Stocks vs. rental property

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HomerJ
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Re: Stocks vs. rental property

Post by HomerJ » Tue Jun 26, 2018 11:49 pm

WildBill wrote:
Tue Jun 26, 2018 6:39 pm
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
This is a great post... Thanks for posting.

I do want to point out that saying "as long as you buy a good property in a good area" is a lot like saying "as long you buy a good stock, everything's great"

And an office complex in Detroit in 1960 WAS considered a good property in a good area. At the time.
The J stands for Jay

WildBill
Posts: 379
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

Re: Stocks vs. rental property

Post by WildBill » Wed Jun 27, 2018 12:08 am

HomerJ wrote:
Tue Jun 26, 2018 11:49 pm
WildBill wrote:
Tue Jun 26, 2018 6:39 pm
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
This is a great post... Thanks for posting.

I do want to point out that saying "as long as you buy a good property in a good area" is a lot like saying "as long you buy a good stock, everything's great"

And an office complex in Detroit in 1960 WAS considered a good property in a good area. At the time.
Howdy

And that office complex is probably a good value again :twisted: May require some renovations.

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

Valuethinker
Posts: 35275
Joined: Fri May 11, 2007 11:07 am

Re: Stocks vs. rental property

Post by Valuethinker » Wed Jun 27, 2018 3:04 am

AerialWombat wrote:
Mon Jun 25, 2018 12:45 pm


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.
1. if you go along the East Coast of England, you have the Saxon Shore. Fortresses built in late Roman times to protect against raiders from the Dutch & German lowlands across the North Sea.

https://en.wikipedia.org/wiki/Saxon_Shore


2. then you had the Vikings ....

So coastal location is OK when civilization is up and running. The sea which brings commerce, also brings the Spanish to Aztec Mexico, the Vikings to Anglo Saxon England ...

But this is all terribly ironic. Look at those maps of Hurricane Sandy and see how much of lower Manhattan and Brooklyn were literally under water. Infrastructure badly damaged, etc.

So coastal locations? Make sure you have seen the 100 year forecast. Some of the most expensive real estate in the world is a place called Sandbanks in Poole in Dorset, south coast of England. And it quite literally won't be there in pick a number between 30 and 100 years.

https://en.wikipedia.org/wiki/Sandbanks

Of course, rich people can afford to jack up their houses etc. But even that won't stop storm force wind and waves.

totallystudly
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Joined: Sat May 31, 2014 9:02 pm

Re: Stocks vs. rental property

Post by totallystudly » Wed Jun 27, 2018 3:12 am

Real estate is illiquid. Stocks aren't. Why not just do both and buy some REITs?

Oddball
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Joined: Thu May 03, 2018 9:35 am

Re: Stocks vs. rental property

Post by Oddball » Wed Jun 27, 2018 9:50 am

HomerJ wrote:
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


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.
The problem with this debate, which has already been stated, is that it is apples to nuts.
The above "80x return > 15x return" is completely missing why *MOST* people buy real estate. That return is purely based on appreciation. Most people buy rental properties for 1) cash flow and 2) have someone else pay off a mortgage. Appreciation is considered a bonus.

I don't live in San Fran but a quick look online I am guessing that rent on 1.5 mil house would be in the range of $8,000 - $10,000+ per month. Now, that $80k was paid upfront so no mortgage. Going on $8,000 per month, $96,000 a year a tenant is giving you to live there. Let's say after expenses (insurance, taxes, vacancy, wear/rehab) you have a cash flow of $60,000 a year at today's rates. That means every year you get $60k to do what you want which could be buy more real estate, invest more in stocks, whatever.

The house would have positive cash flow every year you have been renting it. 40 years of positive cash flow NOT included in "80x return > 15x return" statement. In 1978 maybe the income was ~$4000 for the initial investment of $80,000, 1979 it was $4,200, etc., up to today with $60,000. Adding those values, assuming linear growth from $4k to $60k earning, the house would have cash flowed after expenses $1,280,000. This is money that could be re-invested or increased quality of life, or most likely both. It doesn't need to be locked away in the market.

Please feel free to update my numbers, I feel they are fairly conservative in regards to both rent (likey higher) and expenses (likely lower). I really don't understand why there are so often "Stocks vs. Real Estate" topics and no "Stocks vs Buying a Apple Orchard" or "Stocks vs Opening a Dog Day Care". Either of those would be just as relevant.

User avatar
HomerJ
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Re: Stocks vs. rental property

Post by HomerJ » Wed Jun 27, 2018 10:34 am

Oddball wrote:
Wed Jun 27, 2018 9:50 am
The problem with this debate, which has already been stated, is that it is apples to nuts.
The above "80x return > 15x return" is completely missing why *MOST* people buy real estate. That return is purely based on appreciation. Most people buy rental properties for 1) cash flow and 2) have someone else pay off a mortgage. Appreciation is considered a bonus.
You make an excellent point about cash-flow. I stand corrected. Probably investing in San Francisco from the 70s to today did beat the market. Probably New York and Hawaii too. (Of course, we're ignoring repairs and vacancies, but in those three locations, you still did very well)

But probably real estate in most of the rest of the country didn't beat the market, even accounting for cash flow. Because usually the first 10-20 years, you're not getting a lot of extra cash flow, just paying off the mortgage, and saving for possible repairs. Rent goes up and your mortgage payment stays constant, so cash flow slowly increases, but in general, rents go up slowly, not sky-rocketing like in San Fran over 10 years.

Look, I have nothing against real-estate investing. I consider it a second job though, unless you get a management company, and that dilutes your profits a lot.

But I have friends with rental houses, and they are slowly paying them off, and will be positioned with great cash-flow in retirement. Part of me wishes we had gone that route too, and put some of our money into 2-3 rental houses, but 10-15 years ago, I was busy building my career and raising my kids, and I couldn't be bothered and today we're in a position where we don't really need real estate to meet our goals.

But my main point stands - the average person doesn't become financially independent in less than 5 years by leveraging houses. Unless you were very lucky and bought in San Fran 5 years ago, and had a high salary (which qualifies one for bigger loans with less down) and in a period of historically low interest rates.

But that's not the average person or the average real-estate market or the average time period or the average interest rate.
The J stands for Jay

renue74
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Re: Stocks vs. rental property

Post by renue74 » Wed Jun 27, 2018 10:49 am

In 2013, we came into some extra money. We always wanted to have rental property. I'm a very handy person and love to tinker/build/fix things.

Over the past 5 years....we've bought 4 rentals....some in really bad shape, some not so bad.

It's definitely a business. If you want to make money, you make it your baby. I self manage and deal with tenants. Finding a honest property manager who cares about your rentals as much as you do is difficult. I just bought a $38K house and inherited a tenant and prop manager. Within 1 month, the tenant moved out in the middle of the night and left all their stuff, plus about 500 roaches.

Prop manager didn't really help at all. But they would love to "help" you get all the old tenants stuff out, charge you $500 on top of the 10% you pay them and they will place another tenant in for 1/2 of the first month's rent.

I still like dealing with it. I have friends who have been landlords for 15+ years and they want out. I can tell that over time, most landlords just want to sell all their properties and move on.

I don't buy for appreciation. In my area, Charlotte, NC, appreciation in rentals was not a "thing," until the past 5 years or so. You bought at $50K "Mill House," in 2000 and you sold it for $55K in 2015. It just didn't appreciate a lot.

But recently rental house appreciation has gone through the roof. I bought a $37K house a couple of years ago, collected rent from a nice old lady and then sold the house last summer for $55K. I put zero work into the house.

I'm not sure now is the best timeframe to be getting into rental property. We have bidding wars even in my town for these now. That didn't happen before...even in the mid-2000s.

bloom2708
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Re: Stocks vs. rental property

Post by bloom2708 » Wed Jun 27, 2018 10:53 am

If you have bonus time after the 10+ hours getting ready for work, getting to work, being at work, getting home from work and checking on work when not at work, then having a second job in rental real estate might work out. It is real work. Everyone is looking for a "deal".

I'm tapped out after my 1 job. Stocks and bond index funds for me.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

LarryAllen
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Re: Stocks vs. rental property

Post by LarryAllen » Wed Jun 27, 2018 11:03 am

I prefer real estate but I think putting 100% in any one asset class is foolish. I would mix it up between both. Maybe use $500k toward investment real estate and put $500k into low cost etfs. It's not rocket science here. Nobody has a crystal ball. Mix it up and hope it works out.

CantPassAgain
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Re: Stocks vs. rental property

Post by CantPassAgain » Wed Jun 27, 2018 2:22 pm

Oddball wrote:
Wed Jun 27, 2018 9:50 am
The problem with this debate, which has already been stated, is that it is apples to nuts.
The above "80x return > 15x return" is completely missing why *MOST* people buy real estate. That return is purely based on appreciation. Most people buy rental properties for 1) cash flow and 2) have someone else pay off a mortgage. Appreciation is considered a bonus.

I don't live in San Fran but a quick look online I am guessing that rent on 1.5 mil house would be in the range of $8,000 - $10,000+ per month. Now, that $80k was paid upfront so no mortgage. Going on $8,000 per month, $96,000 a year a tenant is giving you to live there. Let's say after expenses (insurance, taxes, vacancy, wear/rehab) you have a cash flow of $60,000 a year at today's rates. That means every year you get $60k to do what you want which could be buy more real estate, invest more in stocks, whatever.

The house would have positive cash flow every year you have been renting it. 40 years of positive cash flow NOT included in "80x return > 15x return" statement. In 1978 maybe the income was ~$4000 for the initial investment of $80,000, 1979 it was $4,200, etc., up to today with $60,000. Adding those values, assuming linear growth from $4k to $60k earning, the house would have cash flowed after expenses $1,280,000. This is money that could be re-invested or increased quality of life, or most likely both. It doesn't need to be locked away in the market.

Please feel free to update my numbers, I feel they are fairly conservative in regards to both rent (likey higher) and expenses (likely lower). I really don't understand why there are so often "Stocks vs. Real Estate" topics and no "Stocks vs Buying a Apple Orchard" or "Stocks vs Opening a Dog Day Care". Either of those would be just as relevant.
I don't have a problem with real estate either, I just have to speak up when folks come on Bogelheads.org all pumped up after attending the Grant Cardone University and start talking about how average folks can become financially independent in 5 years or less using leverage to increase their real estate holdings exponentially and that things like index funds/401ks/IRAs are for losers/suckers who fail at life.

That is what my problem is.

There are some things that can only work for a certain % of the population. Being a landlord is one of them. Not everyone can be a landlord, and not for reasons of personal inadequacy (as implied by some), but because of simple reality. Someone has to pay the rent. And getting rich by selling "How To Get Rich In Real Estate" books and inspirational seminars. Too many people crowding that game leaves less suckers to buy your product, y'know?

Boglehead style investing can work for each and every member of society because it is about positioning yourself to obtain a fair share of societies productivity (the "market return") which historically has been good enough for most. That is why we don't recommend real estate to every person who comes here. And the fact that is it called "Bogleheads - Investing Advice Inspired By Jack Bogle."

Anyway to your point, yeah cash flow. It's a thing, I get it. Let's make some rosy assumptions:

Say that $80k initial investment in 1975 could get you, I dunno, a cash flow of 8% in rents. Call it $6.4k a year in year one.

Assume no leverage, so no mortgage to pay reducing your cash flow.

Assume cash flow maintains 8% of market value of property, with no vacancies any time in 44 years.

Assume no maintenance/property tax/insurance/property manager costs in 44 years.

$80k property appreciates at 6.89% to arrive at $1.5mm market value in 2018, and in 2018 you are collecting $112K per year in rent.

In 44 years, you have collected just over $1.6mm in rents.

$1.5M market value of property + $1.6M cash flow = $3.1M on $80k investment.

Could you have reinvested your cash flow into more properties to increase your return? Sure! But at this point you are solidly in "this is a job" territory and not "passive stock market investing" territory and it's probably going to be a bit more difficult to maintain the whole "no vacancies or any other costs whatsoever" assumption.

WanderingDoc
Posts: 929
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Re: Stocks vs. rental property

Post by WanderingDoc » Wed Jun 27, 2018 7:01 pm

CantPassAgain wrote:
Wed Jun 27, 2018 2:22 pm
Oddball wrote:
Wed Jun 27, 2018 9:50 am
The problem with this debate, which has already been stated, is that it is apples to nuts.
The above "80x return > 15x return" is completely missing why *MOST* people buy real estate. That return is purely based on appreciation. Most people buy rental properties for 1) cash flow and 2) have someone else pay off a mortgage. Appreciation is considered a bonus.

I don't live in San Fran but a quick look online I am guessing that rent on 1.5 mil house would be in the range of $8,000 - $10,000+ per month. Now, that $80k was paid upfront so no mortgage. Going on $8,000 per month, $96,000 a year a tenant is giving you to live there. Let's say after expenses (insurance, taxes, vacancy, wear/rehab) you have a cash flow of $60,000 a year at today's rates. That means every year you get $60k to do what you want which could be buy more real estate, invest more in stocks, whatever.

The house would have positive cash flow every year you have been renting it. 40 years of positive cash flow NOT included in "80x return > 15x return" statement. In 1978 maybe the income was ~$4000 for the initial investment of $80,000, 1979 it was $4,200, etc., up to today with $60,000. Adding those values, assuming linear growth from $4k to $60k earning, the house would have cash flowed after expenses $1,280,000. This is money that could be re-invested or increased quality of life, or most likely both. It doesn't need to be locked away in the market.

Please feel free to update my numbers, I feel they are fairly conservative in regards to both rent (likey higher) and expenses (likely lower). I really don't understand why there are so often "Stocks vs. Real Estate" topics and no "Stocks vs Buying a Apple Orchard" or "Stocks vs Opening a Dog Day Care". Either of those would be just as relevant.
I don't have a problem with real estate either, I just have to speak up when folks come on Bogelheads.org all pumped up after attending the Grant Cardone University and start talking about how average folks can become financially independent in 5 years or less using leverage to increase their real estate holdings exponentially and that things like index funds/401ks/IRAs are for losers/suckers who fail at life.

That is what my problem is.

There are some things that can only work for a certain % of the population. Being a landlord is one of them. Not everyone can be a landlord, and not for reasons of personal inadequacy (as implied by some), but because of simple reality. Someone has to pay the rent. And getting rich by selling "How To Get Rich In Real Estate" books and inspirational seminars. Too many people crowding that game leaves less suckers to buy your product, y'know?

Boglehead style investing can work for each and every member of society because it is about positioning yourself to obtain a fair share of societies productivity (the "market return") which historically has been good enough for most. That is why we don't recommend real estate to every person who comes here. And the fact that is it called "Bogleheads - Investing Advice Inspired By Jack Bogle."

Anyway to your point, yeah cash flow. It's a thing, I get it. Let's make some rosy assumptions:

Say that $80k initial investment in 1975 could get you, I dunno, a cash flow of 8% in rents. Call it $6.4k a year in year one.

Assume no leverage, so no mortgage to pay reducing your cash flow.

Assume cash flow maintains 8% of market value of property, with no vacancies any time in 44 years.

Assume no maintenance/property tax/insurance/property manager costs in 44 years.

$80k property appreciates at 6.89% to arrive at $1.5mm market value in 2018, and in 2018 you are collecting $112K per year in rent.

In 44 years, you have collected just over $1.6mm in rents.

$1.5M market value of property + $1.6M cash flow = $3.1M on $80k investment.

Could you have reinvested your cash flow into more properties to increase your return? Sure! But at this point you are solidly in "this is a job" territory and not "passive stock market investing" territory and it's probably going to be a bit more difficult to maintain the whole "no vacancies or any other costs whatsoever" assumption.
Its just simple math, though. Indexing is fine, its just a 25-30+ year plan. Not everyone wants to be pigeon holed for that long working a job (or jobs) that may be uncertain, or they may not like. People change. Things change. Health changes. What if they want to train for a triathlon, start a business, travel through Asia, or spend more time with their kids?

A 401k/IRA produces NO INCOME. Well it produces maybe a 1.8% dividend, which is a joke. Not that you could use that money (not that you would have enough) since its usually locked in a 401k.

The beauty of real estate is that you can have a net annualized income of 8-15% quite easily. So whether all your properties are worth $5M or $50,000 or $0. it doesn't matter. Lets say you need $6K per month to cover your living expenses. That is very easily done by buying 5-10 properties with leverage. I started investing in real estate during medical residency. I never took any courses or seminars. I just surrounded myself with people that did what I wanted to do.

My real estate portfolio is mostly hands off, and it took me 3.5 years total for rental income to cover all my living expenses. That is a beautiful thing. I managed to graduate residency, get board certified, travel often, during those 3.5 years. I am not talented and I didn't take on a huge amount of risk. Most of my profits from real estate are invested into 100% passive large apartment deals today.

Real estate today takes up less of my time than browsing index fund forums and reading books on investing. To do what I did, in less than 5 or less than 10 years with an index fund portfolio and the 4% rule, is a PIPE DREAM. 2 investment vehicles - 2 different goals
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

jb1
Posts: 174
Joined: Sun Nov 27, 2016 8:33 am
Location: NC

Re: Stocks vs. rental property

Post by jb1 » Wed Jun 27, 2018 8:18 pm

WanderingDoc wrote:
Wed Jun 27, 2018 7:01 pm


Its just simple math, though. Indexing is fine, its just a 25-30+ year plan. Not everyone wants to be pigeon holed for that long working a job (or jobs) that may be uncertain, or they may not like. People change. Things change. Health changes. What if they want to train for a triathlon, start a business, travel through Asia, or spend more time with their kids?

A 401k/IRA produces NO INCOME. Well it produces maybe a 1.8% dividend, which is a joke. Not that you could use that money (not that you would have enough) since its usually locked in a 401k.

The beauty of real estate is that you can have a net annualized income of 8-15% quite easily. So whether all your properties are worth $5M or $50,000 or $0. it doesn't matter. Lets say you need $6K per month to cover your living expenses. That is very easily done by buying 5-10 properties with leverage. I started investing in real estate during medical residency. I never took any courses or seminars. I just surrounded myself with people that did what I wanted to do.

My real estate portfolio is mostly hands off, and it took me 3.5 years total for rental income to cover all my living expenses. That is a beautiful thing. I managed to graduate residency, get board certified, travel often, during those 3.5 years. I am not talented and I didn't take on a huge amount of risk. Most of my profits from real estate are invested into 100% passive large apartment deals today.

Real estate today takes up less of my time than browsing index fund forums and reading books on investing. To do what I did, in less than 5 or less than 10 years with an index fund portfolio and the 4% rule, is a PIPE DREAM. 2 investment vehicles - 2 different goals
Love it. I remember you a few months back when I asked about REI. I am in the process of looking at properties now. REI is something I want to do long term. I have about 70k in the market now, which is great, but like you said, for what? A 2% dividend?

At the end of the day, people need a place to live. I cannot control the stock market, but I can control my property like a business.

WanderingDoc
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Re: Stocks vs. rental property

Post by WanderingDoc » Wed Jun 27, 2018 9:13 pm

jb1 wrote:
Wed Jun 27, 2018 8:18 pm
WanderingDoc wrote:
Wed Jun 27, 2018 7:01 pm


Its just simple math, though. Indexing is fine, its just a 25-30+ year plan. Not everyone wants to be pigeon holed for that long working a job (or jobs) that may be uncertain, or they may not like. People change. Things change. Health changes. What if they want to train for a triathlon, start a business, travel through Asia, or spend more time with their kids?

A 401k/IRA produces NO INCOME. Well it produces maybe a 1.8% dividend, which is a joke. Not that you could use that money (not that you would have enough) since its usually locked in a 401k.

The beauty of real estate is that you can have a net annualized income of 8-15% quite easily. So whether all your properties are worth $5M or $50,000 or $0. it doesn't matter. Lets say you need $6K per month to cover your living expenses. That is very easily done by buying 5-10 properties with leverage. I started investing in real estate during medical residency. I never took any courses or seminars. I just surrounded myself with people that did what I wanted to do.

My real estate portfolio is mostly hands off, and it took me 3.5 years total for rental income to cover all my living expenses. That is a beautiful thing. I managed to graduate residency, get board certified, travel often, during those 3.5 years. I am not talented and I didn't take on a huge amount of risk. Most of my profits from real estate are invested into 100% passive large apartment deals today.

Real estate today takes up less of my time than browsing index fund forums and reading books on investing. To do what I did, in less than 5 or less than 10 years with an index fund portfolio and the 4% rule, is a PIPE DREAM. 2 investment vehicles - 2 different goals
Love it. I remember you a few months back when I asked about REI. I am in the process of looking at properties now. REI is something I want to do long term. I have about 70k in the market now, which is great, but like you said, for what? A 2% dividend?

At the end of the day, people need a place to live. I cannot control the stock market, but I can control my property like a business.
Bingo! Assuming we enter a bear market in U.S./Int'l stocks this year (or next), ask me if I will stop receiving rent checks every month. Ask me if my long term vacancy rate will go from 97.5% to 0%. Even if it goes down to 90% (doubt it), will continue chugging along, paying me in 5 different ways. :D God bless America and bless long-term, low interest, fixed debt on investment properties.

Do keep in touch and let me know what market/property type/real estate investing niche you choose as your first investment.
Last edited by WanderingDoc on Thu Jun 28, 2018 10:56 am, edited 1 time in total.
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 MossySF » Thu Jun 28, 2018 12:46 am

There's nothing wrong with real estate ...

But please stop using San Francisco Bay Area examples when you guys have no idea what it's like there. For example, guessing that you can get $8K-$10K/mo rent on a 1.5M house when the real number is $5K-$6K/mo.

And stop assuming you COULD have bought back a whole bunch of SF Bay Area houses in 1970 to be a mega landlord now. Remember the interest rates? Remember what kind of jobs there were? It's not like today where you can toss a rock in the Bay Area and you hit a Google engineer married to a Facebook PR person with a collective $600K in household income. With the type of average blue collar/white collar jobs back then, you'd have been lucky to qualify to buy a single half-rundown 1000sf house -- one for yourself to live in. (These houses don't sell for $1.5M now -- they usually are torn down and rebuilt for $500K in order to sell for 1.5M.)

I grew up in SF, lived there for 35 years, own rental property there, my parents owned several rental properties -- so I know all about what kind of stuff we had to do to stretch to make it happen. This is the reason why your posts sound like "Trump University get rich quick as real estate magnate" sales pitch -- because you give examples that simply are not realistic. You'd find more receptive responses if you only used personal examples that actually happened.

Also cut out the talk about "oh man, you just gonna be a company slave for the next 40 years". You have zero idea how good or bad some of us have done with only mutual funds -- or dedicating our time instead to careers, businesses.

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Re: Stocks vs. rental property

Post by SGM » Thu Jun 28, 2018 4:28 am

Farm rental, hunt leases and cell tower income require next to nothing in effort. Residential real estate is more problematic especially in our over-regulated county. The stock market has been good to us. We no longer get weekly calls from developers offering to buy our farm since the 2008 debacle. Although recently we have been getting mail from hungry real estate agents.

Nephews in their 30s have teamed up to buy residential real estate and done quite well. They own stocks too.

There is no certainty in any of this.

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Re: Stocks vs. rental property

Post by Valuethinker » Thu Jun 28, 2018 5:50 am

MossySF wrote:
Thu Jun 28, 2018 12:46 am
There's nothing wrong with real estate ...

But please stop using San Francisco Bay Area examples when you guys have no idea what it's like there. For example, guessing that you can get $8K-$10K/mo rent on a 1.5M house when the real number is $5K-$6K/mo.

And stop assuming you COULD have bought back a whole bunch of SF Bay Area houses in 1970 to be a mega landlord now. Remember the interest rates? Remember what kind of jobs there were? It's not like today where you can toss a rock in the Bay Area and you hit a Google engineer married to a Facebook PR person with a collective $600K in household income. With the type of average blue collar/white collar jobs back then, you'd have been lucky to qualify to buy a single half-rundown 1000sf house -- one for yourself to live in. (These houses don't sell for $1.5M now -- they usually are torn down and rebuilt for $500K in order to sell for 1.5M.)

I grew up in SF, lived there for 35 years, own rental property there, my parents owned several rental properties -- so I know all about what kind of stuff we had to do to stretch to make it happen. This is the reason why your posts sound like "Trump University get rich quick as real estate magnate" sales pitch -- because you give examples that simply are not realistic. You'd find more receptive responses if you only used personal examples that actually happened.

Also cut out the talk about "oh man, you just gonna be a company slave for the next 40 years". You have zero idea how good or bad some of us have done with only mutual funds -- or dedicating our time instead to careers, businesses.
The triumph of local knowledge of local conditions.

Real Estate is quintessentially a local business.

Anyone who does not understand local cap rates, local peculiarities (tenant risks, different laws, zoning, contamination or sub surface risks etc.) is not going to be able to take a realistic view of likely returns.

What makes RE investing work is the leverage. The underlying return is lower than stocks-- with the exceptions of some coastal cities. Leverage, however, cuts both ways.

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Re: Stocks vs. rental property

Post by jadd806 » Thu Jun 28, 2018 6:04 am

MossySF wrote:
Thu Jun 28, 2018 12:46 am
There's nothing wrong with real estate ...

But please stop using San Francisco Bay Area examples when you guys have no idea what it's like there. For example, guessing that you can get $8K-$10K/mo rent on a 1.5M house when the real number is $5K-$6K/mo.

And stop assuming you COULD have bought back a whole bunch of SF Bay Area houses in 1970 to be a mega landlord now. Remember the interest rates? Remember what kind of jobs there were? It's not like today where you can toss a rock in the Bay Area and you hit a Google engineer married to a Facebook PR person with a collective $600K in household income. With the type of average blue collar/white collar jobs back then, you'd have been lucky to qualify to buy a single half-rundown 1000sf house -- one for yourself to live in. (These houses don't sell for $1.5M now -- they usually are torn down and rebuilt for $500K in order to sell for 1.5M.)

I grew up in SF, lived there for 35 years, own rental property there, my parents owned several rental properties -- so I know all about what kind of stuff we had to do to stretch to make it happen. This is the reason why your posts sound like "Trump University get rich quick as real estate magnate" sales pitch -- because you give examples that simply are not realistic. You'd find more receptive responses if you only used personal examples that actually happened.

Also cut out the talk about "oh man, you just gonna be a company slave for the next 40 years". You have zero idea how good or bad some of us have done with only mutual funds -- or dedicating our time instead to careers, businesses.
+1. All of his posts read like an advertisement. I wouldn't be surprised if he starts trying to sell a course or something after a while. I've seen it play out dozens of times on Forex forums. A user spends months building up this carefully curated tale of them being a wildly successful trader. Once they've established a reputation, they reveal that they've developed a premium course for others to learn from them. Since advertising is banned on most forums the user usually entices those who display interest in their "system" into a private messaging conversation, where they can more easily advertise and lead their targets away from the site.

I also enjoy how he uses the 1.8% dividend of the S&P 500 as his comparison point and ignores selling shares for income. It's an amusing tell that he's stuck behind the mental block of illiquid real estate investments, where equity cannot be accessed without paying someone else interest or by selling the entire asset, losing the income stream that it provides and paying massive transaction fees in the process.

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Re: Stocks vs. rental property

Post by Valuethinker » Thu Jun 28, 2018 6:06 am

renue74 wrote:
Wed Jun 27, 2018 10:49 am
In 2013, we came into some extra money. We always wanted to have rental property. I'm a very handy person and love to tinker/build/fix things.

Over the past 5 years....we've bought 4 rentals....some in really bad shape, some not so bad.

It's definitely a business. If you want to make money, you make it your baby. I self manage and deal with tenants. Finding a honest property manager who cares about your rentals as much as you do is difficult. I just bought a $38K house and inherited a tenant and prop manager. Within 1 month, the tenant moved out in the middle of the night and left all their stuff, plus about 500 roaches.

Prop manager didn't really help at all. But they would love to "help" you get all the old tenants stuff out, charge you $500 on top of the 10% you pay them and they will place another tenant in for 1/2 of the first month's rent.

I still like dealing with it. I have friends who have been landlords for 15+ years and they want out. I can tell that over time, most landlords just want to sell all their properties and move on.

I don't buy for appreciation. In my area, Charlotte, NC, appreciation in rentals was not a "thing," until the past 5 years or so. You bought at $50K "Mill House," in 2000 and you sold it for $55K in 2015. It just didn't appreciate a lot.

But recently rental house appreciation has gone through the roof. I bought a $37K house a couple of years ago, collected rent from a nice old lady and then sold the house last summer for $55K. I put zero work into the house.

I'm not sure now is the best timeframe to be getting into rental property. We have bidding wars even in my town for these now. That didn't happen before...even in the mid-2000s.
This is all good stuff.

I am just amazed you can buy houses for these amounts.

Say it costs $100 psf to build a new house. The actual cost in most places in USA is probably $175-200?

A 1000 square foot house (40% of the size of the average new home) would cost $100k + land + connection to services. Say $150k.

A $55k house is a 2/3rds discount to a new house (at least).

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Re: Stocks vs. rental property

Post by Valuethinker » Thu Jun 28, 2018 6:17 am

jadd806 wrote:
Thu Jun 28, 2018 6:04 am
MossySF wrote:
Thu Jun 28, 2018 12:46 am
There's nothing wrong with real estate ...

But please stop using San Francisco Bay Area examples when you guys have no idea what it's like there. For example, guessing that you can get $8K-$10K/mo rent on a 1.5M house when the real number is $5K-$6K/mo.

And stop assuming you COULD have bought back a whole bunch of SF Bay Area houses in 1970 to be a mega landlord now. Remember the interest rates? Remember what kind of jobs there were? It's not like today where you can toss a rock in the Bay Area and you hit a Google engineer married to a Facebook PR person with a collective $600K in household income. With the type of average blue collar/white collar jobs back then, you'd have been lucky to qualify to buy a single half-rundown 1000sf house -- one for yourself to live in. (These houses don't sell for $1.5M now -- they usually are torn down and rebuilt for $500K in order to sell for 1.5M.)

I grew up in SF, lived there for 35 years, own rental property there, my parents owned several rental properties -- so I know all about what kind of stuff we had to do to stretch to make it happen. This is the reason why your posts sound like "Trump University get rich quick as real estate magnate" sales pitch -- because you give examples that simply are not realistic. You'd find more receptive responses if you only used personal examples that actually happened.

Also cut out the talk about "oh man, you just gonna be a company slave for the next 40 years". You have zero idea how good or bad some of us have done with only mutual funds -- or dedicating our time instead to careers, businesses.
+1. All of his posts read like an advertisement. I wouldn't be surprised if he starts trying to sell a course or something after a while. I've seen it play out dozens of times on Forex forums. A user spends months building up this carefully curated tale of them being a wildly successful trader. Once they've established a reputation, they reveal that they've developed a premium course for others to learn from them. Since advertising is banned on most forums the user usually entices those who display interest in their "system" into a private messaging conversation, where they can more easily advertise and lead their targets away from the site.

I also enjoy how he uses the 1.8% dividend of the S&P 500 as his comparison point and ignores selling shares for income. It's an amusing tell that he's stuck behind the mental block of illiquid real estate investments, where equity cannot be accessed without paying someone else interest or by selling the entire asset, losing the income stream that it provides and paying massive transaction fees in the process.
I had not realized this was a "phenomenon" as such. I had wondered what the upside is for the poster. If we are not listening, why preach? Why waste your time?

We saw something which had similar suspicious character vis-a-vis cryptocurrency "investing". A wave of posts and posters who have more recently fallen silent.

The aggrieved tone when someone was "mean" to them about their favourite idea was also discordant. Couldn't tell whether zealot or self interested.

You've now supplied the additional observation that means I should consider the former possibility.

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Re: Stocks vs. rental property

Post by CantPassAgain » Thu Jun 28, 2018 8:50 am

Valuethinker wrote:
Thu Jun 28, 2018 6:17 am
jadd806 wrote:
Thu Jun 28, 2018 6:04 am
MossySF wrote:
Thu Jun 28, 2018 12:46 am
I grew up in SF, lived there for 35 years, own rental property there, my parents owned several rental properties -- so I know all about what kind of stuff we had to do to stretch to make it happen. This is the reason why your posts sound like "Trump University get rich quick as real estate magnate" sales pitch -- because you give examples that simply are not realistic. You'd find more receptive responses if you only used personal examples that actually happened.

Also cut out the talk about "oh man, you just gonna be a company slave for the next 40 years". You have zero idea how good or bad some of us have done with only mutual funds -- or dedicating our time instead to careers, businesses.
+1. All of his posts read like an advertisement. I wouldn't be surprised if he starts trying to sell a course or something after a while. I've seen it play out dozens of times on Forex forums. A user spends months building up this carefully curated tale of them being a wildly successful trader. Once they've established a reputation, they reveal that they've developed a premium course for others to learn from them. Since advertising is banned on most forums the user usually entices those who display interest in their "system" into a private messaging conversation, where they can more easily advertise and lead their targets away from the site.

I also enjoy how he uses the 1.8% dividend of the S&P 500 as his comparison point and ignores selling shares for income. It's an amusing tell that he's stuck behind the mental block of illiquid real estate investments, where equity cannot be accessed without paying someone else interest or by selling the entire asset, losing the income stream that it provides and paying massive transaction fees in the process.
I had not realized this was a "phenomenon" as such. I had wondered what the upside is for the poster. If we are not listening, why preach? Why waste your time?

We saw something which had similar suspicious character vis-a-vis cryptocurrency "investing". A wave of posts and posters who have more recently fallen silent.

The aggrieved tone when someone was "mean" to them about their favourite idea was also discordant. Couldn't tell whether zealot or self interested.

You've now supplied the additional observation that means I should consider the former possibility.
I think that's wise. Also notice his "supporters" tend to tag team with him in other threads like the young, scrappy "jb1" (Jordan Belfort :shock: ) who was curiously interested in cryptocurrency at one point.

All comes across as carefully curated. Bogleheads are a trusting group, and it's sad to see people falling for this kind of stuff.

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Re: Stocks vs. rental property

Post by Nate79 » Thu Jun 28, 2018 10:07 am

The real estate deal is made at the buy. The problem is today the hot thing to do is run leverage to the max as if there is no risk with leverage. Propose to have paid for rentals and you get called an idiot or you just don't know what you are doing or you will never make money with a paid for rental. Hogwash. If you've got the time, money, and if needed a great property manager it can be a great deal if you do your due diligence at the beginning. Personally for me I don't have time but am considering doing remote rental ownership in the future. The key is the cash flow with not requirement of appreciation, though appreciation with inflation is long term expected.

For retirement there can be some big income advantages to own rental homes vs stock/bond investing. The cash flow thrown off of rentals I believe can be greater than the 4% SWR of stock/bond investing so I have a lot of interest to consider a mix of both in retirement.

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Re: Stocks vs. rental property

Post by Reb Tevye » Thu Jun 28, 2018 10:17 am

I was an semi-accidental landlord once, Hated it. Lying tenants, deficating pets, lawyers. I decided never again. I decided to put my life energy elsewhere, and left real estate profits to someone else to earn.

I owned an individual stock that zeroed out once.
I owned an individual stock that increased 10x in 5 years.
At this point, never again on buying single stocks.

Do you see the connection?
I can’t predictably buy only the high performing stocks or the high performIng manageable pieces of real estate.

One more tiny anecdote about the West Coast. People who bought in a solid upscale Brady Bunch neighborhood in LA in late 80’s took a decade or two to get back above purchase price. And had cracked foundations and roof from the earthquake 15 miles away.

I think your original Subject question is akin to “should I exercise in the mountains by hiking or swimming?” Everyone can hike a diversified stock fund. Not everyone can swim across an open lake. But those who can have an amazing swim.

But there is only one way to know if RE is the investment for you...
"So, what would have been so terrible if I had a small fortune?"

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Re: Stocks vs. rental property

Post by CyclingDuo » Thu Jun 28, 2018 10:26 am

jadd806 wrote:
Thu Jun 28, 2018 6:04 am
+1. All of his posts read like an advertisement. I wouldn't be surprised if he starts trying to sell a course or something after a while. I've seen it play out dozens of times on Forex forums. A user spends months building up this carefully curated tale of them being a wildly successful trader. Once they've established a reputation, they reveal that they've developed a premium course for others to learn from them. Since advertising is banned on most forums the user usually entices those who display interest in their "system" into a private messaging conversation, where they can more easily advertise and lead their targets away from the site.

I also enjoy how he uses the 1.8% dividend of the S&P 500 as his comparison point and ignores selling shares for income. It's an amusing tell that he's stuck behind the mental block of illiquid real estate investments, where equity cannot be accessed without paying someone else interest or by selling the entire asset, losing the income stream that it provides and paying massive transaction fees in the process.
Nail meet hammerhead.

Well struck, jadd806!
:sharebeer

Get rich quick schemes, lose weight fast schemes, Trade like Chuck schemes, make your fortune in options schemes, how to make a fortune in real estate with no money down schemes, etc... will always be touted and proselytized.

We have plenty of evidence of what a high saving's rate, and living within your means can do for the typical Boglehead investor. The simple math of saving more to shorten the duration of building your wealth should not be thrown out the window in these threads by suggestions of being lured into other strategies beyond equity/bond portfolios such as the Three Fund Portfolio or other version of a Lazy Portfolio.

Don't like the end result ($$ amount) or time needed (years) to reach it? Double or triple or quadruple the suggested savings rate and amount you set aside every month. 10% not enough? Try 20% or 30% or 40% or 50% if you can. Dual income household? Live off of one of the salaries, and save all of the other net income.

Image

Plenty of posts here at BH how people were able to increase their savings rate and enjoy the power of compounding to shorten the duration of accumulating wealth in terms of years. Although a higher salary seems like a logical path to do that (and it sure does help), we have all read countless posts here at BH where a higher salary or household income alone has not led to wealth accumulation due to other factors (debt servicing, overspent on housing/transportation/food/childcare/lifestyle, etc...).

This Millennial and Boglehead Forum member blogged about his 5 year path to saving $1.25M:

https://millennialmoney.com/save-1-million-dollars/

Typical BH advice...

Here are the variables that matter most:

1. Income: How much money you are making

2. Expenses: How much money you are spending

3. Savings: How much money you are saving

4. Savings Rate: = Savings divided by income

5. Investment Growth Rate: How much your investments compound annually. For the purpose of these examples I’ve set it at 7%, but as you’ll see from my specific situation, the higher your compounding rate, the faster you will reach 1 million.

FYI, here’s the best two books I’ve ever read on index fund investing that you should definitely check out to get more background on the strategy The Bogleheads’ Guide to Investing and The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On with Your Life.


Although I am slightly hesitant to source his success as not to be misconstrued as yet another touting of a "get rich quick" scheme, but it does need to be pointed out that the author (along with the rest of us) experienced an exceptional period of growth from 2010-15. In spite of that, the avenue exists for wealth accumulation using index funds (the author also invested in Apple, Amazon, and Facebook shares in addition to his core Vanguard Index Funds).

We've been through an amazing return on investment the past 8-9 years, so when he says about the 2010-15 time frame...

The Vanguard Total Stock Market Index Fund returns (with dividends reinvested) was 13.53% – so considerably higher than the 7% average used in the calculation examples earlier in the post. An average return of 13.53% is insanely strong performance and well above the average annual stock market returns over the past 100 years.

...one should not get deterred by lower rates of return while still saving as those periods will and do exist throughout our investing journey.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

mrgeeze
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Re: Stocks vs. rental property

Post by mrgeeze » Thu Jun 28, 2018 10:33 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!

I believe rental property is about the LAST place you should put your money.
I say this as having owned rental properties for the last 30 years.
I've had winners and losers.
There is NO easy money there

There are a lot of people trying to make money in the rental market.
Perhaps too many.
Property prices get bid up.
You just can't make real money if you pay too much for the property.
Long run appreciation is the icing on the cake, not the cake itself.
If the thing won't pay 5%+ net before depreciation, its not worth having.
5% net before depreciation means gross rental income of 12-15% (+-)of value of the property annually.
If you do the hard math you will find mostly that is unlikely in a high demand area.
The properties just cost too much from the start.
Don't forget the internal escrows you'll need for maintenance, carpet, painting as your tenants move out.
That's a month's rent easy every year, assuming nothing major breaks.

If you must, multi-unit properties are the way to go. Apartment buildings if you can
1 million is probably not enough to play here unless you find partners.
A duplex or quadplex would be the minimum.


Again you have to buy cheap or you won't make any money
Realtors,Zillow,Trulia, etc, make this much harder to do unless you find an inside play.

Above all remember the people telling you about all the $$$ you make are probably bad accountants.
There is an awful lot of leakage in property management.

Take $990,000, invest in the 3 fund - the Bogle way.
Take 10 grand and reward yourself for staying out of the real estate rental market.

WanderingDoc
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Re: Stocks vs. rental property

Post by WanderingDoc » Thu Jun 28, 2018 11:02 am

MossySF wrote:
Thu Jun 28, 2018 12:46 am
There's nothing wrong with real estate ...

But please stop using San Francisco Bay Area examples when you guys have no idea what it's like there. For example, guessing that you can get $8K-$10K/mo rent on a 1.5M house when the real number is $5K-$6K/mo.

And stop assuming you COULD have bought back a whole bunch of SF Bay Area houses in 1970 to be a mega landlord now. Remember the interest rates? Remember what kind of jobs there were? It's not like today where you can toss a rock in the Bay Area and you hit a Google engineer married to a Facebook PR person with a collective $600K in household income. With the type of average blue collar/white collar jobs back then, you'd have been lucky to qualify to buy a single half-rundown 1000sf house -- one for yourself to live in. (These houses don't sell for $1.5M now -- they usually are torn down and rebuilt for $500K in order to sell for 1.5M.)

I grew up in SF, lived there for 35 years, own rental property there, my parents owned several rental properties -- so I know all about what kind of stuff we had to do to stretch to make it happen. This is the reason why your posts sound like "Trump University get rich quick as real estate magnate" sales pitch -- because you give examples that simply are not realistic. You'd find more receptive responses if you only used personal examples that actually happened.

Also cut out the talk about "oh man, you just gonna be a company slave for the next 40 years". You have zero idea how good or bad some of us have done with only mutual funds -- or dedicating our time instead to careers, businesses.
You sound angry. Its not only SF. There are dozens of profitable markets all around the U.S. I bought several rentals in Honolulu, just half a decade ago, and have already seen solid appreciation, AND rent growth which nets me a solid $800-$1K per month per door in INCOME. We have a choice - this isn't index funds - past performance is often an indicator of future performance in real estate when it comes to geographic areas to invest.

I don't care if it sounds like a sales pitch to you, that is not my problem. I am not a salesman and I don't sell real estate (I buy and hold forever). I am enthusiastic about it because of the RESULTS. If it sounds like a sales pitch, so be it. Less people investing in real estate will only make me more successful. I have received many PMs from folks looking to jump into real estate investing, and I don't receive a dime by helping people out and providing a little education. I love it.
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 » Thu Jun 28, 2018 11:13 am

This reminds of a story I heard from a colleague of mine.

He was working with a CT tech (lets call him Don) for 20 years. So Don worked his butt off his entire life, and all he did was talk about the stock markets and the beauty of index fund investing. He was a hard worker too. He had amassed close to a million dollars by his 64th birthday around 2008. He had already planned vacation, retirement, spending more time with his family, etc.

Let me update you, he lost more than half his portfolio balance by 2009. Don didn't get to retire. He had continued working for another 10 years, because he didn't have enough money to retire.

Real estate investing is independent of portfolio VALUE. Its about the income you generate. I'm in my 30s, and I could retire TODAY based on the income my real estate portfolio generates. After mortgages as payed off (not by me, by my tenants), this will 2-3X this income even further. Don was super excited to retire, but he couldn't. That is why I invest (primarily) by the principle in my sig. I do own index funds, but they are the inferior investment. I call a spade a spade.

CyclingDuo wrote:
Thu Jun 28, 2018 10:26 am
jadd806 wrote:
Thu Jun 28, 2018 6:04 am
+1. All of his posts read like an advertisement. I wouldn't be surprised if he starts trying to sell a course or something after a while. I've seen it play out dozens of times on Forex forums. A user spends months building up this carefully curated tale of them being a wildly successful trader. Once they've established a reputation, they reveal that they've developed a premium course for others to learn from them. Since advertising is banned on most forums the user usually entices those who display interest in their "system" into a private messaging conversation, where they can more easily advertise and lead their targets away from the site.

I also enjoy how he uses the 1.8% dividend of the S&P 500 as his comparison point and ignores selling shares for income. It's an amusing tell that he's stuck behind the mental block of illiquid real estate investments, where equity cannot be accessed without paying someone else interest or by selling the entire asset, losing the income stream that it provides and paying massive transaction fees in the process.
Nail meet hammerhead.

Well struck, jadd806!
:sharebeer

Get rich quick schemes, lose weight fast schemes, Trade like Chuck schemes, make your fortune in options schemes, how to make a fortune in real estate with no money down schemes, etc... will always be touted and proselytized.

We have plenty of evidence of what a high saving's rate, and living within your means can do for the typical Boglehead investor. The simple math of saving more to shorten the duration of building your wealth should not be thrown out the window in these threads by suggestions of being lured into other strategies beyond equity/bond portfolios such as the Three Fund Portfolio or other version of a Lazy Portfolio.

Don't like the end result ($$ amount) or time needed (years) to reach it? Double or triple or quadruple the suggested savings rate and amount you set aside every month. 10% not enough? Try 20% or 30% or 40% or 50% if you can. Dual income household? Live off of one of the salaries, and save all of the other net income.

Image

Plenty of posts here at BH how people were able to increase their savings rate and enjoy the power of compounding to shorten the duration of accumulating wealth in terms of years. Although a higher salary seems like a logical path to do that (and it sure does help), we have all read countless posts here at BH where a higher salary or household income alone has not led to wealth accumulation due to other factors (debt servicing, overspent on housing/transportation/food/childcare/lifestyle, etc...).

This Millennial and Boglehead Forum member blogged about his 5 year path to saving $1.25M:

https://millennialmoney.com/save-1-million-dollars/

Typical BH advice...

Here are the variables that matter most:

1. Income: How much money you are making

2. Expenses: How much money you are spending

3. Savings: How much money you are saving

4. Savings Rate: = Savings divided by income

5. Investment Growth Rate: How much your investments compound annually. For the purpose of these examples I’ve set it at 7%, but as you’ll see from my specific situation, the higher your compounding rate, the faster you will reach 1 million.

FYI, here’s the best two books I’ve ever read on index fund investing that you should definitely check out to get more background on the strategy The Bogleheads’ Guide to Investing and The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On with Your Life.


Although I am slightly hesitant to source his success as not to be misconstrued as yet another touting of a "get rich quick" scheme, but it does need to be pointed out that the author (along with the rest of us) experienced an exceptional period of growth from 2010-15. In spite of that, the avenue exists for wealth accumulation using index funds (the author also invested in Apple, Amazon, and Facebook shares in addition to his core Vanguard Index Funds).

We've been through an amazing return on investment the past 8-9 years, so when he says about the 2010-15 time frame...

The Vanguard Total Stock Market Index Fund returns (with dividends reinvested) was 13.53% – so considerably higher than the 7% average used in the calculation examples earlier in the post. An average return of 13.53% is insanely strong performance and well above the average annual stock market returns over the past 100 years.

...one should not get deterred by lower rates of return while still saving as those periods will and do exist throughout our investing journey.
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 TropikThunder » Thu Jun 28, 2018 11:40 am

WanderingDoc wrote:
Thu Jun 28, 2018 11:13 am
He had amassed close to a million dollars by his 64th birthday around 2008. He had already planned vacation, retirement, spending more time with his family, etc.

Let me update you, he lost more than half his portfolio balance by 2009. Don didn't get to retire. He had continued working for another 10 years, because he didn't have enough money to retire.
Didn’t the market recover within a couple years of the bottom in 2009? If he was still working and not withdrawing, his portfolio would have gotten back to 2008 levels in WAY less than 10 years.

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Re: Stocks vs. rental property

Post by Pajamas » Thu Jun 28, 2018 12:05 pm

TropikThunder wrote:
Thu Jun 28, 2018 11:40 am
Didn’t the market recover within a couple years of the bottom in 2009? If he was still working and not withdrawing, his portfolio would have gotten back to 2008 levels in WAY less than 10 years.
A common theme with a lot of the people who favor being a landlord over investing in equities is that they are young. There seems to be a generational shift in thinking on this and similar topics. They may not have the context from personal experience that older people have and may have a different view of the financial and real estate crisis of 2008-2009.

I chuckle when people talk about the great returns from buying real estate in San Francisco or New York in the 1970s or 1980s. Apparently they don't know what the market was like at the time.

What's curious is why they choose Bogleheads rather than another website to push their real estate viewpoints. This website has a specific purpose and that's not it.

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Re: Stocks vs. rental property

Post by WanderingDoc » Thu Jun 28, 2018 12:11 pm

TropikThunder wrote:
Thu Jun 28, 2018 11:40 am
WanderingDoc wrote:
Thu Jun 28, 2018 11:13 am
He had amassed close to a million dollars by his 64th birthday around 2008. He had already planned vacation, retirement, spending more time with his family, etc.

Let me update you, he lost more than half his portfolio balance by 2009. Don didn't get to retire. He had continued working for another 10 years, because he didn't have enough money to retire.
Didn’t the market recover within a couple years of the bottom in 2009? If he was still working and not withdrawing, his portfolio would have gotten back to 2008 levels in WAY less than 10 years.
No idea. Either way, at that age I'd be upset. Can you imagine a 70yo tech doing your CT at the clinic/hospital? He should probably be playing with his grandkids. His dreams and plans were taken away by something he couldn't control.

That's why I started to invest in index funds/maxing out my 401k AFTER I had hit financial independence from real estate income. I got the important stuff I actually have an influence in out of the way, then diversified into heavily manipulated paper assets where have no informational/analytical advantage nor control. I learned an important lesson when I heard Don's story.

Illiquidity and leverage are the key features of real estate, by the way. Most of the benefits of real estate investing come from leverage.
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 HomerJ » Thu Jun 28, 2018 1:18 pm

WanderingDoc wrote:
Thu Jun 28, 2018 11:02 am
I don't care if it sounds like a sales pitch to you, that is not my problem. I am not a salesman and I don't sell real estate (I buy and hold forever). I am enthusiastic about it because of the RESULTS.
I don't think you're a salesman...

I think you're young and you got lucky (along with some hard work) and lack perspective to realize it may not always be repeatable.

You're EXACTLY like someone who bought Netflix or Tesla 5 years ago and made 800% in 5 years. And then posts about how easy it is. Not how easy it WAS, but how easy it IS to get 800% for anyone, anytime, because you did it once.

The last 5 years have been very good for housing appreciation in San Fran and Hawaii.. You've never been invested during a housing crash. Leverage cuts both ways. You've been fortunate so far. It sounds like you're established enough now that you will even survive the next housing crash. Good for you.

But someone just starting out following your advice could be destroyed if a housing crash happens in the first or second year.

And even without a crash, normal housing appreciation in most of the world is not fast enough to make you financially independent in 5 years. Real estate investing, normally, in general, is a get-rich-slow investment.

Just like stocks.
The J stands for Jay

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Re: Stocks vs. rental property

Post by HomerJ » Thu Jun 28, 2018 1:24 pm

WanderingDoc wrote:
Thu Jun 28, 2018 11:13 am
This reminds of a story I heard from a colleague of mine.

He was working with a CT tech (lets call him Don) for 20 years. So Don worked his butt off his entire life, and all he did was talk about the stock markets and the beauty of index fund investing. He was a hard worker too. He had amassed close to a million dollars by his 64th birthday around 2008. He had already planned vacation, retirement, spending more time with his family, etc.

Let me update you, he lost more than half his portfolio balance by 2009. Don didn't get to retire. He had continued working for another 10 years, because he didn't have enough money to retire.
Wow, that's a really stupid story. It's like you don't read ANYTHING on this website.

(1) No one here would suggest anyone be 100% in stocks at 64 right before retirement.

(2) Markets recovered a lot faster than 10 years. He had all his money back by late 2011... Plus all the money he invested while working in 2009-2011 increased substantially. By 2011, he would have had MORE than his original $1 million and three less years of retirement to fund, plus his Social Security checks would have been larger by waiting an extra 3 years.

There would have been no reason whatsoever for him to keep working another 10 years. So there's more to the story or you just made it up.

Edit: $1 million invested in June 2008 is worth $2.65 million today. "Don" was planning to retire in 2008 with $1 million at age 64, but continues to work in 2018 because $2.65 million just isn't enough at age 74.

That's a 10% annual return a year even INCLUDING the crash.
Last edited by HomerJ on Thu Jun 28, 2018 1:41 pm, edited 3 times in total.
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Re: Stocks vs. rental property

Post by HomerJ » Thu Jun 28, 2018 1:27 pm

WanderingDoc wrote:
Thu Jun 28, 2018 12:11 pm
TropikThunder wrote:
Thu Jun 28, 2018 11:40 am
WanderingDoc wrote:
Thu Jun 28, 2018 11:13 am
He had amassed close to a million dollars by his 64th birthday around 2008. He had already planned vacation, retirement, spending more time with his family, etc.

Let me update you, he lost more than half his portfolio balance by 2009. Don didn't get to retire. He had continued working for another 10 years, because he didn't have enough money to retire.
Didn’t the market recover within a couple years of the bottom in 2009? If he was still working and not withdrawing, his portfolio would have gotten back to 2008 levels in WAY less than 10 years.
No idea.
You have no idea? Then you need to read more here and post less. Again, total lack of perspective if you don't even know what happened with the stock market 10 years ago. You also probably have no idea what happened with the housing market 10 years ago either.

Want me to make up a story about a guy who was totally leveraged in rental houses in 2008, and lost it all, and had to work 20 more years until he was 90, and never got to even meet his grandkids because his life was so messed up from investing in real estate?
The J stands for Jay

viz
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Re: Stocks vs. rental property

Post by viz » Thu Jun 28, 2018 1:32 pm

WanderingDoc wrote:
Thu Jun 28, 2018 1:11 pm
Pajamas wrote:
Thu Jun 28, 2018 12:21 pm
WanderingDoc wrote:
Thu Jun 28, 2018 12:18 pm

You need not feel threatened if someone discusses the nuances/benefits of real estate on here. If index fund investing is so much better than investing in real estate, it should shine through no matter what anyone says about a different investment. Are you anti free speech? Last I checked, the words real estate weren't banned. Criticism (and praise) should be welcomed about both stocks and real estate. Judging by the feedback and PMs I receive about real estate investing as an investment shows that truth, civil debate, and freedom of speech is the way forward.
How presumptuous! No one on Bogleheads feels threatened by the infomercials, they feel annoyed.
By your definition of infomercial, virtually every post on here is an index fund infomercial. Since someone simply talking about the benefits of owning a particular asset class is apparently an infomercial? Good to know :P
Disclosure: I invest both in RE (not single family) and index funds (3 fund + value tilt) and I believe both are valid investment avenues.

My opinion is that index fund can be generalized as long as you follow the template. You & I invest in the same ETF over the same period of time & we will get the same results. It is not so much in RE. We can buy 2 homes, same size, same neighborhood and right next 2 each other for the same price & we can get very different results. And it is not only different in terms of money but experience too. Your tenant might be the best person in the world who treats your home like hers and mine is the worst who makes holes in walls. This is the reason why some folks find very hard to believe that money can be made in RE. Also, I believe appreciation in real estate should not be the main driver; it is cashflow, tenant paying your mortgage and tax benefits. + it is as easy to lose money in RE as it is stock market and due to leverage, the risk is higher. IMHO, you are paid more for the higher risk.


It is like option investing; I tried it few years back & paid a guru for monthly newsletter. I couldn't replicate his profits. I personally know people who make money trading options. I just can't.

Back to OP, I will not put all my savings in real-estate. Also, I will not buy in Bay Area if I need the cash-flow and if I buy in Bay Area, I would have reserves to pay expenses out of pocket as rent will not cover them.

PS: you is a generic person and not any poster.

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Re: Stocks vs. rental property

Post by sergeant » Thu Jun 28, 2018 1:45 pm

Pajamas wrote:
Thu Jun 28, 2018 12:21 pm
WanderingDoc wrote:
Thu Jun 28, 2018 12:18 pm

You need not feel threatened if someone discusses the nuances/benefits of real estate on here. If index fund investing is so much better than investing in real estate, it should shine through no matter what anyone says about a different investment. Are you anti free speech? Last I checked, the words real estate weren't banned. Criticism (and praise) should be welcomed about both stocks and real estate. Judging by the feedback and PMs I receive about real estate investing as an investment shows that truth, civil debate, and freedom of speech is the way forward.
How presumptuous! No one on Bogleheads feels threatened by the infomercials, they feel annoyed.
Why is Wandering Doc continually writing about members PM'ing him? Something doesn't smell right. WD's comparisons of equities vs rentals are ridiculous. My family had dozens of SFH rentals in So. Ca. in the 70's and 80's. My dad managed them and I did all the maintenance. We did alright. It was a lot of work. I prefer passive investing.
Lincoln 3 EOW!

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Re: Stocks vs. rental property

Post by Pajamas » Thu Jun 28, 2018 2:05 pm

WanderingDoc wrote:
Thu Jun 28, 2018 1:11 pm
By your definition of infomercial, virtually every post on here is an index fund infomercial. Since someone simply talking about the benefits of owning a particular asset class is apparently an infomercial? Good to know :P
You are very presumptuous about what other people think and feel.

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Re: Stocks vs. rental property

Post by 3CT_Paddler » Thu Jun 28, 2018 2:19 pm

I do think too many Bogleheads ignore rental property, but the time to buy rental property is not today in most parts of the country.

The time was 5-10 years ago when people were trying to give those properties away and the Great Recession was in full swing.

It is more work, and it is also more grounded in your local economy. That may be a good or bad thing, but the downside to that approach is the lack of diversification.

Buying real estate based on speculative price appreciation is much more risky IMO vs buying based on good cap rates. If the cap rates are not there, don't buy.

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Re: Stocks vs. rental property

Post by WildBill » Thu Jun 28, 2018 2:27 pm

3CT_Paddler wrote:
Thu Jun 28, 2018 2:19 pm

Buying real estate based on speculative price appreciation is much more risky IMO vs buying based on good cap rates. If the cap rates are not there, don't buy.
Howdy

Yep. This sums it up.

W B
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Re: Stocks vs. rental property

Post by LadyGeek » Thu Jun 28, 2018 3:12 pm

I removed some off-topic posts. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
The discussion is also getting derailed.

johnkgan - has your question been answered?
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!
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EddyB
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Re: Stocks vs. rental property

Post by EddyB » Thu Jun 28, 2018 4:08 pm

WanderingDoc wrote:
Wed Jun 27, 2018 9:13 pm
jb1 wrote:
Wed Jun 27, 2018 8:18 pm
WanderingDoc wrote:
Wed Jun 27, 2018 7:01 pm


Its just simple math, though. Indexing is fine, its just a 25-30+ year plan. Not everyone wants to be pigeon holed for that long working a job (or jobs) that may be uncertain, or they may not like. People change. Things change. Health changes. What if they want to train for a triathlon, start a business, travel through Asia, or spend more time with their kids?

A 401k/IRA produces NO INCOME. Well it produces maybe a 1.8% dividend, which is a joke. Not that you could use that money (not that you would have enough) since its usually locked in a 401k.

The beauty of real estate is that you can have a net annualized income of 8-15% quite easily. So whether all your properties are worth $5M or $50,000 or $0. it doesn't matter. Lets say you need $6K per month to cover your living expenses. That is very easily done by buying 5-10 properties with leverage. I started investing in real estate during medical residency. I never took any courses or seminars. I just surrounded myself with people that did what I wanted to do.

My real estate portfolio is mostly hands off, and it took me 3.5 years total for rental income to cover all my living expenses. That is a beautiful thing. I managed to graduate residency, get board certified, travel often, during those 3.5 years. I am not talented and I didn't take on a huge amount of risk. Most of my profits from real estate are invested into 100% passive large apartment deals today.

Real estate today takes up less of my time than browsing index fund forums and reading books on investing. To do what I did, in less than 5 or less than 10 years with an index fund portfolio and the 4% rule, is a PIPE DREAM. 2 investment vehicles - 2 different goals
Love it. I remember you a few months back when I asked about REI. I am in the process of looking at properties now. REI is something I want to do long term. I have about 70k in the market now, which is great, but like you said, for what? A 2% dividend?

At the end of the day, people need a place to live. I cannot control the stock market, but I can control my property like a business.
Bingo! Assuming we enter a bear market in U.S./Int'l stocks this year (or next), ask me if I will stop receiving rent checks every month. Ask me if my long term vacancy rate will go from 97.5% to 0%. Even if it goes down to 90% (doubt it), will continue chugging along, paying me in 5 different ways. :D God bless America and bless long-term, low interest, fixed debt on investment properties.

Do keep in touch and let me know what market/property type/real estate investing niche you choose as your first investment.
After the .com bust, my landlord in one of the most prime locations in the Bay Area cut his rents by 20%. He kept a good crop of tenants, but that was the step he thought he needed to take to avoid the uncertainty of vacancies.

As a landlord, my occupancy rates and, umm, tenant quality were much lower in 2009-2011 than any time before or after.
I'm a landlord, so obviously not opposed to rental real estate, but don't pretend that there's no way to lose here or that you've got sufficient experience to be very convincing. Nobody's Vanguard investments have ever needed expensive repair, or required ongoing payments, but that's something you may have to deal with as a landlord.

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Re: Stocks vs. rental property

Post by balbrec2 » Thu Jun 28, 2018 4:17 pm

The kind of RE investing the OP asks about, is a job as well as an investment.
Unless you want a part time job (could be more than that) put (some of) your money in REITs
if you feel the need to invest in real estate.

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Re: Stocks vs. rental property

Post by 3funder » Thu Jun 28, 2018 7:43 pm

TravelforFun wrote:
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
Sounds like a very sweet setup for them.

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Re: Stocks vs. rental property

Post by CyclingDuo » Thu Jun 28, 2018 8:36 pm

HomerJ wrote:
Thu Jun 28, 2018 1:24 pm
WanderingDoc wrote:
Thu Jun 28, 2018 11:13 am
This reminds of a story I heard from a colleague of mine.

He was working with a CT tech (lets call him Don) for 20 years. So Don worked his butt off his entire life, and all he did was talk about the stock markets and the beauty of index fund investing. He was a hard worker too. He had amassed close to a million dollars by his 64th birthday around 2008. He had already planned vacation, retirement, spending more time with his family, etc.

Let me update you, he lost more than half his portfolio balance by 2009. Don didn't get to retire. He had continued working for another 10 years, because he didn't have enough money to retire.
Wow, that's a really stupid story. It's like you don't read ANYTHING on this website.

(1) No one here would suggest anyone be 100% in stocks at 64 right before retirement.

(2) Markets recovered a lot faster than 10 years. He had all his money back by late 2011... Plus all the money he invested while working in 2009-2011 increased substantially. By 2011, he would have had MORE than his original $1 million and three less years of retirement to fund, plus his Social Security checks would have been larger by waiting an extra 3 years.

There would have been no reason whatsoever for him to keep working another 10 years. So there's more to the story or you just made it up.

Edit: $1 million invested in June 2008 is worth $2.65 million today. "Don" was planning to retire in 2008 with $1 million at age 64, but continues to work in 2018 because $2.65 million just isn't enough at age 74.

That's a 10% annual return a year even INCLUDING the crash.
Shhhhh....you'll ruin his story. :mrgreen:

Yes, the drop in portfolio values in both the 2000-02 bear market, and in the 2007-2009 were substantial. We all experienced varying degrees of loss for those periods before the bounce backs. If the 64 year old colleague of the OP's suffered a 50% haircut, sounds like he had too high of an allocation in equities for the "just about to retire" age 64 worker - especially according to the suggested glidepath for the protection of a bond tent to prevent a hefty 50% decline right before retirement...

Image

As show above, his colleague, Don, should have been near 30% equities/70% bonds at age 64. Swedroe's table of loss for the 48.2% bear market decline in the early 70's (not exactly the same amount of loss as 2007-2009, but similar enough of an example of a hefty percentage loss to the 2007-2009 bear) shows the amount of loss Don would have been exposed to provided he was not in a portfolio too stacked with equities to experience a 50% haircut:

Image

That being said, it has been pointed out in other posts above that his colleague would have been fine just a mere 3 years later:

Image

My only guess is WanderingDoc's subject Don in the story either must have hit the panic button and sold out at or near the lows which is why it required him to work an additional 10 years, or his asset allocation (which was very much in his control) was skewed too risky which led to the loss, or it spooked him enough to go too conservative after the fact delaying the return to his pre-bear market portfolio value. Good lesson for the rest of us Dons. :beer

Too bad he didn't utilize his index card...

Image

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https://www.yardeni.com/pub/sp500corrbear.pdf
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Re: Stocks vs. rental property

Post by ncbill » Fri Jun 29, 2018 10:42 am

Yep, sounds like he sold at market lows.

Instead, since he was retiring in 2008 he should have rebalanced to 25-35% equities in order to follow the "rising equity glide path" model to minimize sequence of return risk.

The more I read here the more I favor the above approach for retirement.

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Re: Stocks vs. rental property

Post by DaftInvestor » Fri Jun 29, 2018 12:06 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.
Valuethinker wrote:
Wed Jun 27, 2018 3:04 am
AerialWombat wrote:
Mon Jun 25, 2018 12:45 pm


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.
1. if you go along the East Coast of England, you have the Saxon Shore. Fortresses built in late Roman times to protect against raiders from the Dutch & German lowlands across the North Sea.

https://en.wikipedia.org/wiki/Saxon_Shore


2. then you had the Vikings ....

So coastal location is OK when civilization is up and running. The sea which brings commerce, also brings the Spanish to Aztec Mexico, the Vikings to Anglo Saxon England ...

But this is all terribly ironic. Look at those maps of Hurricane Sandy and see how much of lower Manhattan and Brooklyn were literally under water. Infrastructure badly damaged, etc.

So coastal locations? Make sure you have seen the 100 year forecast. Some of the most expensive real estate in the world is a place called Sandbanks in Poole in Dorset, south coast of England. And it quite literally won't be there in pick a number between 30 and 100 years.

https://en.wikipedia.org/wiki/Sandbanks

Of course, rich people can afford to jack up their houses etc. But even that won't stop storm force wind and waves.
Even looking at the last 100 - 200 years you can't generalize "Coastal Markets" in this way. Sure - there are some Coastal Markets that have delivered and those are the examples everyone clings to and brings up. But for each of those markets there are several more that haven't - examples exist in every state. Example - In Massachusetts people think of Cape Cod, Boston, Marblehead....Rich coastal communities with seemingly ever-increasing valuations. But over 100 years ago the richest Coastal community wasn't these - it was New Bedford - this is where the Moby Dick story started - it was the whaling capital of the world. Some of the very large houses built by the wealthy former industry leaders are still there from the whaling days - and if you want you can buy one these very large historical houses for probably around $300,000 to $400,000 easily today. A quick google search finds me an article in a local paper to that community that states that "prices are soaring" with the median housing prices being over $200,000 for the first time in a decade (http://www.southcoasttoday.com/news/201 ... lly-surges). They have beaches and houses with Oceanviews. Its a Coastal Community.
I'm not saying that San Francisco will become the next New Bedford when the Tech-Industry goes by the way-side or finds another place to take root like New Bedford did when the Whaling Industry collapsed - but you simply can't make these kind of generalizations based upon the successful examples.
The point is investing in one or two properties in what you think is a solid location is like investing in one or two stocks. You don't know what the market will bear over a long period of time.
Last edited by DaftInvestor on Fri Jun 29, 2018 12:21 pm, edited 1 time in total.

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DaftInvestor
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Re: Stocks vs. rental property

Post by DaftInvestor » Fri Jun 29, 2018 12:21 pm

Some one mentioned Detroit above - this is another great example of how quickly a real-estate market can change in any give location/city.
I laughed recently as I now heard Detroit described as "an up and coming community".
It seems like you can pick up the phone and call a real estate agent in about any city in the US that hasn't seen sky-high increases like San Francisco and they will describe the town/city as "an up and coming area" so that you know you are getting in at the right time :)

megabad
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Re: Stocks vs. rental property

Post by megabad » Fri Jun 29, 2018 1:34 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? I think real estate is neither better nor worse than stocks since I cannot predict the future. Because rental property would provide appreciation as well as monthly incoming though there is always the pain of not being able to find tenants? There are many risks to real estate investing including vacancy. There are also risks to stock/bond investing. Or should I be only investing say 80% of my savings in rental property? I do not invest 80% of my savings in any single sector of a single asset class in a single geography. My investment policy statements calls for diversity and therefore does not allow me to do this with this high of a %. You are not me, but this strong of a tilt to one sector would not be consistent with my plan.

If real estate is better, would Bay area California be okay to consider for good appreciation along with rent?As above, I cannot predict the future. Would agree with prior posters that I would look more at the net return from rental income and not focus much on appreciation.
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? I don't know.
Should I buy a small 3 bed room single family home or are bigger home easy to rent out as well? In my experience with my area, I lean toward 3 bed, 2 bath SFH as I find that the sweet spot for rentals. Every area is different though and I do not know the Bay area well.
I would greatly appreciate your advice. Thank you so much!
I recommend people treat all investments the same. In theory, I see no difference with investing in stocks, bonds, real estate, or really anything. Leverage can be used to invest in nearly anything so that is not unique to real estate. Analyze the predicted returns for the investments (obviously there will be limited accuracy), analyze the risk of the investments, come up with an investment plan, and stick to it. If you choose to invest in real estate directly, in much the same way as picking an individual stock, you have concentrated your risk in this one specific choice which is why I limit the size of this as a % of my total portfolio. Just as with a stock I would carefully analyze the risks (regional, tax changes, maintenance costs, etc) and balance that with the predicted rental returns. I would value short term rental return more highly than predicted appreciation as money today is worth more to me than predicted money on sale many years from now (this consideration carefully mirrors how I consider investing in bonds of various terms.) To me, relying on long term price appreciation alone is more gambling, not investing (akin to "investing" in block-chain currencies for instance). Just my 2 cents, you will have to decide your views on each investment type and come up with your own plan.

AerialWombat
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Re: Stocks vs. rental property

Post by AerialWombat » Fri Jun 29, 2018 9:36 pm

CyclingDuo wrote:
Thu Jun 28, 2018 8:36 pm
Too bad he didn't utilize his index card...

Image


Never seen the note card before. This is great! Thanks for posting this.

sabhen
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Re: Stocks vs. rental property

Post by sabhen » Sat Jun 30, 2018 2:56 pm

I owned a property and had some bad experience with tenants, property management company, finding good tenants to occupy it etc..

A person I know bought his house 40 years ago - not too far from the coast - for $30,000 and is now worth about $800,000 which is not too shabby.

But real estate comes with a lot of costs that often ignored. Paying the mortgage including interest (cost of money), taxes, insurance, maintenance and upkeep (a new roof, plumbing issues,...). These costs add up despite some tax advantages. It is not liquid. You pay a big fee for buying/selling a home.

Professor Elroy Dimson studied various asset classes for last 100 years in the US and overseas. His conclusion is that real estate performance falls between bonds and stocks. In general about 1% better than inflation.

I prefer to invest in stock index funds.

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ThereAreNoGurus
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Re: Stocks vs. rental property

Post by ThereAreNoGurus » Sat Jun 30, 2018 3:28 pm

sabhen wrote:
Sat Jun 30, 2018 2:56 pm
Professor Elroy Dimson studied various asset classes for last 100 years in the US and overseas. His conclusion is that real estate performance falls between bonds and stocks. In general about 1% better than inflation.
I do not know about this particular study, but most of the studies that compare assets classes, I believe, do not take into account that most folks who invest in real estate use leverage, which of course would generate a much higher ROI on average, I suspect.

I know of few other investment vehicles where you can get somebody else to pay off your debt. It's leverage that often makes real estate a very lucrative investment. Of course, it can go the other way.

(That being said, I have never invested in real estate myself, nor do I have any interest in doing so.)

renue74
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Re: Stocks vs. rental property

Post by renue74 » Sun Jul 01, 2018 8:47 pm

Valuethinker wrote:
Thu Jun 28, 2018 6:06 am
renue74 wrote:
Wed Jun 27, 2018 10:49 am
In 2013, we came into some extra money. We always wanted to have rental property. I'm a very handy person and love to tinker/build/fix things.

Over the past 5 years....we've bought 4 rentals....some in really bad shape, some not so bad.

It's definitely a business. If you want to make money, you make it your baby. I self manage and deal with tenants. Finding a honest property manager who cares about your rentals as much as you do is difficult. I just bought a $38K house and inherited a tenant and prop manager. Within 1 month, the tenant moved out in the middle of the night and left all their stuff, plus about 500 roaches.

Prop manager didn't really help at all. But they would love to "help" you get all the old tenants stuff out, charge you $500 on top of the 10% you pay them and they will place another tenant in for 1/2 of the first month's rent.

I still like dealing with it. I have friends who have been landlords for 15+ years and they want out. I can tell that over time, most landlords just want to sell all their properties and move on.

I don't buy for appreciation. In my area, Charlotte, NC, appreciation in rentals was not a "thing," until the past 5 years or so. You bought at $50K "Mill House," in 2000 and you sold it for $55K in 2015. It just didn't appreciate a lot.

But recently rental house appreciation has gone through the roof. I bought a $37K house a couple of years ago, collected rent from a nice old lady and then sold the house last summer for $55K. I put zero work into the house.

I'm not sure now is the best timeframe to be getting into rental property. We have bidding wars even in my town for these now. That didn't happen before...even in the mid-2000s.


This is all good stuff.

I am just amazed you can buy houses for these amounts.

Say it costs $100 psf to build a new house. The actual cost in most places in USA is probably $175-200?

A 1000 square foot house (40% of the size of the average new home) would cost $100k + land + connection to services. Say $150k.

A $55k house is a 2/3rds discount to a new house (at least).
We live about 20 minutes outside Charlotte, NC. Rental property has traditionally been in that price point for a few decades....which is a product of lower wages and LCOL.

The deals are getting fewer though.

But this "bubble," feels different. Banks are not throwing money at home buyers. You still have to jump through hoops....AND the home inventory is low.

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