Stocks vs. rental property

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johnkgan
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Stocks vs. rental property

Post by johnkgan » Sun Jun 24, 2018 11:25 pm

Dear experts, I was wondering if you think investing (say 1 million dollars for example) in rental property may be better than stocks and bonds? Because rental property would provide appreciation as well as monthly incoming though there is always the pain of not being able to find tenants? Or should I be only investing say 80% of my savings in rental property?

If real estate is better, would Bay area California be okay to consider for good appreciation along with rent?
Am I right in my assumption that school districts and downtowns close to companies such as upcoming google campus in San Jose near Diridon station may appreciate more?
Should I buy a small 3 bed room single family home or are bigger home easy to rent out as well?
I would greatly appreciate your advice. Thank you so much!

viz
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Joined: Fri May 04, 2018 11:22 pm

Re: Stocks vs. rental property

Post by viz » Sun Jun 24, 2018 11:39 pm

johnkgan wrote:
Sun Jun 24, 2018 11:25 pm
Dear experts, I was wondering if you think investing (say 1 million dollars for example) in rental property may be better than stocks and bonds?
Do you plan to use leverage for your real estate investment? If you do then real estate "can" give better returns but will be a lot more work. It "can" also perform much worse than stocks and bonds. You might have to replace the roof within first 5 years
Because rental property would provide appreciation as well as monthly incoming though there is always the pain of not being able to find tenants? Or should I be only investing say 80% of my savings in rental property?

If real estate is better, would Bay area California be okay to consider for good appreciation along with rent?
Am I right in my assumption that school districts and downtowns close to companies such as upcoming google campus in San Jose near Diridon station may appreciate more?
Should I buy a small 3 bed room single family home or are bigger home easy to rent out as well?
I would greatly appreciate your advice. Thank you so much!
This is pure speculation. A lot of prices in San Jose already factor in the commuter hub and Google campus in downtown. Also, the rent to price ratio will be less than .5% and rent would barely cover your mortgage and you would pay taxes and other expenses out of pocket. Of course, you could find a deal.

I do think that long term (10 or more years), home prices in Bay Area will be up.

DaBombCat
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Re: Stocks vs. rental property

Post by DaBombCat » Sun Jun 24, 2018 11:52 pm

johnkgan wrote:
Sun Jun 24, 2018 11:25 pm
Dear experts, I was wondering if you think investing (say 1 million dollars for example) in rental property may be better than stocks and bonds? Because rental property would provide appreciation as well as monthly incoming though there is always the pain of not being able to find tenants? Or should I be only investing say 80% of my savings in rental property?

If real estate is better, would Bay area California be okay to consider for good appreciation along with rent?
Am I right in my assumption that school districts and downtowns close to companies such as upcoming google campus in San Jose near Diridon station may appreciate more?
Should I buy a small 3 bed room single family home or are bigger home easy to rent out as well?
I would greatly appreciate your advice. Thank you so much!
In the hands of an established real estate investor, $1 mill could probably fetch $100k in annual cash flow, plus have annual price appreciation and rent increases, plus have other people manage the properties. Heck, there are lots of assets that could get you to retirement today on $1 mill. But, if you don’t have the systems, industy contacts, and understanding of how real estate investing works, then it could be a tough haul to get to that point.

Stocks and bonds aren’t easily comparable to real estate. Also, there are many ways to invest in stocks/bonds that support different goals.

What is your financial life like now and what are your financial goals?

DJN
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Re: Stocks vs. rental property

Post by DJN » Sun Jun 24, 2018 11:54 pm

Its always nice to think about investing in property because it is tangible and you feel like you own something tangible, however if you ever suffer from a property downturn where you have bought high and are stuck then the potential destruction of your personal wealth can last some time and force you to take a hit by selling low. This circumstance can be devastating to the individual particularly as with only one or two property investments you can be unable to address the situation.
Property is a tricky investment area even for the experts. The main drawback is the illiquidity of the asset class coupled with the transaction costs if you are relying upon capital growth as well as income. Another consideration is the costs of holding RE. The great thing about the stock market is that the costs are more transparent, and therefore you may have a better chance. This forum would seem to suggest that RE should be a small part of your portfolio if separately allocated at all.

dacalo
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Re: Stocks vs. rental property

Post by dacalo » Sun Jun 24, 2018 11:57 pm

Just to provide one point of view:

We bought our San Jose home back in September. It was listed $770k and we submitted an offer for $850k that was accepted (our's wasn't even the highest). Now it is worth around $960k.

There was a home we were interested in downtown area at the time listed around $670k. It was around 1400 sq ft. and in poor condition that required some significant repairs. It sold for $800k cash and now it is worth $1M.

Will the houses keep going up? Maybe yes or maybe not. Will it go up at above trend? It's all speculative. All I know is that you will have to pay premium price for any houses in this market. The latest word is that Adobe and HP will join Google opening DT offices but again, speculative. We plan to stay long-term.

AerialWombat
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Re: Stocks vs. rental property

Post by AerialWombat » Mon Jun 25, 2018 12:25 am

I’m an active real estate investor. Generates nice cash flow, and pays me several different ways (appreciation, debt paydown by tenants, tax writeoff from depreciation, monthly positive cashflow, etc).

However, I would advise against investing in the Bay Area. Prices are just way too high, and there will likely be a significant price correction within a few years.

Look to Vegas, Portland, Salt Lake, Phoenix instead. Buy and use a property manager.

MrPotatoHead
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Re: Stocks vs. rental property

Post by MrPotatoHead » Mon Jun 25, 2018 1:13 am

johnkgan wrote:
Sun Jun 24, 2018 11:25 pm
Dear experts, I was wondering if you think investing (say 1 million dollars for example) in rental property may be better than stocks and bonds? Because rental property would provide appreciation as well as monthly incoming though there is always the pain of not being able to find tenants? Or should I be only investing say 80% of my savings in rental property?

If real estate is better, would Bay area California be okay to consider for good appreciation along with rent?
Am I right in my assumption that school districts and downtowns close to companies such as upcoming google campus in San Jose near Diridon station may appreciate more?
Should I buy a small 3 bed room single family home or are bigger home easy to rent out as well?
I would greatly appreciate your advice. Thank you so much!
Ask Larry Holmes about the efficacy of concentrating your investments in a non geographically diverse portfolio of real estate. Spoiler: it may not end well.

I have nothing against real estate investments, in fact I love them, but there are some places you could not pay me enough to invest in, California, Illinois, New York, New Jersey among them. On the other hand a relative of mine has some 100 million plus in CA real estate so it is doable, I guess. . He started in the 50s though and his children are also developers but none of them have approached daddy in asset growth.

FYI, I hold about 1/30th of my portfolio in real estate currently which is very low for me historically (I divested of property in a problematic state over a decade ago to beat the rush and put the proceeds in the total stock market. So far it has paid off very well). I would go up to 25% if I found the right deals in the right location. I am hunting some AG land out of state for a new venture.

I try to invest in a loose biblical fashion: 25% real estate (except for now as indicated), 25% in reserve, 25% in business, 25% in the securities market. FYI I only count my securities market and reserve as retirement holdings.
Last edited by MrPotatoHead on Mon Jun 25, 2018 1:30 am, edited 1 time in total.

WanderingDoc
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Re: Stocks vs. rental property

Post by WanderingDoc » Mon Jun 25, 2018 1:23 am

AerialWombat wrote:
Mon Jun 25, 2018 12:25 am
I’m an active real estate investor. Generates nice cash flow, and pays me several different ways (appreciation, debt paydown by tenants, tax writeoff from depreciation, monthly positive cashflow, etc).

However, I would advise against investing in the Bay Area. Prices are just way too high, and there will likely be a significant price correction within a few years.

Look to Vegas, Portland, Salt Lake, Phoenix instead. Buy and use a property manager.
Same think my mentors were advised in the 1960s, 1970s, 1980s, 1990s, 2000s, and 2010s:
"Don't invest in San Diego, San Francisco, San Jose, Honolulu, etc." Guess what? Pick any year or decade until now, those coastal markets have have the BEST RETURNS (cash flow + capital appreciation) in the nation, no matter the time period.

Its something like a broken record that has been going for decades. When will people learn that real estate is LOCAL. It doesn't follow YOUR preconceived notions of what it SHOULD do, or what Case-Schiller said about the entire U.S. The markets that people who wished they had invested years ago, tell you not to invest there. That should be your clue, they are the most PROFITABLE markets.

"Prices are just way too high" - same thing people have said about SF and NYC since the 1970s, and investors have made, and continue to make a killing no matter what year they bought, if they were doing buy and hold.

I agree totally with the first line in the quote above though.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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peterinjapan
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Re: Stocks vs. rental property

Post by peterinjapan » Mon Jun 25, 2018 1:57 am

Real estate is amazing. A solid asset that goes up in value (if it does), balancing of stock risk by being totally different, the ability to write off income through depreciation often resulting in $0 taxes owed (this is why Mr. Trump pays no taxes, I am 100% sure), and the ability to step up value at death. Definitely good for some people.

3funder
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Re: Stocks vs. rental property

Post by 3funder » Mon Jun 25, 2018 7:00 am

I vote for stocks. Takes less work than real estate and usually outperforms over the long term.

StarTrekFan
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Re: Stocks vs. rental property

Post by StarTrekFan » Mon Jun 25, 2018 7:26 am

Leveraging is the operative word here. Also remember like stocks, rental properties have different groupings too.

In the most aggressive method -- bank on appreciation (akin to growth stocks): one can accumulate vast amounts and let appreciation do the heavy lift over time while cash flow is neutral and taking on depreciation for current income protection. This is where one uses money to make money for the future --- not today.

As time passes, one inverts this and flips the property via exchange to a cash producing property (akin to income stocks) - one that doesn't appreciate much, but has high cash flow characteristics -- very different from the above property.

It takes time and patience and a lot more skill than a simple 3fund strategy; but the work pays off in spades if done correctly. If not done right, better winning in Vegas.

Valuethinker
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Re: Stocks vs. rental property

Post by Valuethinker » Mon Jun 25, 2018 9:03 am

johnkgan wrote:
Sun Jun 24, 2018 11:25 pm
Dear experts, I was wondering if you think investing (say 1 million dollars for example) in rental property may be better than stocks and bonds? Because rental property would provide appreciation as well as monthly incoming though there is always the pain of not being able to find tenants? Or should I be only investing say 80% of my savings in rental property?

If real estate is better, would Bay area California be okay to consider for good appreciation along with rent?
Am I right in my assumption that school districts and downtowns close to companies such as upcoming google campus in San Jose near Diridon station may appreciate more?
Should I buy a small 3 bed room single family home or are bigger home easy to rent out as well?
I would greatly appreciate your advice. Thank you so much!
You cannot compare the 2 investments, really.

Stock investing is about indexation. Buy the market and let the market do its work. Minimize costs. Hope you are not Japan 1989 or USA 1966 or UK 1970 or anywhere 1929.

Real estate? You have tied yourself to one location and maybe only one property. You have limited diversification. If you are leveraged, you can lose the lot. If you are not leveraged, you would expect to have inferior returns to stocks in the long run. Because housing pays an amenity return (you can live in a house, but not your stock portfolio) you would expect returns to be lower in the long run. By and large that is true, although there's a group of coastal cities in the USA (and global centres) that have broken that rule for the last 30 years or so.

We have real stats for stock performance. Whatever I say about my portfolio, if I tell you I started investing in 1983 (close enough) then you have a pretty good idea of how well I did, at the maximum (I could have done a lot worse than index ;-)).

Real estate? Men lie about a few things: women (number), golf handicap and how much money they make. Oh yes, and about real estate ;-).


I'd say this. When everybody is talking how much money they have made in real estate, it's seldom a good time to invest. You want apocalypse or as close to it as you can get. And hope you are not in the next Detroit, but rather the next Brooklyn.

I'd avoid investing in an area that was totally dependent on one industry for its economic prospects.
Last edited by Valuethinker on Mon Jun 25, 2018 9:10 am, edited 1 time in total.

Valuethinker
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Re: Stocks vs. rental property

Post by Valuethinker » Mon Jun 25, 2018 9:08 am

DaBombCat wrote:
Sun Jun 24, 2018 11:52 pm


In the hands of an established real estate investor, $1 mill could probably fetch $100k in annual cash flow, plus have annual price appreciation and rent increases, plus have other people manage the properties. Heck, there are lots of assets that could get you to retirement today on $1 mill. But, if you don’t have the systems, industy contacts, and understanding of how real estate investing works, then it could be a tough haul to get to that point.

Stocks and bonds aren’t easily comparable to real estate. Also, there are many ways to invest in stocks/bonds that support different goals.

What is your financial life like now and what are your financial goals?
I agree re this is a business/ lifestyle decision, not an investment one. I would say owning 1 property for $1m is just about the worst strategy one can have in real estate. 10 properties for $100k equity each (or 5 for $200k) is more likely.

Out of curiousity, how would you get $100k out of that - Cap Rate of 10%? Otherwise you are including leverage, and then you won't have that cash flow-- it will go back into paying interest + loan principal.

There's not much out there, I don't think, that has Cap Rates of 10%.

Yields (same thing) in West End London commercial are below 4%. Residential maybe less than 3%. If you buy ex Local Authority housing (privatized public housing) in the more outer suburbs you can probably get to 6-7%. Some tower block in a northern British city maybe you can get to 9-10%. Just pray that the building doesn't have non fire resistant cladding ;-) (tasteless joke alluding to recent death of 82 people in a fire carried by renovated external cladding).

Condos in Vancouver are below 2% cap rate, from what I can gather. Cash flow negative for their owners even after rental income.

Jason-Paul
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Re: Stocks vs. rental property

Post by Jason-Paul » Mon Jun 25, 2018 10:21 am

Hello,
I am also considering the same comparison, but on a much smaller scale. I have a condo that I currently live in, and I am entertaining the idea of leasing it for the next 10-12 years until it's paid off. In my analysis, I estimated the average costs renting for annual maintenance, management fees, taxes, insurance, etc., versus taking that same amount and just investing it in stocks, with an average of 7.5% returns until the year 2030, versus 3.5% annual appreciation in my local real estate market. The end results were pretty close, but main advantage of real estate was in capital gains taxes owed when selling. Granted, even though my comparison was on a much smaller scale, I concluded that the extra work that goes into real estate is not always a clear advantage to more reward. There's liquidity issues, and the old, "location, location, location" mantra is still the most important question. I think if you're not currently holding and converting a property, then perhaps sideline that money and wait for a better buying opportunity in real estate in the near future. Prices are expected to skyrocket in 2019, and the supply is still tight, while demand is high, and this can't continue much longer, especially with rates inching up. Just my novice two-cents worth :happy :happy

AerialWombat
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Re: Stocks vs. rental property

Post by AerialWombat » Mon Jun 25, 2018 12:45 pm

WanderingDoc wrote:
Mon Jun 25, 2018 1:23 am
Same think my mentors were advised in the 1960s, 1970s, 1980s, 1990s, 2000s, and 2010s:
"Don't invest in San Diego, San Francisco, San Jose, Honolulu, etc." Guess what? Pick any year or decade until now, those coastal markets have have the BEST RETURNS (cash flow + capital appreciation) in the nation, no matter the time period.

Its something like a broken record that has been going for decades. When will people learn that real estate is LOCAL. It doesn't follow YOUR preconceived notions of what it SHOULD do, or what Case-Schiller said about the entire U.S. The markets that people who wished they had invested years ago, tell you not to invest there. That should be your clue, they are the most PROFITABLE markets.

"Prices are just way too high" - same thing people have said about SF and NYC since the 1970s, and investors have made, and continue to make a killing no matter what year they bought, if they were doing buy and hold.

I agree totally with the first line in the quote above though.
First of all, glad to see another real estate investor here on Bogleheads. I've seen your handle on many other pro-real estate posts, and kudos to you for waving the pro-real estate flag on a stock forum. :sharebeer

Second, I totally agree with you. Coastal markets, around the world, have delivered superior real estate returns for literally several THOUSAND years of human history, for obvious reasons. My comments to the OP, to clarify, had to do with market timing and diversification. I'm a firm believer in market timing for real estate, and right now, in my humble opinion, is the wrong time for San Fran. I'm 100% convinced their will be a crash in local property values. Tech companies are already starting to flee California's absurd tax regime for friendlier climates, and this will have an impact on property values within 2-5 years.

The other end had to do with diversification. With property values currently exceeding a million buckaroos for an SFR, it's just impossible to diversify at 20-30% down. I currently own property in two states, have the next property under construction in a third state. Just like the conversation about diversifying across domestic and international equities, varying bond terms, etc., I believe in geographical diversification of REI holdings. Even at 30% down, I can simply buy 3x as many properties outside SF, or 6x as many as my home market of Seattle (where some of those tech companies are fleeing CA taxation).

I kinda wish we had an REI sub-forum here on Bogleheads. Oh, what fun we could have! :mrgreen:

WanderingDoc
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Re: Stocks vs. rental property

Post by WanderingDoc » Mon Jun 25, 2018 1:11 pm

AerialWombat wrote:
Mon Jun 25, 2018 12:45 pm
WanderingDoc wrote:
Mon Jun 25, 2018 1:23 am
Same think my mentors were advised in the 1960s, 1970s, 1980s, 1990s, 2000s, and 2010s:
"Don't invest in San Diego, San Francisco, San Jose, Honolulu, etc." Guess what? Pick any year or decade until now, those coastal markets have have the BEST RETURNS (cash flow + capital appreciation) in the nation, no matter the time period.

Its something like a broken record that has been going for decades. When will people learn that real estate is LOCAL. It doesn't follow YOUR preconceived notions of what it SHOULD do, or what Case-Schiller said about the entire U.S. The markets that people who wished they had invested years ago, tell you not to invest there. That should be your clue, they are the most PROFITABLE markets.

"Prices are just way too high" - same thing people have said about SF and NYC since the 1970s, and investors have made, and continue to make a killing no matter what year they bought, if they were doing buy and hold.

I agree totally with the first line in the quote above though.
First of all, glad to see another real estate investor here on Bogleheads. I've seen your handle on many other pro-real estate posts, and kudos to you for waving the pro-real estate flag on a stock forum. :sharebeer

Second, I totally agree with you. Coastal markets, around the world, have delivered superior real estate returns for literally several THOUSAND years of human history, for obvious reasons. My comments to the OP, to clarify, had to do with market timing and diversification. I'm a firm believer in market timing for real estate, and right now, in my humble opinion, is the wrong time for San Fran. I'm 100% convinced their will be a crash in local property values. Tech companies are already starting to flee California's absurd tax regime for friendlier climates, and this will have an impact on property values within 2-5 years.

The other end had to do with diversification. With property values currently exceeding a million buckaroos for an SFR, it's just impossible to diversify at 20-30% down. I currently own property in two states, have the next property under construction in a third state. Just like the conversation about diversifying across domestic and international equities, varying bond terms, etc., I believe in geographical diversification of REI holdings. Even at 30% down, I can simply buy 3x as many properties outside SF, or 6x as many as my home market of Seattle (where some of those tech companies are fleeing CA taxation).

I kinda wish we had an REI sub-forum here on Bogleheads. Oh, what fun we could have! :mrgreen:
Totally agree. I think many people (even on this forum based on the PMs I receive) are starting to see the benefits of investing in real estate, in terms of being financially free, monthly income you can use or reinvest NOW not some date decades ahead, diversification, holding real assets, and excellent tax benefits.

I have been pretty lazy myself. With bodybuilding/fitness/language learning consuming a great deal of my time these days, I have not bought a property as the sole owner in 15 months. If I can generate 16-19% IRR 100% passively by investing in a large apartment complex, its almost not worth it to find the great SFH property deals in such an "expensive", tight market. That said, waiting 10 years for a correction isn't the best strategy either.

Trying to pile some cash and shunt it all into a 30-60 unit deal in a couple years. Have you done any larger multifamily projects? The SFHs/condos have great returns but have bored me as of late due to lack of ability to scale.

+1 vote for the real estate subforum. Sadly, I don't see that happening but you never know 8-)
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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jadd806
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Re: Stocks vs. rental property

Post by jadd806 » Mon Jun 25, 2018 1:12 pm

WanderingDoc wrote:
Mon Jun 25, 2018 1:23 am
AerialWombat wrote:
Mon Jun 25, 2018 12:25 am
I’m an active real estate investor. Generates nice cash flow, and pays me several different ways (appreciation, debt paydown by tenants, tax writeoff from depreciation, monthly positive cashflow, etc).

However, I would advise against investing in the Bay Area. Prices are just way too high, and there will likely be a significant price correction within a few years.

Look to Vegas, Portland, Salt Lake, Phoenix instead. Buy and use a property manager.
Same think my mentors were advised in the 1960s, 1970s, 1980s, 1990s, 2000s, and 2010s:
"Don't invest in San Diego, San Francisco, San Jose, Honolulu, etc." Guess what? Pick any year or decade until now, those coastal markets have have the BEST RETURNS (cash flow + capital appreciation) in the nation, no matter the time period.

Its something like a broken record that has been going for decades. When will people learn that real estate is LOCAL. It doesn't follow YOUR preconceived notions of what it SHOULD do, or what Case-Schiller said about the entire U.S. The markets that people who wished they had invested years ago, tell you not to invest there. That should be your clue, they are the most PROFITABLE markets.

"Prices are just way too high" - same thing people have said about SF and NYC since the 1970s, and investors have made, and continue to make a killing no matter what year they bought, if they were doing buy and hold.

I agree totally with the first line in the quote above though.
Survivorship bias is a very interesting phenomenon.

WanderingDoc
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Re: Stocks vs. rental property

Post by WanderingDoc » Mon Jun 25, 2018 2:45 pm

jadd806 wrote:
Mon Jun 25, 2018 1:12 pm
WanderingDoc wrote:
Mon Jun 25, 2018 1:23 am
AerialWombat wrote:
Mon Jun 25, 2018 12:25 am
I’m an active real estate investor. Generates nice cash flow, and pays me several different ways (appreciation, debt paydown by tenants, tax writeoff from depreciation, monthly positive cashflow, etc).

However, I would advise against investing in the Bay Area. Prices are just way too high, and there will likely be a significant price correction within a few years.

Look to Vegas, Portland, Salt Lake, Phoenix instead. Buy and use a property manager.
Same think my mentors were advised in the 1960s, 1970s, 1980s, 1990s, 2000s, and 2010s:
"Don't invest in San Diego, San Francisco, San Jose, Honolulu, etc." Guess what? Pick any year or decade until now, those coastal markets have have the BEST RETURNS (cash flow + capital appreciation) in the nation, no matter the time period.

Its something like a broken record that has been going for decades. When will people learn that real estate is LOCAL. It doesn't follow YOUR preconceived notions of what it SHOULD do, or what Case-Schiller said about the entire U.S. The markets that people who wished they had invested years ago, tell you not to invest there. That should be your clue, they are the most PROFITABLE markets.

"Prices are just way too high" - same thing people have said about SF and NYC since the 1970s, and investors have made, and continue to make a killing no matter what year they bought, if they were doing buy and hold.

I agree totally with the first line in the quote above though.
Survivorship bias is a very interesting phenomenon.
So is not trying anything substantial/contrarian/extraordinary in life because other people or "psychologists" warned you not to.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

finite_difference
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Re: Stocks vs. rental property

Post by finite_difference » Mon Jun 25, 2018 2:53 pm

In my opinion whether you should or shouldn’t do RE is not just a formula. It depends on several different factors:

-Does owning RE make you feel safe? Does it make you feel more secure about owning some stocks?
-The state of your local RE market.
-Do you enjoy all the work behind owning rental properties. Does it give you satisfaction?
-Do you like to DIY, which can significantly reduce costs?
-Do you like to manage and select tenants?
-Do you have a decent amount of spare time?
-Are you going to be living near your local RE market for the long term?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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Pajamas
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Re: Stocks vs. rental property

Post by Pajamas » Mon Jun 25, 2018 2:59 pm

If you are considering buying rental property in the Bay area, be sure to investigate the appropriate laws and regulations. In places such as San Francisco or New York City where there are strong tenant protection laws, it can be difficult to evict a tenant even if they don't pay the rent.

There is also the risk of a nightmare tenant who goes well beyond the usual situation of being unable or unwilling to pay rent or move out.

https://www.nytimes.com/2013/06/07/opin ... right.html

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jadd806
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Re: Stocks vs. rental property

Post by jadd806 » Mon Jun 25, 2018 3:10 pm

WanderingDoc wrote:
Mon Jun 25, 2018 2:45 pm
jadd806 wrote:
Mon Jun 25, 2018 1:12 pm
WanderingDoc wrote:
Mon Jun 25, 2018 1:23 am
AerialWombat wrote:
Mon Jun 25, 2018 12:25 am
I’m an active real estate investor. Generates nice cash flow, and pays me several different ways (appreciation, debt paydown by tenants, tax writeoff from depreciation, monthly positive cashflow, etc).

However, I would advise against investing in the Bay Area. Prices are just way too high, and there will likely be a significant price correction within a few years.

Look to Vegas, Portland, Salt Lake, Phoenix instead. Buy and use a property manager.
Same think my mentors were advised in the 1960s, 1970s, 1980s, 1990s, 2000s, and 2010s:
"Don't invest in San Diego, San Francisco, San Jose, Honolulu, etc." Guess what? Pick any year or decade until now, those coastal markets have have the BEST RETURNS (cash flow + capital appreciation) in the nation, no matter the time period.

Its something like a broken record that has been going for decades. When will people learn that real estate is LOCAL. It doesn't follow YOUR preconceived notions of what it SHOULD do, or what Case-Schiller said about the entire U.S. The markets that people who wished they had invested years ago, tell you not to invest there. That should be your clue, they are the most PROFITABLE markets.

"Prices are just way too high" - same thing people have said about SF and NYC since the 1970s, and investors have made, and continue to make a killing no matter what year they bought, if they were doing buy and hold.

I agree totally with the first line in the quote above though.
Survivorship bias is a very interesting phenomenon.
So is not trying anything substantial/contrarian/extraordinary in life because other people or "psychologists" warned you not to.
I don't think retail real estate investment classifies as any of those things.

What do psychologists have to do with anything? Are you ok?

22twain
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Re: Stocks vs. rental property

Post by 22twain » Mon Jun 25, 2018 4:11 pm

WanderingDoc wrote:
Mon Jun 25, 2018 2:45 pm
So is not trying anything substantial/contrarian/extraordinary in life because other people or "psychologists" warned you not to.
I have no interest in trying substantial/contrarian/extraordinary (financial) things because I don't have an entrepeneurial personality. I respect the things that entrepeneurs do, and recognize that the economy needs them. Nevertheless, it is simply not my cup of tea. That includes investing in and managing real estate.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Re: Stocks vs. rental property

Post by MikeMak27 » Mon Jun 25, 2018 4:39 pm

Believe it or not, you can get pretty good cap rates in multiple middle class chicago neighborhoods. Prices are pretty darn cheap for middle class tenants in neighborhoods of Chicago such as Garfield Ridge, Clearing, and Archer Heights. They are right next to Midway airport. The violence you hear on the news about Chicago doesn’t exist in the first two neighborhoods since they are loaded with cops, firefighters, and teachers. Cheers :)
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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Re: Stocks vs. rental property

Post by rgs92 » Mon Jun 25, 2018 5:03 pm

If you had bought in Southern California in 1989, you would in most cases not have seen your house return to the price you bought it at for almost 10 years. Meanwhile, your stock portfolio (S&P500) would have more than tripled.

And in the middle of this, around 1992-4, you would be under your original price.

So is now 1989, or 1999, or something in between?

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Re: Stocks vs. rental property

Post by Pajamas » Mon Jun 25, 2018 5:32 pm

MikeMak27 wrote:
Mon Jun 25, 2018 4:39 pm
Believe it or not, you can get pretty good cap rates in multiple middle class chicago neighborhoods. Prices are pretty darn cheap for middle class tenants in neighborhoods of Chicago such as Garfield Ridge, Clearing, and Archer Heights.
Makes sense because Chicago's population has pretty much been decreasing since the 1950s, same for employment rates. Not as bad of a situation as Detroit but basically the same trends. Buffalo, Cleveland, Philadelphia, Baltimore, all those and more have struggled as cities in the sunbelt grew.

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Re: Stocks vs. rental property

Post by J295 » Mon Jun 25, 2018 6:02 pm

We own some alternative investments as a very modest part of our portfolio, but principally we are a stock and bond type investor.

Some of our family members have invested in real estate over the years and been quite successful. I’ve been aware of others who, particularly due to leverage, were flying high then crashed and burned. The great recession wasn’t that long ago, and there was a lot of blood in the water in real estate as well as other investment classes. Of course, when equities drop in value, and there is no leverage involved, there are no payments required for property and casualty insurance, utilities, capital improvements, mortgage payments, etc. Not true in real estate, especially when the tenant defaults and you can’t re-let the property

On the other hand, the depreciation and other deductions that would be available to a real estate owner would have been very attractive to us during our higher earning pre-– retirement years

Real estate investing just wasn’t something that interested us due to the time commitments. If we had been interested, real estate would not have replaced all stocks but would have been factored into as part of our overall allocation, given our needs and risk tolerance.

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Re: Stocks vs. rental property

Post by Pajamas » Mon Jun 25, 2018 6:08 pm

J295 wrote:
Mon Jun 25, 2018 6:02 pm
I’ve been aware of others who, particularly due to leverage, were flying high then crashed and burned. The great recession wasn’t that long ago, and there was a lot of blood in the water in real estate as well as other investment classes. Of course, when equities drop in value, and there is no leverage involved, there are no payments required for property and casualty insurance, utilities, capital improvements, mortgage payments, etc. Not true in real estate, especially when the tenant defaults and you can’t re-let the property
Lots of people speculated in housing in the last boom before the 2008-2009 financial crisis. I know someone who was flipping houses and got stuck with some severely underwater properties that were not ready to sell or even rent. The wife had to end her retirement and go back to work to pay for college for two kids and keep them afloat. Had to commute 1 1/2 hours each way. Prices never recovered in that area. It took them many years to get out of debt and unload the properties. In the meantime, the equities markets recovered and roared ahead.

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Re: Stocks vs. rental property

Post by MikeMak27 » Mon Jun 25, 2018 6:45 pm

Pajamas wrote:
Mon Jun 25, 2018 5:32 pm
MikeMak27 wrote:
Mon Jun 25, 2018 4:39 pm
Believe it or not, you can get pretty good cap rates in multiple middle class chicago neighborhoods. Prices are pretty darn cheap for middle class tenants in neighborhoods of Chicago such as Garfield Ridge, Clearing, and Archer Heights.
Makes sense because Chicago's population has pretty much been decreasing since the 1950s, same for employment rates. Not as bad of a situation as Detroit but basically the same trends. Buffalo, Cleveland, Philadelphia, Baltimore, all those and more have struggled as cities in the sunbelt grew.
Chicago’s population decline from the 50’s is a result of two things. One, in the 50’s there were a number of neighborhoods that were complete slums. No joke, people were living 7-8 people per apartment (2 parents, 5-6 kids). Both of my parents lived like this in Irish neighborhoods on the south side. It was the same for poor black neighborhoods. As those groups made their way out of complete poverty, they had fewer kids and bought their entire 2 or 3 flat so now 1 family was living in 3 units instead of 20 people.
Secondly, population is down in certain neighborhoods due to complete war zone violence. Certain south and west sides I would not even consider going to. The vast majority of middle class black families that aren’t city workers have fled to the burbs. That said, murders are down over the last two years compared to their 2016 recent high. Middle and upper class neighborhoods are doing as well as ever. Chicago’s greater downtown is growing faster than any city in the country. The neighborhoods I mentioned, Clearing, Garfield Ridge, and Archer Heights are safe. They’re also cheaper and have better cap rates for investors compared to the wealthy neighborhoods like Lincoln Park, Old Town, the West Loop, as well as the rapidly gentrifying neighborhoods of Logan Square, Avondale, and Portage Park.
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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Re: Stocks vs. rental property

Post by DaBombCat » Mon Jun 25, 2018 9:21 pm

Valuethinker wrote:
Mon Jun 25, 2018 9:08 am
DaBombCat wrote:
Sun Jun 24, 2018 11:52 pm


In the hands of an established real estate investor, $1 mill could probably fetch $100k in annual cash flow, plus have annual price appreciation and rent increases, plus have other people manage the properties. Heck, there are lots of assets that could get you to retirement today on $1 mill. But, if you don’t have the systems, industy contacts, and understanding of how real estate investing works, then it could be a tough haul to get to that point.

Stocks and bonds aren’t easily comparable to real estate. Also, there are many ways to invest in stocks/bonds that support different goals.

What is your financial life like now and what are your financial goals?
I agree re this is a business/ lifestyle decision, not an investment one. I would say owning 1 property for $1m is just about the worst strategy one can have in real estate. 10 properties for $100k equity each (or 5 for $200k) is more likely.

Out of curiousity, how would you get $100k out of that - Cap Rate of 10%? Otherwise you are including leverage, and then you won't have that cash flow-- it will go back into paying interest + loan principal.

There's not much out there, I don't think, that has Cap Rates of 10%.

Yields (same thing) in West End London commercial are below 4%. Residential maybe less than 3%. If you buy ex Local Authority housing (privatized public housing) in the more outer suburbs you can probably get to 6-7%. Some tower block in a northern British city maybe you can get to 9-10%. Just pray that the building doesn't have non fire resistant cladding ;-) (tasteless joke alluding to recent death of 82 people in a fire carried by renovated external cladding).

Condos in Vancouver are below 2% cap rate, from what I can gather. Cash flow negative for their owners even after rental income.
Hi Valuethinker,
In the US, there are a bunch of cities where one can find small multifam properties that can cash flow +10% with >25% down (so, yes, leveraged as you assumed), thats including management, vacancy, debt service, and cap ex. Lots of people are finding these in Florida, Ohio, Indiana, and other southern or midwestern states. In such a situation, one would break up the $1mill into many properties. The really skilled investors can find something that they can buy distressed, rehab, then rent for a solid return—a value-add kind of investment.

On the commercial side, some of the REITs that I follow are buying or selling low-growth properties for 9-10% cap rates. These tend to be skilled nursing facilities, senior housing, some middle America shopping centers (that I know about).

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Re: Stocks vs. rental property

Post by WanderingDoc » Tue Jun 26, 2018 12:49 am

rgs92 wrote:
Mon Jun 25, 2018 5:03 pm
If you had bought in Southern California in 1989, you would in most cases not have seen your house return to the price you bought it at for almost 10 years. Meanwhile, your stock portfolio (S&P500) would have more than tripled.

And in the middle of this, around 1992-4, you would be under your original price.

So is now 1989, or 1999, or something in between?
That literally makes no sense. Houses in the Bay Area which were bought for $60-80K in the 70s, are selling for over $1.5M right now. That is a >15X return. Practically speaking, there is no house in San Diego, San Jose, or San Francisco that is worth less now than 20, 30, or 40 years ago (pick any year you want). That is capital appreciation alone. Not counting the 4 or 5 other ways real estate pays you.

Even if those property values went to zero, anyone who bought in NYC, SF, or Honolulu 10, 15, 20 years ago, is netting a cool $1000 or more per month per property in cash flow, not counting tax benefits from depreciation, principal paydown by tenants, and tax free cash out refinances of several hundred thousand dollars along the way.

So the real estate investor who bought just 4 houses in those areas is earning >$5K per month on the conservative side, but the index fund investor is earning a laughable 1.8% dividend which she can't spend now (reinvests because its locked in a 401k/IRA, or if in a taxable account since she doesn't want to pay taxes). The index fund investor continues to toil away at his work-a-day job for 30-40 years (has no choice) until his index fund portfolio grew enough, all the same hoping he had enough at age 55-60 to withdraw 4% and not run out of money.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: Stocks vs. rental property

Post by WanderingDoc » Tue Jun 26, 2018 12:59 am

J295 wrote:
Mon Jun 25, 2018 6:02 pm
We own some alternative investments as a very modest part of our portfolio, but principally we are a stock and bond type investor.

Some of our family members have invested in real estate over the years and been quite successful. I’ve been aware of others who, particularly due to leverage, were flying high then crashed and burned. The great recession wasn’t that long ago, and there was a lot of blood in the water in real estate as well as other investment classes. Of course, when equities drop in value, and there is no leverage involved, there are no payments required for property and casualty insurance, utilities, capital improvements, mortgage payments, etc. Not true in real estate, especially when the tenant defaults and you can’t re-let the property

On the other hand, the depreciation and other deductions that would be available to a real estate owner would have been very attractive to us during our higher earning pre-– retirement years

Real estate investing just wasn’t something that interested us due to the time commitments. If we had been interested, real estate would not have replaced all stocks but would have been factored into as part of our overall allocation, given our needs and risk tolerance.
Many real estate investors (particularly large apartment owners) do BETTER in real estate/stock market recessions. Housing is after all a basic need. So while doggy day care spas and lattes are out the window, people may it a priority to pay their rent. A few of my mentors saw DECREASED vacancies during 2006-2009.

I have said this before - I spend 2-3 hours or less per month managing my 7 figure real estate portfolio, which generates enough income to live on (I don't need my W-2 income today). I spent more than 2-3 hours browsing this forum in the last WEEK. Ergo I spend significantly more time on indexing per month (research and reading counts) than real estate, despite better returns and tax treatment in real estate.

People get scared away from certain things because their uncles girlfriend's neighbor has a bad experience, or they heard about phone calls at 3AM. Those people weren't real estate investors. There were "dabbling in real estate". By the way, I have never received a phone call at 3 AM. I have never received a phone call PERIOD, despite owning a couple of my properties without a property manager. I get texts once every few months, which I handle in a non-urgent manner.

If real estate really took up so much time, dontcha think I would not have time to be a practicing physician, real estate investor, read 40 books per year, take 3-4 overseas vacations, AND post on this forum (and others) :beer
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: Stocks vs. rental property

Post by bgf » Tue Jun 26, 2018 7:45 am

WanderingDoc wrote:
Tue Jun 26, 2018 12:59 am
J295 wrote:
Mon Jun 25, 2018 6:02 pm
We own some alternative investments as a very modest part of our portfolio, but principally we are a stock and bond type investor.

Some of our family members have invested in real estate over the years and been quite successful. I’ve been aware of others who, particularly due to leverage, were flying high then crashed and burned. The great recession wasn’t that long ago, and there was a lot of blood in the water in real estate as well as other investment classes. Of course, when equities drop in value, and there is no leverage involved, there are no payments required for property and casualty insurance, utilities, capital improvements, mortgage payments, etc. Not true in real estate, especially when the tenant defaults and you can’t re-let the property

On the other hand, the depreciation and other deductions that would be available to a real estate owner would have been very attractive to us during our higher earning pre-– retirement years

Real estate investing just wasn’t something that interested us due to the time commitments. If we had been interested, real estate would not have replaced all stocks but would have been factored into as part of our overall allocation, given our needs and risk tolerance.
Many real estate investors (particularly large apartment owners) do BETTER in real estate/stock market recessions. Housing is after all a basic need. So while doggy day care spas and lattes are out the window, people may it a priority to pay their rent. A few of my mentors saw DECREASED vacancies during 2006-2009.

I have said this before - I spend 2-3 hours or less per month managing my 7 figure real estate portfolio, which generates enough income to live on (I don't need my W-2 income today). I spent more than 2-3 hours browsing this forum in the last WEEK. Ergo I spend significantly more time on indexing per month (research and reading counts) than real estate, despite better returns and tax treatment in real estate.

People get scared away from certain things because their uncles girlfriend's neighbor has a bad experience, or they heard about phone calls at 3AM. Those people weren't real estate investors. There were "dabbling in real estate". By the way, I have never received a phone call at 3 AM. I have never received a phone call PERIOD, despite owning a couple of my properties without a property manager. I get texts once every few months, which I handle in a non-urgent manner.

If real estate really took up so much time, dontcha think I would not have time to be a practicing physician, real estate investor, read 40 books per year, take 3-4 overseas vacations, AND post on this forum (and others) :beer
what are your unleveraged returns on real estate? i go back and forth... i have no particular stance on real estate other than i know NOTHING about it, and that scares me. I also just want to be a completely passive investor. I don't want to be a small business owner or manager. If I could invest in an apartment complex at a good price and do nothing, I'd be happy to do it. I don't think that opportunity is available to me unfortunately.

I can always buy shares in an index fund though. Its just much easier.
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Re: Stocks vs. rental property

Post by WhyNotUs » Tue Jun 26, 2018 11:21 am

Apples and Oranges- two very different types of investments. Actually more than two as there are different branches of REI just as there are different branches of market investments.

If the OP wants to get involved in REI, then this forum is probably not the best place. www.biggerpockets.com would be a better place to start a longish education process. From there one might find some meetups to advance their knowledge. There are plenty of sharks in that field so go slow before jumping into a deal.

Apartment deals can be very attractive if the location, condition, cap rate and partners are solid. Those deals require one to know the business before jumping in.

Individual SFH deals are hard IMO. Wanderdoc may not get phone calls but plenty of us have over the years. I like REI but one have one unit at this time due to some previous headaches.
I own the next hot stock- VTSAX

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Re: Stocks vs. rental property

Post by CyclingDuo » Tue Jun 26, 2018 12:09 pm

johnkgan wrote:
Sun Jun 24, 2018 11:25 pm
Dear experts, I was wondering if you think investing (say 1 million dollars for example) in rental property may be better than stocks and bonds? Because rental property would provide appreciation as well as monthly incoming though there is always the pain of not being able to find tenants? Or should I be only investing say 80% of my savings in rental property?

If real estate is better, would Bay area California be okay to consider for good appreciation along with rent?
Am I right in my assumption that school districts and downtowns close to companies such as upcoming google campus in San Jose near Diridon station may appreciate more?
Should I buy a small 3 bed room single family home or are bigger home easy to rent out as well?
I would greatly appreciate your advice. Thank you so much!
We would hesitate to ever use the word "better" when choosing asset classes: equities, bonds, real estate/alternatives. Likewise, we would give pause when saying if passive or active investing within one of those classes - such as real estate - is "better". Whether through Limited Partnerships, REITs, Real Estate Crowdfunding, or actual sole ownership of real estate - there are options to consider for passive vs. active.

If we look at a rather passive investing style of equity/bond asset allocation via pre-tax 401k/403b/457b deductions where really the only important "active" portion of the equation (after an appropriate asset allocation balance is arrived at) is choosing your saving's rate. Plenty of posts here on BH about what the best saving's rate is: 10%, 20%, 30%, etc... . Skipping the saving's rate, another oft mentioned strategy is maxing out one's 401k. Whether or not it is possible based on one's salary, expenses, household income - it at least is worth looking at with regard to what the tax-deferred passive investing strategy could have yielded in past years. It's a very important part of the equation, and due to the routine of bi-weekly or monthly pre-tax deduction out of one's salary - it's really as automatic pilot and passive as it gets.

Typical chart if one had invested the maximum into their 401K under IRS pre-tax deductions over the past 30 years (or jump in on the chart wherever it fits your age for when one started maxing out their employer sponsored plan):

[This does not include the employer's contribution, only the employee's contribution. The numbers are much higher when you include the employer's contributions.]

Image
That represents total contributions of $379,096 for 30 years of maxing out one's 401k. If we include whatever the employer contributions were along the way to get the full picture, a 30 year maximum contribution to one's 401k plus the employer contribution has grown to an amount capable of producing a healthy retirement income.

Historical contribution limits including employer and catch ups under IRS law:

Image

In this example, contributions alone based on maximum 401k contribution from the employee, and maximum from the employer shows that from 1986 to 2017 (31 years of work), contributions alone would have totaled $1,080,000 before calculating return. Not many have fallen into this advantageous situation, but it does exist.

We certainly have taken advantage of the catch up contributions allowed by the IRS once we hit 50, but have not had the advantage of working for the kind of employers that came anywhere near maxing out the employer contributions to our retirement plans. However, some Bogleheads do have this luxury along with a higher salary that when combined - builds wealth rather quickly to the point many have not even considered real estate as an alternative investment outside of stocks/bonds.

What is your situation with regard to how much you contribute on an annual basis, and how much does your employer contribute? Do you have enough salary and equity to invest in both stocks, bonds, and alternatives (real estate)?

When you mention "better" between equities/bonds vs. real estate, we would advocate both - if and when possible. We have owned real estate in the Bay Area, we have bought and sold land in other areas of the country, and we also invest in passive real estate investing via alternatives (REITs, MLP's). We currently have no sole ownership land or real estate (outside of our primary residence), but have considered diversifying into a rental unit(s) if the right opportunity and timing presents itself.
Last edited by CyclingDuo on Tue Jun 26, 2018 12:40 pm, edited 2 times in total.
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Re: Stocks vs. rental property

Post by MossySF » Tue Jun 26, 2018 12:30 pm

WanderingDoc wrote:
Tue Jun 26, 2018 12:49 am
So the real estate investor who bought just 4 houses in those areas is earning >$5K per month on the conservative side, but the index fund investor is earning a laughable 1.8% dividend which she can't spend now (reinvests because its locked in a 401k/IRA, or if in a taxable account since she doesn't want to pay taxes). The index fund investor continues to toil away at his work-a-day job for 30-40 years (has no choice) until his index fund portfolio grew enough, all the same hoping he had enough at age 55-60 to withdraw 4% and not run out of money.
Forget about what you paid in the past to earn $5K/mo now. The problem is time makes our memory fuzzy on what we paid and how we might have stretched and skimped back then to make it happen.

What you need to focus on is what people need to invest NOW and can earn NOW.

Right now, to buy a $1.5M house in the SF Bay Area, it's about $10,000/mo in costs -- mortgage, downpayment opportunity cost, property tax, maintenance, etc.

What you can rent it out for is $6000/mo.

Most of the time, just hearing $6000/mo for rent makes us think "this is INSANE!" But the cost of owning is way higher.

In time, price and rent appreciation will make it feel good. But you will be stretched for many years. Forget about the idea of BOTH appreciation and monthly cash flow for a long time.

I have experience as a Bay Area landlord. I timed the absolute bottom for prices in 2009 and it still took about 8 years to get into the black (non-inflation-adjusted). Now the price of my purchase has doubled so that feels great. But I had to feed the gator for 5 years out of pocket until rents finally caught back up. With even higher own:rent ratios now ($10K versus $6K), you might bleed red for a decade -- that $1.5M rental would probably be another $200K in costs not covered by monthly cashflow. No big deal if in 15 years, the 1.5M house is worth 2.5M but you still need the income to paper over the losses.

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Re: Stocks vs. rental property

Post by ncbill » Tue Jun 26, 2018 1:15 pm

bgf wrote:
Tue Jun 26, 2018 7:45 am
what are your unleveraged returns on real estate? i go back and forth... i have no particular stance on real estate other than i know NOTHING about it, and that scares me. I also just want to be a completely passive investor. I don't want to be a small business owner or manager. If I could invest in an apartment complex at a good price and do nothing, I'd be happy to do it. I don't think that opportunity is available to me unfortunately.

I can always buy shares in an index fund though. Its just much easier.
then (directly-held) rental real estate probably isn't for you.

best returns are when you are actively involved in all aspects, as much as possible - e.g. demo, rehab, screening tenants, collecting rent.

especially when you have a high taxable income already (e.g. doctor) and want to use the depreciation to offset the income from your day job.

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Re: Stocks vs. rental property

Post by bgf » Tue Jun 26, 2018 1:42 pm

ncbill wrote:
Tue Jun 26, 2018 1:15 pm
bgf wrote:
Tue Jun 26, 2018 7:45 am
what are your unleveraged returns on real estate? i go back and forth... i have no particular stance on real estate other than i know NOTHING about it, and that scares me. I also just want to be a completely passive investor. I don't want to be a small business owner or manager. If I could invest in an apartment complex at a good price and do nothing, I'd be happy to do it. I don't think that opportunity is available to me unfortunately.

I can always buy shares in an index fund though. Its just much easier.
then (directly-held) rental real estate probably isn't for you.

best returns are when you are actively involved in all aspects, as much as possible - e.g. demo, rehab, screening tenants, collecting rent.

especially when you have a high taxable income already (e.g. doctor) and want to use the depreciation to offset the income from your day job.
that sounds like it is ideal for a select few. someone with a high enough income to get all tax benefits but enough time/knowledge/experience to handle every stage of the RE process. definitely doesn't include me.
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Re: Stocks vs. rental property

Post by CantPassAgain » Tue Jun 26, 2018 2:10 pm

WanderingDoc wrote:
Tue Jun 26, 2018 12:49 am
rgs92 wrote:
Mon Jun 25, 2018 5:03 pm
If you had bought in Southern California in 1989, you would in most cases not have seen your house return to the price you bought it at for almost 10 years. Meanwhile, your stock portfolio (S&P500) would have more than tripled.

And in the middle of this, around 1992-4, you would be under your original price.

So is now 1989, or 1999, or something in between?
That literally makes no sense. Houses in the Bay Area which were bought for $60-80K in the 70s, are selling for over $1.5M right now. That is a >15X return.
I'm not sure what buying a house in the Bay Area in the 70's has to do with buying a house in Southern California in 1989, but anyway it would be nice if one of the portfolio visualizer knowledgeable folks could show what $80,000 invested in the US stock market in, say, 1975 would have grown to today.

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Re: Stocks vs. rental property

Post by Sandtrap » Tue Jun 26, 2018 2:13 pm

Stocks = passive investment = (investor) = apples
Rental Property = business/business investment = (businessman) = watermellons
j

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Re: Stocks vs. rental property

Post by Sandtrap » Tue Jun 26, 2018 2:15 pm

MossySF wrote:
Tue Jun 26, 2018 12:30 pm
WanderingDoc wrote:
Tue Jun 26, 2018 12:49 am
So the real estate investor who bought just 4 houses in those areas is earning >$5K per month on the conservative side, but the index fund investor is earning a laughable 1.8% dividend which she can't spend now (reinvests because its locked in a 401k/IRA, or if in a taxable account since she doesn't want to pay taxes). The index fund investor continues to toil away at his work-a-day job for 30-40 years (has no choice) until his index fund portfolio grew enough, all the same hoping he had enough at age 55-60 to withdraw 4% and not run out of money.
Forget about what you paid in the past to earn $5K/mo now. The problem is time makes our memory fuzzy on what we paid and how we might have stretched and skimped back then to make it happen.

What you need to focus on is what people need to invest NOW and can earn NOW.

Right now, to buy a $1.5M house in the SF Bay Area, it's about $10,000/mo in costs -- mortgage, downpayment opportunity cost, property tax, maintenance, etc.

What you can rent it out for is $6000/mo.

Most of the time, just hearing $6000/mo for rent makes us think "this is INSANE!" But the cost of owning is way higher.

In time, price and rent appreciation will make it feel good. But you will be stretched for many years. Forget about the idea of BOTH appreciation and monthly cash flow for a long time.

I have experience as a Bay Area landlord. I timed the absolute bottom for prices in 2009 and it still took about 8 years to get into the black (non-inflation-adjusted). Now the price of my purchase has doubled so that feels great. But I had to feed the gator for 5 years out of pocket until rents finally caught back up. With even higher own:rent ratios now ($10K versus $6K), you might bleed red for a decade -- that $1.5M rental would probably be another $200K in costs not covered by monthly cashflow. No big deal if in 15 years, the 1.5M house is worth 2.5M but you still need the income to paper over the losses.
Very well said.
Thanks for posting.
mahalo
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Re: Stocks vs. rental property

Post by CyclingDuo » Tue Jun 26, 2018 2:30 pm

CantPassAgain wrote:
Tue Jun 26, 2018 2:10 pm
I'm not sure what buying a house in the Bay Area in the 70's has to do with buying a house in Southern California in 1989, but anyway it would be nice if one of the portfolio visualizer knowledgeable folks could show what $80,000 invested in the US stock market in, say, 1975 would have grown to today.
1975 - 2018 with dividends reinvested, you'd be at about $7M before cap gains taxes:

https://dqydj.com/sp-500-dividend-reinv ... alculator/

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HomerJ
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Re: Stocks vs. rental property

Post by HomerJ » Tue Jun 26, 2018 3:09 pm

CantPassAgain wrote:
Tue Jun 26, 2018 2:10 pm
WanderingDoc wrote:
Tue Jun 26, 2018 12:49 am
rgs92 wrote:
Mon Jun 25, 2018 5:03 pm
If you had bought in Southern California in 1989, you would in most cases not have seen your house return to the price you bought it at for almost 10 years. Meanwhile, your stock portfolio (S&P500) would have more than tripled.

And in the middle of this, around 1992-4, you would be under your original price.

So is now 1989, or 1999, or something in between?
That literally makes no sense. Houses in the Bay Area which were bought for $60-80K in the 70s, are selling for over $1.5M right now. That is a >15X return.
I'm not sure what buying a house in the Bay Area in the 70's has to do with buying a house in Southern California in 1989, but anyway it would be nice if one of the portfolio visualizer knowledgeable folks could show what $80,000 invested in the US stock market in, say, 1975 would have grown to today.
VFINX - Vanguard 500 Index Fund opened in 1976.

$80,000 invested in that would be worth $6.4 million today, or an 80x return.
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MossySF
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Re: Stocks vs. rental property

Post by MossySF » Tue Jun 26, 2018 3:15 pm

bgf wrote:
Tue Jun 26, 2018 1:42 pm
that sounds like it is ideal for a select few. someone with a high enough income to get all tax benefits but enough time/knowledge/experience to handle every stage of the RE process. definitely doesn't include me.
I don't know why people say rental depreciation helps those with higher incomes. Over $150K -- whether filing married or single, you cannot deduct rental losses from regular income or other investment gains -- only carryover into the future when you finally earn rental profits or sell the property for a gain. Or somehow arrange your income so you make about 125K for a bunch of years in a row because you certainly don't want to waste rental losses against low income brackets.

My only solution was to pay off the mortgage on my rental in order to generate taxable rental profits to use up the loss carryover because I was getting zero deductions from mortgage interest/property tax/maintenance/etc.

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Re: Stocks vs. rental property

Post by WanderingDoc » Tue Jun 26, 2018 4:14 pm

bgf wrote:
Tue Jun 26, 2018 7:45 am
WanderingDoc wrote:
Tue Jun 26, 2018 12:59 am
J295 wrote:
Mon Jun 25, 2018 6:02 pm
We own some alternative investments as a very modest part of our portfolio, but principally we are a stock and bond type investor.

Some of our family members have invested in real estate over the years and been quite successful. I’ve been aware of others who, particularly due to leverage, were flying high then crashed and burned. The great recession wasn’t that long ago, and there was a lot of blood in the water in real estate as well as other investment classes. Of course, when equities drop in value, and there is no leverage involved, there are no payments required for property and casualty insurance, utilities, capital improvements, mortgage payments, etc. Not true in real estate, especially when the tenant defaults and you can’t re-let the property

On the other hand, the depreciation and other deductions that would be available to a real estate owner would have been very attractive to us during our higher earning pre-– retirement years

Real estate investing just wasn’t something that interested us due to the time commitments. If we had been interested, real estate would not have replaced all stocks but would have been factored into as part of our overall allocation, given our needs and risk tolerance.
Many real estate investors (particularly large apartment owners) do BETTER in real estate/stock market recessions. Housing is after all a basic need. So while doggy day care spas and lattes are out the window, people may it a priority to pay their rent. A few of my mentors saw DECREASED vacancies during 2006-2009.

I have said this before - I spend 2-3 hours or less per month managing my 7 figure real estate portfolio, which generates enough income to live on (I don't need my W-2 income today). I spent more than 2-3 hours browsing this forum in the last WEEK. Ergo I spend significantly more time on indexing per month (research and reading counts) than real estate, despite better returns and tax treatment in real estate.

People get scared away from certain things because their uncles girlfriend's neighbor has a bad experience, or they heard about phone calls at 3AM. Those people weren't real estate investors. There were "dabbling in real estate". By the way, I have never received a phone call at 3 AM. I have never received a phone call PERIOD, despite owning a couple of my properties without a property manager. I get texts once every few months, which I handle in a non-urgent manner.

If real estate really took up so much time, dontcha think I would not have time to be a practicing physician, real estate investor, read 40 books per year, take 3-4 overseas vacations, AND post on this forum (and others) :beer
what are your unleveraged returns on real estate? i go back and forth... i have no particular stance on real estate other than i know NOTHING about it, and that scares me. I also just want to be a completely passive investor. I don't want to be a small business owner or manager. If I could invest in an apartment complex at a good price and do nothing, I'd be happy to do it. I don't think that opportunity is available to me unfortunately.

I can always buy shares in an index fund though. Its just much easier.
Unleveraged returns are 12-15%, but this varies quite a bit. However, I would never invest in real estate if it wasn't for (long term, fixed rate) leverage. That's where ALL the advantages (diversification of capital and geography,, shuttle risk to the bank, tax benefits, inflation hedging/profiting) of real estate lie.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: Stocks vs. rental property

Post by WanderingDoc » Tue Jun 26, 2018 4:24 pm

HomerJ wrote:
Tue Jun 26, 2018 3:09 pm
CantPassAgain wrote:
Tue Jun 26, 2018 2:10 pm
WanderingDoc wrote:
Tue Jun 26, 2018 12:49 am
rgs92 wrote:
Mon Jun 25, 2018 5:03 pm
If you had bought in Southern California in 1989, you would in most cases not have seen your house return to the price you bought it at for almost 10 years. Meanwhile, your stock portfolio (S&P500) would have more than tripled.

And in the middle of this, around 1992-4, you would be under your original price.

So is now 1989, or 1999, or something in between?
That literally makes no sense. Houses in the Bay Area which were bought for $60-80K in the 70s, are selling for over $1.5M right now. That is a >15X return.
I'm not sure what buying a house in the Bay Area in the 70's has to do with buying a house in Southern California in 1989, but anyway it would be nice if one of the portfolio visualizer knowledgeable folks could show what $80,000 invested in the US stock market in, say, 1975 would have grown to today.
VFINX - Vanguard 500 Index Fund opened in 1976.

$80,000 invested in that would be worth $6.4 million today, or an 80x return.
So? That doesn't prove anything. You cannot become financially free with index funds for decades even if you invest $18.5K per year into an 80/20 portfolio - your money is trapped and the dividend is garbage.

With real estate, the average person with average intelligence and below average math knowledge can (and does) become financially free with real estate in 5 years or less if they buy 1 property and reinvest the proceeds and repeat. There is actual cash flow that you can use TODAY, and legally pax no tax on it to boot. Both approaches have their own advantages, it's just that real estate has most of them. Real estate pays you in 5 or 6 ways, index funds pay you in 1 at best (and that's being generous because most people don't actually use that money until they are "old")
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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HomerJ
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Re: Stocks vs. rental property

Post by HomerJ » Tue Jun 26, 2018 5:07 pm

WanderingDoc wrote:
Tue Jun 26, 2018 4:24 pm
HomerJ wrote:
Tue Jun 26, 2018 3:09 pm
CantPassAgain wrote:
Tue Jun 26, 2018 2:10 pm
WanderingDoc wrote:
Tue Jun 26, 2018 12:49 am
rgs92 wrote:
Mon Jun 25, 2018 5:03 pm
If you had bought in Southern California in 1989, you would in most cases not have seen your house return to the price you bought it at for almost 10 years. Meanwhile, your stock portfolio (S&P500) would have more than tripled.

And in the middle of this, around 1992-4, you would be under your original price.

So is now 1989, or 1999, or something in between?
That literally makes no sense. Houses in the Bay Area which were bought for $60-80K in the 70s, are selling for over $1.5M right now. That is a >15X return.
I'm not sure what buying a house in the Bay Area in the 70's has to do with buying a house in Southern California in 1989, but anyway it would be nice if one of the portfolio visualizer knowledgeable folks could show what $80,000 invested in the US stock market in, say, 1975 would have grown to today.
VFINX - Vanguard 500 Index Fund opened in 1976.

$80,000 invested in that would be worth $6.4 million today, or an 80x return.
So? That doesn't prove anything. You cannot become financially free with index funds for decades even if you invest $18.5K per year into an 80/20 portfolio - your money is trapped and the dividend is garbage.

With real estate, the average person with average intelligence and below average math knowledge can (and does) become financially free with real estate in 5 years or less if they buy 1 property and reinvest the proceeds and repeat. There is actual cash flow that you can use TODAY, and legally pax no tax on it to boot. Both approaches have their own advantages, it's just that real estate has most of them. Real estate pays you in 5 or 6 ways, index funds pay you in 1 at best (and that's being generous because most people don't actually use that money until they are "old")
I'll do the math for you.

80x return > 15x return. And we're comparing the hottest real estate market in America to stocks there. Compare other parts of the country to stocks since 1976 and the comparison is much worse.
With real estate, the average person with average intelligence and below average math knowledge can (and does) become financially free with real estate in 5 years or less if they buy 1 property and reinvest the proceeds and repeat.
This is completely false. Every time you repeat it, you lose credibility. It worked for a specific person (you) with a doctor's high salary, very low expenses, in a specific expensive real estate area, during a specific time period.

The average person with average income with average expenses in an average real estate area during an average time-period will not become financially free in 5 years or less.
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Hulu
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Re: Stocks vs. rental property

Post by Hulu » Tue Jun 26, 2018 5:53 pm

Apple meet orange. Real estate has liability, time and debt...stocks don't.

Never topped six figures from my day job and put a lot into small multifamilies and apartment complexes. Due mostly to the timing it took about five years to replace my day job with rental income. Had I had a larger salary and better knowledge I'd have done about twice as well. Now it would have probably taken 10 years in this market but still a lot faster than stocks.

I feel both stocks and real estate are vulnerable to interest rate risk. And that I may need cash if there's another crash to either buy or survive. So stocks are lower in my AA than even CDs. Which lowers the return and thus the attractiveness of real estate. However I think it's so much better than stocks because of cash flow that I still recommend it to my partner.

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CyclingDuo
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Re: Stocks vs. rental property

Post by CyclingDuo » Tue Jun 26, 2018 6:01 pm

WanderingDoc wrote:
Tue Jun 26, 2018 4:24 pm

So? That doesn't prove anything. You cannot become financially free with index funds for decades even if you invest $18.5K per year into an 80/20 portfolio - your money is trapped and the dividend is garbage.

With real estate, the average person with average intelligence and below average math knowledge can (and does) become financially free with real estate in 5 years or less if they buy 1 property and reinvest the proceeds and repeat. There is actual cash flow that you can use TODAY, and legally pax no tax on it to boot. Both approaches have their own advantages, it's just that real estate has most of them. Real estate pays you in 5 or 6 ways, index funds pay you in 1 at best (and that's being generous because most people don't actually use that money until they are "old")
Wait - aren't you the guy who has about $25K in tax deferred accounts and haven't contributed any more into them since 2015?

viewtopic.php?f=1&t=225092&p=3481075#p3481075

I have heard of the 5% employee match they will be offering in 2018. This makes things interesting. I have never believed in 401ks/IRAs, as I have always liked to have control over my investments. I have 90% sure I will leave the military in roughly 6 years. Although, people tell me I am dumb to give up a $90K pension and free healthcare.

So the main question is, should I be investing in equities at all? Should I stop contributing to the taxable accounts, and just focus on IRAs and the 401k (with the 5% employee match)? Thank you and I value your feedback.


Here's to your real estate investments removing any need for your pension, your healthcare, and your tax deferred investment vehicles via your current job. I doubt calling the rest of us "crazy" for our contributions to our tax-deferred retirement accounts, our pensions, our SS, and our taxable accounts that we have been contributing to over the years to build our nest eggs would agree with you. Some love the career(s) they have/ or have had, their professions, their lifestyle whether it involved real estate investing or not, and whether it involved hitting FI early, mid, or late in their careers. There are no merit badges awarded for an age when FI is hit over another.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

WildBill
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Re: Stocks vs. rental property

Post by WildBill » Tue Jun 26, 2018 6:39 pm

WanderingDoc wrote:
Tue Jun 26, 2018 4:24 pm
HomerJ wrote:
Tue Jun 26, 2018 3:09 pm
CantPassAgain wrote:
Tue Jun 26, 2018 2:10 pm
WanderingDoc wrote:
Tue Jun 26, 2018 12:49 am
rgs92 wrote:
Mon Jun 25, 2018 5:03 pm
If you had bought in Southern California in 1989, you would in most cases not have seen your house return to the price you bought it at for almost 10 years. Meanwhile, your stock portfolio (S&P500) would have more than tripled.

And in the middle of this, around 1992-4, you would be under your original price.

So is now 1989, or 1999, or something in between?
That literally makes no sense. Houses in the Bay Area which were bought for $60-80K in the 70s, are selling for over $1.5M right now. That is a >15X return.
I'm not sure what buying a house in the Bay Area in the 70's has to do with buying a house in Southern California in 1989, but anyway it would be nice if one of the portfolio visualizer knowledgeable folks could show what $80,000 invested in the US stock market in, say, 1975 would have grown to today.
VFINX - Vanguard 500 Index Fund opened in 1976.

$80,000 invested in that would be worth $6.4 million today, or an 80x return.
So? That doesn't prove anything. You cannot become financially free with index funds for decades even if you invest $18.5K per year into an 80/20 portfolio - your money is trapped and the dividend is garbage.

With real estate, the average person with average intelligence and below average math knowledge can (and does) become financially free with real estate in 5 years or less if they buy 1 property and reinvest the proceeds and repeat. There is actual cash flow that you can use TODAY, and legally pax no tax on it to boot. Both approaches have their own advantages, it's just that real estate has most of them. Real estate pays you in 5 or 6 ways, index funds pay you in 1 at best (and that's being generous because most people don't actually use that money until they are "old")

Howdy

I have been and still am an investor in both real estate and securities, including index funds, individual stocks and various flavors of bonds.

My experience in making money with real estate over 40 years is that:

Purchases of raw land can produce substantial capital gains, generally in line with equity investments, sometimes better. This is my favored real estate investment. Minimum work or management after the purchase, however patience may be required. You also need about 50% for a down payment, as you don’t get loans on raw land. Well you might, but it is rare.

Commercial property can be an excellent investment, if bought at the right price and if managed by yourself. As a limited partner in a commercial property investment it usually is in line with a 5-7% real return, with an accompanying nice inflation hedge. The K 1 s are annoying, and the general partner is always going to be late with them and mess up your tax preparation, but that is how it goes.

Residential property bought at decent prices is equivalent to a medium coupon inflation indexed bond bought in 2000, ie 3-4 % real return with a nice accompanying inflation hedge. Alas, those 4% inflation indexed bonds have gone the way of the dodo.

Residential real estate requires work and attention unless there is a property manager. If there is a property manager you are typically paying 10%, which is a lot, maybe all of your margin on the property.

All real estate investments have the following characteristics:

- It is an inflation hedge, as long as you have bought a good property in a good area, and not an office complex in Detroit in 1960. In my view this inflation hedge is the most attractive feature for an individual investor who remembers the 1970s and 12% inflation.

- It is illiquid.

- it is expensive to buy and sell. At least a 10% hair cut on a round trip.

- The tax benefits are real, but not as attractive as the OP states. You cannot write off losses above a certain income (last I remember it was $150K per year). You can carry the losses forward, which is good as capital gains taxes are higher than on equity sales. In effect you recapture the depreciation when and if you sell. Big deal.

You can depreciate the property and then do a like kind exchange, but you have just postponed taxation and not created liquidity. Of course, it is great for your heirs, as they get a stepped up basis when you die.

As my real estate mentor was fond of saying “ Real estate is a treadmill where you break even, and you make your money when you die.” This is overstating it, as commercial property can yield excellent cash flows, as a business that you manage. Residential not so much, and definitely not with a property manager.


-To make money in anything other than raw land, leverage is required, in terms of a mortgage. This requires paying the mortgage, regardless of the income from the property. If you do not pay the mortgage, the lender takes the property. To achieve superior returns, increased leverage, and risk, are necessary.

The OP stating above a plan (scheme) to leverage a daisy chain of properties over five years to become financially independent is extremely risky and requires a buoyant real estate market and economy, an understanding and generous lender (best of luck), a strong and stable economy and good execution. A difficulty with one of the leases or properties would lead to the loss of income that could very likely lead to the loss of all of the properties. This is not a course I would advise. It is somewhat akin to buying stocks on margin, only nobody is going to loan you 80% on margin for stocks. They will on appraised real estate, because when you can’t pay they take the property.

People have made money leveraging up real estate like this , but people have also made fortunes in Las Vegas betting on black. There are any number of seminars, books and courses to teach you to do this, but my experience is that the people teaching the courses and writing the books are the only ones making the money.

To digress, all of these courses focus on “find a motivated seller”. So the dutiful student researches the market, looks for tenant occupied housing, and writes the owner in the faux handwritten form provided by the course, offering cash for the property. I get 5 or 6 of these homely missives a month. They have not motivated me yet.

Real estate is a business and it requires knowledge of value, financial acumen, luck, discipline and excellent execution.

Good luck to all.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

TravelforFun
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Re: Stocks vs. rental property

Post by TravelforFun » Tue Jun 26, 2018 6:50 pm

3funder wrote:
Mon Jun 25, 2018 7:00 am
I vote for stocks. Takes less work than real estate and usually outperforms over the long term.
I vote for stocks too just because I know nothing about real estate including house flipping or home rental. My last real estate experience happened 25 years ago when I bought my house.

Our friends own 10 mortgage-free rental properties in North Texas and clear about $10K a month.

TravelforFun

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