Battle-Royale: Rent-Generating Investments vs. Stock Market

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condo_renter9
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Battle-Royale: Rent-Generating Investments vs. Stock Market

Post by condo_renter9 »

I was browsing Zillow and came across a 37-unit apartment building in my city that a guy had recently bought for 3.3 million. The units are primarily 2-bedroom. I was curious to see what type of money he was making from it so I put together this rent-income calculating spreadsheet. The spreadsheet has inputs for purchase price and down-payment, and then calculates everything looking ahead 50 years while taking into account increases in rent, tax, etc.

For this scenario, I took into account an annual $35,000 on maintenance, a 20% vacancy rate, a 30% tax rate on the rental income, as well as $30,000/year in taxes and HOA fees. I assumed an 8.00% loan rate for a $2.65 million loan ($3,300,000 - $650,000) I assumed a 2.5% annual rental increase and property value increase. I also under-estimated the rent ($1,400/mo) for the 2-bedrooms. I believe these units could easily get $2,000/mo given the city and location (Washington, DC, Adams Morgan neighborhood).

The spreadsheet shows that, had the owner taken his $650,000 down-payment and put it in the market, and gotten the historical annual 6.5% increase, he would have about $15,000,000 after 50 years.
However, had he put his $650,000 into a down-payment on the apartment building, he would have over $100,000,000 after 50 years, assuming he invests the rent money into an index-fund at the end of each year.

I ran out two scenarios: a 30 year mortgage and a 15-year mortgage. The 30-year scenario provides more income in the beginning ($1.5 million post-tax rent income in the first 10 years, as opposed to $1 million for the 15-year scenario), and the end-sum of the 30-year mortgage scenario was only about 3% smaller than the 15-year mortgage scenario after 50 years. I also noticed that his index-fund investment account is worth $94 million after 50 years, compared to the assumed value of the actual property at only $11 million.

The purpose of this sheet is to show what type of return on investment one can expect from rental properties as opposed to the stock market. I thought this was a fun exercise, and I learned that shorter mortgages are not always better and the value of the real estate pales in comparison to the money it generated during its rental life. I wanted to put this spreadsheet out there for anyone who wishes to use it, or can offer any tweaks!

Link to the excel file: https://docs.google.com/open?id=0By45FQ ... FBVcDQ0cWc
Lumpr
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Lumpr »

Your maintenance expense estimate is way to low, plus no property taxes, insurance and operating expenses accounted for.
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condo_renter9
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by condo_renter9 »

Lumpr wrote:Your maintenance expense estimate is way to low, plus no property taxes, insurance and operating expenses accounted for.

What is something more accurate for maintenance? At $35k a year, that's $1,000/yr per apartment. I don't think that's unreasonable.

Taxes I have included, they are in the HOA/fees category.

What does insurance typically run, and what operating expenses would there be?
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by nisiprius »

Is a rental property an investment, a business, or a self-employed job? How much time does the average landlord need to spend managing that rental property?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
exigent
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by exigent »

Not a fair comparison. He leveraged $650k into a $3.3M investment on the real estate deal, but is investing only $650k in your stock scenario.

What happens if you assume he paid $3.3M cash vs. putting $3.3M into the stock market?
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by normaldude »

condo_renter9 wrote: The purpose of this sheet is to show what type of return on investment one can expect from rental properties as opposed to the stock market.
They're not comparable.

1) Liquidity. Stock index funds are very liquid. You can liquidate immediately, turn everything into a briefcase of cash immediately, leave the country, etc.

2) Legal Issues. I know plenty of people who have been tied up for decades in real estate litigation, often over environmental issues. I've never heard of that for a stock fund at a major mutual fund company like Vanguard or Fidelity.

3) Work & Hours. Owning & managing real estate is a job. To be comparable, you need to include the cost of hiring a property management firm.

4) Leverage. With a mortgage, a real estate investment is leveraged. That means that you can easily be wiped out, and lose everything.

5) Diversification. Most real estate investors are tied to one or two markets, like Las Vegas or Miami. A localized downturn can wipe out a real estate investment.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by btenny »

Typical operating expenses for a multi-unit apartment building are around 35-50% of the rent all inclusive. This covers water, electric, gas, labor, taxes, insurance, pool costs, driveway upkeep, equipment replacement, etc... Everything..... Some active owners get by for less by skipping or postponing maintenance or doing a lot of the management and maintenance themselves. Same goes for book keeping and legal. But beware of postponed maintenance. It is not usually a good idea because units become vacant or the building needs to be refinanced and then the big cost fixes are required immediately when you are not prepared.

Also note that many big complexes like you illustrate are owned and run by dedicated professional owner/managers. These people studied real estate in college for 4 years and know all kinds of legal rental rules and plumbing codes, etc.. These guys work at this full time for a living. They spend all day 5-6 days a week looking at rents and choosing good tenents etc... They draw a salary working for others when they are young and buy their own buildings as they learn more and get better. They have teams of help like bankers and lawyers and insurance guys who help them find good areas of town to build new apartments in and when a older bulding is not being run correctly and can be bought right etc....

So revise your calculations for operating expenses to 45% or so and your vacancy factor to 6-10%.

Bill
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Alex Frakt »

The question should be, "What is the excess return, if any, of active property management versus passive investment per hour of your time?" It may be more profitable to use your excess time enhancing your primary job or "spending" it with your friends and family.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by btenny »

Nisiprius, I have several friends in California who are all well off professional property managers. None studied property management in college. All bought a 1-2 units when they were young and working for someone else. They learned maintenance and rental management by doing it at night and on weekends. They bought second and thrid units and started getting others to help them. One lady friend and her husband bought a house a year for 20+ years. Another bought office buildings and duplexes and smaller buildings. All of them had day jobs for many years.

Now all these people work as business people running there properties sorta part time. They have no other jobs. They collect rents, they pay bills, they hire repair guys, they do payroll for their workers, they talk about issues with their managers, they shop for new properties, they are busy a lot. Several hours per week. And around the first of the month and around tax time they are really really busy.

BIll
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Clearly_Irrational »

I agree that comparison doesn't include all costs, especially the operating and property management costs as previously mentioned. I ran something similar to this myself previously comparing real estate purchase to a 60/40 stock/bond portfolio over 40 years. If you use all cash then the Stock/Bond portfolio wins easily, however with pretty standard 20% down leverage real estate crushes the market nearly 2:1. No one sane is going to leverage their portfolio enough to beat that, yet for real estate it's actually pretty reasonable.

I'm not advocating anyone dump their portfolio and move everything to real estate, but there is a good reason so many of the Forbes 500 have significant real estate holdings.

Food for thought, 4% cash flow from a 60/40 portfolio will probably last you 30 years, but real estate actually throws off more like 6% non-depleting.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by irwinmfletcher »

I agree with exigent, and to make it even more apples to apples, put all of the stock money in the REIT index. Viola, you in essence own commercial real estate and have professional management and you are diversified across the entire US.

I still think you can make better returns in local markets--I know one investor who makes about a 25% yearly return renting houses he buys with cash and has for years and years--but this would be a better comparison.
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condo_renter9
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by condo_renter9 »

exigent wrote:Not a fair comparison. He leveraged $650k into a $3.3M investment on the real estate deal, but is investing only $650k in your stock scenario.

What happens if you assume he paid $3.3M cash vs. putting $3.3M into the stock market?

I disagree with you. The rest of the $3.3 million is provided by the rental property itself. Where is the rest of the 3.3 million going to come from in the stock scenario?
Last edited by condo_renter9 on Fri May 18, 2012 5:50 pm, edited 1 time in total.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by condo_renter9 »

btenny wrote:Typical operating expenses for a multi-unit apartment building are around 35-50% of the rent all inclusive. This covers water, electric, gas, labor, taxes, insurance, pool costs, driveway upkeep, equipment replacement, etc... Everything..... Some active owners get by for less by skipping or postponing maintenance or doing a lot of the management and maintenance themselves. Same goes for book keeping and legal. But beware of postponed maintenance. It is not usually a good idea because units become vacant or the building needs to be refinanced and then the big cost fixes are required immediately when you are not prepared.

Also note that many big complexes like you illustrate are owned and run by dedicated professional owner/managers. These people studied real estate in college for 4 years and know all kinds of legal rental rules and plumbing codes, etc.. These guys work at this full time for a living. They spend all day 5-6 days a week looking at rents and choosing good tenents etc... They draw a salary working for others when they are young and buy their own buildings as they learn more and get better. They have teams of help like bankers and lawyers and insurance guys who help them find good areas of town to build new apartments in and when a older bulding is not being run correctly and can be bought right etc....

So revise your calculations for operating expenses to 45% or so and your vacancy factor to 6-10%.

Bill
I agree with this. What can you learn in college about landlording that basic life experiences couldnt teach you? Im not challenging the worthiness of that degree in certain situations, but i dont feel like its relevent for purchasing a pre-existing apt. Building thats already built out with units. It then turns into a basic issue of people skills, common sense, and maintenance, or hiring people for maintenance.

I actually live in this building so i have a decent idea of how the owner runs it. He does all the interviewing potential tenants, advertising, etc. and then hires a local handyman to come do odd jobs. Theres no one there 90% of the time.

The way i see it theres a large initial hump, but once you have everything set up and running its a pretty good cash cow.

Thanks for the feedback everyone!
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by dyangu »

Buying and managing an apartment building can be very rewarding for people who are looking to start their own business. You should compare the after tax return to your salary, not to market returns. In this low interest rate environment, I imagine many small business can give you above 10% returns.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by SSSS »

condo_renter9 wrote:he would have over $100,000,000 after 50 years
Do apartment buildings actually survive 50 years?

Would anyone want to live in a 50-year-old apartment?
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by exigent »

condo_renter9 wrote:
exigent wrote:Not a fair comparison. He leveraged $650k into a $3.3M investment on the real estate deal, but is investing only $650k in your stock scenario.

What happens if you assume he paid $3.3M cash vs. putting $3.3M into the stock market?
I disagree with you. The rest of the $3.3 million is provided by the rental property itself. Where is the rest of the 3.3 million going to come from in the stock scenario?
Dude, the rest of the $3.3M is provided by the MONEY HE BORROWED to buy the property. He's profiting on a $3.3M investment, $2.65M of which is borrowed. Not even close to the same thing as a $650k market investment.

He's leveraging and taking much greater risks, which is where much of the additional return comes from. Not saying it's necessarily a bad idea, but it doesn't show that rent-generating investment are better. It shows that (given your assumptions) using huge leverage to invest in real estate beats a completely non-leveraged market investment. No surprise there.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by btenny »

Leverage oh leverage..... Probably the most IMPORTANT thing not discussed above is what happens if the apartment buyer fails to keep up the mortgage payments and defaults due to vacancies or other issues. Then the mortgage owner can forclose amd take over the the apartment building just like happens with a house foreclosure. Many of these mortgages are recourse loans. So when apartments are foreclosed the owner is liable for the losses and may get sued by the lender and have to forfeit all or most of his personel property including his investment accounts or his home or summer home.....

Bill
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by tfb »

btenny wrote:Leverage oh leverage.....
In the other thread I wondered where the return from rental real estate come from:
* leverage OR
* tax deferral (due to depreciation) OR
* substitute wages for property management

This spreadsheet shows it's primarily leverage. Why not invest in e-minis if you want leverage?
Harry Sit, taking a break from the forums.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by steadyeddy »

I live in a complex with 212 units. I read that in 2008 the police were called out to the premises nearly 1,000 times. The situation grew so bad that the city eventually stepped in and revoked the owner's rental license. With no rental license for the property, it was virtually worthless to a prospective buyer without deep pockets and some political savvy. It was eventually sold for a song to an established apartment owner in town. The city not only granted him a rental license, but huge tax incentives in exchange for him investing an extra $4M in renovating the units thereby raising rents/tax base.

One owner had a massive financial failure, and now a new owner has an absolute cash cow. The devil is in the details.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by CaliJim »

Don't suffer the fate of pre-Katrina New Orleans apartment building owners.

Avoid apartment building in areas where there may be floods, earthquakes, tornadoes, hurricanes, terrorists, urban decay, local economic melt-down/factory towns, environmental/pollution disasters.

Many people have said this:

You can make lots of money by starting/running a business, making concentrated stock market bets (speculation), and, in general, taking on promising endeavors where there are high levels of non-systemic risk. However - once you have made lots of money, the best way to keep it, is to DIVERSIFY.

In The Intelligent Investor, Ben Graham talks about the incredible turnover there is in the Forbes 400 Wealthiest list. Most of these folks on the list got wealthy by placing concentrated bets. He notes that all they had to do to stay on list was get market average returns. Instead, many stayed with their concentrated bets, and later fell off the list.

tl;dr: don't confuse business ownership and speculative operations with investment operations.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Clearly_Irrational »

SSSS wrote:
condo_renter9 wrote:he would have over $100,000,000 after 50 years
Do apartment buildings actually survive 50 years?

Would anyone want to live in a 50-year-old apartment?
Quite well if you keep up with the the maintenance, and it's generally very easy to rent just about any unit that is in decent shape.

Both of my properties are around 40 years old and they're doing great.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Clearly_Irrational »

tfb wrote:This spreadsheet shows it's primarily leverage. Why not invest in e-minis if you want leverage?
Captial gains on real estate mostly comes from inflation + population growth, obviously leverage allows you to magnify that. Five to one leveraged real estate and five to one leveraged e-minis are NOT at risk parity, in fact leveraged real estate is probably less dangerous than un-leveraged e-minis.

Just out of curiousity, has anyone here calculated a sharpe ratio for direct ownership of leveraged rentals 1972-2011? (no, REITs are not a substitute here)
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by bertie wooster »

SSSS wrote:
condo_renter9 wrote:he would have over $100,000,000 after 50 years
Do apartment buildings actually survive 50 years?

Would anyone want to live in a 50-year-old apartment?
If you live in San Francisco, lots of people. Our place was built before the 1906 earthquake!
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by grayfox »

condo_renter9 wrote:I was browsing Zillow and came across a 37-unit apartment building in my city that a guy had recently bought for 3.3 million. The units are primarily 2-bedroom. I was curious to see what type of money he was making from it so I put together this rent-income calculating spreadsheet. The spreadsheet has inputs for purchase price and down-payment, and then calculates everything looking ahead 50 years while taking into account increases in rent, tax, etc.
I'll take your analysis at face value and assume it is correct.

Your result is not surprising. Now buying and renting out a SFH, usually the numbers don't work. The Price/Rent is usually too high. Bruce Williams, who was on the radio for many years, used to say that a quick rule of thumb is MonthlyRent/Price over 1% is doable. Under 1%, pass. For example in southern California, a SFH might rent for $2,000 per month but sell for $1,000,000. That's a ratio of 0.2%, not even close to making sense.

But with multi-units the numbers work. For instance, in your example the monthly rent is $1,400 and price per unit is $89,189. MonthlyRent/Price is 1.5697%. Definitely doable.

:arrow: However, to compare owning and operating a 37-unit apartment building to owning, say, stock index fund is apples and oranges. It takes 5 seconds to buy Vanguard Total World Stock Index (VT) with no commission. Apartment building will be a full-time job.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by grayfox »

SSSS wrote:
condo_renter9 wrote:he would have over $100,000,000 after 50 years
Do apartment buildings actually survive 50 years?

Would anyone want to live in a 50-year-old apartment?
Are you kidding? I rented an apartment in a building that was about 300 years old. It was re-constucted to modern standards. The building was better than anything built in the last 50 years in the U.S. The outside walls were at least one meter thick. It was well heated in the winter with huge radiators. And double-pane windows kept out the cold and all the street noise. It could be -10 C outside and I was wearing shorts and t-shirt inside.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by MarkS »

One factor I see is inflation. It seems to me that the "historical annual 6.5% increase" you used for the stock market is the historic real return. However, you adjust the real estate return for 2.5% inflation. You should adjust either both or neither investments for inflation in order to get a proper end value comparison.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by bb »

MarkS wrote:One factor I see is inflation. It seems to me that the "historical annual 6.5% increase" you used for the stock market is the historic real return. However, you adjust the real estate return for 2.5% inflation. You should adjust either both or neither investments for inflation in order to get a proper end value comparison.
Not so sure you are correct. Assume 2.5% is in the ball park. Also, according to several sources 6% neighorhood is a
reasonable expectations for the stock going foreward for nominal return.

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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by texasdiver »

I think much of the confusion on this thread has to do with the apples and oranges comparison.

Real estate is a business. The stock market is an investment.

Buying a large apartment complex is really no different than buying any business such as a McDonalds franchise, car dealership, or dairy farm. In all of these businesses you have to deal with real estate, taxes, city inspectors, employees, managers, contractors, suppliers, customers, accountants, etc. etc. You have to worry about your cash flow and a host of other business-related issues. It is MUCH more than a full time 24-7 job.

Investing in the stock market is something you do with a few keystrokes of the computer and is the same as investing in bonds, mutual funds, TIPS, CDs, REITs, etc. You are not worried about any of the above issues (except taxes). Rather, you are just worried about whether your portfolio is appropriately balanced for your life situation.

Buying or starting a business might be the appropriate choice for a lot of people and it is certainly one route towards financial independence. I think real estate is particularly attractive business for a lot of people because of the low bar to participation. And they confuse owning a home with owning a large apartment complex. But one should never confuse owning a business with an investment portfolio.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by exigent »

texasdiver wrote:I think much of the confusion on this thread has to do with the apples and oranges comparison.

Real estate is a business. The stock market is an investment.
There's no confusion here. You are correct that one is a business and the other is a pure (passive) investment. But even more to the point (and I'm trying not to beat a dead horse here...) the former is fueled by massive amounts of borrowed money while the latter is not.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by wklose99 »

Well part of my original thinking was people always clamor about returns on real estate, like "i bought a house in the mid 70s and it was $100,000, today its worth 1.2 million!" But if you look at what that same money would do in the stock market it would be equal or more than that (at 6.5% annual interest).

Tired of hearing that, I looked for real estate scenarios where it would smash market returns and came up with this. I lost sight of the work involved, but my landlord seems to be very hands off (considering he doesn't hire anyone to manage the property for him). If I had to guess I would say he spends no more than 15 hours a week managing this property. I'm sure when he first bought it it sucked up a lot of time, but how many other jobs pay 6 figures for 15 hours/wk of work?

Anyways, with everyone talking about the massive amounts of leverage involved, is this really that different from a normal mortgage? People routinely take this type of leverage out on a house, 20% down on a $500k or more house (especially in the DC area, where $500k wont get you much). The big difference in this scenario is other people are paying your mortgage interest, taxes, etc.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by wklose99 »

exigent wrote:
condo_renter9 wrote:
exigent wrote:Not a fair comparison. He leveraged $650k into a $3.3M investment on the real estate deal, but is investing only $650k in your stock scenario.

What happens if you assume he paid $3.3M cash vs. putting $3.3M into the stock market?
I disagree with you. The rest of the $3.3 million is provided by the rental property itself. Where is the rest of the 3.3 million going to come from in the stock scenario?
Dude, the rest of the $3.3M is provided by the MONEY HE BORROWED to buy the property. He's profiting on a $3.3M investment, $2.65M of which is borrowed. Not even close to the same thing as a $650k market investment.

He's leveraging and taking much greater risks, which is where much of the additional return comes from. Not saying it's necessarily a bad idea, but it doesn't show that rent-generating investment are better. It shows that (given your assumptions) using huge leverage to invest in real estate beats a completely non-leveraged market investment. No surprise there.
Ok, if we run the scenario of $3.3 million invested in the market, and the apartment building bought outright with $3.3 million, even if I bump maintenance up to $100k/yr as suggested earlier the real estate scenario brings in almost $160 million after 50 years, compared to about $75 million for the stocks.

If we want to go even further, say the stock scenario the guy still works a 9-5 and invests $100k a year increase by 3% per year, (ill assume if he has 3.3 million in a bank account hes making, say $330k a year), we still only end up with $125 mil in the stock scenario opposed to $160 mil in the rental scenario, and thats comparing working 15/hrs a week to 40/hrs a week.

Food for thought!
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by exigent »

wklose99 wrote:Ok, if we run the scenario of $3.3 million invested in the market, and the apartment building bought outright with $3.3 million, even if I bump maintenance up to $100k/yr as suggested earlier the real estate scenario brings in almost $160 million after 50 years, compared to about $75 million for the stocks.

If we want to go even further, say the stock scenario the guy still works a 9-5 and invests $100k a year increase by 3% per year, (ill assume if he has 3.3 million in a bank account hes making, say $330k a year), we still only end up with $125 mil in the stock scenario opposed to $160 mil in the rental scenario, and thats comparing working 15/hrs a week to 40/hrs a week.

Food for thought!
Interesting. Thanks for running the numbers. It definitely narrows the gap, but not as much as I would have expected. There are still a lot of assumptions here and I'm not particularly fond of making such a huge, narrow bet. Note that this is a purely deterministic calculation, and there is no consideration give to the likelihood of failure (or even negative results). IMHO, there's a much greater chance of getting wiped out entirely in the apartment building scenario, but this is definitely food for thought.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by btenny »

Well those are great calculations that seem to reflect that today a lot of rental real estate is well priced thus setting owners up to make good money for many years in the future while stocks are currently over priced. In fact the Shiller 10 year P/E is over 20 so most long term invester should be selling stocks right now....

Or as Warren Buffet would say the time to buy is when blood is running in the streets as it is in real estate....

Food for thought.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by texasdiver »

exigent wrote:
texasdiver wrote:I think much of the confusion on this thread has to do with the apples and oranges comparison.

Real estate is a business. The stock market is an investment.
There's no confusion here. You are correct that one is a business and the other is a pure (passive) investment. But even more to the point (and I'm trying not to beat a dead horse here...) the former is fueled by massive amounts of borrowed money while the latter is not.
Yes, we agree. But that is the same for ANY business, not just real estate. Virtually every type of business start-up is fueled by massive amounts of borrowed money. That's mainly why banks even exist.
Honobob
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Honobob »

btenny wrote:Nisiprius, I have several friends in California who are all well off professional property managers. None studied property management in college. All bought a 1-2 units when they were young and working for someone else. They learned maintenance and rental management by doing it at night and on weekends. They bought second and thrid units and started getting others to help them. One lady friend and her husband bought a house a year for 20+ years. Another bought office buildings and duplexes and smaller buildings. All of them had day jobs for many years.

Now all these people work as business people running there properties sorta part time. They have no other jobs. They collect rents, they pay bills, they hire repair guys, they do payroll for their workers, they talk about issues with their managers, they shop for new properties, they are busy a lot. Several hours per week. And around the first of the month and around tax time they are really really busy.

BIll
http://brennansberkeley.com/food.html

And here's where they conduct their business. I'm a small time investor that has turned a few hundred thousand into multi-millions in real estate equity. My cash flow more than doubles every ten years. I stop here when I'm working in the area or on my way to my dentist on Solano. There's always this group of "investors" at the bar. Mostly boomers that had a "trade" that guaranteed employment at a decent rate (electrician/plumber) or government employee. They bought up properties with fixed rates and Prop 13. California subsidizes them to the tune of $60,000-$320,000+ on property taxes every year! They ARE the millionaires next door. They mostly keep their rents below market because they can which reduces their vacancy. Their workmen come in and get their instructions and probably a pretty good wage. These guys support the local hardwares and carpet and tile places. Seems like a pretty nice life.
It's slowly dawned on me that we won the real estate lottery!
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by btenny »

My friends are more likely to stop at this place just down the road from their Marin county homes...

http://www.wipeoutbarandgrill.com

Bill
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Nathan Drake »

btenny wrote:Well those are great calculations that seem to reflect that today a lot of rental real estate is well priced thus setting owners up to make good money for many years in the future while stocks are currently over priced. In fact the Shiller 10 year P/E is over 20 so most long term invester should be selling stocks right now....

Or as Warren Buffet would say the time to buy is when blood is running in the streets as it is in real estate....

Food for thought.
Bill
The Shiller PE10 isn't to be taken in a isolation.

When have stocks been priced like this relative to interest rates? Relative to 10 year treasury yields? Where earnings are less likely to be distributed as dividends? What if we examine the PE3, where stocks are attractively priced?
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by btenny »

What is PE3? Why is it attractively priced?

Bill
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ladders11
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by ladders11 »

Nathan Drake wrote:
btenny wrote:Well those are great calculations that seem to reflect that today a lot of rental real estate is well priced thus setting owners up to make good money for many years in the future while stocks are currently over priced. In fact the Shiller 10 year P/E is over 20 so most long term invester should be selling stocks right now....

Or as Warren Buffet would say the time to buy is when blood is running in the streets as it is in real estate....

Food for thought.
Bill
The Shiller PE10 isn't to be taken in a isolation.

When have stocks been priced like this relative to interest rates? Relative to 10 year treasury yields? Where earnings are less likely to be distributed as dividends? What if we examine the PE3, where stocks are attractively priced?
Good point, Nathan Drake.

When we talk about the PE10, we need a comparable metric for real estate. Real estate valuations have eased over the last five years, but so have expectations for economic growth, population growth, and inflation. And, there was an unprecedented run-up until 2007.

Aside, there is no way I would call today's real estate market "blood running in the streets" and so forth. Interest rates are practically at an all time low.
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Clearly_Irrational
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Clearly_Irrational »

ladders11 wrote:Aside, there is no way I would call today's real estate market "blood running in the streets" and so forth. Interest rates are practically at an all time low.
From a capital gains perspective it's pretty bad, the notional market value of my properties drops weekly. From a cash flow perspective they're doing just dandy, so I'm not too stressed about it, especially since my preferred holding period for real estate is forever. The only downside is that I can't access home equity loans as much, too bad too because that's a really cheap way to borrow.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by arkerr123 »

After going through the excel document, there is something that I think should be stated that has not been stated yet.

The OP that made the excel document is taking the income from the apartment, and investing it in the stockmarket (the equation is =(K14*((1+$E$4)))+J15) ).

The cash from the appt building is not just simply sitting in an account. This turns this into a growing perpetuity. For the example with the stock market, you get approximately 6.5% for 50 years on the 650K at the beginning.
For the Apartment building, it is treated as though you receive a check for rent annually for 118K (post tax). Each year, rent goes up 2.5%. Ok Great. But all of that money gained is put into the stock market, earning 6.5% as well.

It looks legit to me.
getRichSlower
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by getRichSlower »

Given that most of the 1 bed condos in the Adams Morgan neighborhood seem to be going for $250k or more on Zillow, a price of 3.3 million for 37 2-bedroom condos seems incredibly low as a purchase price.
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Clearly_Irrational
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Clearly_Irrational »

getRichSlower wrote:Given that most of the 1 bed condos in the Adams Morgan neighborhood seem to be going for $250k or more on Zillow, a price of 3.3 million for 37 2-bedroom condos seems incredibly low as a purchase price.
Multi-unit buildings are priced based on CAP rates and as such don't line up linearly with single unit prices.
ilmartello
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by ilmartello »

Another fallacy is the cost of leverage.
Sure because of the gse's you can get a 30 yr 3.75 percent rate loan for an owner-occupied home. No way you'd get that or anything close to that for a commercial property.
devilslayer
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by devilslayer »

with all those units you would have to hire a some fulltime maintanince men...look at $60,000 + per worker for that..

im not a expert but a 2million dollar loan might have a interest rate higher then 8%
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SnapShots
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by SnapShots »

A 37-unit apartment building isn't all that big or much to take care of. I've been in the real-estate rental business for 35 years; selling most of my units about 10 years ago. Owning on average 14-20 units at a time. An owner, with the skills, that wants to do most of the repair work plus leasing can easily do it but it is full time job. For a couple it's a piece of cake. One spouse can have a full time paid job; the other can manage the rentals.

You have periodic calls for maintenance and with 37 units you establish working relationships with plumbers, electricians, heat & air guys who respond quickly when called. If the owner rents the units, collects rental payments and answers phone calls, they have relationships with their tenants. I gave my renters the phone numbers to my repair companies if they weren't able to get in touch with me so they could get things repaired quickly.

With a 37 unit apartment complex you can get a tenant to show your apartments and even field maintenance issues; fixing or calling repairmen. If your a good landlord and keep your property maintained your tenants will refer their friends; it's kind of like compounding interest.

However, there are lots of issues over time. New apartments are built. Areas of town change. AC/Heat units, refrigerators, ranges & ovens, toilets, carpeting, tiling, all have to be replaced over the course of 20, 30, 50 years. I'm not sure $1,000/unit maintenance cost is enough but it would not require this every year...so maybe over time it's a workable number.

I got tired of the business. The area of town changed and I was finding it harder to rent to good tenants. And, got out of the business except for a couple of rentals I bought on a 1031 exchange to avoid paying back depreciation and capital gain taxes. There's another problem with rentals. You'll get hit big time with depreciation and tax gains if you ever want to sell them.

However, considering the ups and downs and sideways movement of the stock market. I think, I should have stayed in the business. While it was a lot of work it was something I had some control over.
the best decision many times is the hardest to do
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by abuss368 »

Before I invested that much into an illiquid asset, I would invest in the Vanguard REIT and probably International REIT funds.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by bungalow10 »

I think $1k/unit is low.

Carpet (in the midwest) for a 2-bed is $1500. Water heater is $800, tub and shower surround $1500. We have a four unit and probably spend $1200/year on maint per unit. Some years none, other years it all piles up.

Also, there is nothing in there for management costs. Hiring a property management company takes 10% off the gross rents. The alternatives are hiring staff. Depending on the stability of the area, you could be turning 50-80% of your units each year.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Clearly_Irrational »

ilmartello wrote:Another fallacy is the cost of leverage.
Sure because of the gse's you can get a 30 yr 3.75 percent rate loan for an owner-occupied home. No way you'd get that or anything close to that for a commercial property.
Commercial no, nor a 37 unit building, but there is a loophole in the 2-4 unit market where you can.
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Clearly_Irrational
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Re: Battle-Royale: Rent-Generating Investments vs. Stock Mar

Post by Clearly_Irrational »

abuss368 wrote:Before I invested that much into an illiquid asset, I would invest in the Vanguard REIT and probably International REIT funds.
Is liquidity really that important since a lot of your financial assets are going to be tied up in IRA accounts where you can't get at them anyways?
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