Why not Real Estate instead of Stocks?

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Addy
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Why not Real Estate instead of Stocks?

Post by Addy »

Would like to get everyone's opinion on this.

The forecast of next 10 years US stocks returns is pretty low. E.g.:

U.S. equities 3.9%-5.9%
Global equities ex-U.S. (unhedged) 7.4%-9.4%
https://americas.vanguard.com/instituti ... ctives.htm

And for people who have, say, 1/3rd of Stocks in Foreign equities, this means a return of 6%. (If the median of the forecast turns out to be true.)

It seems one can find Real Estate, for which, even when making conservative assumptions, one can get a 9% return e.g.: https://www.calculator.net/rental-prope ... &x=89&y=27.

If this is so, why not invest in Real Estate rather then Stocks?
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gwe67
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Re: Why not Real Estate instead of Stocks?

Post by gwe67 »

A $450,000 property that rents for $2,500 monthly will never make it. Even the web site you linked says:

1% Rule—The gross monthly rent income should be 1% or more of the property purchase price, after repairs. It is not uncommon to hear of people who use the 2% or even 3% Rule – the higher the better
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Topic Author
Addy
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Re: Why not Real Estate instead of Stocks?

Post by Addy »

gwe67 wrote: Sat Oct 03, 2020 9:23 pm A $450,000 property that rents for $2,500 monthly will never make it. Even the web site you linked says:

1% Rule—The gross monthly rent income should be 1% or more of the property purchase price, after repairs. It is not uncommon to hear of people who use the 2% or even 3% Rule – the higher the better
Let us, for now, not worry about specifics of rules which tell you which properties to buy.

The IRR calculation shows that assuming that the numbers remain true, one can get this 9% return. The numbers are reasonable and even conservative and have been exceeded by many properties in the last few years.

The main point here is that with the expected returns on stocks low and mortgage rates low, Real Estate looks very attractive.
Last edited by Addy on Sat Oct 03, 2020 9:30 pm, edited 1 time in total.
austin757
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Re: Why not Real Estate instead of Stocks?

Post by austin757 »

Addy wrote: Sat Oct 03, 2020 9:19 pm Would like to get everyone's opinion on this.

The forecast of next 10 years US stocks returns is pretty low. E.g.:

U.S. equities 3.9%-5.9%
Global equities ex-U.S. (unhedged) 7.4%-9.4%
https://americas.vanguard.com/instituti ... ctives.htm

And for people who have, say, 1/3rd of Stocks in Foreign equities, this means a return of 6%. (If the median of the forecast turns out to be true.)

It seems one can find Real Estate, for which, even when making conservative assumptions, one can get a 9% return e.g.: https://www.calculator.net/rental-prope ... &x=89&y=27.

If this is so, why not invest in Real Estate rather then Stocks?
Real estate investing is a part-time job. You’re not making huge returns unless you’re serious about it and invest smartly. Even if you hand the keys over to a property manager, which you have to account for in your monthly expenses, things can still go wrong.

I think it’s a great investment for someone with the right mindset
Bobby206
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Re: Why not Real Estate instead of Stocks?

Post by Bobby206 »

I would say diversify and have some of each. We are about half cash/equities and half real estate. We are probably heavier real estate than I want but it's fine for now. You can make it as much of a job as you want but, even at it's best, is more time intensive than a stock portfolio.

Our real estate ranges from .5% to over 1% on rents. That is I have a $300k property in one place that rents for $1,600 and I have a $100k house in another region that rents for $1,200. Property taxes and insurance are higher in the latter. Also, costs of turnover tends to be a bit more on the cheaper house. The $300k property is in a region that tenants seem to be very easy on properties, often stay longer term, and don't complain a lot. The lower level one is in a region where people move every 12-18 months so it has more vacancies. Just some data points for consideration.
JustinR
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Re: Why not Real Estate instead of Stocks?

Post by JustinR »

Investing has the same returns as real estate for -523,370.27% the amount of work.
UpperNwGuy
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Re: Why not Real Estate instead of Stocks?

Post by UpperNwGuy »

Addy wrote: Sat Oct 03, 2020 9:29 pm Let us, for now, not worry about specifics of rules which tell you which properties to buy.

The IRR calculation shows that assuming that the numbers remain true, one can get this 9% return. The numbers are reasonable and even conservative and have been exceeded by many properties in the last few years.

The main point here is that with the expected returns on stocks low and mortgage rates low, Real Estate looks very attractive.
Are you willing to put your money where your mouth is? If so, please report back to us on how it went.
Bobby206
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Re: Why not Real Estate instead of Stocks?

Post by Bobby206 »

UpperNwGuy wrote: Sat Oct 03, 2020 9:34 pm
Addy wrote: Sat Oct 03, 2020 9:29 pm Let us, for now, not worry about specifics of rules which tell you which properties to buy.

The IRR calculation shows that assuming that the numbers remain true, one can get this 9% return. The numbers are reasonable and even conservative and have been exceeded by many properties in the last few years.

The main point here is that with the expected returns on stocks low and mortgage rates low, Real Estate looks very attractive.
Are you willing to put your money where your mouth is? If so, please report back to us on how it went.
Ya, I am a real estate guy and I will honestly say the only people making the 9% returns are working it like a job (and thus are really getting a very low return) OR they bought a house a long time ago so it's appreciated and/or some other dumb-luck situation. On average you don't get 9% when you buy a house today as the costs of ownership are usually not honestly evaluated by landlords. However, you can use leverage and tax rules to your advantage with real estate.
000
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Re: Why not Real Estate instead of Stocks?

Post by 000 »

Ease of diversification is reason number 1.

But it doesn't have to be "real estate instead of stocks". One can hold both.
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Addy
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Re: Why not Real Estate instead of Stocks?

Post by Addy »

Bobby206 wrote: Sat Oct 03, 2020 9:37 pm
Ya, I am a real estate guy and I will honestly say the only people making the 9% returns are working it like a job (and thus are really getting a very low return) OR they bought a house a long time ago so it's appreciated and/or some other dumb-luck situation. On average you don't get 9% when you buy a house today as the costs of ownership are usually not honestly evaluated by landlords. However, you can use leverage and tax rules to your advantage with real estate.
This is very interesting. What throws off the calculations? Is is maintenance expenses?

Point taken about it being a second job.
dml130
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Re: Why not Real Estate instead of Stocks?

Post by dml130 »

If you believe that returns on real estate will be better than other sectors, wouldn't REIT investments be an alternative way to express that, with less hassle?
DH0
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Re: Why not Real Estate instead of Stocks?

Post by DH0 »

We're about 50/50 real estate to stocks and bonds. The real estate has been leveraged and done incredibly well, mainly due to outsized appreciation since the 2009 financial crisis. Given where prices are now, I don't see above average appreciation going forward in our area so am staying focused on equities. In normal times, the returns are almost as good on a three fund portfolio and it is a h*** of a lot less work.
WildBill
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Re: Why not Real Estate instead of Stocks?

Post by WildBill »

If this is so, why not invest in Real Estate rather then Stocks?

Howdy

Lots to like about real estate

However:

Real estate cons

Lack of Liquidity
Expenses - taxes, maintenance, repairs
Difficult to find properties at right price
Management requirement
Expensive to buy and sell
Potential tenant issues
Erosion of landlords rights in many locales in response to pandemic

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
Hiker8
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Re: Why not Real Estate instead of Stocks?

Post by Hiker8 »

if you think real estate will give you a 9% return i have two bridges to sell you. Even if you get a 9% return annually, which you won't in most places in this country, it still doesn't factor it transaction costs (have you ever sold a house before? I assume not) and annual upkeep, landscaping, painting, property taxes, etc.
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willthrill81
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Re: Why not Real Estate instead of Stocks?

Post by willthrill81 »

Addy wrote: Sat Oct 03, 2020 9:45 pm
Bobby206 wrote: Sat Oct 03, 2020 9:37 pm
Ya, I am a real estate guy and I will honestly say the only people making the 9% returns are working it like a job (and thus are really getting a very low return) OR they bought a house a long time ago so it's appreciated and/or some other dumb-luck situation. On average you don't get 9% when you buy a house today as the costs of ownership are usually not honestly evaluated by landlords. However, you can use leverage and tax rules to your advantage with real estate.
This is very interesting. What throws off the calculations? Is is maintenance expenses?

Point taken about it being a second job.
It's easy to forget about seemingly small expenses that can really add up.

For homeowners, the general rule of thumb is that maintenance expenses will average, over the long-term, to about 1% of the value of the structure every year. Given that renters tend to be harder on properties, I would think that that should be increased to 1.5% to 2%, maybe even more.

Further, rental real estate generally only makes good sense in moderate or low cost of living areas. The ratios of rents to property values are too poor in high and especially in very high cost of living areas for renting to work unless you make a big bet on property appreciation. Most of the successful RE investors I know of ignore property appreciation altogether when determining whether they'll buy a property and focus exclusively on cash flow. They don't even take principal payments into account because they're so small for so long in a 30 year mortgage.

Some here love rental RE. Others did it for years and swore it off. It's definitely not easy money.

I would change the title to "in addition to" rather than "instead."
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Re: Why not Real Estate instead of Stocks?

Post by Bobby206 »

Addy wrote: Sat Oct 03, 2020 9:45 pm
Bobby206 wrote: Sat Oct 03, 2020 9:37 pm
Ya, I am a real estate guy and I will honestly say the only people making the 9% returns are working it like a job (and thus are really getting a very low return) OR they bought a house a long time ago so it's appreciated and/or some other dumb-luck situation. On average you don't get 9% when you buy a house today as the costs of ownership are usually not honestly evaluated by landlords. However, you can use leverage and tax rules to your advantage with real estate.
This is very interesting. What throws off the calculations? Is is maintenance expenses?

Point taken about it being a second job.
I believe landlords underestimate costs of little repairs, deferred maintenance items like HVAC, vacancy and pretty much anything else that can be estimated. So go to a great real estate site like biggerpockets and see what people are estimating for expenses in their deals. In my opinion they uniformly underestimate. At least the sales/promoter types who promise "10-15% returns...."

To be clear I like real estate but it's not as simple as most proponents say. I am thinking long term of diversifying into some DST investments and/or some real estate syndications. However, especially with the latter, you really have to check those promoters out because you are writing a check to some stranger and hoping he's not the next Bernie Madoff.
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Addy
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Re: Why not Real Estate instead of Stocks?

Post by Addy »

Hiker8 wrote: Sat Oct 03, 2020 9:56 pm if you think real estate will give you a 9% return i have two bridges to sell you. Even if you get a 9% return annually, which you won't in most places in this country, it still doesn't factor it transaction costs (have you ever sold a house before? I assume not) and annual upkeep, landscaping, painting, property taxes, etc.
Hi Hiker8!

Genuinely interested in your perspective. Would you care to share your experiences and the rough location in which you had these experiences?
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Re: Why not Real Estate instead of Stocks?

Post by Bobby206 »

willthrill81 wrote: Sat Oct 03, 2020 10:03 pm
I would change the title to "in addition to" rather than "instead."

Agreed.
RevFran
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Re: Why not Real Estate instead of Stocks?

Post by RevFran »

I am nowhere near 9%. Nonetheless, I like having some real estate as a diversification. Because my rents are pretty stable, I think of rental houses as a partial replacement for bonds, not for stocks.
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Re: Why not Real Estate instead of Stocks?

Post by flaccidsteele »

Addy wrote: Sat Oct 03, 2020 9:19 pm If this is so, why not invest in Real Estate rather then Stocks?
As an investor who has done well investing in both stocks and real estate, my question is, what makes a person believe that they can achieve a better return with real estate going forward?

No disrespect but from reading the real estate threads on this forum the vast majority of bogleheads would perform miserably investing in real estate tbh
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Addy
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Re: Why not Real Estate instead of Stocks?

Post by Addy »

dml130 wrote: Sat Oct 03, 2020 9:46 pm If you believe that returns on real estate will be better than other sectors, wouldn't REIT investments be an alternative way to express that, with less hassle?
That is the other weird thing, the Vanguard link in the OP has REITs at a median of 4.4% in the next 10 years which is quite a ways from the 9% example:

U.S. REITs 3.4%-5.4%
https://americas.vanguard.com/instituti ... ctives.htm

So:
  • Either, I am making too optimistic calculations for the rental property in the OP
  • Or, Vanguard's forecast for REITs is wrong
  • Or even, residential rental real estate is not comparable to REITs
Not sure which one is correct.
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Re: Why not Real Estate instead of Stocks?

Post by 000 »

deleted
Last edited by 000 on Sat Oct 03, 2020 10:31 pm, edited 2 times in total.
phxjcc
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Re: Why not Real Estate instead of Stocks?

Post by phxjcc »

1. As a landlord I am calling a Red Card on the numbers.
Vacancy rate: 2.5 weeks per year, no.
That is one month EVERY TWO YEARS. Horse doo-doo.
Acq. Cost: 2%. Not 0.75% as shown.
Maintenance: NOT REPAIR! If you don’t hire your own Gardener, you are crazy. Add $150/month.
Taxes need to be inflated by a COLA figure, pick between 2-5%.
Same with repairs and maintenance costs.
Cost of disposing of property is 8%.
BEFORE repairs and repainting, etc. to get it on the market.
You need to take 25% off of depreciation for recapture PLUS state tax.

2. Stocks and RE are a good mix, but you are comparing apples to orangutans. Real life is NOT HGTV.
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Re: Why not Real Estate instead of Stocks?

Post by Sandtrap »

Addy wrote: Sat Oct 03, 2020 9:19 pm Would like to get everyone's opinion on this.

The forecast of next 10 years US stocks returns is pretty low. E.g.:

U.S. equities 3.9%-5.9%
Global equities ex-U.S. (unhedged) 7.4%-9.4%
https://americas.vanguard.com/instituti ... ctives.htm

And for people who have, say, 1/3rd of Stocks in Foreign equities, this means a return of 6%. (If the median of the forecast turns out to be true.)

It seems one can find Real Estate, for which, even when making conservative assumptions, one can get a 9% return e.g.: https://www.calculator.net/rental-prope ... &x=89&y=27.

If this is so, why not invest in Real Estate rather then Stocks?
Index funds vs physically held real estate income property (more like a, or is a, business venture) is like comparing golf balls and ducks.

Neither is better or "either or". Each serves a different function. If anything, do both for diversification if that is a preference.
j :D
Last edited by Sandtrap on Sun Oct 04, 2020 7:53 am, edited 1 time in total.
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000
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Re: Why not Real Estate instead of Stocks?

Post by 000 »

Addy wrote: Sat Oct 03, 2020 10:19 pm
  • Either, I am making too optimistic calculations for the rental property in the OP
  • Or, Vanguard's forecast for REITs is wrong
  • Or even, residential rental real estate is not comparable to REITs
Not sure which one is correct.
None of the above.

You are being too optimistic.
Vanguard's forecasts are useless at best.
RRRE is different from most of the stuff in VNQ.
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AerialWombat
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Re: Why not Real Estate instead of Stocks?

Post by AerialWombat »

Sandtrap wrote: Sat Oct 03, 2020 10:30 pm Index funds vs physically held real estate income property is like comparing golf balls and ducks.
+1
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ohboy!
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Re: Why not Real Estate instead of Stocks?

Post by ohboy! »

Bobby206 wrote: Sat Oct 03, 2020 9:31 pm I would say diversify and have some of each. We are about half cash/equities and half real estate. We are probably heavier real estate than I want but it's fine for now. You can make it as much of a job as you want but, even at it's best, is more time intensive than a stock portfolio.

Our real estate ranges from .5% to over 1% on rents. That is I have a $300k property in one place that rents for $1,600 and I have a $100k house in another region that rents for $1,200. Property taxes and insurance are higher in the latter. Also, costs of turnover tends to be a bit more on the cheaper house. The $300k property is in a region that tenants seem to be very easy on properties, often stay longer term, and don't complain a lot. The lower level one is in a region where people move every 12-18 months so it has more vacancies. Just some data points for consideration.
I've had 3 rentals. A $300k place that rents for $1,600 is in my opinion no good and I would sell it. Many people are going in for similar returns because they can get in on low mortgage rate leverage. It's a risky game. Although the last recession had a lot of get out of jail free cards, and whatever we are in now has had a lot of free passes. I would not count on it going forward.
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22twain
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Re: Why not Real Estate instead of Stocks?

Post by 22twain »

Addy wrote: Sat Oct 03, 2020 9:19 pm If this is so, why not invest in Real Estate rather then Stocks?
DW and I have never had a desire to have a "side hustle" e.g. be landlords.

We earned enough in our day jobs to maintain our accustomed lifestyle while working, and saved/invested enough to maintain that lifestyle now that we're retired.
Help save endangered words! When you write "princiPLE", make sure you don't really mean "princiPAL"!
Sasquatch1
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Re: Why not Real Estate instead of Stocks?

Post by Sasquatch1 »

I like both. I do think real estate may have an advantage if you wanna deal with it.

One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!

One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.

The cash flow is hard to beat in my eyes.

Ex. I paid cash for a single family home, 125k

I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation

That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems

The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!

If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
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unclescrooge
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Re: Why not Real Estate instead of Stocks?

Post by unclescrooge »

austin757 wrote: Sat Oct 03, 2020 9:29 pm
Addy wrote: Sat Oct 03, 2020 9:19 pm Would like to get everyone's opinion on this.

The forecast of next 10 years US stocks returns is pretty low. E.g.:

U.S. equities 3.9%-5.9%
Global equities ex-U.S. (unhedged) 7.4%-9.4%
https://americas.vanguard.com/instituti ... ctives.htm

And for people who have, say, 1/3rd of Stocks in Foreign equities, this means a return of 6%. (If the median of the forecast turns out to be true.)

It seems one can find Real Estate, for which, even when making conservative assumptions, one can get a 9% return e.g.: https://www.calculator.net/rental-prope ... &x=89&y=27.

If this is so, why not invest in Real Estate rather then Stocks?
Real estate investing is a part-time job. You’re not making huge returns unless you’re serious about it and invest smartly. Even if you hand the keys over to a property manager, which you have to account for in your monthly expenses, things can still go wrong.

I think it’s a great investment for someone with the right mindset
The same could be said about stock investing. If you are going to be actively involved, you could easily find an undervalued stock.
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Schlabba
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Re: Why not Real Estate instead of Stocks?

Post by Schlabba »

Sasquatch1 wrote: Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.

One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!

One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.

The cash flow is hard to beat in my eyes.

Ex. I paid cash for a single family home, 125k

I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation

That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems

The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!

If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
If you loose your job selling stocks and bonds takes about 5 minutes. If you are worth 125k and its all in the house, it is a lot harder to access.
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Re: Why not Real Estate instead of Stocks?

Post by finite_difference »

Addy wrote: Sat Oct 03, 2020 9:29 pm
gwe67 wrote: Sat Oct 03, 2020 9:23 pm A $450,000 property that rents for $2,500 monthly will never make it. Even the web site you linked says:

1% Rule—The gross monthly rent income should be 1% or more of the property purchase price, after repairs. It is not uncommon to hear of people who use the 2% or even 3% Rule – the higher the better
Let us, for now, not worry about specifics of rules which tell you which properties to buy.

The IRR calculation shows that assuming that the numbers remain true, one can get this 9% return. The numbers are reasonable and even conservative and have been exceeded by many properties in the last few years.

The main point here is that with the expected returns on stocks low and mortgage rates low, Real Estate looks very attractive.
I bet you can find plenty of articles claiming that picking stocks will let you easily earn 7% real per year.

Our own leveraged “hedgefundie” portfolio should beat 7% real.

I would also expect Vanguard Total Stock to beat 7% real over decades of time.

(I’m assuming you’re discussing nominal rates, so I converted it to real using 2% for inflation.)

Do you like owning houses? Do you like to fix houses yourself (DIY) and help people find a place to live? Do you like figuring out all the tax and tenant laws? If so, real estate might be for you.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
finite_difference
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Re: Why not Real Estate instead of Stocks?

Post by finite_difference »

Sasquatch1 wrote: Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.

One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!

One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.

The cash flow is hard to beat in my eyes.

Ex. I paid cash for a single family home, 125k

I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation

That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems

The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!

If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
So you pay 0 tax?

With stocks you could withdraw $4,375 per year without lifting a finger and likely have your balance go up over time (increasing your allowance despite keeping a fixed 3.5% withdrawal rate). And pay 0% or 15% tax depending on your bracket.

For maintaining a house that someone lives in, you earn a premium of $5,625 before tax. I’d rather do other things with my time to earn $5k.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
Sasquatch1
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Re: Why not Real Estate instead of Stocks?

Post by Sasquatch1 »

Very little tax, once using depreciation and deductions. And the little I do pay comes from adding on to the already high tax bracket from my job.

I’ve been having 2 rentals for several years now. I’ve had to do nothing but pick up a check every month. One time I’ve had to call a plumber to go to one house. That’s it

One of these options have afforded people the opp to get away from punching a time card, the other requires them to keep punching the clock to put more of their own money in the market. It really is that basic to me.

Paying cash is prob the bad way to do real estate but I don’t like bills and choose that route. The bigger way to benefit is with leverage and having the renter over time purchase the house for you by covering the note.

My 401k lost 40k so far this year.

The rentals just keep on paying me on the 5th every month.
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Re: Why not Real Estate instead of Stocks?

Post by Sasquatch1 »

Schlabba wrote: Sun Oct 04, 2020 1:36 am
Sasquatch1 wrote: Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.

One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!

One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.

The cash flow is hard to beat in my eyes.

Ex. I paid cash for a single family home, 125k

I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation

That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems

The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!

If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
If you loose your job selling stocks and bonds takes about 5 minutes. If you are worth 125k and its all in the house, it is a lot harder to access.

The goal is to not need to sell them, since you have the cash flow to survive. However yes, it’s not as tangible
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Brianmcg321
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Re: Why not Real Estate instead of Stocks?

Post by Brianmcg321 »

I already have a full time job.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
flaccidsteele
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Re: Why not Real Estate instead of Stocks?

Post by flaccidsteele »

Brianmcg321 wrote: Sun Oct 04, 2020 6:50 am I already have a full time job.
My rentals ensure that I don’t need one

Note all the people invested in the stock market who still need to trade their Life for money at a job until they’re 55+ years old and beyond
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
JustinR
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Re: Why not Real Estate instead of Stocks?

Post by JustinR »

flaccidsteele wrote: Sun Oct 04, 2020 7:24 am
Brianmcg321 wrote: Sun Oct 04, 2020 6:50 am I already have a full time job.
My rentals ensure that I don’t need one

Note all the people invested in the stock market who still need to trade their Life for money at a job until they’re 55+ years old and beyond
That's...just not true at all.

Have you heard of FIRE? The entire idea is retiring early by investing in index funds.

Stocks offer similar returns to real estate investing for -523,370.27% the amount of work.
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Re: Why not Real Estate instead of Stocks?

Post by flaccidsteele »

JustinR wrote: Sun Oct 04, 2020 7:33 am
flaccidsteele wrote: Sun Oct 04, 2020 7:24 am
Brianmcg321 wrote: Sun Oct 04, 2020 6:50 am I already have a full time job.
My rentals ensure that I don’t need one

Note all the people invested in the stock market who still need to trade their Life for money at a job until they’re 55+ years old and beyond
That's...just not true at all.

Have you heard of FIRE? The entire idea is retiring early by investing in index funds.

Stocks offer similar returns to real estate investing for -523,370.27% the amount of work.
What work?

I don’t even live in the same country as my rental real estate. I couldn’t do work on them even if I wanted too

What’s the % of employees who FIRE? Statistically no different than 0

I FIRE’d and that’s because of real estate. Nothing says FIRE requires investing in the stock market
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
dml130
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Re: Why not Real Estate instead of Stocks?

Post by dml130 »

Sasquatch1 wrote: Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.

One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!

One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.

The cash flow is hard to beat in my eyes.

Ex. I paid cash for a single family home, 125k

I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation

That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems

The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!

If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
You can also engineer the same type of benefit from the market by buying REITs or dividend paying stocks/funds though.
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Re: Why not Real Estate instead of Stocks?

Post by flaccidsteele »

dml130 wrote: Sun Oct 04, 2020 7:44 am
Sasquatch1 wrote: Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.

One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!

One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.

The cash flow is hard to beat in my eyes.

Ex. I paid cash for a single family home, 125k

I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation

That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems

The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!

If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
You can also engineer the same type of benefit from the market by buying REITs or dividend paying stocks/funds though.
You could. But total return may be worse (depends on purchase price and type of asset purchased)

Also REIT dividends taxed at ordinary rates

No depreciation to reduce taxes

No ability to cash out refi/LOC/blanket

No 1031 exchange

I’ll go back to my original comment that bogleheads wouldn’t be the best group to ask about growing wealth with real estate. Vast majority would fail as landlords
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
dml130
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Re: Why not Real Estate instead of Stocks?

Post by dml130 »

flaccidsteele wrote: Sun Oct 04, 2020 7:49 am
dml130 wrote: Sun Oct 04, 2020 7:44 am
You can also engineer the same type of benefit from the market by buying REITs or dividend paying stocks/funds though.
You could. But total return may be worse (depends on purchase price and type of asset purchased)

Also REIT dividends taxed at ordinary rates

No depreciation to reduce taxes

No ability to cash out refi/LOC/blanket

No 1031 exchange

I’ll go back to my original comment that bogleheads wouldn’t be the best group to ask about growing wealth with real estate. Vast majority would fail as landlords
I agree that there are some benefits to owning your own real estate, if you are the right person for it and in a good situation to do it. I have thought about it myself, but haven't really found a convincing reason to do it as of yet (someday if I have enough to pay cash for multiple properties as a diversifier, then I may consider, but I'm a long way off).

To your last point, I think the issue is similar to that of stock picking; to consistently benefit beyond what the average market return is, you have to have a certain mindset and skillset, and maybe a little luck as well. I suspect that for most, the chance at a somewhat higher return wouldn't be worth the headaches.
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Re: Why not Real Estate instead of Stocks?

Post by Dave55 »

I have friends who are private equity commercial real estate investors/partners and all of their money is in commercial real estate, nothing in the stock market. Some of these guys are multi-millionaires. But it is their primary business too.

Dave
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Re: Why not Real Estate instead of Stocks?

Post by flaccidsteele »

Addy wrote: Sat Oct 03, 2020 9:19 pm If this is so, why not invest in Real Estate rather then Stocks?
You may find the following 28 year analysis of single family rentals useful (or not)

TOTAL RETURNS TO SINGLE FAMILY RENTALS
Andrea Eisfeldt
Andrew Demers
NATIONAL BUREAU OF ECONOMIC RESEARCH

Personally I believe most purchasers of rental real estate and individual stocks go by gut feeling and probably have the same level of ability in interpreting financial statements
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Why not Real Estate instead of Stocks?

Post by Bobby206 »

ohboy! wrote: Sat Oct 03, 2020 11:40 pm
Bobby206 wrote: Sat Oct 03, 2020 9:31 pm I would say diversify and have some of each. We are about half cash/equities and half real estate. We are probably heavier real estate than I want but it's fine for now. You can make it as much of a job as you want but, even at it's best, is more time intensive than a stock portfolio.

Our real estate ranges from .5% to over 1% on rents. That is I have a $300k property in one place that rents for $1,600 and I have a $100k house in another region that rents for $1,200. Property taxes and insurance are higher in the latter. Also, costs of turnover tends to be a bit more on the cheaper house. The $300k property is in a region that tenants seem to be very easy on properties, often stay longer term, and don't complain a lot. The lower level one is in a region where people move every 12-18 months so it has more vacancies. Just some data points for consideration.
I've had 3 rentals. A $300k place that rents for $1,600 is in my opinion no good and I would sell it. Many people are going in for similar returns because they can get in on low mortgage rate leverage. It's a risky game. Although the last recession had a lot of get out of jail free cards, and whatever we are in now has had a lot of free passes. I would not count on it going forward.
I agree with you for the most part. Everybody's circumstances are different though. Some people like that "mail box money" that rentals supply and don't mind the low return of such a place. If it's a low maintenance type property that attracts high quality tenants it's really not so bad. A lot of times return look incredible on paper but don't pan out. For example, I have seen lots of deals for $50k for a $800 or $900 per month rent. Problem is those tenants don't seem to stay long and having a vacancy every 6-12 months KILLS returns. The tenants might pay higher rent due to bad credit or stuffing two families into the house which isn't good for the landlord generally. Also, a $50k property is probably pretty old and thus maintenance issues can be problematic. I like in the middle. Maybe $100k for a $1k/month rent (i.e. 1%) or even $125k for a $1k rent but the property is in good condition and in a decent neighborhood.
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Re: Why not Real Estate instead of Stocks?

Post by willthrill81 »

Bobby206 wrote: Sun Oct 04, 2020 10:05 am
ohboy! wrote: Sat Oct 03, 2020 11:40 pm
Bobby206 wrote: Sat Oct 03, 2020 9:31 pm I would say diversify and have some of each. We are about half cash/equities and half real estate. We are probably heavier real estate than I want but it's fine for now. You can make it as much of a job as you want but, even at it's best, is more time intensive than a stock portfolio.

Our real estate ranges from .5% to over 1% on rents. That is I have a $300k property in one place that rents for $1,600 and I have a $100k house in another region that rents for $1,200. Property taxes and insurance are higher in the latter. Also, costs of turnover tends to be a bit more on the cheaper house. The $300k property is in a region that tenants seem to be very easy on properties, often stay longer term, and don't complain a lot. The lower level one is in a region where people move every 12-18 months so it has more vacancies. Just some data points for consideration.
I've had 3 rentals. A $300k place that rents for $1,600 is in my opinion no good and I would sell it. Many people are going in for similar returns because they can get in on low mortgage rate leverage. It's a risky game. Although the last recession had a lot of get out of jail free cards, and whatever we are in now has had a lot of free passes. I would not count on it going forward.
I agree with you for the most part. Everybody's circumstances are different though. Some people like that "mail box money" that rentals supply and don't mind the low return of such a place. If it's a low maintenance type property that attracts high quality tenants it's really not so bad. A lot of times return look incredible on paper but don't pan out. For example, I have seen lots of deals for $50k for a $800 or $900 per month rent. Problem is those tenants don't seem to stay long and having a vacancy every 6-12 months KILLS returns. The tenants might pay higher rent due to bad credit or stuffing two families into the house which isn't good for the landlord generally. Also, a $50k property is probably pretty old and thus maintenance issues can be problematic. I like in the middle. Maybe $100k for a $1k/month rent (i.e. 1%) or even $125k for a $1k rent but the property is in good condition and in a decent neighborhood.
Further, without getting into politics, it seems to me that our culture is strongly tilting in favor of 'protections' for renters, regardless of what happens to landlords. I deem that there is significant and increasing legal risk with being a landlord.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why not Real Estate instead of Stocks?

Post by tibbitts »

Addy wrote: Sat Oct 03, 2020 9:19 pm ...
Global equities ex-U.S. (unhedged) 7.4%-9.4%

It seems one can find Real Estate, for which, even when making conservative assumptions, one can get a 9% return...

If this is so, why not invest in Real Estate rather then Stocks?
Or, just choose the global equities that will be the ones that produce 9.4%: similar odds to owning the real estate that will return 9%.
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Re: Why not Real Estate instead of Stocks?

Post by gougou »

There are some researches done showing that SFHs in the US typically returned around 9% per year (around 4% to 5% net rental income + 4% to 5% appreciation) unlevered over a long period of time (30+ years), meaning that if you apply a 4x leverage at 3% interest rate you would expect to make around 27% per year. But then historical return might not repeat so it's always a bet.
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Addy
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Re: Why not Real Estate instead of Stocks?

Post by Addy »

gougou wrote: Sun Oct 04, 2020 10:55 am There are some researches done showing that SFHs in the US typically returned around 9% per year (around 4% to 5% net rental income + 4% to 5% appreciation) unlevered over a long period of time (30+ years), meaning that if you apply a 4x leverage at 3% interest rate you would expect to make around 27% per year. But then historical return might not repeat so it's always a bet.
Not sure if this is true, even with 4x initial leverage my model in OP cannot get anywhere close to 27%.

Also, if this were true then why would anyone invest in anything else other than leveraged Real Estate?
whereskyle
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Re: Why not Real Estate instead of Stocks?

Post by whereskyle »

Addy wrote: Sat Oct 03, 2020 9:29 pm
gwe67 wrote: Sat Oct 03, 2020 9:23 pm A $450,000 property that rents for $2,500 monthly will never make it. Even the web site you linked says:

1% Rule—The gross monthly rent income should be 1% or more of the property purchase price, after repairs. It is not uncommon to hear of people who use the 2% or even 3% Rule – the higher the better
Let us, for now, not worry about specifics of rules which tell you which properties to buy.

The IRR calculation shows that assuming that the numbers remain true, one can get this 9% return. The numbers are reasonable and even conservative and have been exceeded by many properties in the last few years.

The main point here is that with the expected returns on stocks low and mortgage rates low, Real Estate looks very attractive.
Low interest rates are keeping prices high and pushing them even higher. I see no free lunch in real estate. I bought a couple months ago, but I bought because I needed a new place to live. I would not want to be desperate to find a renter in this environment.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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