Real Estate vs Equity

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Kal1981
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Real Estate vs Equity

Post by Kal1981 »

I’ve been contemplating getting into real estate, beyond my primary residence and started researching the topic. I came across this research paper published by the Federal Reserve a few years ago: https://www.frbsf.org/economic-research ... 017-25.pdf

Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
Call_Me_Op
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Re: Real Estate vs Equity

Post by Call_Me_Op »

Kal1981 wrote: Wed Jun 15, 2022 12:09 pm I’ve been contemplating getting into real estate, beyond my primary residence and started researching the topic. I came across this research paper published by the Federal Reserve a few years ago: https://www.frbsf.org/economic-research ... 017-25.pdf

Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
It is a matter of preference - but it is not like you do "eenee meenee minee mo." There are fundamental differences. Investing directly in real estate usually requires becoming a landlord - so it is a totally different situation. There are limited ways to invest directly in real estate without become a landlord but usually it cannot be done within a 401k or brokerage account. There may be a few limited exceptions. There are many here who know a lot more about it than I, so anticipate them jumping in.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
manuvns
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Re: Real Estate vs Equity

Post by manuvns »

yes it's a good idea but right now is not a good time to get into real estate , given the prices and mortgae rates . you make money when you buy it below market
Thanks!
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JonL
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Re: Real Estate vs Equity

Post by JonL »

Kal1981 wrote: Wed Jun 15, 2022 12:09 pm I’ve been contemplating getting into real estate, beyond my primary residence and started researching the topic. I came across this research paper published by the Federal Reserve a few years ago: https://www.frbsf.org/economic-research ... 017-25.pdf

Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
Generally, here's what I tell folks when I get asked this question:

Keeping investment costs low is critical to investing success. That means investing in real estate directly. While this is a low-cost option for accessing real estate, it is far from “passive.” Successful real estate investing is a part-time (if not full-time) job: finding properties, hiring a management company, sourcing contractors, etc.

If you’re passionate about real estate – and want to pursue real estate investing as a fun side hobby because the subject interests you – it could make sense to do so. (And, starting small can help manage risk.) Yet, most don’t need to invest in real estate as a wealth diversifier. Generally, sticking with low-cost index funds is fine.
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Kal1981
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Re: Real Estate vs Equity

Post by Kal1981 »

Thanks! I definitely don’t have a passion for real estate but would consider it as a diversification tool.

[/quote]


Generally, here's what I tell folks when I get asked this question:

Keeping investment costs low is critical to investing success. That means investing in real estate directly. While this is a low-cost option for accessing real estate, it is far from “passive.” Successful real estate investing is a part-time (if not full-time) job: finding properties, hiring a management company, sourcing contractors, etc.

If you’re passionate about real estate – and want to pursue real estate investing as a fun side hobby because the subject interests you – it could make sense to do so. (And, starting small can help manage risk.) Yet, most don’t need to invest in real estate as a wealth diversifier. Generally, sticking with low-cost index funds is fine.
[/quote]
Gaston
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Re: Real Estate vs Equity

Post by Gaston »

Kal1981 wrote: Wed Jun 15, 2022 12:09 pm Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
If you are thinking about REITS, you might want to listen to episode #58 of the Rational Reminder podcast. It’s been a while since I heard it, but my recollection is that, according to the hosts, a combination of SCV + Bonds matches the factor exposure of REITS, while also delivering greater returns.

Also, if you backtest Vanguard’s REIT ETF against VOO, my guess is VOO delivered higher returns.

Just food for thought.
Bud
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Re: Real Estate vs Equity

Post by Bud »

You can check the link below and see the Vanguard REIT index has outperformed Vanguard Total Market (both with reinvested dividends) over the last 20 years. This is of interest to me since I have invested in Vanguard REIT for the last 20 years.

https://www.dividendchannel.com/drip-re ... alculator/

Dynamic DCA increases the amount invested in categories which lag and decrease in over-performing categories. You can use the Callan returns chart to adjust your DCA. This style of investing is based on Reversion to the Mean, a tenet of John Bogle.

https://www.bogleheads.org/wiki/File:Ca ... eturns.png

This style of investing requires smiling and increasing your investment, even when the REIT index is down 35-40% (ie 2009) and it has served me well.

If you want to access john Bogle's work, you can check here.

https://www.bogleheads.org/wiki/John_C. ... d_speeches

At a personal level, I do not invest across all the Callan categories, but REIT is a diversifier worth holding.

All the best.
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JoMoney
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Re: Real Estate vs Equity

Post by JoMoney »

There is a matter of "preference" to it, but that's not all of it.
For "Real Estate" to generate some form of earnings you have to rent it out, farm it, mine it, do something with it that essentially makes it a business.
You can own a real estate businesses in the form of publicly traded stocks, private REITs, or even direct ownership.
Some issues with directly owning and operating some real estate operation is it requires more work and attention to it, as well as a large investment that's hard to diversify. With the other forms of investing in real estate you can easily diversify, invest small fractional amounts, and you're usually paying some form of management to run the business so it's completely passive. Stocks are also very liquid and easy to "rebalance" to your desired risk allocations.
On the other saide, owning real estate directly has lots of tax benefits, and if you enjoy the work and are good at it, you might be able to run the operation at a lower cost (more $ saved) then going through some pooled investment paying others to run it... but that's not a "passive" form of investing, that takes work.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Gaston
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Re: Real Estate vs Equity

Post by Gaston »

Bud wrote: Thu Jun 16, 2022 6:34 am You can check the link below and see the Vanguard REIT index has outperformed Vanguard Total Market (both with reinvested dividends) over the last 20 years. This is of interest to me since I have invested in Vanguard REIT for the last 20 years.

https://www.dividendchannel.com/drip-re ... alculator/
Interesting. When I use Portfolio Visualizer and run a backtest from Jan 1997 thur May 2022, $10,000 invested in the S&P 500 grew to $87,144. $10,000 invested in the REIT index grew to $89,911. So yes, slightly better with the REIT.

https://www.portfoliovisualizer.com/bac ... sisResults

Do you happen to know if the Dividend Channel tool uses the same datasets and performs the same type of analysis as the Portfolio Visualizer tool?
Bud
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Re: Real Estate vs Equity

Post by Bud »

Gaston wrote: Thu Jun 16, 2022 12:18 pm
Bud wrote: Thu Jun 16, 2022 6:34 am You can check the link below and see the Vanguard REIT index has outperformed Vanguard Total Market (both with reinvested dividends) over the last 20 years. This is of interest to me since I have invested in Vanguard REIT for the last 20 years.

https://www.dividendchannel.com/drip-re ... alculator/
Interesting. When I use Portfolio Visualizer and run a backtest from Jan 1997 thur May 2022, $10,000 invested in the S&P 500 grew to $87,144. $10,000 invested in the REIT index grew to $89,911. So yes, slightly better with the REIT.

https://www.portfoliovisualizer.com/bac ... sisResults

Do you happen to know if the Dividend Channel tool uses the same datasets and performs the same type of analysis as the Portfolio Visualizer tool?
Some of these tools seem to perform simple calculations of NAV and do not consider reinvestment of dividends. REITs will always appear to perform poorly on these tools.

Whether Dividend Channel and Portfolio Visualizer use the same data set, I do not know but would think they would use the annual appreciation plus the dividend. Whether they calculate annually or quarterly and how they figure the reinvestment price, I don't know.

All the best.
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Re: Real Estate vs Equity

Post by richard.h.gao »

Kal1981 wrote: Wed Jun 15, 2022 12:09 pm Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
My real estate investments have greatly outpaced my stock investments and with virtually no volatility in comparison. As long as buy in the right location you will be a winner. :sharebeer
barberakb
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Re: Real Estate vs Equity

Post by barberakb »

It is a matter of preference but I like to do both for diversification purposes.

I have not bought a house since rates started rising tho. Its harder to make $$$.

But the ones I bought within the last 5 yrs at sub 4% rates are gold right now. Rents are increasing and my mortgages basically stay the same. Stocks are tanking right now but my RE is doing great.

My RE makes me quite a bit more return, especially when you throw in leverage and tax advantages.

But they are more work for sure.
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Kal1981
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Re: Real Estate vs Equity

Post by Kal1981 »

If I understand correctly, your return is currently higher in RE since we’re in a bear market. Or are you saying RE has a higher return in general for you than stocks?

Is the higher return in RE after all the costs you’ve incurred in being a landlord?
barberakb wrote: Thu Jun 16, 2022 5:17 pm It is a matter of preference but I like to do both for diversification purposes.

I have not bought a house since rates started rising tho. Its harder to make $$$.

But the ones I bought within the last 5 yrs at sub 4% rates are gold right now. Rents are increasing and my mortgages basically stay the same. Stocks are tanking right now but my RE is doing great.

My RE makes me quite a bit more return, especially when you throw in leverage and tax advantages.

But they are more work for sure.
tertre
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Re: Real Estate vs Equity

Post by tertre »

Kal1981 wrote: Wed Jun 15, 2022 12:09 pm I’ve been contemplating getting into real estate, beyond my primary residence and started researching the topic. I came across this research paper published by the Federal Reserve a few years ago: https://www.frbsf.org/economic-research ... 017-25.pdf

Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
The paper deals with countries-level housing indexes ; according to the authors these indexes often had the same returns as the countries-level equity indexes.
But you cannot invest in countries-level housing indexes. You can invest in an equity index fund. Unless you are very rich you you won't be able to buy more than few properties. For this reason I would not use this article to extrapolate the performance of some real estate properties.

These articles provide good insights on the paper


https://evergreensmallbusiness.com/rate ... ing-paper/
https://evergreensmallbusiness.com/rate ... ne-charts/


"The Rate of Return on Everything working paper authors make this point in their paper, cautioning us,

… both individual housing returns and those of individual equities show a higher volatility than the aggregate indices. For example, we found that in the U.S., local (ZIP5) housing return volatility is about twice as large as aggregate volatility, which would about equalize risk-adjusted returns to equity and housing if investors owned one undiversified house."
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Kal1981
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Re: Real Estate vs Equity

Post by Kal1981 »

tertre wrote: Sun Jun 19, 2022 2:25 am
Kal1981 wrote: Wed Jun 15, 2022 12:09 pm I’ve been contemplating getting into real estate, beyond my primary residence and started researching the topic. I came across this research paper published by the Federal Reserve a few years ago: https://www.frbsf.org/economic-research ... 017-25.pdf

Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
The paper deals with countries-level housing indexes ; according to the authors these indexes often had the same returns as the countries-level equity indexes.
But you cannot invest in countries-level housing indexes. You can invest in an equity index fund. Unless you are very rich you you won't be able to buy more than few properties. For this reason I would not use this article to extrapolate the performance of some real estate properties.

These articles provide good insights on the paper


https://evergreensmallbusiness.com/rate ... ing-paper/
https://evergreensmallbusiness.com/rate ... ne-charts/


"The Rate of Return on Everything working paper authors make this point in their paper, cautioning us,

… both individual housing returns and those of individual equities show a higher volatility than the aggregate indices. For example, we found that in the U.S., local (ZIP5) housing return volatility is about twice as large as aggregate volatility, which would about equalize risk-adjusted returns to equity and housing if investors owned one undiversified house."
Thanks for the links! So for investors who don’t want to be a landlord but want to own real estate, what else can we do? I looked at VNQ and it lags the VOO in returns.
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JoeRetire
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Re: Real Estate vs Equity

Post by JoeRetire »

Kal1981 wrote: Wed Jun 15, 2022 12:09 pmIs investing between real estate and equities, a matter of preference?
Yes.

It's a preference between having a side job and investing.
This is gonna be my time. Time to taste the fruits and let the juices drip down my chin. I proclaim this: The Summer of George!
tibbitts
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Re: Real Estate vs Equity

Post by tibbitts »

Kal1981 wrote: Mon Jun 20, 2022 12:52 pm Thanks for the links! So for investors who don’t want to be a landlord but want to own real estate, what else can we do? I looked at VNQ and it lags the VOO in returns.
I'm not sure the statistics you're looking at factor in expenses, like paying for another layer of professional real estate management.

You can look into something like Fundrise but it's not exactly the same as investing in a simple real estate index.
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Re: Real Estate vs Equity

Post by LTCM »

JoMoney wrote: Thu Jun 16, 2022 8:27 am On the other saide, owning real estate directly has lots of tax benefits
Can you direct me to where I can read about that specifically?
60% VUG - 20% VEA - 10% EDV - 10% I-Bonds
toomanysidehustles
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Re: Real Estate vs Equity

Post by toomanysidehustles »

LTCM wrote: Mon Jun 20, 2022 4:32 pm
JoMoney wrote: Thu Jun 16, 2022 8:27 am On the other saide, owning real estate directly has lots of tax benefits
Can you direct me to where I can read about that specifically?
Rental properties build wealth but rarely do you pay taxes on those properties until you sell them. Below is a good start. Good luck.

https://www.youtube.com/watch?v=uQwDMmvN2-Q&t=448s
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Re: Real Estate vs Equity

Post by Portfolio7 »

Anecdotally it seems like a well-structured real estate investment plan often yields significant wealth in 10-15 years or so, vs 15 to 25 for index investing. That may be due to the understandable tendency of people to share their successes and not their failures. I've also read that returns are about the same, which dissuades me from jumping into RE unless I get a real sweetheart deal!

As I understand it, benefits include items below that can be deducted, or treated differently for tax purposes. These are not universal, depend on the size of your real estate efforts and what kinds of transactions you engage in, etc, etc. I marked the more straight-forward business type deductions from income taxes with ^, though not all are applicable to every real estate investor.
Depreciation
Deferral of capital gains via 1031 exchange
^ Mortgage interest tax deductions from income.
^ Cost of repairs, maintenance, and upkeep
^ Cost of services (rental property management & legal consultation or services)
^ Utilities
^ Travel costs associated with the property
^ Property tax deductions
Pass-through income deductions
Long-Term Capital Gains (vs regular income)
Self employment with no FICA tax

I drop this here until someone more in the know provides better documented input, this is my outsider's perspective thus far.
"An investment in knowledge pays the best interest" - Benjamin Franklin
barberakb
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Re: Real Estate vs Equity

Post by barberakb »

Kal1981 wrote: Sun Jun 19, 2022 12:52 am If I understand correctly, your return is currently higher in RE since we’re in a bear market. Or are you saying RE has a higher return in general for you than stocks?

Is the higher return in RE after all the costs you’ve incurred in being a landlord?
barberakb wrote: Thu Jun 16, 2022 5:17 pm It is a matter of preference but I like to do both for diversification purposes.

I have not bought a house since rates started rising tho. Its harder to make $$$.

But the ones I bought within the last 5 yrs at sub 4% rates are gold right now. Rents are increasing and my mortgages basically stay the same. Stocks are tanking right now but my RE is doing great.

My RE makes me quite a bit more return, especially when you throw in leverage and tax advantages.

But they are more work for sure.
Currently yes, my RE is killing my stock portfolio.

But long term yes, including all costs my RE has a higher return than stocks. I mean it should... There is more work and more risk so most people wouldn't invest in RE if it couldn't beat the returns of passive stock investing. That just wouldn't make sense to do.
Statistical
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Re: Real Estate vs Equity

Post by Statistical »

Kal1981 wrote: Mon Jun 20, 2022 12:52 pm
tertre wrote: Sun Jun 19, 2022 2:25 am
Kal1981 wrote: Wed Jun 15, 2022 12:09 pm I’ve been contemplating getting into real estate, beyond my primary residence and started researching the topic. I came across this research paper published by the Federal Reserve a few years ago: https://www.frbsf.org/economic-research ... 017-25.pdf

Essentially, investing in real estate and equities pretty much generates similar annualized returns. Is investing between real estate and equities, a matter of preference?
The paper deals with countries-level housing indexes ; according to the authors these indexes often had the same returns as the countries-level equity indexes.
But you cannot invest in countries-level housing indexes. You can invest in an equity index fund. Unless you are very rich you you won't be able to buy more than few properties. For this reason I would not use this article to extrapolate the performance of some real estate properties.

These articles provide good insights on the paper


https://evergreensmallbusiness.com/rate ... ing-paper/
https://evergreensmallbusiness.com/rate ... ne-charts/


"The Rate of Return on Everything working paper authors make this point in their paper, cautioning us,

… both individual housing returns and those of individual equities show a higher volatility than the aggregate indices. For example, we found that in the U.S., local (ZIP5) housing return volatility is about twice as large as aggregate volatility, which would about equalize risk-adjusted returns to equity and housing if investors owned one undiversified house."
Thanks for the links! So for investors who don’t want to be a landlord but want to own real estate, what else can we do? I looked at VNQ and it lags the VOO in returns.
Own the whole market (VTI). VTI is about 3% REITs and about another 5% in housing related sectors. You get exposure without concentration.
tibbitts
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Re: Real Estate vs Equity

Post by tibbitts »

Statistical wrote: Tue Jun 21, 2022 8:41 am Own the whole market (VTI). VTI is about 3% REITs and about another 5% in housing related sectors. You get exposure without concentration.
That doesn't address the (arguable) underweight of real estate in VTI. To some extent it depends on how you count the real estate components of businesses like Walmart, etc. but probably you'll still end up with some underweighting vs. weighting in the overall economy. And no matter what you do you'll have real estate risk mixed with equity market risk unless you invest in real estate outside of the traditional equity markets.
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Kal1981
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Re: Real Estate vs Equity

Post by Kal1981 »

From https://evergreensmallbusiness.com/rate ... ne-charts/ whom provided some charts which another poster linked, in the US, stocks did better than real estate. Whether or not this trend continues, who knows. But in other countries, real estate did do better at times.

Here’s another article comparing returns between stocks and real estate: https://www.mindfullyinvesting.com/the- ... vs-stocks/
gougou
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Re: Real Estate vs Equity

Post by gougou »

Kal1981 wrote: Wed Jun 22, 2022 11:28 am From https://evergreensmallbusiness.com/rate ... ne-charts/ whom provided some charts which another poster linked, in the US, stocks did better than real estate. Whether or not this trend continues, who knows. But in other countries, real estate did do better at times.

Here’s another article comparing returns between stocks and real estate: https://www.mindfullyinvesting.com/the- ... vs-stocks/
Looks like real estate total return (price + rent) is very close to S&P 500 return. And this is assuming no leverage for real estate. That means even if you use a conservative 50% LTV you’ll significantly outperform S&P 500.

All the REITs in S&P 500 use some debt to buy properties. So those companies are more leveraged thus more risky than unlevered real estate.
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Re: Real Estate vs Equity

Post by Laurizas »

gougou wrote: Wed Jun 22, 2022 11:36 am Looks like real estate total return (price + rent) is very close to S&P 500 return.
If you bought a tiny part of all the houses, yes, but you couldn't and can not do that.
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