Author Topic: Rental Properties vs. Stock Market Investing  (Read 2836 times)

joer1212

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Rental Properties vs. Stock Market Investing
« on: October 01, 2017, 09:04:30 PM »
Which investment strategy would produce a higher and more reliable income in retirement, buying rental properties or maxing out my retirement accounts?
What are the pros and cons of each?

Details:

- I am single, 48 years old, with no kids

- I have about $500,000 in my 401(k) and other accounts

- I contribute 43k/yr to these accounts (90% stocks, 10% bonds)

- I make 78k/yr

- My goal is to retire by age 55, with at least 1m saved

- I will receive a partial pension at age 62 from my employer (about 15k/yr.)

- I live in Brooklyn, NY, and I'm considering buying rental houses in Massachusetts

Any thoughts and suggestions are highly appreciated

Thanks





« Last Edit: October 01, 2017, 11:45:20 PM by joer1212 »

Goldielocks

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Re: Rental Properties vs. Stock Market Investing
« Reply #1 on: October 02, 2017, 12:15:40 AM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Meanwhile DJIA has, net of inflation, increased to 13,500 versus 2,230.. an increase of 600% in the same 62 years..  (!)

The truth is that without new injections of financing and "affordability" -- foreign buyers, parental contributions, absurdly low interest rates, the inclusion of two or more incomes, home prices tend to keep roughly to the increase in inflation (but not in lockstep, obviously).

The market over LONG periods of time, consistently outperforms inflation... (but be warned because it can decline or match it for up to 20 years).
« Last Edit: October 02, 2017, 12:31:36 PM by Goldielocks »

Dicey

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Re: Rental Properties vs. Stock Market Investing
« Reply #2 on: October 02, 2017, 01:12:38 AM »
Well, I could have gone either way until you mentioned that the properties you wish to buy are out of state. To put it bluntly: no fucking way. Don't do it.

And yes, I do have experience with multiple long-distance rentals. Don't do it.

The stock market is so much easier. Do that.
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TallMike

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Re: Rental Properties vs. Stock Market Investing
« Reply #3 on: October 02, 2017, 04:48:43 AM »
I agree with Dicey. I've only had one long distance rental and by any sane appraisal it went really well logistically. Even with that, market returns plus not having to deal with unexpected maintenance put me solidly in the stock market category.

I think I've internalized the advice from this forum that you should only be a landlord if you have something that gives you a particular edge, e.g. a talent (and passion) for home improvements. Otherwise, the market is just more reliable and gives you way more flexibility.

EarthSurfer

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Re: Rental Properties vs. Stock Market Investing
« Reply #4 on: October 02, 2017, 05:35:27 AM »

- I live in Brooklyn, NY, and I'm considering buying rental houses in Massachusetts

Any thoughts and suggestions are highly appreciated

Please explain why you would consider houses in Massachusetts.

While more favorable than NY, MA is also known for not being landlord friendly. The security deposit & last months rent requirements are definitely a minefield.

High taxes + tenant friendly laws = HELL NO!

Definitely check out the forums at BiggerPockets. Here is thread on some of the issues related to being a landlord in MA: https://www.biggerpockets.com/forums/81/topics/393646-massachusetts-rental-laws-and-regulations-for-tenants-landlords
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Car Jack

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Re: Rental Properties vs. Stock Market Investing
« Reply #5 on: October 02, 2017, 07:24:03 AM »
What town/city in Massachusetts.  Mass has some of the toughest laws protecting tenants in the country.  Many of the towns have others piled on top of the state laws.  Buy a duplex in Cambridge and if someone on the second floor sneezes, bothering the tenant on the first floor, you'll owe all tenants $1,000 a month for life.  Yah, I'm exaggerating but it seems like a bad plan. 

If I wanted the benefits of renting and the potential income along with the work required, I'd get a job at Stop & Shop at night.  At least then, my extra pay doesn't become massively negative and nobody's going to call me at 3am because they just plugged up their toilet.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #6 on: October 02, 2017, 09:34:49 AM »
Well, I could have gone either way until you mentioned that the properties you wish to buy are out of state. To put it bluntly: no fucking way. Don't do it.

And yes, I do have experience with multiple long-distance rentals. Don't do it.

The stock market is so much easier. Do that.

Can you elaborate on why you're so averse to owning rentals out of state? I'm not challenging you, I just want to be educated about the potential pitfalls (remember, I'm totally new at this).

I wholeheartedly agree that the stock market is easier, but I'm speculating that the potential for profits are much greater if I venture out of my comfort zone. Correct me if I'm wrong.
« Last Edit: October 02, 2017, 11:21:47 AM by joer1212 »

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #7 on: October 02, 2017, 10:00:45 AM »
What town/city in Massachusetts.  Mass has some of the toughest laws protecting tenants in the country.  Many of the towns have others piled on top of the state laws.  Buy a duplex in Cambridge and if someone on the second floor sneezes, bothering the tenant on the first floor, you'll owe all tenants $1,000 a month for life.  Yah, I'm exaggerating but it seems like a bad plan. 

If I wanted the benefits of renting and the potential income along with the work required, I'd get a job at Stop & Shop at night.  At least then, my extra pay doesn't become massively negative and nobody's going to call me at 3am because they just plugged up their toilet.

I won't mention the specific town, but the area is the Berkshires. It's quickly becoming very artsy, and properties are projected to rise faster than the national average, at least according to my brother, who's already purchased two homes there. He's aggressively trying to get me to do the same thing, because he always hears me complaining about having to trade my time to go to work every day. He advises me to just buy 10 fixer upper houses for 30k each, throw another 15k into each of them, and do the construction myself (I'm pretty good with my hands). Then, I can rent them for about $1,000 apiece. It sounds wonderful on paper, because, according to my calculations, after all expenses are accounted for, I can clear about 20% ROI vs. the roughly 10% my investment portfolio will likely garner in the long run.

But, like some posters here already mentioned, Massachusetts may not be the most landlord-friendly state. I even mentioned this to my brother, but he downplays my concerns. This is the article he texted me last week regarding evicting a tenant in Massachusetts. Not sure what to make of it:

https://www.nolo.com/legal-encyclopedia/eviction-notices-nonpayment-rent-massachusetts.html

 
« Last Edit: October 02, 2017, 10:04:51 AM by joer1212 »

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #8 on: October 02, 2017, 10:03:03 AM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Meanwhile DJIA has, net of inflation, increased to 13,500 versus 2,230.. an increase of 600% in the same 62 years..  (!)

The truth is that without new injections of financing -- foreign buyers, parental contributions, the inclusion of two or more incomes, home prices tend to keep roughly to the increase in inflation (but not in lockstep, obviously).

The market over LONG periods of time, consistently outperforms inflation... (but be warned because it can decline or match it for up to 20 years).

It's not so much the price of homes that I'm looking to capitalize on, but the cash flow from the rentals. In fact, I'm looking to simply buy and hold my properties indefinitely. I'll basically treat them like high-yielding bonds.
« Last Edit: October 02, 2017, 10:42:47 AM by joer1212 »

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #9 on: October 02, 2017, 10:17:40 AM »
I agree with Dicey. I've only had one long distance rental and by any sane appraisal it went really well logistically. Even with that, market returns plus not having to deal with unexpected maintenance put me solidly in the stock market category.

I think I've internalized the advice from this forum that you should only be a landlord if you have something that gives you a particular edge, e.g. a talent (and passion) for home improvements. Otherwise, the market is just more reliable and gives you way more flexibility.

I think my "edge" is that I'm good with my hands. I can buy homes that cost 25-40k and rehabilitate them within a few months at minimal cost. Then, I can rent them for about $700-$1,000 apiece. Even after deducting the property taxes, insurance, vacancy rate, and maintenance costs, that's still a huge return on investment, much greater than I can ever hope to make in the stock market. This would allow me to enjoy an earlier and more prosperous retirement than I could have ever expected, which is my #1 goal in life. When looked at from that perspective, being a landlord suddenly starts to look very appealing. I mean, it might be a real pain in the ass, but compared to going to work every day for an extra several years, it's a no-brainer.

My only real concern is income taxes. Say I'm handed a check for $1,000 every month by each of my tenants. That's going to be fully taxable at my marginal rate. I can't hide this income. That's going to really cut into my profits. With my 401(k)/457(b)/Roth IRA on the other hand, I get to shelter my money from taxes for years.
Of course, there are probably homeowner tax deductions that can partially offset this, am I right?
« Last Edit: October 02, 2017, 10:44:12 AM by joer1212 »

soontoberich

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Re: Rental Properties vs. Stock Market Investing
« Reply #10 on: October 02, 2017, 10:58:42 AM »
I agree with Dicey. I've only had one long distance rental and by any sane appraisal it went really well logistically. Even with that, market returns plus not having to deal with unexpected maintenance put me solidly in the stock market category.

I think I've internalized the advice from this forum that you should only be a landlord if you have something that gives you a particular edge, e.g. a talent (and passion) for home improvements. Otherwise, the market is just more reliable and gives you way more flexibility.

I think my "edge" is that I'm good with my hands. I can buy homes that cost 25-40k and rehabilitate them within a few months at minimal cost. Then, I can rent them for about $700-$1,000 apiece. Even after deducting the property taxes, insurance, vacancy rate, and maintenance costs, that's still a huge return on investment, much greater than I can ever hope to make in the stock market. This would allow me to enjoy an earlier and more prosperous retirement than I could have ever expected, which is my #1 goal in life. When looked at from that perspective, being a landlord suddenly starts to look very appealing. I mean, it might be a real pain in the ass, but compared to going to work every day for an extra several years, it's a no-brainer.

My only real concern is income taxes. Say I'm handed a check for $1,000 every month by each of my tenants. That's going to be fully taxable at my marginal rate. I can't hide this income. That's going to really cut into my profits. With my 401(k)/457(b)/Roth IRA on the other hand, I get to shelter my money from taxes for years.
Of course, there are probably homeowner tax deductions that can partially offset this, am I right?

The biggest one you are missing is depreciation. This deduction plus other expenses will shield most if not all of your rental income.

I'd read both of these cover to cover before you make the leap:

https://www.amazon.com/Investing-Real-Estate-Gary-Eldred/dp/1118172973/ref=sr_1_1?ie=UTF8&qid=1506963461&sr=8-1&keywords=investing+in+real+estate

https://www.amazon.com/Book-Rental-Property-Investing-Intelligent/dp/099071179X/ref=pd_sim_14_1?_encoding=UTF8&psc=1&refRID=3HFTPX3KSCR6NQN57VXQ

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #11 on: October 02, 2017, 10:59:33 AM »

- I live in Brooklyn, NY, and I'm considering buying rental houses in Massachusetts

Any thoughts and suggestions are highly appreciated

Please explain why you would consider houses in Massachusetts.

While more favorable than NY, MA is also known for not being landlord friendly. The security deposit & last months rent requirements are definitely a minefield.

High taxes + tenant friendly laws = HELL NO!

Definitely check out the forums at BiggerPockets. Here is thread on some of the issues related to being a landlord in MA: https://www.biggerpockets.com/forums/81/topics/393646-massachusetts-rental-laws-and-regulations-for-tenants-landlords

Thanks for the link. Will check it out.

As I explained to Car Jack, the reason I chose Massachusetts is because the Berkshires are an up-and-coming region. There are plenty of houses there I can purchase for a song, do a little construction work on them, and rent them for relatively high. The vacancy rate in that area may also be lower than average due to demand.

For example, it would not be uncommon to spend 50k in total on a small house, and rent it for $1,000 a month. Compare that to the average home in my neighborhood in Brooklyn, which goes for over 1 million, and can be rented for only $1,800/mo. Massachusetts gives you much more bang for buck.
« Last Edit: October 02, 2017, 11:01:14 AM by joer1212 »

SwordGuy

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Re: Rental Properties vs. Stock Market Investing
« Reply #12 on: October 02, 2017, 11:16:12 AM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Meanwhile DJIA has, net of inflation, increased to 13,500 versus 2,230.. an increase of 600% in the same 62 years..  (!)

The truth is that without new injections of financing -- foreign buyers, parental contributions, the inclusion of two or more incomes, home prices tend to keep roughly to the increase in inflation (but not in lockstep, obviously).

The market over LONG periods of time, consistently outperforms inflation... (but be warned because it can decline or match it for up to 20 years).

You are neglecting leverage.

I get 100% of the property value appreciation for the fractional value of the price I actually pay for the property up front.
You are assuming I actually pay full retail for the property in the first place.

$100,000 property, bought for $60,000, with 25% down (or $15,000).   I get 100% of inflation gains for 15% of the cost!

You are forgetting depreciation, which makes some of that income tax free.

You are forgetting equity that the tenants pay for when they rent.

There was a really good thread on this started by ARebelSpy a year ago.  Will try to find it this evening.

waltworks

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Re: Rental Properties vs. Stock Market Investing
« Reply #13 on: October 02, 2017, 12:26:48 PM »
Yeah, there was a good thread about this a while back. The conclusion (of sorts) was that your typical 1% rule house, purchased with leverage, with all the attendant tax advantages, came out about even with just investing in stocks. There are some obvious risk and liquidity disadvantages, though, which mean you probably want to try to do a little better if you can.

The devil is in the details, though. There are plenty of places where property taxes are high enough that you wouldn't want a house that rents for $500 a month even if it was *free*. The very low end can be pretty rough (bad tenants/difficult management/high turnover/vacancy, more maintenance, property taxes higher as a percentage of your cashflow, etc).

If you're looking at really cheap places (which it sounds like you are), run the numbers *very* carefully and include conservative assumptions for maintaining the structure and vacancy.

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Goldielocks

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Re: Rental Properties vs. Stock Market Investing
« Reply #14 on: October 02, 2017, 12:36:42 PM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Meanwhile DJIA has, net of inflation, increased to 13,500 versus 2,230.. an increase of 600% in the same 62 years..  (!)

The truth is that without new injections of financing -- foreign buyers, parental contributions, the inclusion of two or more incomes, home prices tend to keep roughly to the increase in inflation (but not in lockstep, obviously).

The market over LONG periods of time, consistently outperforms inflation... (but be warned because it can decline or match it for up to 20 years).

It's not so much the price of homes that I'm looking to capitalize on, but the cash flow from the rentals. In fact, I'm looking to simply buy and hold my properties indefinitely. I'll basically treat them like high-yielding bonds.

That's a fair answer.   Around here, and in many, many other areas, finding the 1% rule (rent is 1% of asset value) is exceptionally rare. 

I think I found one where you could rent out 12 bedrooms to students at the local university, and it is in an extremely expensive area.  The home is discounted for sale because there is only 25 years left on the lease for the land, then it reverts, with all improvements, back to the landowners.    There is a chance one could earn enough rent over 25 years to make it worth the loss of the initial capital plus the profit and $ for your time that you would expect...
« Last Edit: October 02, 2017, 12:38:23 PM by Goldielocks »

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #15 on: October 02, 2017, 01:02:11 PM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Meanwhile DJIA has, net of inflation, increased to 13,500 versus 2,230.. an increase of 600% in the same 62 years..  (!)

The truth is that without new injections of financing -- foreign buyers, parental contributions, the inclusion of two or more incomes, home prices tend to keep roughly to the increase in inflation (but not in lockstep, obviously).

The market over LONG periods of time, consistently outperforms inflation... (but be warned because it can decline or match it for up to 20 years).

It's not so much the price of homes that I'm looking to capitalize on, but the cash flow from the rentals. In fact, I'm looking to simply buy and hold my properties indefinitely. I'll basically treat them like high-yielding bonds.

That's a fair answer.   Around here, and in many, many other areas, finding the 1% rule (rent is 1% of asset value) is exceptionally rare. 

I think I found one where you could rent out 12 bedrooms to students at the local university, and it is in an extremely expensive area.  The home is discounted for sale because there is only 25 years left on the lease for the land, then it reverts, with all improvements, back to the landowners.    There is a chance one could earn enough rent over 25 years to make it worth the loss of the initial capital plus the profit and $ for your time that you would expect...

1% rule?? That's a TERRIBLE investment for a rental property! I'm looking at houses that I can spend maybe 40k on, and rent them for $1000/mo. That's 2.5%.

waltworks

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Re: Rental Properties vs. Stock Market Investing
« Reply #16 on: October 02, 2017, 01:18:04 PM »
Again, at the bottom end you need to do better. WAY better. At the *very* bottom (which at $40k for a house you are close to), you have a ton more headaches as well as more overhead in terms of property taxes and maintenance as a percentage of the gross. A $40k 3/2 house in the Berkshires doesn't cost much less to replace the roof on than a 3/2 in Marin that costs $2 million. It might be a little cheaper to have someone fix a leak or do landscaping, of course, but it's not going to be 1/50 the price.

Like I said before, you can make a pretty strong argument that in almost any location in the US, a single family house that rents for $500/mo is literally not worth taking for free - taxes, vacancy, maintenance, capex, and management costs will literally eat the entire amount.

Remember also that it's *mostly* impossible to get loans for <$50k homes, at least at good gov't-cheese 4% rates. Which means that you lose the leverage advantage.

But if you can really get $1000/mo for a $40k house in the Berkshires (and I know there are plenty of old kinda thrashed houses you can at least buy at those kind of prices, no idea on rents) it might be worth doing. I certainly wouldn't throw more than 20-30% of my savings at it, though - having all your eggs in one (location) basket is always a bad idea.

-W


joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #17 on: October 02, 2017, 01:31:08 PM »
Again, at the bottom end you need to do better. WAY better. At the *very* bottom (which at $40k for a house you are close to), you have a ton more headaches as well as more overhead in terms of property taxes and maintenance as a percentage of the gross. A $40k 3/2 house in the Berkshires doesn't cost much less to replace the roof on than a 3/2 in Marin that costs $2 million. It might be a little cheaper to have someone fix a leak or do landscaping, of course, but it's not going to be 1/50 the price.

Like I said before, you can make a pretty strong argument that in almost any location in the US, a single family house that rents for $500/mo is literally not worth taking for free - taxes, vacancy, maintenance, capex, and management costs will literally eat the entire amount.

Remember also that it's *mostly* impossible to get loans for <$50k homes, at least at good gov't-cheese 4% rates. Which means that you lose the leverage advantage.

But if you can really get $1000/mo for a $40k house in the Berkshires (and I know there are plenty of old kinda thrashed houses you can at least buy at those kind of prices, no idea on rents) it might be worth doing. I certainly wouldn't throw more than 20-30% of my savings at it, though - having all your eggs in one (location) basket is always a bad idea.

-W

I'm not planning on putting the bulk of my money into this, at least not at first. I might buy just one house for now, fix it up, rent it, and see how it goes. Hopefully, by the time I'm ready to buy my second, third and fourth property, home prices will not have skyrocketed.

Also, I'll probably just write a check and pay the house in full, rather than get a loan, which will probably run me 5% or more.

But, something in the back of my mind tells me this whole thing is too good to be true. Can I really get fairly consistent 20%+ annual returns from renting cheap houses? Why isn't everyone looking to do this? Why bother breaking your back working every day if it's that easy? What's the catch? 
« Last Edit: October 02, 2017, 01:43:04 PM by joer1212 »

waltworks

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Re: Rental Properties vs. Stock Market Investing
« Reply #18 on: October 02, 2017, 01:47:20 PM »
There might or might not be a catch. My guess in your case (if there's a catch) is that your rent estimates are high, but I only rarely am in western MA and haven't been there in several years.

It could also be that the housing stock is in really rough shape and maintenance is going to kill you, or that the houses at the bottom end are mostly rented by druggies and criminals, who knows. Find a house (no need to show us the specific place) and go look up the property taxes, find rental rates for similar properties, and run all the numbers.

Lots of folks (including me) made a killing in the last decade on both rental houses and property appreciation. It's not as liquid a market as the stock market, and there are plenty of market inefficiencies to exploit, especially if you have fix-it skills or landlording skills.

Now that the markets I live near are WAY higher, I've sold all my rentals. At some point if housing gets cheap I'll buy more (maybe, I'm not sure I want the hassle regardless of returns).

-W

NorthernBlitz

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Re: Rental Properties vs. Stock Market Investing
« Reply #19 on: October 02, 2017, 02:10:25 PM »
Which investment strategy would produce a higher and more reliable income in retirement...

I'm not an expert, but I don't think you can have "higher" and "more reliable" in terms of retirement income. I think that higher return requires higher risk. Higher risk means less reliable income in the short term.

My understanding is that over the long term low cost index funds will provide higher income, but it will be more volatile (less reliable).

I also understand that rental income will be "more reliable" in the short term (but generally will return less compared to the total US stock index). I can't remember the interview, but I heard / read somewhere that rental occupancy / rent payments didn't change much in the downturn despite home prices (and the market) tanking.


Goldielocks

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Re: Rental Properties vs. Stock Market Investing
« Reply #20 on: October 02, 2017, 02:12:09 PM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Meanwhile DJIA has, net of inflation, increased to 13,500 versus 2,230.. an increase of 600% in the same 62 years..  (!)

The truth is that without new injections of financing -- foreign buyers, parental contributions, the inclusion of two or more incomes, home prices tend to keep roughly to the increase in inflation (but not in lockstep, obviously).

The market over LONG periods of time, consistently outperforms inflation... (but be warned because it can decline or match it for up to 20 years).

It's not so much the price of homes that I'm looking to capitalize on, but the cash flow from the rentals. In fact, I'm looking to simply buy and hold my properties indefinitely. I'll basically treat them like high-yielding bonds.

That's a fair answer.   Around here, and in many, many other areas, finding the 1% rule (rent is 1% of asset value) is exceptionally rare. 

I think I found one where you could rent out 12 bedrooms to students at the local university, and it is in an extremely expensive area.  The home is discounted for sale because there is only 25 years left on the lease for the land, then it reverts, with all improvements, back to the landowners.    There is a chance one could earn enough rent over 25 years to make it worth the loss of the initial capital plus the profit and $ for your time that you would expect...

1% rule?? That's a TERRIBLE investment for a rental property! I'm looking at houses that I can spend maybe 40k on, and rent them for $1000/mo. That's 2.5%.

It's a little different for a home worth $500k that you get $5k for, that only has one tenant, and one set of appliances, etc.   Less hands on management per $1000 of rent.   I would agree that 2.5% is better than 1%, however!

Capt j-rod

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Re: Rental Properties vs. Stock Market Investing
« Reply #21 on: October 02, 2017, 02:24:19 PM »
I have a significant amount of rental property in Ohio. All of my properties are within 10 miles of my home. I do very well with these investments, but I do 99% of all the repairs and work to the property. If I paid people to do the work my profits would plummet. Rentals are a hands on business and you get dirty doing it. Everyone has their own way of doing this, but I will strongly advise you to avoid this idea. If I didn't own my tools and have the skill sets that I do, I would be in the stock market. I buy the failed properties that others have tried to rent or flip or whatever and they have lost their ass.

waltworks

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Re: Rental Properties vs. Stock Market Investing
« Reply #22 on: October 02, 2017, 02:37:37 PM »
Capt J-rod makes a great point - stocks are basically passive (unless you're day-trading or something stupid like that). Rentals *can* be passive if you hire out all the management and labor. But if you DIY some/all of that, you have a business/job as well as an investment. If you're good at selecting properties and tenants, it can be pretty easy. If you're not (or you get unlucky) it can be hell.

Really, it's apples/oranges. But fun to discuss regardless.

-W

Slow2FIRE

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Re: Rental Properties vs. Stock Market Investing
« Reply #23 on: October 02, 2017, 07:13:23 PM »
My parents own several ghetto houses ($15K to $20K price back in the late 80s to early 90s) and are long distance landlords.

Seems like they are always replacing windows, drywall, and evicting at least one tenant for failure to pay rent every year.  One year a tenant sold off all the appliances, half the cabinets and a few plumbing fixtures (the police caught this guy and he served some jail time).  Mom hates it and says they are money losers.  Dad says they earn profits just fine.  Never seen the numbers for myself though.  Just wanted to add my parent's anecdote on what you can expect from tenants in such a cheap neighborhood.

SwordGuy

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Re: Rental Properties vs. Stock Market Investing
« Reply #24 on: October 02, 2017, 07:36:15 PM »
Yeah, there was a good thread about this a while back. The conclusion (of sorts) was that your typical 1% rule house, purchased with leverage, with all the attendant tax advantages, came out about even with just investing in stocks. There are some obvious risk and liquidity disadvantages, though, which mean you probably want to try to do a little better if you can.

I can only say that at least one of us drew an erroneous conclusion from reading that forum thread! :)

Naturally, I don't think it was me...

I would recommend that anyone who is interested in this topic read the thread in full, very attentively.  There was a whole lot of good information in it.  I'm going to go back and re-read it because it's worth my time to do so.

FYI - the sample situation stipulated buying just one house AT FULL RETAIL PRICE and then plowing all profits into an index fund.   There are multiple ways that a real estate investor can do better than that - like buying a house at a small fraction of FULL RETAIL and plowing the profits back into other houses.

Here's the thread:

https://forum.mrmoneymustache.com/real-estate-and-landlording/real-estate-returns-vs-stock-returns-the-maths/


FYI - If anyone starts off a real estate horror story with "I could not sell my house that I bought at full retail price without a thought in hell of ever renting it out in the future..." just ignore them.  It's the functional equivalent of saying, "I bought a small sports car and you know what?  It did a terrible job of moving my furniture and household goods across country!  Who knew?!"   

waltworks

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Re: Rental Properties vs. Stock Market Investing
« Reply #25 on: October 02, 2017, 08:18:03 PM »
Did I miss something? The 1% rule house was about even (a bit ahead) of straight stocks after 30 years, reinvesting the rental proceeds in the stock market. It was a bit behind after 50 but IMO that's silly.

Sure, you can get a better deal than a 1% rule house, which of course you should if you can. If you're not getting a 1% rule house (generically, every situation will be a little different) you might as well just buy stocks.

-W

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Re: Rental Properties vs. Stock Market Investing
« Reply #26 on: October 02, 2017, 09:45:52 PM »
Did I miss something? The 1% rule house was about even (a bit ahead) of straight stocks after 30 years, reinvesting the rental proceeds in the stock market. It was a bit behind after 50 but IMO that's silly.

Sure, you can get a better deal than a 1% rule house, which of course you should if you can. If you're not getting a 1% rule house (generically, every situation will be a little different) you might as well just buy stocks.

-W
In the original analysis, several factors were left off that dramatically improve the results for the 1% house. 
Here are the two biggest:

1) ARebelSpy forgot that after 30 years the mortgage was paid off, so the P&I money was available for the next 20 years.
Circa $400 a month for 20 years is nothing to sneeze at.

2) Also forgot to increase rents to account for inflation.  Even if you treat it as a lagging increase (due to leases), an extra 2% to 3% on 50% of the rent, compounded, adds up.  (I ignore the portion of the rent going to the 50% for repairs, etc., as those expenses will also go up with inflation.  But I do include the net profit and the P&I expenses because the mortgage is fixed, so the extra rent goes straight to profit.

Those to corrections to the original scenario definitely tilt the balance more towards RE.

And, of course, he's assuming a baseline 1% house purchased at full retail price.  I don't know any professional real estate investors that try to buy a house at full retail price or who recommend doing so.   There are lots of ways to keep costs down when it comes to buying real estate!  They won't work for every property everywhere, but, then again, none of us will be trying to buy every property everywhere. :)

waltworks

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Re: Rental Properties vs. Stock Market Investing
« Reply #27 on: October 02, 2017, 09:58:07 PM »
Oh, absolutely. You want to pay as little as you can. I never understood the 1% rule to mean anything about how a property was purchased, whether on the open market or not. It's just about the price you pay and the rent you expect to get. If you can snag a great deal on the open market (not bloody likely right now), do it. If you can't get a deal on the open market but you can network, pound pavement, direct mail, whatever - and find one, then do that!

I concur that 1% rule RE beats stock returns, but it's not by that much - and you have some HUGE risks associated with it that don't really exist with stocks. You also have a liquidity disadvantage. So to me, they're basically even. If you can beat 1% (again assuming some generic overhead costs) then you should *probably* do it. If you can't, don't. With the usual "run the numbers on the specific property" caveat, of course.

-W

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #28 on: October 03, 2017, 09:47:26 AM »
Which investment strategy would produce a higher and more reliable income in retirement...

I'm not an expert, but I don't think you can have "higher" and "more reliable" in terms of retirement income. I think that higher return requires higher risk. Higher risk means less reliable income in the short term.

My understanding is that over the long term low cost index funds will provide higher income, but it will be more volatile (less reliable).

I also understand that rental income will be "more reliable" in the short term (but generally will return less compared to the total US stock index). I can't remember the interview, but I heard / read somewhere that rental occupancy / rent payments didn't change much in the downturn despite home prices (and the market) tanking.

Good points. Risk and reward are inversely correlated. That's one of the main tenets of stock investing, and I'm sure the same applies to real estate.
« Last Edit: October 03, 2017, 11:14:14 AM by joer1212 »

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #29 on: October 03, 2017, 09:57:30 AM »
My parents own several ghetto houses ($15K to $20K price back in the late 80s to early 90s) and are long distance landlords.

Seems like they are always replacing windows, drywall, and evicting at least one tenant for failure to pay rent every year.  One year a tenant sold off all the appliances, half the cabinets and a few plumbing fixtures (the police caught this guy and he served some jail time).  Mom hates it and says they are money losers.  Dad says they earn profits just fine.  Never seen the numbers for myself though.  Just wanted to add my parent's anecdote on what you can expect from tenants in such a cheap neighborhood.

The homes that sell for 30k in Massachusetts aren't in cheap neighborhoods. They sell for that price because they need work done. The surrounding homes are valued at over 100k, and even the property assessment of these 30k houses are often that price.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #30 on: October 03, 2017, 10:58:44 AM »
I have a significant amount of rental property in Ohio. All of my properties are within 10 miles of my home. I do very well with these investments, but I do 99% of all the repairs and work to the property. If I paid people to do the work my profits would plummet. Rentals are a hands on business and you get dirty doing it. Everyone has their own way of doing this, but I will strongly advise you to avoid this idea. If I didn't own my tools and have the skill sets that I do, I would be in the stock market. I buy the failed properties that others have tried to rent or flip or whatever and they have lost their ass.

Here's the thing: I have a full-time civil service job in Brooklyn. That's 5 days a week, 40 hrs minimum. There is no flexibility in my job in terms of hours. I have to be there on their schedule if I want to keep it. That leaves only Sat & Sun to do repairs on my rental properties, and Massachusetts is a 3.5 hr drive away. That's 7 hrs r/t.

The question I've been asking myself is do I really want to spend my precious weekends working harder than my regular job? This is one of the major issues that's been keeping me from pulling the trigger on rental properties.

Also, while I'm good with my hands overall, I don't know how to do everything. Plumbing, for example, is outside of my sphere of competence. So is electrical (but to a lesser extent). So, I would have to hire a company for some problems. That will cut into my profit and bring it closer to my hands-off investment portfolio returns.

So, in light of this, I guess I would I need to find an area much closer to where I live, if I want to dip my toe in real estate. But, I can't think of any place near NY that has a hot rental market coupled with low home prices like Massachusetts.

How do people on this forum determine where to buy rental properties?
« Last Edit: October 03, 2017, 11:21:35 AM by joer1212 »

SwordGuy

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Re: Rental Properties vs. Stock Market Investing
« Reply #31 on: October 03, 2017, 04:07:55 PM »
Zillow.com is a great resource for an overview of a market over time, plus current properties for sale.  Real estate investment groups in the area are another source of properties.

Trulia.com is another.  Has crime maps which are useful.

Rentometer.com for comparable rents.

County property tax websites to double-check the tax info from Zillow.com.

County registrar of deeds websites to check for liens or mortgages on the property.   With the info on the loan, a mortgage calculator, and a googled chart of historical mortgage rates,  you can determine the maximum likely balance of the seller's mortgage or HELOC.  Very useful for determining the lowest price they could accept without having to bring cash to the table.


Capt j-rod

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Re: Rental Properties vs. Stock Market Investing
« Reply #32 on: October 03, 2017, 04:12:53 PM »
I buy them as close as I can to my house. I also try to stay on the side of town closest to the supply house and lumber yard. Miles add up very quickly. I have standardized as many things as I can.... Same toilets, faucets, furnaces, hot water heaters etc... I can now stock parts for one and fix many. Lots of people try rentals in my town. They are profitable if you run them as a business. As I stated above, I have bought multiple failed flips, fixer uppers, and trashed rentals. The bank won't lend on them and I pay cash when the time is right. You have to be very opportunistic and strike when the time is right.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #33 on: October 04, 2017, 01:33:12 PM »
Zillow.com is a great resource for an overview of a market over time, plus current properties for sale.  Real estate investment groups in the area are another source of properties.

Trulia.com is another.  Has crime maps which are useful.

Rentometer.com for comparable rents.

County property tax websites to double-check the tax info from Zillow.com.

County registrar of deeds websites to check for liens or mortgages on the property.   With the info on the loan, a mortgage calculator, and a googled chart of historical mortgage rates,  you can determine the maximum likely balance of the seller's mortgage or HELOC.  Very useful for determining the lowest price they could accept without having to bring cash to the table.

Thanks. Will do my due diligence before deciding.

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #34 on: October 04, 2017, 01:34:44 PM »
I buy them as close as I can to my house. I also try to stay on the side of town closest to the supply house and lumber yard. Miles add up very quickly. I have standardized as many things as I can.... Same toilets, faucets, furnaces, hot water heaters etc... I can now stock parts for one and fix many. Lots of people try rentals in my town. They are profitable if you run them as a business. As I stated above, I have bought multiple failed flips, fixer uppers, and trashed rentals. The bank won't lend on them and I pay cash when the time is right. You have to be very opportunistic and strike when the time is right.

Sounds like a sensible plan, however the part about buying close to your house is not feasible for me, as I live in NY. Everything within a 200 mile radius of here is expensive.

afox

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Re: Rental Properties vs. Stock Market Investing
« Reply #35 on: October 04, 2017, 04:32:03 PM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Meanwhile DJIA has, net of inflation, increased to 13,500 versus 2,230.. an increase of 600% in the same 62 years..  (!)

The truth is that without new injections of financing and "affordability" -- foreign buyers, parental contributions, absurdly low interest rates, the inclusion of two or more incomes, home prices tend to keep roughly to the increase in inflation (but not in lockstep, obviously).

The market over LONG periods of time, consistently outperforms inflation... (but be warned because it can decline or match it for up to 20 years).

This is an incorrect statement because the "avergage" home in the past is not the same as the average home of today.  Over time average home size and quality has gone up dramatically.  So, you are comparing 800 sq ft houses with no insulation and no central heating from the 1930's with 1600 sq ft homes of today with amenities that people in the 30's could'nt have dreamt about.  This is the reason for home price indices.  Home price indices compare sale prices of like houses. 

Its very common for realtors and others in the lucrative RE industry to talk about average home prices.  Especially in areas that have a lot of older (and thus smaller) housing stock.  In my neighborhood of my town in northern colorado almost all houses upto the 1960's were 800-900 sq ft 2 bedroom one bath.  These were family houses back then, today they are teardowns.

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Re: Rental Properties vs. Stock Market Investing
« Reply #36 on: October 05, 2017, 12:03:24 AM »
I used a benchmark home price index for the $10k versus $125k numbers.   Same with CPI.   DJIA was net of inflation.

aasdfadsf

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Re: Rental Properties vs. Stock Market Investing
« Reply #37 on: October 05, 2017, 12:10:53 AM »
In an efficient market, real estate, stocks, and all other investments should produce similar gains after you discount risk premium, transaction costs, etc. Of course we don't live in a perfectly efficient market. Sometimes things get way out of whack, in which case some investments are vastly better than others. But it's hard to know when this happens, because if everyone knew it was happening, things would never get out of whack to begin with. In other words, your first order assumption should be that it doesn't matter.

The benefits of real estate investing as an individual investor (remember, you can always buy a REIT) is that you have a lot of control. You can use your brains during the buying, selling, or managing of your investment to increase your gains. And this can work out really well if you do it right. But then again, the same is true when picking stocks.

You should ask yourself if being into real estate is what you want to do. If so, awesome! It can pay off really well because it's something where putting in a lot of work and research can really pay off. But if you're just looking to diversify, why not buy a REIT? That requires no work or research.

aasdfadsf

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Re: Rental Properties vs. Stock Market Investing
« Reply #38 on: October 05, 2017, 12:41:50 AM »
From 2012 versus 1950,  a home price average is $125k versus $10k.
During the same time, the CPI (inflation index is 976 versus 100).
This means, that net of inflation the average home increased close to 30% over 62 years.

Most gains from owning real estate come in the form of rents. If you somehow fail to collect any rent, whether through being a terrible landlord or not living in the house and thus avoiding paying rent to others, then of course it's going to be a bad investment. A house sitting empty is wasted money.

With a P/R of 15, which is not that great, your rents are 6.7% a year. Add to that capital gains, and you're looking at something roughly similar to long-term stock market gains. Which is exactly what you should expect, because if it were much different than that, it would scream market failure and you'd have to wonder what the heck was going on.

afox

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Re: Rental Properties vs. Stock Market Investing
« Reply #39 on: October 05, 2017, 09:28:00 AM »
I used a benchmark home price index for the $10k versus $125k numbers.   Same with CPI.   DJIA was net of inflation.

Okay, you didnt say that so no way to know but I should have realized that if you were talking about averages the number would have been much much higher.

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Re: Rental Properties vs. Stock Market Investing
« Reply #40 on: October 05, 2017, 09:28:38 AM »
With a P/R of 15, which is not that great, your rents are 6.7% a year. Add to that capital gains, and you're looking at something roughly similar to long-term stock market gains. Which is exactly what you should expect, because if it were much different than that, it would scream market failure and you'd have to wonder what the heck was going on.
Well...

It should be in a similar range after deducting the full cost of management, maintenance, taxes, insurance, etc, AND discounting for liquidity risk and all the other factors.

So, the gross return before that can quite reasonably be expected to run substantially higher, in an efficient market.

Not that market behavior supports efficiency in the universal, immediate sense that some would have us believe.
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afox

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Re: Rental Properties vs. Stock Market Investing
« Reply #41 on: October 05, 2017, 09:49:49 AM »
In an efficient market, real estate, stocks, and all other investments should produce similar gains after you discount risk premium, transaction costs, etc. Of course we don't live in a perfectly efficient market. Sometimes things get way out of whack, in which case some investments are vastly better than others. But it's hard to know when this happens, because if everyone knew it was happening, things would never get out of whack to begin with. In other words, your first order assumption should be that it doesn't matter.

The benefits of real estate investing as an individual investor (remember, you can always buy a REIT) is that you have a lot of control. You can use your brains during the buying, selling, or managing of your investment to increase your gains. And this can work out really well if you do it right. But then again, the same is true when picking stocks.

You should ask yourself if being into real estate is what you want to do. If so, awesome! It can pay off really well because it's something where putting in a lot of work and research can really pay off. But if you're just looking to diversify, why not buy a REIT? That requires no work or research.

For the reasons you stated (using your brains (ie planning), managing your rentals, "putting in a lot of work", etc) I believe that in an efficient market returns should be higher for RE than stock market.  What a lot of RE investors overlook is that their hard work in the form of rental management, research, tax planning, maintenance, etc are costs that a RE buisness would incur to offer the same product to the public.  If you are a small time RE investor and doing all of this yourself you're basically paying yourself to do this work.  Thus, as a private RE investor doing all of this yourself you better be outperforming the S&P or a REIT!  REITs dont have teams of people working for "free" nites and weekends to fix repairs and deal with tenants.  Of course if you enjoy this type of work and have the time for it it can really pay off.  But then again, working harder in your profession, starting a business, or other endevours can pay off with careful planning and hard work too.  Its a fallacy to compare returns from a private RE investor who is the manager, handy man, tax planner, etc to S&P or REIT returns where someone else is doing all of that work.  A true comparison of private RE vs Markets would use a fully managed private RE model, as anyone who is in the buisness knows rental management services are not inexpensive. 

There is no hard and fast simple rule, the answer to the eternal question: "Rental Properties vs. Stock Market Investing" the answer is of course: IT DEPENDS.  Do you have an employer sponsored 401K?  What do you do for a living, can you work more?  Do you need to diversify your investments?  Ill just say right now that if you have an employer sponsored 401k with any kind of matching or employer subsidized management (seems very common these days) you had better do due diligence by analyzing whether your should first make max annual contributions to that account before considering private RE. 

joer1212

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Re: Rental Properties vs. Stock Market Investing
« Reply #42 on: October 05, 2017, 11:54:50 AM »
So far, we've determined that long distance landlording for a guy like me is not something I want to get into. But, what about if I hire a property management company? Are the costs prohibitively expensive?

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Re: Rental Properties vs. Stock Market Investing
« Reply #43 on: October 05, 2017, 12:21:17 PM »
So far, we've determined that long distance landlording for a guy like me is not something I want to get into. But, what about if I hire a property management company? Are the costs prohibitively expensive?

You always should factor PM into your calculations regardless of whether you use a property management company.  If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

Costs for PM are usually anywhere between 5-20%.  For your purposes, consider 10% the base.

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Re: Rental Properties vs. Stock Market Investing
« Reply #44 on: October 05, 2017, 12:25:40 PM »
You'll have to price management companies in your area, in my area they are around 10% of rental income.  The thing is that does not include any maintenance, if the tenant reports a clogged toilet they will call a professional plumber to unclog the toilet.  The service they are providing is calling the professional plumber.  For my rentals I want to do the easy maintenance to save lots of money so I can be assured that my rental will be a good investment.  I dont even know how much plumbers charge to unclog toilets or fix a leaky faucet, I bet its not cheap.

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Re: Rental Properties vs. Stock Market Investing
« Reply #45 on: October 05, 2017, 12:27:57 PM »
You'll have to price management companies in your area, in my area they are around 10% of rental income.  The thing is that does not include any maintenance, if the tenant reports a clogged toilet they will call a professional plumber to unclog the toilet.  The service they are providing is calling the professional plumber.  For my rentals I want to do the easy maintenance to save lots of money so I can be assured that my rental will be a good investment.  I dont even know how much plumbers charge to unclog toilets or fix a leaky faucet, I bet its not cheap.

About $100/hour where I am.

afox

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Re: Rental Properties vs. Stock Market Investing
« Reply #46 on: October 05, 2017, 12:31:30 PM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

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Re: Rental Properties vs. Stock Market Investing
« Reply #47 on: October 05, 2017, 01:06:51 PM »
If you're going to buy something that only gives you a decent return if you self-manage, don't do it.

HA!!!  Start talking to real private real estate "investors".  This is not the way it works in the real world.  But on the flip side, we are helping to provide affordable housing to individuals and families.  If everyone followed this rule guarantee rental rates would be a bit higher than they are.

That is *exactly* how it works in my real world. Managing your property is a job, not an investment. If it doesn't beat the market, even after hiring out everything but the occasional phone call, it is a shitty real estate investment.

I'm glad you're providing affordable housing. So am I, but I'm also earning 2-3x average market returns for my trouble, with hired management.
I am not a cog. I am an organizational lubricant.

Goldielocks

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Re: Rental Properties vs. Stock Market Investing
« Reply #48 on: October 05, 2017, 02:16:35 PM »
I used a benchmark home price index for the $10k versus $125k numbers.   Same with CPI.   DJIA was net of inflation.

Okay, you didnt say that so no way to know but I should have realized that if you were talking about averages the number would have been much much higher.

np.  You did get me thinking that the benchmark home from 1979 must look a bit different from the benchmark home in the same city in 2017, however...   We have fewer and fewer 1970s era homes reselling in our community so less and less data to use for the current benchmark price.

Goldielocks

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Re: Rental Properties vs. Stock Market Investing
« Reply #49 on: October 05, 2017, 02:52:11 PM »
Based on this thread, I wanted to see, locally, how real estate has appreciated net of inflation and compared to stock market increases (how often was it better to have real estate than stocks?)

My cheating shortcuts

I used net of inflation to sorta - kinda approximate the drag that higher mortgage interest rates would have, and I did not compare to actual stock market returns, just a target rate of 5-6%, net of inflation, net sale (assuming realtor commission is 6%).

I assumed maintenance and taxes were a function of the expenses to live there or use it as a rental business., e.g., i excluded these costs.  I assume that rental income versus expenses is BUSINESS income, that you work for, not investment.
Looked at average increases over rolling 5, 7, 15 year periods.



The DATA:

House data for Greater Vancouver, HCOL with outrageous prices today... and CPI for British Columbia, which is lower than Canada's average --
Years -- Jan 1979 to Jan 2017.   (interesting fact, home prices doubled in 1981, were flat for 8 years from 1993, but that doesn't get a lot of press)
Year 2017 value is $1.6 Million; Year 1979 value is $68,200.   So an impressive run up in value in 38 years.

Result
 
60% of the time, home ownership returned at least 6% annually to the homeowner, net of inflation.  Sometimes a lot more:  1 out of 7 years, the 5 year return exceeded 15% annually, net of inflation.. However,  1 in 6 years the 5 year appreciation was actually negative.   


TLDR
This means that in the 1980's through today, more than half the time, owning a home for 5 or more years would have beaten the long term average stock market real returns.  Buying property within a year or two of a sudden dip appears to be the primary driver of returns, especially if it is held deliberately until a minimum annual target increase is achieved (need to hold between 5 and 19 years).

I was honestly expecting a much better frequency of success by owning real estate in Vancouver from 1978 to today.