5% growth + 2% dividends.
RE may yield ~2% growth and ~5% dividends.
This cash flow is what allows people to *need less* in RE investments than they do with an index fund following the 3% rule (perpetual income) to yield the same amount of financial independence.
There are a lot of other things like the tax deductions, depreciation, leveraging, etc. that are tangential to this.
For me, while in the accumulation phase, we invest our taxable money in leveraged RE to increase our growth rate in a tax efficient fashion. In our FI phase, it will help replace our cash flow in a tax efficient fashion.
In the meanwhile, we still invest in index funds in our qualified accounts.
Re: Yet Another Real Estate vs Stock Market Thread
$7,500 management fees on a $600k investment is about 1.25%. Many MFs (granted, it is not the index funds that most Bogleheads own) charge 1.00%-1.50%DVMResident wrote:You forgot inflation on leverage. Let's say you've put down $150k/25%. 2% inflation appreciation on $600k assets would nominally gain $12k/yr. $12k gain on $150k is a nominal gain of 8% on top of the rent. The mortgage interest will be something like $17k/yr the first year (30yr fixed @4%), but that's a tax deductible expense (drops after-tax costs to ~$11k) and drops to $13k gross/$9k after-tax in year 10.$600,000 Investment
[...]
9% management company fees (% of rental income) --> a mistake; do you own work
$7,560 management company fees
[...]
$50,340 total expenses --> without checking all your math, remember to deduct all expenses
$33,660 NOI
Also, the 9% PM is stupid. You wouldn't accept those fees in your MFs/ETFs. Why accept in your RE? Sweat equity
That said, OP does not appear to have properly subtracted all expenses (unless I did the math wrong!). Bur that is likely balanced by the exclusion of the property's appreciation.
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Re: Yet Another Real Estate vs Stock Market Thread
The main difference you aren't accounting for is leverage. No one would buy 1 rental all cash for $600,000 they would buy 5 rentals with 20% down and have $6mil in property value after 30 years.
Also your numbers seem really random. 9% property managment, how did you figure that? How are you getting 3% vacancy and 3% repairs? 7.5% from stocks is pushing it.
You also don't factor in the ability to find deals. It's pretty well established that index funds is the way to go with stocks but in real estate you have to make a specific purchase, which can go both ways. If your willing to put in a little work to learn your market and are patient, you can make a lot of profit just on the initial purchase. Something you can't do with stocks.
If you want to be passive go index funds but real estate will always have more potential for profit/risk because of leverage.
Also your numbers seem really random. 9% property managment, how did you figure that? How are you getting 3% vacancy and 3% repairs? 7.5% from stocks is pushing it.
You also don't factor in the ability to find deals. It's pretty well established that index funds is the way to go with stocks but in real estate you have to make a specific purchase, which can go both ways. If your willing to put in a little work to learn your market and are patient, you can make a lot of profit just on the initial purchase. Something you can't do with stocks.
If you want to be passive go index funds but real estate will always have more potential for profit/risk because of leverage.
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Re: Yet Another Real Estate vs Stock Market Thread
In the land of professional investors, I mean really top ones, you don't find on average that they beat the index.avalpert wrote:Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
So "good stock investors" are a pretty rare breed, based on all the evidence we have:
- active public managers underperform the index funds
- even where managers do outperform, on average it is by less than the fees
- hedge fund managers may be cleverer, but there's huge survivor bias in the data (for all the efforts to strip it out) and they don't seem to outperform the index funds *after costs*
- the average individual investor appears to underperform the market, significantly, partly due to bad market timing
So whoever these "good stock investors" are, they keep their heads down.
I mean, it's a bit like guys talking in the bar about number of people they have slept with . You hear a lot of talk, but there isn't a way to check .
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Re: Yet Another Real Estate vs Stock Market Thread
On the subject of things guys say in bars, I'd just like to state it here that I have one portfolio that has outperformed the index by about 100% over the last 25 years .bigred77 wrote:
What I think also plays a big part, is that those people who think they are among the few who are great at spotting these opportunities both in stocks and real estate, can't accept the role luck played in their good fortune. Over the past couple of decades, most mom and pop landlords in the bay area, southern California, NYC, etc. fared pretty well. I don't think they are all shrewd, savvy, visionaries. I think a rising tide lifts all boats.
I agree with you about real estate markets. I think we are about to see that tide go out in Vancouver and Toronto, and some boats will get left on the beach.
Mind, I sat on the plane next to a guy who had made quite a bit of money buying houses in Toronto and replacing them with bigger homes (the lots in the area were zoned after WW1 for returning veterans, i.e. typically 1200 square foot bungalows-- he was replacing them with 2500 square foot 2 storeys; his business partner had a construction contracting company).
*He* I could believe knew what he was doing-- he talked good sense on economics. He told me he had pulled out of the market because valuations had become just scary.
This was 3 years ago . Prices have risen by about 50% since then .
Re: Yet Another Real Estate vs Stock Market Thread
+1Finance-MD wrote:assuming unleveraged real estate not bought at a discount and with a 7% return, similar to a SP500 index fund...
i'm going to give a rough estimate of an example (please BH's do not hammer at any inaccuracies, it is JUST an example).
RE as an asset class generally produces more cash flow per dollar invested.
The SP500 index fund will yield 5% growth + 2% dividends.
RE may yield ~2% growth and ~5% dividends.
This cash flow is what allows people to *need less* in RE investments than they do with an index fund following the 3% rule (perpetual income) to yield the same amount of financial independence.
There are a lot of other things like the tax deductions, depreciation, leveraging, etc. that are tangential to this.
For me, while in the accumulation phase, we invest our taxable money in leveraged RE to increase our growth rate in a tax efficient fashion. In our FI phase, it will help replace our cash flow in a tax efficient fashion.
In the meanwhile, we still invest in index funds in our qualified accounts.
It's just another way to diversify into an additional income stream. We still invest in index funds but added real estate over the last 7 years. And while it has taken some of my time to deal with 6 properties, it's not to the extreme that people often claim. I probably waste more time on this forum on a typical Saturday than I spend all month on the properties.
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Re: Yet Another Real Estate vs Stock Market Thread
As others have said, you're neglecting appreciation.
Also, why are you paying taxes before you're deducted your expenses? Looks like you're underestimating profit there by $8K or so.
Also, why are you paying taxes before you're deducted your expenses? Looks like you're underestimating profit there by $8K or so.
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Re: Yet Another Real Estate vs Stock Market Thread
Our posts are not mutually exclusive. I'm making two claims: (1) RE pricing is less efficient than equities and (2) two RE investors may get different results based their tax/leverage status independent of the asset [1]. You're claiming most investors in both RE and the equities space are pretty bad: "few who are great at spotting these opportunities." I think all these claims are correct.avalpert wrote:I would just point out the Buffet, among many others, might disagree with the distinction you are making. I would also point out that, when looked at closely, you will find that lot's of those people who think they are among the few who are great at spotting these opportunities both in stocks and real estate, tend to not have the financial results to back it up.DVMResident wrote:The major difference is RE pricing is very inefficient relative to stocks. Owners sell even properties with favorable fundamentals for a variety of reasons: tired of being landlords; inherited properties; geographical moves; or just simply liquidating. There are few buyers, commonly only 1 or 2 serious ones. This leads to price-to-rent divergences. Add in the complexity of leverage and taxes: for the owner who paid off the mortgage and a fully depreciated and high marginal taxes, the ROI maybe unattractive compared to alternative investments; in contrast the buyer who will leverage 3-to-1 and lots of expenses/depreciation to go, the ROI maybe superior to alternative investments. One investment, two people different people, two different results.avalpert wrote:Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
Large equities have thousands and thousands of trades honing in on a consensuses price. Totally different beasts.
FWIW, my RE ROI has outpaced my BH AA by 9.2x over 5 years. I'm not skilled in either RE or equity selection.
[1] Actually, the tax aspect applies to equity and bond investors as well: e.g. RIETs' non-qualified dividends are appealing to one group of investors and munis' tax advantage are appealing to a different group. The tax status of the investor is an important consideration in any investment.
Re: Yet Another Real Estate vs Stock Market Thread
You are going to get $7,000/month rent for a $600,000 place? That's a dream I believe. Even in a tight high-rent area like the NYC metro area, you are lucky to get half that.
And property taxes are likely to be over $12,000, again twice your estimate.
The scenario presented is not even close to the ballpark.
(And if it's in a lower property-tax area, the rent would even be a lot lower to reflect that.)
And property taxes are likely to be over $12,000, again twice your estimate.
The scenario presented is not even close to the ballpark.
(And if it's in a lower property-tax area, the rent would even be a lot lower to reflect that.)
Last edited by rgs92 on Mon May 22, 2017 5:14 pm, edited 1 time in total.
Re: Yet Another Real Estate vs Stock Market Thread
One concrete example from real life: couple was going through a divorce, hated each other, so they sold their house for $100k under market just to get it over with. You will never see that happen in the stock market whereas you see it regularly in real estate. Investors with good networks and strong balance sheets tend to buy those properties.DVMResident wrote:Our posts are not mutually exclusive. I'm making two claims: (1) RE pricing is less efficient than equities and (2) two RE investors may get different results based their tax/leverage status independent of the asset [1]. You're claiming most investors in both RE and the equities space are pretty bad: "few who are great at spotting these opportunities." I think all these claims are correct.avalpert wrote:I would just point out the Buffet, among many others, might disagree with the distinction you are making. I would also point out that, when looked at closely, you will find that lot's of those people who think they are among the few who are great at spotting these opportunities both in stocks and real estate, tend to not have the financial results to back it up.DVMResident wrote:The major difference is RE pricing is very inefficient relative to stocks. Owners sell even properties with favorable fundamentals for a variety of reasons: tired of being landlords; inherited properties; geographical moves; or just simply liquidating. There are few buyers, commonly only 1 or 2 serious ones. This leads to price-to-rent divergences. Add in the complexity of leverage and taxes: for the owner who paid off the mortgage and a fully depreciated and high marginal taxes, the ROI maybe unattractive compared to alternative investments; in contrast the buyer who will leverage 3-to-1 and lots of expenses/depreciation to go, the ROI maybe superior to alternative investments. One investment, two people different people, two different results.avalpert wrote:Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.Valuethinker wrote:
Or Napoleon to his generals "First and foremost, you must be lucky". .
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
Large equities have thousands and thousands of trades honing in on a consensuses price. Totally different beasts.
FWIW, my RE ROI has outpaced my BH AA by 9.2x over 5 years. I'm not skilled in either RE or equity selection.
[1] Actually, the tax aspect applies to equity and bond investors as well: e.g. RIETs' non-qualified dividends are appealing to one group of investors and munis' tax advantage are appealing to a different group. The tax status of the investor is an important consideration in any investment.
It is true that most Real Estate investors lack skill. But skill is persistent in RE in a way it just doesn't appear to be in the stock market.
Re: Yet Another Real Estate vs Stock Market Thread
Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
So, can you equate Real Estate investing to actively managed funds? Where there are some winners and some losers. Is chasing the the Real Estate dream somewhat like picking individual stocks? Except you have more control over your destiny?
Re: Yet Another Real Estate vs Stock Market Thread
Perhaps this is a big part of it as well. Using Real Estate to shelter against taxes. Then when you die, the capital gains get stepped up and you never have to pay those depreciation-tax-savings back.itstoomuch wrote:We will allow this rental or equivalent to be passed on to our heirs in a step-up and in the meantime use the depreciation schedule and expenses to modify our retirement taxes.
So Real Estate could be a good method for transferring wealth to children?
Re: Yet Another Real Estate vs Stock Market Thread
Here's a jumping off point I used to estimate expenses.tylerherman wrote: Also your numbers seem really random. 9% property managment, how did you figure that? How are you getting 3% vacancy and 3% repairs? 7.5% from stocks is pushing it.
https://www.biggerpockets.com/renewsbl ... -expenses/
However a previous poster was correct. I didn't write off ALL of the expenses, only the depreciation. It seems that would make much more of a difference.
Re: Yet Another Real Estate vs Stock Market Thread
Thank you for pointing this out. I updated my original post to include a deduction of all expenses.metrunt wrote:As others have said, you're neglecting appreciation.
Also, why are you paying taxes before you're deducted your expenses? Looks like you're underestimating profit there by $8K or so.
Re: Yet Another Real Estate vs Stock Market Thread
rgs92 wrote:You are going to get $7,000/month rent for a $600,000 place? That's a dream I believe. Even in a tight high-rent area like the NYC metro area, you are lucky to get half that.
And property taxes are likely to be over $12,000, again twice your estimate.
The scenario presented is not even close to the ballpark.
(And if it's in a lower property-tax area, the rent would even be a lot lower to reflect that.)
Good points. However, I don't think the numbers are that far off.
Imagine a 4 unit property in California. Each unit renting for $1750. What a deal! Also, property taxes are generally a tad more than 1% in California. Though this varies slightly by city.
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Re: Yet Another Real Estate vs Stock Market Thread
YMMVBAM! wrote:Perhaps this is a big part of it as well. Using Real Estate to shelter against taxes. Then when you die, the capital gains get stepped up and you never have to pay those depreciation-tax-savings back.itstoomuch wrote:We will allow this rental or equivalent to be passed on to our heirs in a step-up and in the meantime use the depreciation schedule and expenses to modify our retirement taxes.
So Real Estate could be a good method for transferring wealth to children?
There's more to this story of our inheritance.
My InLaws left their home for their incompetent, autistic son, who passed prior to my MIL death at age 95. This home has been vacant for 25 years. No entry whatsoever. Property values indicated that it was worth ~$1M, if updated. The place was sold for ~$700,000. Exit currency fee was ~300,000 (wife never told me exactly). Wife net inheritance $400,000. Now this amount, we take as just compensation for our care of BIL for 30years, to his death in our home. He never did any chores, and stole priceless Ming treasures from me given to me from my Mother from her father and grandfather.
Sometimes one gets lucky. Sometimes not. One can only do the best one can given the times, information and conditions.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: Yet Another Real Estate vs Stock Market Thread
I don't know if this is your actual situation, but there are others that work well...An 8-plex in someplace like Tulsa would generate the income you're talking about with relatively low property taxes.BAM! wrote:Imagine a 4 unit property in California. Each unit renting for $1750. What a deal! Also, property taxes are generally a tad more than 1% in California. Though this varies slightly by city.
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Re: Yet Another Real Estate vs Stock Market Thread
I don't really equate it at all.BAM! wrote:Valuethinker wrote:Or Napoleon to his generals "First and foremost, you must be lucky". .KyleAAA wrote:Your analysis seems to ignore appreciation (I'd expect values to go up with inflation) and your example is, at best, a marginal deal a lot of investors wouldn't bother with. But the main thing you're ignoring is the availability of cheap, safe, long-term, fixed-rate leverage. Good RE investors routinely earn 15-20% with moderate risk because they know how to evaluate properties and buy at great prices.
But even in your example, the RE number is a real return while the stock market return is nominal.
The underlined bit gets to the nub of this. It's knowing what you are buying and buying well that makes you the money.
So you can't compare it to an equity index investment, where one lets the market efficiency do the work.
So, can you equate Real Estate investing to actively managed funds? Where there are some winners and some losers. Is chasing the the Real Estate dream somewhat like picking individual stocks? Except you have more control over your destiny?
With RE you have one property (or several) in one location, one city. Even tech or Wall Street has its down periods. I am old enough to remember when American cities were turning into something out of Robocop. And when prosperous cities included places like Cleveland, which have some great assets but which have struggled.
There's no doubt RE is a good way to get rich slowly. If you get it right in terms of location then using leverage you can build a substantial portfolio.
Each individual RE investment has to be examined on its own merits, you can't generalize about it. There are lots of books and seminars about getting rich doing this, which makes me cautious.
However it is not comparable to index investing, where you seek maximum diversification geographically and in every other dimension. And where your approach to your portfolio is purely passive.
Re: Yet Another Real Estate vs Stock Market Thread
A 4-unit in any decent area of California would be about 1.5 to 3 million dollars and up.
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Re: Yet Another Real Estate vs Stock Market Thread
What kind of rent would you achieve on that?rgs92 wrote:A 4-unit in any decent area of California would be about 1.5 to 3 million dollars and up.
I suggested in another thread 6% cap rate = Net Operating Income/ Value (cost)
Others suggested that is too low. Certainly in the UK one would struggle to achieve that.
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Re: Yet Another Real Estate vs Stock Market Thread
Which is why its riskier to invest in rentals in expensive markets like San Francisco, LA, DC, Seattle, New York, etc. You are banking on appreciation for return. Whereas in a lot of other markets, cap rates are reasonable, and good returns from rental real estate can be found based on rental income alone. Certainly it was a much better time to invest in rental real estate a couple of years ago.rgs92 wrote:A 4-unit in any decent area of California would be about 1.5 to 3 million dollars and up.
Re: Yet Another Real Estate vs Stock Market Thread
I started investing in Class B and C rental properties 3 years ago. Ugly duplexes in Class C neighborhoods. We went in and renovated a couple of them and bought a single family home in a different neighborhood.
Bought these for $25K duplex, $50K duplex, and $37K single family 3 bedroom home.
In my area, appreciation of rental property almost never happens. My realtor said, "you could buy these things for $45K in 2000 or $45K in 2015"
I just spoke to another landlord in the area and he's selling for $83K...same type of duplexes. 2x or in some cases 3x what landlords have paid for these things in the last 5 to 10 years.
The market is really strange and I wouldn't be putting new money into my local rentals for a while.
Heck...for a moment, I thought about selling last night.
Bought these for $25K duplex, $50K duplex, and $37K single family 3 bedroom home.
In my area, appreciation of rental property almost never happens. My realtor said, "you could buy these things for $45K in 2000 or $45K in 2015"
I just spoke to another landlord in the area and he's selling for $83K...same type of duplexes. 2x or in some cases 3x what landlords have paid for these things in the last 5 to 10 years.
The market is really strange and I wouldn't be putting new money into my local rentals for a while.
Heck...for a moment, I thought about selling last night.
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Re: Yet Another Real Estate vs Stock Market Thread
I am guessing somewhere in the Midwest? Or the South? A friend of mine has a family home in southern Illinois outside of St. Louis. He says it will take years to sell the thing- at any price.renue74 wrote:I started investing in Class B and C rental properties 3 years ago. Ugly duplexes in Class C neighborhoods. We went in and renovated a couple of them and bought a single family home in a different neighborhood.
Bought these for $25K duplex, $50K duplex, and $37K single family 3 bedroom home.
In my area, appreciation of rental property almost never happens. My realtor said, "you could buy these things for $45K in 2000 or $45K in 2015"
You have maintenance, and old Victorians may look nice but they cost a fortune to maintain and keep warm. And you have property taxes-- as the property tax base shrinks, those remaining pay more tax.
Same thing in parts of upstate NY. Low prices (not AFAIK as low as yours) and sky high property taxes.
In the market you are in I am guessing you aim for 10% cap rates (Net Op Income pa/ cost)? Because you won't make any money on the price appreciation. Maybe nobody gets cap rates of 10% any more, but say 7-8%?I just spoke to another landlord in the area and he's selling for $83K...same type of duplexes. 2x or in some cases 3x what landlords have paid for these things in the last 5 to 10 years.
The market is really strange and I wouldn't be putting new money into my local rentals for a while.
Heck...for a moment, I thought about selling last night.
A *lot* of money, including institutional money, poured into the rental housing market in the last few years. Private Equity firms buying big estates of Single Family Dwellings. Individuals looking for a higher return from their savings.
Institutional REIT-type money works well with big apartment buildings. There are economies of scale and efficiencies in managing such. One office to handle rent, repairs etc.
Single Family Dwellings, or even small duplexes, are usually the market for local property investors. They can spend the legwork keeping the rent collected and the things maintained. Do deals with local handymen for repairs, etc.
Institutional money I think poured into those latter and is not really suited for it. At the same time, first time buyers came back into the market but the small developers and housebuilders are gone after the Crash, and the local banks have cut their exposure.
So you have too much demand for rental units, and you have not enough new supply. Result: prices shoot up.
But the economics haven't fundamentally improved on these things. Cap rates have come down, with lower interest rates.
Re: Yet Another Real Estate vs Stock Market Thread
so why bother for a return of 7-8%, with all the extra work of developing your own real estate company. Especially if this is the historic return of the stock market. Isn't a total stock market fund -- all the companies in the US -- well enough diversified?In the market you are in I am guessing you aim for 10% cap rates (Net Op Income pa/ cost)? Because you won't make any money on the price appreciation. Maybe nobody gets cap rates of 10% any more, but say 7-8%?
Surely if all the companies in the US crash and fail we'll have bigger fish to fry...
Re: Yet Another Real Estate vs Stock Market Thread
Leverage, depreciation, and the various tax deductions are not subjective.avalpert wrote:I would just point out the Buffet, among many others, might disagree with the distinction you are making. I would also point out that, when looked at closely, you will find that lot's [sic] of those people who think they are among the few who are great at spotting these opportunities both in stocks and real estate, tend to not have the financial results to back it up.DVMResident wrote:The major difference is RE pricing is very inefficient relative to stocks. Owners sell even properties with favorable fundamentals for a variety of reasons: tired of being landlords; inherited properties; geographical moves; or just simply liquidating. There are few buyers, commonly only 1 or 2 serious ones. This leads to price-to-rent divergences. Add in the complexity of leverage and taxes: for the owner who paid off the mortgage and a fully depreciated and high marginal taxes, the ROI maybe unattractive compared to alternative investments; in contrast the buyer who will leverage 3-to-1 and lots of expenses/depreciation to go, the ROI maybe superior to alternative investments. One investment, two people different people, two different results.avalpert wrote:Right, the comparison isn't too index investing - the comparison is to picking great stocks. A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices... both statements come from the same place.
Large equities have thousands and thousands of trades honing in on a consensuses price. Totally different beasts.
To compare the market efficiency of indexing and RE investing, and to reach the conclusion that success in each market must be equally difficult, is to affirm the consequent. They are not the same. Any given stock has thousands of owners and nearly as many analysts; shares will change hands thousands of times a day. The typical property has one owner and a much more limited supply of buyers; it changes hands perhaps once a decade. The reasons people sell real estate are usually completely different than the reasons people sell stocks - e.g., you generally don't find people liquidating their portfolios when they move.
In my experience, people who approach real estate as a business are usually successful. That has certainly been the case for me; the ROI on my RE is higher than my BH portfolio, with much better cashflow. Many people I know who have had a bad experience in real estate bought a house as an "investment", which is not the same thing as investing in real estate.
Speaking of Buffett, he himself said that single family homes are a better investment than stocks, if done correctly. http://www.cnbc.com/id/46538421
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Re: Yet Another Real Estate vs Stock Market Thread
Leverage.BAM! wrote:so why bother for a return of 7-8%, with all the extra work of developing your own real estate company. Especially if this is the historic return of the stock market. Isn't a total stock market fund -- all the companies in the US -- well enough diversified?In the market you are in I am guessing you aim for 10% cap rates (Net Op Income pa/ cost)? Because you won't make any money on the price appreciation. Maybe nobody gets cap rates of 10% any more, but say 7-8%?
Surely if all the companies in the US crash and fail we'll have bigger fish to fry...
A cap rate of 7-8% should give a return to equity of at least 15-16%-- I'd have to build a model to confirm that. However if you can get 7-8% cap rates, then I doubt there is much price appreciation priced into the market (none, basically?).
Individual real estate investing is a *business* and I am reacting to the poster's description of his/ her business in that area. I was amazed at the low housing valuations.
Say even the cheapest residential construction in the USA costs $150/ psf. So a 2,000 sf house is going to cost $30k. That is not a lot less than the power is buying whole houses for (with land). That suggests the market is basically discounted real estate taxes and maintenance, and pricing in no growth in value.
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Re: Yet Another Real Estate vs Stock Market Thread
Leverage allows you access the 'growth'/appreciation side even when the RE market is fully valued. If you assume a real appreciation rate of 0%, the nominal appreciation is the rate of inflation. Inflation on leverage creates a positive real ROI.Valuethinker wrote:However if you can get 7-8% cap rates, then I doubt there is much price appreciation priced into the market (none, basically?).
Hypothetical to illustrate: $100k unit with 20% down. Inflation 2%. A nominal appreciation of $2k/yr gain on $20k equity or about 10%* nominal gain on cash on top of the monthly rent. The nominal appreciation is a significant contributor of the gains, especially in the early years when equity is low.
---
*That 10% is overstated because (1) that leverage comes at a cost of the mortgage interest and (2) that percentage decays as equity (the denominator) raises.
Re: Yet Another Real Estate vs Stock Market Thread
Hmm, not really.avalpert wrote: A good stock investor routinely earns 15-20% with moderate risk because they know how to evaluate companies and buy at great prices...
I own the next hot stock- VTSAX
Re: Yet Another Real Estate vs Stock Market Thread
About $7000-$8000/month gross rent on the sum of all the units combined.Valuethinker wrote:What kind of rent would you achieve on that?rgs92 wrote:A 4-unit in any decent area of California would be about 1.5 to 3 million dollars and up.
I suggested in another thread 6% cap rate = Net Operating Income/ Value (cost)
Others suggested that is too low. Certainly in the UK one would struggle to achieve that.
Roughly 5% gross return on the total purchase cost in CA. Maintenance, taxes, property mgmt. will reduce this return.
You are banking mainly on decent long term property value appreciation, which could work well (or not). NYC, west coast major cities over the last 40 years have had spectacular appreciation, but of course, we don't know if that will continue.
The opportunity cost is the dividends and capital appreciation in stocks, which could also work well (or not), but the long term record with diversification seems to support this.
Re: Yet Another Real Estate vs Stock Market Thread
Yes, this pretty well sums it up.BAM! wrote:Perhaps the appeal for Real Estate is related to tangible assets, monthly income / replacement income / ability to leverage more easily. Whereas for the stock market to make sense, one has to reinvest the dividends and hold for several decades to have a stronger chance at averaging a 7.5% return.
Thoughts?
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Yet Another Real Estate vs Stock Market Thread
tyler said
No one would buy 1 rental all cash for $600,000 they would buy 5 rentals with 20% down and have $6mil in property value after 30 years.
this is a scenario i am thinking of doing. i am also having a hard time convincing myself this is a good way to go vs just simply going with the 3 fund portfolio and coasting for the next 30 yrs
family currently own a rental property, have had it for 30 yrs, good area always rented, has appreciated alot over the decades. we know the area well and could duplicate with another 6 properties by implementing the scenario above. it would involve a property management company, as keeping 6+1 properties is alot more time than keeping just 1.
properties we're looking at are approx. 400k single family residences, and can rent for 2-2.5k
reality is NOI is paltry in this scenario, yielding a 3-4 %cap rate. and after mortgage etc, properties may produce 100-200/month each.
only way it seems to make sense is if i bought the properties 30 yrs ago !!
to make matters worse i just dont see RE appreciating by 3X 4X or 5X like it did over the last 30 yrs.
in my scenario 6 houses, 100k down each, 400k purchase price
total value 6x400k = 2.4mil
basically renters are paying off mortgages, thats it.
only hope i have is appreciation... will the 400k homes be worth 800k in the next 30 yrs. i doubt it. demographics, stagnant salaries, age of properties.
but lets say they are. so that 4.8 mil, that was paid off by renters.
so my 600k turned into 4.8m.
but if i just invest, hoping to double my nest egg every 10 yrs, after 30 yrs i'm also at 4.8m but with none of the hassles of being a landlord
can anyone explain if there are other benefits like at tax time, or via an llc, or something that makes real estate so much more lucrative that its a smarter investment ? i just dont see it.
No one would buy 1 rental all cash for $600,000 they would buy 5 rentals with 20% down and have $6mil in property value after 30 years.
this is a scenario i am thinking of doing. i am also having a hard time convincing myself this is a good way to go vs just simply going with the 3 fund portfolio and coasting for the next 30 yrs
family currently own a rental property, have had it for 30 yrs, good area always rented, has appreciated alot over the decades. we know the area well and could duplicate with another 6 properties by implementing the scenario above. it would involve a property management company, as keeping 6+1 properties is alot more time than keeping just 1.
properties we're looking at are approx. 400k single family residences, and can rent for 2-2.5k
reality is NOI is paltry in this scenario, yielding a 3-4 %cap rate. and after mortgage etc, properties may produce 100-200/month each.
only way it seems to make sense is if i bought the properties 30 yrs ago !!
to make matters worse i just dont see RE appreciating by 3X 4X or 5X like it did over the last 30 yrs.
in my scenario 6 houses, 100k down each, 400k purchase price
total value 6x400k = 2.4mil
basically renters are paying off mortgages, thats it.
only hope i have is appreciation... will the 400k homes be worth 800k in the next 30 yrs. i doubt it. demographics, stagnant salaries, age of properties.
but lets say they are. so that 4.8 mil, that was paid off by renters.
so my 600k turned into 4.8m.
but if i just invest, hoping to double my nest egg every 10 yrs, after 30 yrs i'm also at 4.8m but with none of the hassles of being a landlord
can anyone explain if there are other benefits like at tax time, or via an llc, or something that makes real estate so much more lucrative that its a smarter investment ? i just dont see it.