Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

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foodhype
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Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by foodhype » Wed Sep 19, 2018 5:05 pm

I've read a lot of opinions on the forums claiming that unleveraged real estate returns are comparable to stock market returns and others claiming that unleveraged real estate returns are just barely a notch above inflation and that all of the stock-like return comes from the leverage. Obviously this depends heavily on location. But what does the market look like? I have never touched real estate, but I'm curious.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 5:20 pm

I read on the Economist just before the 2008 crash that housing prices historically grow just a bit over inflation.
If you add renting on top of that it should be more than "just a notch".

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JoMoney
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by JoMoney » Wed Sep 19, 2018 5:23 pm

Real estate itself, viewed broadly (in aggregate, ignoring individual local specific growth/declines), has for the most part matched inflation.
Image
This also ignores rental income (or imputed rent if you get the value of living in the house yourself), it also ignores the expenses of property taxes and the depreciation of the building itself.
Rental income is usually low margin and very capital intensive with lots of upfront costs sunk into the property and building and constant repairs and upgrades needed to stay current.... but the income itself is usually pretty stable.
If you're looking at a home for your personal residence, there are lots of tax advantages to owning a home, and there are government subsidies/guarantees that make a 30 year mortgage for a personal home a unique deal.

Being a landlord / earning rental income, is a business... there are lots of businesses you can invest in with stocks, including rental income through REITs, which are included in the stock indexes.
Here's a link to the Wilshire REIT index compared to S&P 500: Morningstar TR Growth Chart
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galeno
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by galeno » Wed Sep 19, 2018 5:41 pm

The easiest way answer your question is to use the SEC Yield for a passive REIT like Schwab's US REIT ETF™ (SCHH) with a SEC Yield = 3.42%.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Watty
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Watty » Wed Sep 19, 2018 5:51 pm

JoMoney wrote:
Wed Sep 19, 2018 5:23 pm
Real estate itself, viewed broadly (in aggregate, ignoring individual local specific growth/declines), has for the most part matched inflation.
Image
You need to be careful when looking at numbers like that.

There will be exceptions of course but most houses from 1890 were torn down long ago or are pretty decrepit now.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 5:51 pm

galeno wrote:
Wed Sep 19, 2018 5:41 pm
The easiest way answer your question is to use the SEC Yield for a passive REIT like Schwab's US REIT ETF™ (SCHH) with a SEC Yield = 3.42%.
But that does not include the compensation of all those people running the REIT.

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whodidntante
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by whodidntante » Wed Sep 19, 2018 5:53 pm

Real estate is also risky but with the added bonus of upkeep. It seems there is always something to do. Most years it's toilets, faucets, exhaust fans, landscaping, lighting etc. Sometimes it's furnaces, carpet, structural issues, roofs, etc. And you also get to deal with renters, insurance, taxes, and high transaction costs. Roll the dice enough times and eventually you'll have a property that just becomes a total loss somehow like via uninsured catastrophic damage, or at least the value takes a beating. Like if a grocery store builds adjoining your backyard. Or a renter with no assets destroys the place.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 5:53 pm

Watty wrote:
Wed Sep 19, 2018 5:51 pm
There will be exceptions of course but most houses from 1890 were torn down long ago or are pretty decrepit now.
Well, then also Exxon's oil wells are not the same they were in the 80's...

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by whodidntante » Wed Sep 19, 2018 5:54 pm

Thesaints wrote:
Wed Sep 19, 2018 5:51 pm
galeno wrote:
Wed Sep 19, 2018 5:41 pm
The easiest way answer your question is to use the SEC Yield for a passive REIT like Schwab's US REIT ETF™ (SCHH) with a SEC Yield = 3.42%.
But that does not include the compensation of all those people running the REIT.
Is your "business" going to be more efficient than an average REIT?

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 5:55 pm

whodidntante wrote:
Wed Sep 19, 2018 5:53 pm
Real estate is also risky but with the added bonus of upkeep. It seems there is always something to do. Most years it's toilets, faucets, exhaust fans, landscaping, lighting etc. Sometimes it's furnaces, carpet, structural issues, roofs, etc. And you also get to deal with renters, insurance, taxes, and high transaction costs. Roll the dice enough times and eventually you'll have a property that just becomes a total loss somehow like via uninsured catastrophic damage, or at least the value takes a beating. Like if a grocery store builds adjoining your backyard. Or a renter with no assets destroys the place.
Maybe insuring, buying properties in nice areas, and not renting to people with no assets could help ?

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 5:57 pm

whodidntante wrote:
Wed Sep 19, 2018 5:54 pm
Is your "business" going to be more efficient than an average REIT?
Does not have to be more efficient in order for me to get a higher profit margin, when I'm the company CEO, CFO, secretary, concierge, etc...

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whodidntante
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by whodidntante » Wed Sep 19, 2018 5:58 pm

Thesaints wrote:
Wed Sep 19, 2018 5:55 pm
whodidntante wrote:
Wed Sep 19, 2018 5:53 pm
Real estate is also risky but with the added bonus of upkeep. It seems there is always something to do. Most years it's toilets, faucets, exhaust fans, landscaping, lighting etc. Sometimes it's furnaces, carpet, structural issues, roofs, etc. And you also get to deal with renters, insurance, taxes, and high transaction costs. Roll the dice enough times and eventually you'll have a property that just becomes a total loss somehow like via uninsured catastrophic damage, or at least the value takes a beating. Like if a grocery store builds adjoining your backyard. Or a renter with no assets destroys the place.
Maybe insuring, buying properties in nice areas, and not renting to people with no assets could help ?
Yeah, that's the thing. Insurance policies have exclusions.

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whodidntante
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by whodidntante » Wed Sep 19, 2018 6:00 pm

Thesaints wrote:
Wed Sep 19, 2018 5:57 pm
whodidntante wrote:
Wed Sep 19, 2018 5:54 pm
Is your "business" going to be more efficient than an average REIT?
Does not have to be more efficient in order for me to get a higher profit margin, when I'm the company CEO, CFO, secretary, concierge, etc...
Not if your time is valueless. That's time you could be using to defend real estate as an investment on Bogleheads. :twisted:

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 6:02 pm

whodidntante wrote:
Wed Sep 19, 2018 5:58 pm
Yeah, that's the thing. Insurance policies have exclusions.
:confused

From your description I got the impression of a crack house in Brightmoor, Detroit.
A rental property does not have to be necessarily like that.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 6:05 pm

whodidntante wrote:
Wed Sep 19, 2018 6:00 pm
Not if your time is valueless. That's time you could be using to defend real estate as an investment on Bogleheads. :twisted:
Personally, I would never get in the RE business and whoever asked me I advised against. However the OP was asking whether the expected return is around inflation, or higher. My opinion is that it is higher, although not "stocks-high". Of course, any middle layer, be that a rental management company, or a REIT, will subtract to the performance.

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JoMoney
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by JoMoney » Wed Sep 19, 2018 6:05 pm

Watty wrote:
Wed Sep 19, 2018 5:51 pm
... You need to be careful when looking at numbers like that.

There will be exceptions of course but most houses from 1890 were torn down long ago or are pretty decrepit now.
Below that, I explicitly said, ..."This also ignores rental income (or imputed rent if you get the value of living in the house yourself), it also ignores the expenses of property taxes and the depreciation of the building itself."...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by alex_686 » Wed Sep 19, 2018 6:06 pm

Thesaints wrote:
Wed Sep 19, 2018 5:20 pm
I read on the Economist just before the 2008 crash that housing prices historically grow just a bit over inflation.
If you add renting on top of that it should be more than "just a notch".
I am going to guess you were reading about the Case-Schiller index, which shows that family homes have had principle return of 0 to 2% over inflation. St spastically pretty close to zero.

If you factor in rents you get something closer to risks and returns of a BBB bond.

Also, please don't use publicly traded as a proxy. They are leveraged. The value of the underlying properties are effectively 20% higher because they are liquid. Etc. Too many issues.

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galeno
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by galeno » Wed Sep 19, 2018 6:07 pm

All I'm saying is that passively investing in USA real estate is expected to deliver a 3.4% nominal annual return.

If you want more return you'll have to go active and add risk. Usually leverage. Property managers aren't cheap. Active RE investing can be a lot of work.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 6:12 pm

alex_686 wrote:
Wed Sep 19, 2018 6:06 pm
I am going to guess you were reading about the Case-Schiller index, which shows that family homes have had principle return of 0 to 2% over inflation. St spastically pretty close to zero.
Well the 30-year TIPS pays 1% over inflation, so 2% over is not that bad these days.
Also, please don't use publicly traded as a proxy. They are leveraged. The value of the underlying properties are effectively 20% higher because they are liquid. Etc. Too many issues.
I never did. Others mentioned REIT returns and I commented they underestimate total RE return, so we agree.

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JoMoney
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by JoMoney » Wed Sep 19, 2018 6:14 pm

whodidntante wrote:
Wed Sep 19, 2018 5:54 pm
Thesaints wrote:
Wed Sep 19, 2018 5:51 pm
galeno wrote:
Wed Sep 19, 2018 5:41 pm
The easiest way answer your question is to use the SEC Yield for a passive REIT like Schwab's US REIT ETF™ (SCHH) with a SEC Yield = 3.42%.
But that does not include the compensation of all those people running the REIT.
Is your "business" going to be more efficient than an average REIT?
"Efficient" can be a funny word. Most REITs are highly leveraged, which is necessary to get the kind of performance they've had on such a low-margin capital intensive business. A personally owned business property might not be levered up as much, wouldn't see the marked-to-market fluctuations in value, might have pretty stable income, and it's entirely possible for someone to have an above average ability to manage property (it's not a business that requires a lot of unique skill/information). Some people actually enjoy being landlords, not me... but some people do... so there's theoretically some psychic benefit one might get from doing a job they enjoy, which can be hard to put a price tag on to value.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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snackdog
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by snackdog » Wed Sep 19, 2018 6:56 pm

Real estate business is extremely local as is inflation so I’m not sure what good the generalization is. A generalization I know is real and have observed is that real estate can and does allow average people to retire sooner than stock market investing with more effort up front. The real estate market is inefficient so local advantages can be scooped up all over the country if you have the courage to work outside one market.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Wed Sep 19, 2018 7:01 pm

snackdog wrote:
Wed Sep 19, 2018 6:56 pm
Real estate business is extremely local as is inflation so I’m not sure what good the generalization is. A generalization I know is real and have observed is that real estate can and does allow average people to retire sooner than stock market investing with more effort up front. The real estate market is inefficient so local advantages can be scooped up all over the country if you have the courage to work outside one market.
Either that, or one gets to post on the What is your single most expensive mistake? thread.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by ge1 » Wed Sep 19, 2018 7:11 pm

Obviously depends on the market segment, but I think Cap rates are typically around 6% for real estate. Cap rate is defined as Net Operating Income divided by property value, so excludes any interest costs, i.e. represents an unlevered return. It does not include though overhead expenses and recurring capex, so I would argue a true unlevered return is more like 4%.

Now, depending on the market and where you bought and sold in the cycle, capital gains can be meaningful.

One of the attractive features of real estate is obviously the fact that you obtain debt financing very easily and at attractive conditions.

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JoMoney
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by JoMoney » Wed Sep 19, 2018 7:11 pm

Thesaints wrote:
Wed Sep 19, 2018 7:01 pm
snackdog wrote:
Wed Sep 19, 2018 6:56 pm
Real estate business is extremely local as is inflation so I’m not sure what good the generalization is. A generalization I know is real and have observed is that real estate can and does allow average people to retire sooner than stock market investing with more effort up front. The real estate market is inefficient so local advantages can be scooped up all over the country if you have the courage to work outside one market.
Either that, or one gets to post on the What is your single most expensive mistake? thread.
The thing about people who've lost a bunch of money in real estate, is they tend not to go around talking about the failure.
I've known several people who have earned more, and retired earlier, because of heavy investments in their employers stock.
I'm not sure if the "courage" to hold a riskier concentrated investment rather than the broader market is worthy of praise though...
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by JBTX » Wed Sep 19, 2018 8:29 pm

The price of real estate probably exceeds inflation slightly. The price of the land will likely exceed inflation, but the actual structure won't likely exceed inflation. Real estate as an investment, including rents, such as REITs probably has comparable return to stocks.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by nisiprius » Wed Sep 19, 2018 9:04 pm

Housing prices for not quite 400 years, in Herengracht, a residential district of Amsterdam. Alas, I haven't been able to find out what happened after 2008.

Doubling from 1628 to 2008 = an average real return of +0.52% / year (CAGR)

Incidentally, notice that money invested in 1803 suffered about a -80% decline, after which it took about a century to recover.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by gougou » Wed Sep 19, 2018 9:20 pm

Historical prices for Manhattan condos per square feet: $328/sqft in 1997, $1775/sqft in 2017. Compound return is about 8.8%/year. These condos can generate around 3% of net rental income per year in recent years. Total return is about 11.8%/year.

S&P 500 in 1997: 766.22, in 2017: 2275.12. Compound return is 5.59%/year plus around 2% dividend yield. Total return is 7.59%/year.

I can't find data that goes back further.

The condo here is un-leveraged but it is generally pretty safe to have a 2x to 3x leverage on Real Estate. The S&P index however, consists of companies that have a good amount of leverage (and I don't think it's safe to have 2x leverage on a stock index).

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by AlohaJoe » Wed Sep 19, 2018 9:24 pm

nisiprius wrote:
Wed Sep 19, 2018 9:04 pm
Housing prices for not quite 400 years, in Amsterdam. Incidentally, notice that money invested in 1803 suffered about a -80% decline, after which it took about a century to recover.
A few other studies on local real estate show similar things:

In "Real Estate Prices During the Roaring Twenties and the Great Depression" the authors look at data on Manhattan real estate transactions between 1920-1939.
A typical property bought in 1920 would have retained only 56% of its initial value in nominal terms two decades later. An investment in the stock market index (including dividends) would have outperformed an investment in a typical property (including net rental income) by a factor of 5.2 over our time period
So much for "even in a depression, people have to live somewhere".

There's also "100 Years of Commercial Real Estate Prices in Manhattan" which was able to put together a database of 86 office properties in Manhattan that were in continuous use from 1899-1999.
First, adjusting for inflation, commercial office property values were 30% lower in 1999 than they were in 1899

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by White Coat Investor » Wed Sep 19, 2018 9:36 pm

foodhype wrote:
Wed Sep 19, 2018 5:05 pm
I've read a lot of opinions on the forums claiming that unleveraged real estate returns are comparable to stock market returns and others claiming that unleveraged real estate returns are just barely a notch above inflation and that all of the stock-like return comes from the leverage. Obviously this depends heavily on location. But what does the market look like? I have never touched real estate, but I'm curious.
If you buy a cap rate 6 property and it appreciates at 4% then you get 10% without leverage or considering the depreciation. That sounds far more stock like than inflation like to me. But you have to include not only the appreciation but also the income.
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Meg77 » Thu Sep 20, 2018 1:07 pm

White Coat Investor wrote:
Wed Sep 19, 2018 9:36 pm
foodhype wrote:
Wed Sep 19, 2018 5:05 pm
I've read a lot of opinions on the forums claiming that unleveraged real estate returns are comparable to stock market returns and others claiming that unleveraged real estate returns are just barely a notch above inflation and that all of the stock-like return comes from the leverage. Obviously this depends heavily on location. But what does the market look like? I have never touched real estate, but I'm curious.
If you buy a cap rate 6 property and it appreciates at 4% then you get 10% without leverage or considering the depreciation. That sounds far more stock like than inflation like to me. But you have to include not only the appreciation but also the income.
Agreed. I think the confusion in the answers has to do with whether you're talking about your own home versus an investment property. Real estate generally appreciates at or just above the inflation rate; so that's what you can expect from your home in general and that's what a lot of people are talking about when they say that's the average "return" on real estate. But if you have a rental property then you ALSO get cash flow (and some tax benefits), so that's where you get stock like returns. Typical cap rates at 5-10% depending on the market cycle, which means the cash flow from the property not including a mortgage should be 5-10% after basic operating expenses.
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Thu Sep 20, 2018 1:35 pm

Taxation is unfavourable compared to stock market returns. It is not a pure investment, since it requires your own work to manage the property. Finally, it is arguable riskier, due to concentration alone (one rental property vs. 8000 different stocks).
I'd say it is an inferior investment for individuals, except for the possibility of leveraging at advantageous conditions. But in that case risk is also higher.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by KyleAAA » Thu Sep 20, 2018 1:40 pm

Unleveraged rental properties have fairly similar risk and return characteristics to stocks IME. 2-4% property appreciation and 4-6% cash returns seem about right, on average. I wouldn't bother with unleveraged properties because it isn't passive. With leverage, sustained 20%+ returns are quite common albeit with significant risk.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Thu Sep 20, 2018 1:48 pm

KyleAAA wrote:
Thu Sep 20, 2018 1:40 pm
Unleveraged rental properties have fairly similar risk and return characteristics to stocks IME.
To one stock, or to all of them ?

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by KyleAAA » Thu Sep 20, 2018 1:58 pm

Thesaints wrote:
Thu Sep 20, 2018 1:48 pm
KyleAAA wrote:
Thu Sep 20, 2018 1:40 pm
Unleveraged rental properties have fairly similar risk and return characteristics to stocks IME.
To one stock, or to all of them ?
I'd say all of them. Or at least all REITs. Unless you just own one or a couple in a single small area. But I don't know any serious investors who just own one is a small area.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by ThrustVectoring » Thu Sep 20, 2018 2:10 pm

I heard that the returns are roughly comparable to a mix of cash and long-term real bonds, and maybe a DIY premium (that is, "buying a job").

So the long-term returns aren't all that great. If you're good at using cash purchases to find and make good deals, there's significant opportunity to generate alpha there. And if you're levering up with 30-year fixed mortgages, well, long-term nominal bonds are a fantastic shorting opportunity, especially with the embedded options that a mortgage gives you (early refinance or sale if interest rates move against you).

Also the return profile of real estate is that you can consume the free cash flow from rentals after maintenance/taxes/etc, and the cash flow is often a higher percentage of the market value of the home than the SWR of a portfolio of stocks and bonds.

Overall I'm likely going to end up getting a duplex as a primary residence, get the biggest mortgage I qualify for, and rent out the other half. It's probably not appropriate to take on any additional idiosyncratic risk.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by alex_686 » Thu Sep 20, 2018 2:13 pm

Thesaints wrote:
Wed Sep 19, 2018 6:12 pm
I never did. Others mentioned REIT returns and I commented they underestimate total RE return, so we agree.
Never mean to imply. It was just an aside on the thread that I tacked on at the end.

As another aside, I have a hard time believing that established real estate properties have a return close to stocks. Risk and return and linked, and established rent paying properties have low risk, or at least lower than that of most individual stocks. Now, if we are talking about something in turnaround or development - that is a different story. Of course, doing things like that is much more like an active job than passive investing, and skill is required here.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Thu Sep 20, 2018 2:25 pm

KyleAAA wrote:
Thu Sep 20, 2018 1:58 pm
I'd say all of them. Or at least all REITs. Unless you just own one or a couple in a single small area. But I don't know any serious investors who just own one is a small area.
I think that amongst individual investors might be far more common the case of a single rental property, than multiple ones, in different geographical areas. The latter case would involve much more complex management, which could be well beyond what a single individual may be able to provide.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Thu Sep 20, 2018 2:30 pm

alex_686 wrote:
Thu Sep 20, 2018 2:13 pm
As another aside, I have a hard time believing that established real estate properties have a return close to stocks. Risk and return and linked, and established rent paying properties have low risk, or at least lower than that of most individual stocks. Now, if we are talking about something in turnaround or development - that is a different story. Of course, doing things like that is much more like an active job than passive investing, and skill is required here.
In general I'd agree, but there is the rental property management work which also need to be compensated. If it is the investor himself who provides it, that could be a return booster (but a fair comparison would take into account that an investment in stocks requires no work at all).
Risk assessment is trickier. Can't help feeling that a single property comes with some extra risk, even when compared to a single stock, but I'm probably overweighting tails.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by KyleAAA » Thu Sep 20, 2018 2:32 pm

Thesaints wrote:
Thu Sep 20, 2018 2:25 pm
KyleAAA wrote:
Thu Sep 20, 2018 1:58 pm
I'd say all of them. Or at least all REITs. Unless you just own one or a couple in a single small area. But I don't know any serious investors who just own one is a small area.
I think that amongst individual investors might be far more common the case of a single rental property, than multiple ones, in different geographical areas. The latter case would involve much more complex management, which could be well beyond what a single individual may be able to provide.
It's not at all difficult of you use property managers. I would go so far as to say it is trivial. But they don't need to be in multiple geographic areas, just not in the same neighborhood. If the entire city is going downhill, one would just have to sell out or bet on a recovery. Active management is a necessity in real estate. Luckily, most RE markets are fairly inefficient and there's plenty of room for a smart investor to add alpha. Also luckily, Detroits are rare.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by knpstr » Thu Sep 20, 2018 2:37 pm

foodhype wrote:
Wed Sep 19, 2018 5:05 pm
I've read a lot of opinions on the forums claiming that unleveraged real estate returns are comparable to stock market returns and others claiming that unleveraged real estate returns are just barely a notch above inflation and that all of the stock-like return comes from the leverage. Obviously this depends heavily on location. But what does the market look like? I have never touched real estate, but I'm curious.
You are correct, it depends.
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Thesaints » Thu Sep 20, 2018 2:40 pm

KyleAAA wrote:
Thu Sep 20, 2018 2:32 pm
Thesaints wrote:
Thu Sep 20, 2018 2:25 pm
KyleAAA wrote:
Thu Sep 20, 2018 1:58 pm
I'd say all of them. Or at least all REITs. Unless you just own one or a couple in a single small area. But I don't know any serious investors who just own one is a small area.
I think that amongst individual investors might be far more common the case of a single rental property, than multiple ones, in different geographical areas. The latter case would involve much more complex management, which could be well beyond what a single individual may be able to provide.
It's not at all difficult of you use property managers. I would go so far as to say it is trivial. But they don't need to be in multiple geographic areas, just not in the same neighborhood. If the entire city is going downhill, one would just have to sell out or bet on a recovery. Active management is a necessity in real estate. Luckily, most RE markets are fairly inefficient and there's plenty of room for a smart investor to add alpha. Also luckily, Detroits are rare.
But then they have to pay the manager and returns will be affected.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by White Coat Investor » Thu Sep 20, 2018 4:15 pm

Meg77 wrote:
Thu Sep 20, 2018 1:07 pm
White Coat Investor wrote:
Wed Sep 19, 2018 9:36 pm
foodhype wrote:
Wed Sep 19, 2018 5:05 pm
I've read a lot of opinions on the forums claiming that unleveraged real estate returns are comparable to stock market returns and others claiming that unleveraged real estate returns are just barely a notch above inflation and that all of the stock-like return comes from the leverage. Obviously this depends heavily on location. But what does the market look like? I have never touched real estate, but I'm curious.
If you buy a cap rate 6 property and it appreciates at 4% then you get 10% without leverage or considering the depreciation. That sounds far more stock like than inflation like to me. But you have to include not only the appreciation but also the income.
Agreed. I think the confusion in the answers has to do with whether you're talking about your own home versus an investment property. Real estate generally appreciates at or just above the inflation rate; so that's what you can expect from your home in general and that's what a lot of people are talking about when they say that's the average "return" on real estate. But if you have a rental property then you ALSO get cash flow (and some tax benefits), so that's where you get stock like returns. Typical cap rates at 5-10% depending on the market cycle, which means the cash flow from the property not including a mortgage should be 5-10% after basic operating expenses.
The main return on your home is the imputed rent, not appreciation.
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by ncbill » Thu Sep 20, 2018 4:19 pm

Paying a property manager (~6-10%) will usually absorb whatever cash you've got left after paying mortgage/maintenance/taxes/etc.

There are special unicorns where you still make a decent return after paying the manager, e.g. you bought the home(s) at the nadir of their value in 2009, or inherited them w/o a mortgage.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by ge1 » Thu Sep 20, 2018 4:42 pm

ncbill wrote:
Thu Sep 20, 2018 4:19 pm
Paying a property manager (~6-10%) will usually absorb whatever cash you've got left after paying mortgage/maintenance/taxes/etc.

There are special unicorns where you still make a decent return after paying the manager, e.g. you bought the home(s) at the nadir of their value in 2009, or inherited them w/o a mortgage.
Disagree. Property Management Expenses are included in your operating expenses when calculating the net operating income, which is used for the calculation of the Cap Rate, which is usually how investment property deals are communicated.

As an individual investor there are other factors to consider such as liquidity: You can sell stocks instantly, selling real estate can take a long time and the transaction costs are high.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by randomguy » Thu Sep 20, 2018 8:31 pm

Thesaints wrote:
Thu Sep 20, 2018 2:30 pm
alex_686 wrote:
Thu Sep 20, 2018 2:13 pm
As another aside, I have a hard time believing that established real estate properties have a return close to stocks. Risk and return and linked, and established rent paying properties have low risk, or at least lower than that of most individual stocks. Now, if we are talking about something in turnaround or development - that is a different story. Of course, doing things like that is much more like an active job than passive investing, and skill is required here.
In general I'd agree, but there is the rental property management work which also need to be compensated. If it is the investor himself who provides it, that could be a return booster (but a fair comparison would take into account that an investment in stocks requires no work at all).
Risk assessment is trickier. Can't help feeling that a single property comes with some extra risk, even when compared to a single stock, but I'm probably overweighting tails.
I have a feeling much like stock returns, property risk shows up all at once. You hum along nice for 10 years and then get that one tenant that doesn't pay and it takes 6 months to evict them and another 2 to fix the property to make it liveable again.:) Or it just happens that the the industry that employees half your town decides to move and unemployment shoots to 20%. So you end up with a lot of people making 15% but those making -10% really bring down the average:)

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by randomguy » Thu Sep 20, 2018 8:37 pm

ge1 wrote:
Thu Sep 20, 2018 4:42 pm
ncbill wrote:
Thu Sep 20, 2018 4:19 pm
Paying a property manager (~6-10%) will usually absorb whatever cash you've got left after paying mortgage/maintenance/taxes/etc.

There are special unicorns where you still make a decent return after paying the manager, e.g. you bought the home(s) at the nadir of their value in 2009, or inherited them w/o a mortgage.
Disagree. Property Management Expenses are included in your operating expenses when calculating the net operating income, which is used for the calculation of the Cap Rate, which is usually how investment property deals are communicated.

As an individual investor there are other factors to consider such as liquidity: You can sell stocks instantly, selling real estate can take a long time and the transaction costs are high.
The question is always how many properties can your find at these good cap rates AND if your estimates are remotely right. On paper it sounds great. I get a cap rate 6-8 property after everything and I watch the money roll in. The few people I know who have tried it have said while the money can be decent, it isn't that simple.

I have a feeling that if you look at real estate returns, they will be a lot like stock market ones. Lot of companies returning 12-15%+ but also a bunch returning 4%. How much is luck (i.e. did you get the tenant from hell) versus skill (you picked a good location) I will leave up to you to figure out.

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by ncbill » Thu Sep 20, 2018 10:37 pm

randomguy wrote:
Thu Sep 20, 2018 8:37 pm
ge1 wrote:
Thu Sep 20, 2018 4:42 pm
ncbill wrote:
Thu Sep 20, 2018 4:19 pm
Paying a property manager (~6-10%) will usually absorb whatever cash you've got left after paying mortgage/maintenance/taxes/etc.

There are special unicorns where you still make a decent return after paying the manager, e.g. you bought the home(s) at the nadir of their value in 2009, or inherited them w/o a mortgage.
Disagree. Property Management Expenses are included in your operating expenses when calculating the net operating income, which is used for the calculation of the Cap Rate, which is usually how investment property deals are communicated.

As an individual investor there are other factors to consider such as liquidity: You can sell stocks instantly, selling real estate can take a long time and the transaction costs are high.
The question is always how many properties can your find at these good cap rates AND if your estimates are remotely right. On paper it sounds great. I get a cap rate 6-8 property after everything and I watch the money roll in. The few people I know who have tried it have said while the money can be decent, it isn't that simple.

I have a feeling that if you look at real estate returns, they will be a lot like stock market ones. Lot of companies returning 12-15%+ but also a bunch returning 4%. How much is luck (i.e. did you get the tenant from hell) versus skill (you picked a good location) I will leave up to you to figure out.
Absolutely.

Again, at today's high valuations after paying the mortgage, all other expenses, then giving up 6-10% to a property manager, don't see how you'd make money, at least for residential real estate. Now, if you inherited a relative's paid-off homes...

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Valuethinker » Fri Sep 21, 2018 9:36 am

Thesaints wrote:
Wed Sep 19, 2018 5:53 pm
Watty wrote:
Wed Sep 19, 2018 5:51 pm
There will be exceptions of course but most houses from 1890 were torn down long ago or are pretty decrepit now.
Well, then also Exxon's oil wells are not the same they were in the 80's...
Which plays havoc with house price indices over long periods.

There's a renewal expense in housing.

Neil Monnery "Safe as Houses: 8 Centuries of Housing Prices" pulls together all the data we have on long run, like-for-like, housing costs.

For Paris, where we have (not complete) data back to the 1300s, it's his guess that houses, unmodernized, lose about 1% p.a. in value (in real terms).

Looking at my parents' house (unmodernized since the 1970s except for the addition of central AC) that seems like a fairly good estimate (land values have of course risen).

Commercial buildings have similar pattern. Complete renovation necessary every 15-30 years (end of a typical lease period, in the UK - was 25 years in length, now 15).

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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Sandtrap » Fri Sep 21, 2018 9:44 am

Meg77 wrote:
Thu Sep 20, 2018 1:07 pm
White Coat Investor wrote:
Wed Sep 19, 2018 9:36 pm
foodhype wrote:
Wed Sep 19, 2018 5:05 pm
I've read a lot of opinions on the forums claiming that unleveraged real estate returns are comparable to stock market returns and others claiming that unleveraged real estate returns are just barely a notch above inflation and that all of the stock-like return comes from the leverage. Obviously this depends heavily on location. But what does the market look like? I have never touched real estate, but I'm curious.
If you buy a cap rate 6 property and it appreciates at 4% then you get 10% without leverage or considering the depreciation. That sounds far more stock like than inflation like to me. But you have to include not only the appreciation but also the income.
Agreed. I think the confusion in the answers has to do with whether you're talking about your own home versus an investment property. Real estate generally appreciates at or just above the inflation rate; so that's what you can expect from your home in general and that's what a lot of people are talking about when they say that's the average "return" on real estate. But if you have a rental property then you ALSO get cash flow (and some tax benefits), so that's where you get stock like returns. Typical cap rates at 5-10% depending on the market cycle, which means the cash flow from the property not including a mortgage should be 5-10% after basic operating expenses.
Exactly.
The OP posted "Unleveraged R/E "returns"" which suggests "income property" vs one's home.
A CAP rate of 6% on income property and an annual appreciation of 4%, plus depreciation and tax benefits make unleveraged real estate more like a "business" with all the risk and return, and business savvy, that entails -- than passive market investment returns.
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Valuethinker » Fri Sep 21, 2018 9:45 am

alex_686 wrote:
Thu Sep 20, 2018 2:13 pm
Thesaints wrote:
Wed Sep 19, 2018 6:12 pm
I never did. Others mentioned REIT returns and I commented they underestimate total RE return, so we agree.
Never mean to imply. It was just an aside on the thread that I tacked on at the end.

As another aside, I have a hard time believing that established real estate properties have a return close to stocks. Risk and return and linked, and established rent paying properties have low risk, or at least lower than that of most individual stocks. Now, if we are talking about something in turnaround or development - that is a different story. Of course, doing things like that is much more like an active job than passive investing, and skill is required here.
You've nailed it. If it were easy to make money in RE people would. "Sweat equity" is not just a cute term.

The main advantage of RE is OPM - Other Peoples Money. You can deploy leverage and in the long run that increases a pedestrian return to something quite exciting. If you can hang in their 30 years, reinvest free cash flow to new properties, etc it's quite possible to build up an extensive portfolio.

(to quote Napoleon to his generals "You must be lucky". If you bought houses in Buffalo or Detroit, this strategy probably did not work. If you bought them in LA or SF Bay, you probably don't need to be reading this Forum ;-)).

(Sam Zell, billionaire property investor, expressed scepticism of the Private Equity - Single Family Home model. Multi unit dwellings have economies of scale in management (the US president going door to door with his father, collecting rent cheques, comes to mind) -- there are a number of well established REITs such as CAP REIT (Canadian). SFH don't. There have been several SFH home REITs floated in recent years, I believe).

RE can be a great way to get rich slowly because you can use leverage and not risk margin calls.

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