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

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

Post by JackoC » Fri Sep 21, 2018 9:48 am

Thesaints wrote:
Thu Sep 20, 2018 1:35 pm
Taxation is unfavourable compared to stock market returns.
'Unfavo*u*rable' raises the question of which country you are talking about. In the US, tax treatment of rental properties is generally more favorable than stocks. Although there are offsetting things. The major ones are

-In favor of stocks, most dividend payments on stocks, almost all on US domiciled company stocks, are 'qualified' and taxed at a lower rate equivalent to the capital gains rate. Net rental income is ordinary income
-but, major but, you can take a charge for depreciation on a rental property which often cancels out most of the net rental income, though that somewhat depends whether you are throwing around very optimistic net rental yields as some have quoted here, or lower more realistic ones (at least where I live).
-you can defer capital gains recognition on selling rental properties are long as you roll the proceeds into purchase of a more valuable property, called a 1031 exchange. This has limitations, costs and paperwork hoops to jump through but you can't do that with reinvested proceeds from stock sales. Even holding index funds can't make cg's go away to the same degree.

Anyway basic problem with a lot of the discussion: it's drifted away from the original question about *unleveraged* RE returns to the same old 'but you have to fix toilets' etc. :D
Unlevered RE, reasonably diversified (which doesn't require 8000 properties, just a reasonably limited % of your whole portfolio in any one property) is generally less risky than stocks. REIT's are in the same ballpark of risk as stocks (slightly higher) but they are substantially levered, and also the types of underlying properties they invest in are more volatile (office rentals more sensitive to the business cycle, etc). Stocks of course are also internally levered, the average public stock company has significant debt. There's no reason to believe that underlying corporate assets on average have a lot less volatility than the underlying asset of single or few family rental units. So it stands to reason that corporate debt levers up stocks to a higher level of risk than unlevered rental properties. By the same token it would be surprising, or particularly advantageous anyway, if you could fully match the return of levered corporate assets (ie stocks) with unlevered rental properties.

KyleAAA
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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 » Fri Sep 21, 2018 9:55 am

Thesaints wrote:
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.
Yeah, but you'll still be earning stock-like returns. Technology is also starting to bring those costs down.

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

Post by JackoC » Fri Sep 21, 2018 10:11 am

Valuethinker wrote:
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).
That makes sense in general. Re: tax advantage, it's reasonable to assume that not all of the depreciation allowance you are allowed on buildings is a phantom. At least some of it reflects...depreciation, money you'll eventually have to put in to replace the building and/or keep it as is in ways beyond routine repair.

However the variation is so wide over time and place, and trends are so persistent that it's of limited practical use to know what relative prices were in Paris in the 1300's. In the NY area there are many older places around one might invest in which were around 80 or 100 yrs ago or more. You can look up past prices and see appreciation rates in ballpark of 4% real over the decades, not including rental yield, and major cap improvement isn't close to that for well built urban structures of that vintage. It is a leap of faith to assume that trend will continue, but it's market nothing like as efficient as stocks. And nobody's investment horizon is 700 yrs. :happy

Again though this discussion seems to be back to 'real estate v stocks', which as usual tends to ignore the basic fact that you don't have to choose one or the other. The more relevant question is how or if they add useful diversification to one another. The risk of sustaining the recent decades' trend in building price appreciation is at least a somewhat different risk than the one you take in the stock market. And in this particular case the question is supposed to be how *unleveraged* RE would stack up on the risk/return curve. The stereotype (straw man, in some cases IMO) of get rich quick RE investing is concentrated heavily or even entirely in RE and w/ max leverage.

Valuethinker
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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 11:15 am

JackoC wrote:
Fri Sep 21, 2018 10:11 am
Valuethinker wrote:
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).
That makes sense in general. Re: tax advantage, it's reasonable to assume that not all of the depreciation allowance you are allowed on buildings is a phantom. At least some of it reflects...depreciation, money you'll eventually have to put in to replace the building and/or keep it as is in ways beyond routine repair.

However the variation is so wide over time and place, and trends are so persistent that it's of limited practical use to know what relative prices were in Paris in the 1300's. In the NY area there are many older places around one might invest in which were around 80 or 100 yrs ago or more.
Shiller goes to a lot of lengths to find like for like properties. The Herengracht (canal in Amsterdam) since 1630s. What Monnery additionally says is that if you don't update, the value of the property falls.

The killer in London is if there are no lifts (elevators). There are (or were) Victorian mansion blocs with no lifts - the top floor flat was substantially cheaper than the ground floor one (5 floors of stairs is dissuasive). Not sure when the elevator came to Victorian mansion blocs but it makes a heck of a difference. Retrofitting has been done in many cases. Believe me, lift installation and/or renewal is one giant financial pain in the butt (price we were quoted was something like £60k per flat and that was in the 1990s for lift renovation to meet modern standards).

I noticed in Berlin (Prinzlauer Berg, the old East Berlin -- working men's flats from the 1880s, 5-6 storeys say; think Lower East Side) that they build lift shafts outside in the central courtyard that all Berlin apartments seem to have. You'd struggle to do that with UK planning laws & Local Authorities-- at the front would be impossible.
You can look up past prices and see appreciation rates in ballpark of 4% real over the decades, not including rental yield, and major cap improvement isn't close to that for well built urban structures of that vintage. It is a leap of faith to assume that trend will continue, but it's market nothing like as efficient as stocks. And nobody's investment horizon is 700 yrs. :happy
My freeholder in London, UK, had been around since the 1560s as a charitable trust. (in the UK you often buy a "leasehold" the right to inhabit a property for say 99 years, at which point it reverts to the freeholder. It's quite possible in Mayfair (our Park Avenue) to have a £4m flat with a 30 year leasehold (usually the Grosvenor Estate - the Duke of Westminster is the richest landlord in Britain, several times more billion than his cousin, the Queen).

New York nearly went bust in 1976. Its recovery since then is sacre mirabile. London also was in bad shape in the late 1970s. The c. 4% real pa appreciation in London property prices has beaten even the performance of the FTSE index of the London Stock Exchange over that time. But there was another bust in 1990-92 (40% real drop). Real estate in either city was not a no-brainer in 1976 (friend of a friend, family bought a building downtown Manhattan for an amount now equal to its annual rent).

There's a group of cities tied to the financialization of the world economy that have done phenomenally well. London/ NY/ Hong Kong in particular. These are the centres of global finance (at least Pre Brexit) and they have risen the multiplication of debt, equity & financial instruments over that time. The tech cluster has ridden the rise and rise of Silicon Valley as the centre of the world's tech industry (and the associated VC & IPO boom), and thus the SF Bay area. Edward Gleaser (foremost urban economist right now) says it is about restrictions on land development (Manhattan is only now allowing 100 storey residential buildings, I believe). I don't think that's the entire story (there is also financialization-- properties in London and New York have become financial assets) but it's a big part of it.

But your house does not increase in value. It falls, pretty steadily. If I look at my parents' house (in another city associated with global financial capital) the new "teardowns" are 3000+ square feet, not 2000. They have en suite bathrooms, central AC, 2 car garages, etc. etc. etc. Building that would cost you say $750k-$1m on those lots. To buy say a house for say $800k is to buy the auction to knock it down and spend that again -- the lots are 30' x 140'. You are paying $800k for the lot -- an empty lot with nothing on it probably would go for $800k-1m.

(Vancouver I have to invent entirely new narratives to explain those prices especially re say Seattle (similar city with much better job opportunities, but say 60% of the housing prices of Vancouver?). It comes down to Chinese monetary and fiscal policy, I think).
Again though this discussion seems to be back to 'real estate v stocks', which as usual tends to ignore the basic fact that you don't have to choose one or the other. The more relevant question is how or if they add useful diversification to one another. The risk of sustaining the recent decades' trend in building price appreciation is at least a somewhat different risk than the one you take in the stock market. And in this particular case the question is supposed to be how *unleveraged* RE would stack up on the risk/return curve. The stereotype (straw man, in some cases IMO) of get rich quick RE investing is concentrated heavily or even entirely in RE and w/ max leverage.
Houses produce lower returns than stocks. You might get lucky and be in NYC or London, but you might not - and those housing markets (and to some extent Silicon Valley) have a correlation with equity markets that is higher than housing markets as a whole.

However you can leverage houses, and you can't then be margin called (unless you lose the tenant *and* you can't make up the cash flow short fall). That's totally different from stocks. If you can accept the greater risk and lack of diversification, and the "sweat equity" aspect, then houses can be a great way to get rich slowly.

That's logical. There are few barriers to entry to investing in residential housing. Many many immigrant families make their fortune that way -- buying up and renovating properties, and renting to the next wave of immigrants. Immigrants tend to live below their incomes so they tend to have more cash flow than locals (for the same income levels).

But if there are few barriers to entry other than sweat and time, then also returns will be lower.

Housing also provides a service. You can't live in your stock portfolio ;-). But you can in your house that you own. So in equilibrium that's what you would expect - the market efficiently prices houses against stocks, in aggregate.

I don't really think the housing market is inefficient in an informational sense. It has high transactions costs, to be sure (real estate agents, surveyors etc.). But whenever I have looked for a house I have found them to be pretty efficiently priced. A balcony gets you X more, a garden X + Y, closer to the Tube (subway) X + Y + Z. Schools add or subtract again. When I used to rent, the rental market was even more keenly priced against amenities.

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

Post by JackoC » Fri Sep 21, 2018 1:36 pm

Valuethinker wrote:
Fri Sep 21, 2018 11:15 am

1. Shiller goes to a lot of lengths to find like for like properties. The Herengracht (canal in Amsterdam) since 1630s. What Monnery additionally says is that if you don't update, the value of the property falls.

2. New York nearly went bust in 1976. Its recovery since then is sacre mirabile. London also was in bad shape in the late 1970s. The c. 4% real pa appreciation in London property prices has beaten even the performance of the FTSE index of the London Stock Exchange over that time. But there was another bust in 1990-92 (40% real drop). Real estate in either city was not a no-brainer in 1976 (friend of a friend, family bought a building downtown Manhattan for an amount now equal to its annual rent).

There's a group of cities tied to the financialization of the world economy that have done phenomenally well. London/ NY/ Hong Kong in particular. These are the centres of global finance (at least Pre Brexit) and they have risen the multiplication of debt, equity & financial instruments over that time.

3. But your house does not increase in value. It falls, pretty steadily. If I look at my parents' house (in another city associated with global financial capital) the new "teardowns" are 3000+ square feet, not 2000. They have en suite bathrooms, central AC, 2 car garages, etc. etc. etc. Building that would cost you say $750k-$1m on those lots. To buy say a house for say $800k is to buy the auction to knock it down and spend that again -- the lots are 30' x 140'. You are paying $800k for the lot -- an empty lot with nothing on it probably would go for $800k-1m.

4. Houses produce lower returns than stocks. You might get lucky and be in NYC or London, but you might not - and those housing markets (and to some extent Silicon Valley) have a correlation with equity markets that is higher than housing markets as a whole.

5. However you can leverage houses,

6. I don't really think the housing market is inefficient in an informational sense.
1. I don't challenge those very long time findings and I think they are interesting. But not necessarily so relevant unless your horizon is 100's of years. Could be relevant next year, but not necessarily even for 10's of years.

2. The appreciation I see in particular properties, particular addresses (as in, that I own or have seriously considered buying) is over the early 20th century to now, for buildings that existed then and now. It's not since the 70's. And it's not so uneven actually over long sub periods.

3. It's irrelevant as investor whether it's the land or improvements (ie the structure) which appreciate, it's the total that matters. The whole investment is not in a structure, an especially important difference in expensive areas. Likewise we have to keep in mind that major capital improvement costs as % of the structure are a lower % of the whole investment.

4. Unlevered RE should give lower return than stocks, because of my earlier point: there's no reason to think single/few family properties are inherently more volatile than corporate assets, and corporate assets are already leveraged by corporate debt when you buy stocks without leverage. Risk and return. Unlevered RE should also be less risky than leveraged corporate assets, aka stocks. Some degree of mortgage borrowing should raise the risk of RE to that of stocks. Where that point is and what the relative expected returns would be at the point of equal risk is IMO too complicated and situation dependent to give a valid general answer. Again long term studies of property values are fun but not very relevant to answering that question from a practical stock+RE investor's POV. For example details of NY city rules (where I can increase rents for some forms of capital improvement, for example) are much more practically relevant to me than Amsterdam in the 17th century. :happy One would be a business topic, the other more of a recreational topic.

5. Again stocks already contain leverage. You can lever them more with your own borrowing or via index futures if you want. It's true most people are more used to the concept of *their own borrowing* to leverage rental properties, and varying that according to their risk appetite.

6. The sense I mean is simply that trends IMO are manifestly more likely to persist in RE for many years, doesn't have to be centuries. In the stock market 'everybody knows this product or company is upcoming' is pretty much worthless as an observation, because everybody already knows. That's not as true IME of 'everybody knows this neighboorhood is upcoming' in RE, that's more subject to persistent trends IME. Other people's experience may vary. Overlaid on the issue of leverage or not is the basic apples/oranges of RE v stocks. In stocks (for most people most of the time at least) you want to specifically avoid relying on your own value decisions this stock v that stock. In RE investing you simply can't do that. You must rely on your own value assessments, as well as your ability to execute (deals, management, etc. but competing in a relatively limited sphere, not competing against instantaneous moves of the smartest global money like you would be with stocks). Which is itself another form of diversification: stocks and RE are really not one market in a number of different ways, albeit there is some correlation between just about all forms of financial risk. And again casting aside any assumption that the choice is necessarily *all* in RE or *all* in stocks. The point I'm getting at here is that generalizations are less useful when it comes to RE than stocks, because wise stock investing (most people/most times) is going with averages at least nationally if not globally, RE is not.

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

Post by WanderingDoc » Sat Sep 22, 2018 3:49 am

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.
That's only if you include one profit center of real estate. There are at least five (cash flow, appreciation, net tax incentive/depreciation, principal paydown, inflation hedging).

Compared with just one profit center in stocks (capital appreciation). I don't count a laughable 1.8% dividend as cash flow :P

If you include how real estate pays you in the real world (not an internet article), there isn't even a contest.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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

Post by WanderingDoc » Sat Sep 22, 2018 4:07 am

You can't do anything with stocks that you can do with real estate. A few examples:

1. I have several properties (that pay me every month) that I have $0 in. I refi'd out all of my initial down payment and them some about 1 year after purchase.

2. Financial freedom in a reasonable time (not 20-30 years). I control ~$2MM in real estate, while having less than $280K invested (about $1.2M in equity) - this pays me $54K in net annual income, more than covering my living expenses. I did this in just under 4 years. Good luck acheiving this income with stocks in the same time frame.

3. I don't know a single buy and hold investor that has payed any taxes on their rental income (legally). Myself included. Equities tax treatment sucks.

4. I have a lot more to list but that's enough to chew on for now.

The asset classes couldn't be any more different. After you buy a stock or index fund, you have zero control over your investment. All you can do is hold or sell. I want control, call me crazy.
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: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Nissanzx1 » Sat Sep 22, 2018 4:16 am

1st year ours made just over 8% (we chose all New hvac). Second year 20%.

We are about 1/2 done saving for another...

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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 » Sat Sep 22, 2018 6:51 am

WanderingDoc wrote:
Sat Sep 22, 2018 4:07 am
...The asset classes couldn't be any more different...
Agreed.
WanderingDoc wrote:
Sat Sep 22, 2018 4:07 am
...You can't do anything with stocks that you can do with real estate...
Aw, c'mon. Statements that seem to assert that one investment or the other is simply "better" than the other aren't worth making or reading. But, rising to the bait...

...You can't do "anything" with real estate that you can do with stock or bond mutual funds. An ordinary "mass affluent" retirement saver can't:

--contribute $1000/month to individual properties in theeir employer's 401(k) fund.

--doesn't have daily liquidity

--can't easily sell 1% of a property while retaining ownership in the other 99%

--can't diversify across 6,352 different properties in Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Other, Peru, Philippines, Poland, Portugal, Qatar, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, and the United Kingdom)

--can't takes a hands-off, autopilot approach to individual property ownership
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by tibbitts » Sat Sep 22, 2018 7:16 am

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 ?
Most of those things happen or have happened to the house I live in and I chose it with the idea of living in it - nice area by my standards, and I had plenty of assets. Well, more assets before I bought the house and had to pay to fix all those things over the past twenty years. Of course, you buy one house because you have to live somewhere. Maintaining your own house is like a part-time job. I don't need a second part-time job.

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

Post by WanderingDoc » Sat Sep 22, 2018 7:47 am

nisiprius wrote:
Sat Sep 22, 2018 6:51 am
WanderingDoc wrote:
Sat Sep 22, 2018 4:07 am
...The asset classes couldn't be any more different...
Agreed.
WanderingDoc wrote:
Sat Sep 22, 2018 4:07 am
...You can't do anything with stocks that you can do with real estate...
Aw, c'mon. Statements that seem to assert that one investment or the other is simply "better" than the other aren't worth making or reading. But, rising to the bait...

...You can't do "anything" with real estate that you can do with stock or bond mutual funds. An ordinary "mass affluent" retirement saver can't:

--contribute $1000/month to individual properties in theeir employer's 401(k) fund.

--doesn't have daily liquidity

--can't easily sell 1% of a property while retaining ownership in the other 99%

--can't diversify across 6,352 different properties in Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Other, Peru, Philippines, Poland, Portugal, Qatar, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, and the United Kingdom)

--can't takes a hands-off, autopilot approach to individual property ownership
None of what you listed sounds that appealing to me. No control. No cash flow. No inflation-hedging leverage. Takes too long to achieve FI with the 4% rule. Mediocre tax treatment. I don't want liquidity - too much liquidity and people start making stupid decisions (human emotion).

I still hold ~15% of my NW in equities. So far, not that impressed with the asset class. There are better ones out there. To each their own :wink: Just IMO.
Last edited by WanderingDoc on Sat Sep 22, 2018 12:37 pm, 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: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Valuethinker » Sat Sep 22, 2018 10:49 am

JackoC wrote:
Fri Sep 21, 2018 1:36 pm
Valuethinker wrote:
Fri Sep 21, 2018 11:15 am

1. Shiller goes to a lot of lengths to find like for like properties. The Herengracht (canal in Amsterdam) since 1630s. What Monnery additionally says is that if you don't update, the value of the property falls.

2. New York nearly went bust in 1976. Its recovery since then is sacre mirabile. London also was in bad shape in the late 1970s. The c. 4% real pa appreciation in London property prices has beaten even the performance of the FTSE index of the London Stock Exchange over that time. But there was another bust in 1990-92 (40% real drop). Real estate in either city was not a no-brainer in 1976 (friend of a friend, family bought a building downtown Manhattan for an amount now equal to its annual rent).

There's a group of cities tied to the financialization of the world economy that have done phenomenally well. London/ NY/ Hong Kong in particular. These are the centres of global finance (at least Pre Brexit) and they have risen the multiplication of debt, equity & financial instruments over that time.

3. But your house does not increase in value. It falls, pretty steadily. If I look at my parents' house (in another city associated with global financial capital) the new "teardowns" are 3000+ square feet, not 2000. They have en suite bathrooms, central AC, 2 car garages, etc. etc. etc. Building that would cost you say $750k-$1m on those lots. To buy say a house for say $800k is to buy the auction to knock it down and spend that again -- the lots are 30' x 140'. You are paying $800k for the lot -- an empty lot with nothing on it probably would go for $800k-1m.

4. Houses produce lower returns than stocks. You might get lucky and be in NYC or London, but you might not - and those housing markets (and to some extent Silicon Valley) have a correlation with equity markets that is higher than housing markets as a whole.

5. However you can leverage houses,

6. I don't really think the housing market is inefficient in an informational sense.
1. I don't challenge those very long time findings and I think they are interesting. But not necessarily so relevant unless your horizon is 100's of years. Could be relevant next year, but not necessarily even for 10's of years.
I would term it the other way "things have a long run tendency to revert to their means". What Monnery found was that despite the modern nostrum (he's a British writer) that nothing is "safe as houses" that's actually not ture.

We spend a lot of time trying to dig out stock returns back to the 18th century (we really only have those for one Dutch company; US data starts early 19th century) trying to figure out if the long run returns of stocks are stable. They are to a surprising degree - although if you look at the chart, it looks quite fractal to me.

That was the bulls-eye from Monnery for me. The chart of Dutch housing prices looks fractal-- there was the Dutch Golden Age, then there was stagnation, then catastrophe, then not much, then finally post 1945 another recovery (Dutch housing prices crashed after 2008, I don't think they have recovered).

This should remind us of Mandelbrot's daily cotton prices back to the 1500s. Again, the pattern of returns is fractal (scale invariant). Knowing what they did in the past does not tell you what they will do in the future in terms of magnitude and volatility. That should be central to our understanding of equity returns.

Housing price indices are a lot more tendentious because of the absence of good like-for-like data. It's hard to find. But where we have it, it shows similar patterns, it seems.
2. The appreciation I see in particular properties, particular addresses (as in, that I own or have seriously considered buying) is over the early 20th century to now, for buildings that existed then and now. It's not since the 70's. And it's not so uneven actually over long sub periods.
I don't call say 1929-1945 "short term" -- about the duration of the bear market in houses for most developed world economies (from what I was told in Baltimore, which saw its peak in the 1920s, the real price of houses had not fully recovered as of the 1980s). There have been some serious bear markets in real estate in the data. Toronto I think the 1989 peak was not hit again til something like 2010 (prices have gone insane since then, doubling roughly 2012-2017). One could add Tokyo, of course, where prices are still below the levels of 1990 by about 50% I believe. Boston they took a very long time to recover post 1990.

The point about 1976 in New York or London (and San Francisco I presume; and definitely Sydney Melbourne Toronto Vancouver Seattle Portland) was that it was not at all obvious that houses would do so well in the subsequent 40 years in those cities. Nor that they would do so much better than say, Chicago, or Dallas and Houston. Even population data, had you had perfect foresight, would not have told you that, at least in comparison to say Atlanta and Houston and Dallas-FW.

There's one caveat to this. Edward Gleaser thinks there was a structural change in some American cities, around about the early 1970s - call it the rise of the NIMBYs if you will. Thus, Manhattan has not replaced 20 storey mid century buildings with 100 storey 21st century ones, at the rate that its price inflation would suggest. Similar stories in LA, SF, Boston (perhaps Portland and Seattle). Structural change. There is long term evidence though that employers have responded by moving jobs to where their employees can afford to rent or buy homes -- hence the rapid rise of the population of Texas compared to either California or New York.

I keep coming back to Monnery. Australia has one of the most highly urbanized populations in the world -- actually *sub urbanized*. It has had a rising population since the early 1800s and those people mostly come to live in a handful of big cities. History of previous Australian housing booms shows that these things level out - the real house price surges are followed by busts & stagnations.
3. It's irrelevant as investor whether it's the land or improvements (ie the structure) which appreciate, it's the total that matters. The whole investment is not in a structure, an especially important difference in expensive areas. Likewise we have to keep in mind that major capital improvement costs as % of the structure are a lower % of the whole investment.
Anything but irrelevant. We overestimate the returns on RE because we don't compare like-for-like. Old buildings need *big* updating, and it's expensive, that's a very real outlay. (US tax system appears to subsidize that via depreciation allowances? I am unclear on that).

So you have a structure which is depreciating on you from the day you buy it. Then, you have the land.

And of course there is everyone's favourite thing - -property taxes ;-). That's the carrying cost of your land (plus various capital improvements to utility services). Those are quite large in the USA -- say 1-2% of property value, typically?
4. Unlevered RE should give lower return than stocks, because of my earlier point: there's no reason to think single/few family properties are inherently more volatile than corporate assets, and corporate assets are already leveraged by corporate debt when you buy stocks without leverage. Risk and return. Unlevered RE should also be less risky than leveraged corporate assets, aka stocks. Some degree of mortgage borrowing should raise the risk of RE to that of stocks. Where that point is and what the relative expected returns would be at the point of equal risk is IMO too complicated and situation dependent to give a valid general answer. Again long term studies of property values are fun but not very relevant to answering that question from a practical stock+RE investor's POV. For example details of NY city rules (where I can increase rents for some forms of capital improvement, for example) are much more practically relevant to me than Amsterdam in the 17th century. :happy One would be a business topic, the other more of a recreational topic.
The reason RE pays a lower return, unlevered, than equity, is because residential RE also provides an economic service - you can't live in your stock portfolio. Thus the financial return aspect gets bid down by the other value the asset creates.

I think very long price series on real estate, one of the common forms of investment for as long as we have had post medieval civilization (and land ownership was, of course, very important in the medieval and ancient economies) are extremely relevant. There may be structural shifts around imposition of zoning controls, but the evidence is that over long periods, housing price booms are then followed by long slumps or stagnations.

The interesting thing is that city centre real estate has slipped -- commercial RE. The estimate I saw was of growth in value about 1% less pa than real GDP growth. That's counterintuitive given that economies grow and populations grow. So what is going on? It appears that changing technology has allowed first people (the suburbs) and then businesses (the office park, the Edge City) to move further out, reducing the locational value of city centre RE.

Right now we are in an upswing for "downtown" and telecommuting has not had the impact that it was thought it would have. Yet, more and more workplaces have gone to "hot desking" with seats for only about 60% of staff and "Working From Home" 1-2 days a week. City centre retail is being crucified (as is retail, generally). Cue structural change (the rise of Amazon-style distribution centres).
5. Again stocks already contain leverage. You can lever them more with your own borrowing or via index futures if you want. It's true most people are more used to the concept of *their own borrowing* to leverage rental properties, and varying that according to their risk appetite.
You can get margin called with such strategies. It's a losing strategy in that particular casino because the house has deeper pockets than you do. You can't leverage your stock portfolio to the time horizon that gives you a good probability of winning (say 30 years +).

RE you generally cannot get margin called.
6. The sense I mean is simply that trends IMO are manifestly more likely to persist in RE for many years, doesn't have to be centuries. In the stock market 'everybody knows this product or company is upcoming' is pretty much worthless as an observation, because everybody already knows. That's not as true IME of 'everybody knows this neighboorhood is upcoming' in RE, that's more subject to persistent trends IME. Other people's experience may vary. Overlaid on the issue of leverage or not is the basic apples/oranges of RE v stocks. In stocks (for most people most of the time at least) you want to specifically avoid relying on your own value decisions this stock v that stock. In RE investing you simply can't do that. You must rely on your own value assessments, as well as your ability to execute (deals, management, etc. but competing in a relatively limited sphere, not competing against instantaneous moves of the smartest global money like you would be with stocks). Which is itself another form of diversification: stocks and RE are really not one market in a number of different ways, albeit there is some correlation between just about all forms of financial risk. And again casting aside any assumption that the choice is necessarily *all* in RE or *all* in stocks. The point I'm getting at here is that generalizations are less useful when it comes to RE than stocks, because wise stock investing (most people/most times) is going with averages at least nationally if not globally, RE is not.
There's sweat equity in RE - if you can do the work, then you can improve your performance.

However it's undiversified and lumpy - until you have a fairly big portfolio, a problem with a location or unit is going to hit you quite hard, potentially.

What I did find whenever I wanted to buy property was that the market was informationally quite efficient - there were not a lot of bargains to be had, you could have done a multiple linear regression and got prices along that well explained by features. In fact, in the UK no one quotes square footage or meterage in prices psf/psm etc. Yet the market seems to basically price in the differences in sizes as well.

As to future uncertainties re neighbourhoods etc. It's very hard to get an "inside track" on that. Hoods rise in popularity and fall in popularity, and buyers seem to know this. Buying in Notting Hill (say Park Slope in Brooklyn? Maybe Islington is a better bet) in 1980 was a great move. However you didn't know that London was going to go up, and you couldn't be certain that the drug dealers, rooming houses etc. would be cleaned out -- you could have seen the potential (close to the Tube, close to Hyde Park etc.) but you couldn't be certain that it would be realized.

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

Post by Starfish » Sat Sep 22, 2018 11:23 am

White Coat Investor wrote:
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.
It depends on the real estate market.
In my area rent is ~4%, appreciation is a lot more, maybe double.

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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 » Sat Sep 22, 2018 12:25 pm

WanderingDoc wrote:
Sat Sep 22, 2018 7:47 am
...None of what you listed sounds that appealing. No control. No cash flow. No inflation-hedging leverage. Takes too long to achieve FI with the 4% rule. Mediocre tax treatment. I don't want liquidity - too much liquidity and people start making stupid decisions (human emotion)...
Different strokes for different folks, whatever turns you on. But I would have appreciated it if you'd said "none of what you listed sounds that appealing to me." [WanderingDoc edited his posting, as requested]
Last edited by nisiprius on Sat Sep 22, 2018 2:12 pm, edited 1 time in total.
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Re: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by WanderingDoc » Sat Sep 22, 2018 12:36 pm

nisiprius wrote:
Sat Sep 22, 2018 12:25 pm
WanderingDoc wrote:
Sat Sep 22, 2018 7:47 am
...None of what you listed sounds that appealing. No control. No cash flow. No inflation-hedging leverage. Takes too long to achieve FI with the 4% rule. Mediocre tax treatment. I don't want liquidity - too much liquidity and people start making stupid decisions (human emotion)...
Different strokes for different folks, whatever turns you on. But I would have appreciated it if you'd said "none of what you listed sounds that appealing to me."
Done. I actually was thinking you write that, but I then thought it can be inferred. Have a nice one!
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: Are unleveraged real estate returns more comparable to stock market returns or just a notch above inflation?

Post by Ged » Sat Sep 22, 2018 12:47 pm

ge1 wrote:
Thu Sep 20, 2018 4:42 pm
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.
That's the thing. There are generally three important characteristics of an investment.

1. Liquidity
2. Safety of Principal
3. Return

Talking about just returns isn't considering the whole picture.

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

Post by Starfish » Sat Sep 22, 2018 1:06 pm

WanderingDoc wrote:
Sat Sep 22, 2018 3:49 am
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.
That's only if you include one profit center of real estate. There are at least five (cash flow, appreciation, net tax incentive/depreciation, principal paydown, inflation hedging).

Compared with just one profit center in stocks (capital appreciation). I don't count a laughable 1.8% dividend as cash flow :P

If you include how real estate pays you in the real world (not an internet article), there isn't even a contest.

That is just creative math :).
For example for real estate in Bay Area:
1. If you are really lucky rent covers mortgage and expenses. Actually this does not happen.
2. If the future appreciation is 0 (i.e tracks inflation) your return is 5X (20% down) after 30 years. Which is ~5%.
3. There are some tax advantages, but you can depreciate only the building which is not that much. At the end you still get taxed when you sell.

Of course I oversimplified. Future value of mortgage has to be discounted by inflation (i.e. mortgage rate = interest rate - inflation), houses appreciate more than inflation here. But I also understated the costs and maintenance. When you make houses of insect food and work is expensive they can be major. Add asset concentration and lack of diversification, lack of liquidity, transaction costs etc. There are many issues and I don't know if the potential 7-10% real return makes up for them.

Also let's not forget for a second that leveraging does not do anything positive in terms of of returns adjusted to risk. It multiplies capital but it also multiplies risk and for this service you pay transaction costs and interest rate. A good deal is when you get improved risk adjusted returns.
Otherwise what stops you from buying a 5X leveraged S&P 500 fund? and it would be more diversified than a house.

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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 » Sat Sep 22, 2018 5:36 pm

Starfish wrote:
Sat Sep 22, 2018 11:23 am
White Coat Investor wrote:
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.
It depends on the real estate market.
In my area rent is ~4%, appreciation is a lot more, maybe double.
Interesting. I don't know what my place would rent for, but maybe something like $3500. Multiply that by 12 and that's $42K. Maybe the place is worth $700K, so that's 6%. I'd expect that to be double the long term appreciation rate, but obviously things vary, especially lately. If I could know a home was going to appreciate 8% a year, I wouldn't buy just one.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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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 » Sun Sep 23, 2018 8:23 am

White Coat Investor wrote:
Sat Sep 22, 2018 5:36 pm


Interesting. I don't know what my place would rent for, but maybe something like $3500. Multiply that by 12 and that's $42K. Maybe the place is worth $700K, so that's 6%. I'd expect that to be double the long term appreciation rate, but obviously things vary, especially lately. If I could know a home was going to appreciate 8% a year, I wouldn't buy just one.
Property markets tend to be efficient.

You get high yields where you have limited prospects for capital value growth.

Where capital value growth has been strong, you get low yields. Yields on residential property in Prime Central London (roughly, Zone 1 on the Tube map) are sub 3%. Outskirts you can get 4-6%. Ex Local Authority (social) housing, you can even do better than that.

Single Family Homes usually have worse yields (cap rates) than multiple residential. SFHs are desirable for owner occupiers, and thus generally are more highly priced relative to rental yield. SFHs also have higher management costs and probably higher maintenance costs (those are somewhat proportional to the number of external walls and their surface area; however once you throw in things like elevators to maintain in multiple residential, it can get more complicated).

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

Post by ignition » Sun Sep 23, 2018 9:32 am

WanderingDoc wrote:
Sat Sep 22, 2018 3:49 am
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.
That's only if you include one profit center of real estate. There are at least five (cash flow, appreciation, net tax incentive/depreciation, principal paydown, inflation hedging).

Compared with just one profit center in stocks (capital appreciation). I don't count a laughable 1.8% dividend as cash flow :P

If you include how real estate pays you in the real world (not an internet article), there isn't even a contest.
Why is principal paydown a profit center?

And who cares how many profit centers there are, what matter is the total return on your investment. He's also talking about unleveraged real estate returns so inflation hedging doesn't apply.

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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 » Mon Sep 24, 2018 5:18 am

Valuethinker wrote:
Fri Sep 21, 2018 11:15 am

(Vancouver I have to invent entirely new narratives to explain those prices especially re say Seattle (similar city with much better job opportunities, but say 60% of the housing prices of Vancouver?). It comes down to Chinese monetary and fiscal policy, I think).
Yeah, Chinese policy is absolutely brutal to their savers, and their demographics implies a hell of a lot of people needing to save a hell of a lot of money in order to be at all O.K. at older ages. It's why China has built a bunch of apartment buildings that sit empty and still get the units bought up - there's literally no better way to ensure your money will do useful work for you a few decades from now.

Combine that with many of these investment properties sitting empty (for decent reasons - the real option value of having a house in Canada that you can move into without evicting tenants outweighs the rent they'd collect, especially with rent control being a thing there), and you've got a pretty significant squeeze.

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