Author Topic: Real estate vs. stocks  (Read 4849 times)

a532942

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Real estate vs. stocks
« on: August 11, 2018, 06:32:21 AM »
I found this interesting article that claims that for some countries, real estate has outperformed stocks in the long term (not in the US). Considering that you own the house you live in, and owning a house gives a lot of emotional security stocks don't, wouldn't housing be a better investment?

https://qz.com/1170694/housing-was-the-worlds-best-investment-over-the-last-150-years/

I see two problems with this:

1. Unless you invest in real estate via some fund, it is much harder to diversify (buying a share is much cheaper than buying a house).

2. House prices have become unreasonable overpriced in the last few decades due to excessive regulation; at some point, the dam will fall, and the results will be catastrophic for people whose only assets are their homes.

MustacheAndaHalf

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Re: Real estate vs. stocks
« Reply #1 on: August 11, 2018, 09:06:28 AM »
It would be interesting to see how country level defaults played into the numbers.  France, at the top of the list, went from Napoleon (before the 150 year period) to defeated in two world wars - which doesn't do good things for those who own company stock.  I wonder how collapse of economies played into those numbers.

radram

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Re: Real estate vs. stocks
« Reply #2 on: August 11, 2018, 10:19:39 AM »
According to this article, real estate outperformed stocks the past 145 years, when taking rental income and dividends into account.

https://www.biggerpockets.com/renewsblog/real-estate-vs-stocks-performance/

Interesting to note that about half of the performance in real estate is rental income. Also interesting to note that this article references the SAME research as the OP's article does.

In order to outperform stocks, your real estate needs to collect half of it's gain on rents, while paying $0 in property taxes. Your primary residence will not do either of these things. It is indeed quite a stretch for the OP's article to even mention a primary residence, since the research is only looking at real estate for purposes of investment.

This strengthens my position even more that you should count your primary residence as a liability, not an asset.

Thank you for finding this great talking point article.

theolympians

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Re: Real estate vs. stocks
« Reply #3 on: August 11, 2018, 12:12:09 PM »
I  skimmed the article. I think it is easy to confuse "housing/real estate"---there are many parts to consider. Are you talking about just your house, that you live in, considering it a stable long term investment. Are you buying rental property? Are you directly investing in real estate projects, or in a REIT?

I would argue each is a different apple. In general terms, "real estate" can be a good investment. In general terms, the "market (stocks, etfs, bonds) can be a good investment. The devil is always in the details: which stock or etf, or which property to buy, or which Reit. The article lauds the "research" and data collection, which might be the real purpose of this article. Ultimately the article doesn't give any actionable info in my option; other than in macrocosmic terms "real estate is a good investment". Which brings you back to square one.


tralfamadorian

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Re: Real estate vs. stocks
« Reply #4 on: August 11, 2018, 12:50:07 PM »
Great thread discussing this same paper (the research cited at both biggerpockets and the article) here.

CorpRaider

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Re: Real estate vs. stocks
« Reply #5 on: August 13, 2018, 09:22:17 AM »
I think Profs Dimson and Shiller have come to different conclusions based on the data they have gathered.  Dimson thinks accounting for "sustaining capex" (all the tons of $$$ you have to spend on a house to maintain it/upgrade maintain functionality) is likely to be very material and basically impossible to access in data.  At least that was my interpretation of his commentary.

powskier

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Re: Real estate vs. stocks
« Reply #6 on: August 13, 2018, 04:46:35 PM »
It would be interesting to see how country level defaults played into the numbers.  France, at the top of the list, went from Napoleon (before the 150 year period) to defeated in two world wars - which doesn't do good things for those who own company stock.  I wonder how collapse of economies played into those numbers.
France shed vast amounts of blood and was on the winning side in both World Wars. Either study up on history or pay closer attention to the words you use. Both are recommended.

steveo

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Re: Real estate vs. stocks
« Reply #7 on: August 13, 2018, 05:25:25 PM »
I live in Australia and I own my house. Property has probably outperformed the stock market.

In stating that I don't particularly like real estate as an investment especially outside of my house. I already have a tonne of money invested in my house (over a million) and more property to me just means I'm not diversified enough. I also think property can be more work. I invest in stock indexes and I do nothing.

maizefolk

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Re: Real estate vs. stocks
« Reply #8 on: August 13, 2018, 07:05:47 PM »
According to my old hard copy of Triumph of the Optimists, between 1940 and 1949 French equities returned -7.6%/year in real terms (call it -55.6% over a decade). From 1930-1949 French equities returned -5.8%/year for a total decline of -69.7%.

French bonds returned -21.7%/year in real terms between 1940 and 1949, for -91.4% total over the decade.

As you can no doubt imagine, 1940-1949 looks even worse in countries like Germany, Italy, and Japan.

When people talk about the USA being an outlier in terms of economic returns over the last 150 years, they rarely seem to realize that the main reason our historical stock/bond data looks so different from other countries is simply that we were fortunate enough to avoid having a major war fought in our heartland during that period.

bravotwozero

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Re: Real estate vs. stocks
« Reply #9 on: October 19, 2020, 10:04:45 AM »
My question is what should I do with investment money that is left over after I have maxed out retirement accounts. Put it in the stock market again, via a taxable account, or REIT, or get an apartment and start land lording? I have no prior experience in real estate investment. Is the additional work/hassle needed in investing in a rental property likely to yield gains that will outperform the stock market?

vand

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Re: Real estate vs. stocks
« Reply #10 on: October 20, 2020, 01:18:40 AM »
In the UK property has trounced stocks by a very wide margin in the last 20-25 years, but what was true regarding relative valuations in these asset classes back then is very much the opposite today.

Buying assets is never bad use of your money, whether its buying paper assets to provide a future income stream or buying the imputed rental stream of your house, but just make sure you don't overconsume too much house which can leave you house-poor even with a paid off mortgage.

theoverlook

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Re: Real estate vs. stocks
« Reply #11 on: October 20, 2020, 08:00:17 AM »
It would be interesting to see how country level defaults played into the numbers.  France, at the top of the list, went from Napoleon (before the 150 year period) to defeated in two world wars - which doesn't do good things for those who own company stock.  I wonder how collapse of economies played into those numbers.
France shed vast amounts of blood and was on the winning side in both World Wars. Either study up on history or pay closer attention to the words you use. Both are recommended.
They were certainly on the winning side eventually, but they formally surrendered to Germany in WW2 so to say they were defeated is not incorrect. I don't know how much more defeated a country could be than having surrendered to a foreign army.

Bloop Bloop

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Re: Real estate vs. stocks
« Reply #12 on: October 20, 2020, 08:08:09 AM »
In the UK property has trounced stocks by a very wide margin in the last 20-25 years, but what was true regarding relative valuations in these asset classes back then is very much the opposite today.

Buying assets is never bad use of your money, whether its buying paper assets to provide a future income stream or buying the imputed rental stream of your house, but just make sure you don't overconsume too much house which can leave you house-poor even with a paid off mortgage.

I think one thing that people need to remember about real estate is that "good" real estate, i.e. family homes located close to good school districts and jobs, is finite. The more that gets bought up by investors, the more power investors have (as individuals and as a group) to rent-seek. So the benefit you get from buying a house - that you don't get from shares - is that there is a certain parcel of land that no one can use from that point onwards. It's an exclusive good.

vand

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Re: Real estate vs. stocks
« Reply #13 on: October 20, 2020, 08:24:40 AM »
In the UK property has trounced stocks by a very wide margin in the last 20-25 years, but what was true regarding relative valuations in these asset classes back then is very much the opposite today.

Buying assets is never bad use of your money, whether its buying paper assets to provide a future income stream or buying the imputed rental stream of your house, but just make sure you don't overconsume too much house which can leave you house-poor even with a paid off mortgage.

I think one thing that people need to remember about real estate is that "good" real estate, i.e. family homes located close to good school districts and jobs, is finite. The more that gets bought up by investors, the more power investors have (as individuals and as a group) to rent-seek. So the benefit you get from buying a house - that you don't get from shares - is that there is a certain parcel of land that no one can use from that point onwards. It's an exclusive good.

I think it's much simpler than that: real estate is the asset class that is the most sensitive to interest rates by far, because of the leveraged nature of buying a house.  I remember my first mortgage in 2001 I was on 5.5%. Today my mortgage is 1.38%.  There's also the negative reinforcement effect that people much prefer putting their money into property than into stocks, because all they see is that property keeps going up while stocks have disappointed for as long as anyone can remember.


3toesloth

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Re: Real estate vs. stocks
« Reply #14 on: October 20, 2020, 02:52:17 PM »
I never understood this argument. Isn't it simpler to think of real estate more as a bond. Long term in the USA house value tends to match inflation. Many places you can buy for less than renting thus buying is probably the better option long term. Many places are the opposite. When buying and renting are not significantly different the math gets very difficult and can work out either way.

maizefolk

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Re: Real estate vs. stocks
« Reply #15 on: October 20, 2020, 05:40:35 PM »
I never understood this argument. Isn't it simpler to think of real estate more as a bond. Long term in the USA house value tends to match inflation. Many places you can buy for less than renting thus buying is probably the better option long term. Many places are the opposite. When buying and renting are not significantly different the math gets very difficult and can work out either way.

You can think of real estate as divided into two classes:

1) Places where it's straightforward to build more housing and the cost of housing rises along with inflation (most of the US excluding some big coastal cities)
2) Places where it's not straightforward to build more housing (no land and/or zoning restrictions) where housing rises significantly faster than inflation (SF, Manhattan, etc).

Class 1 behaves like a leveraged bond fund with high front end and back end loads that make it very expensive to trade into or out of.

Class 2 is a speculative bet that goes up or down with the economic prospects of the city in which the real estate is located (more like a leveraged stock fund) which is also very expensive to trade into or out of.

I'm guessing perhaps the UK has a much higher ratio of Class 2 to Class 1 real estate than we have here in the USA?

Bloop Bloop

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Re: Real estate vs. stocks
« Reply #16 on: October 20, 2020, 06:46:44 PM »
^ Yes I would agree with the above.

If you're buying up RE in a place with finite 'good homes' (like in my city, Melbourne, which is still quite centralised and has all the nicer areas (in terms of schools/amenities) concentrated in a ring within 15km of the city, mainly in the east and south east), then RE is almost guaranteed to go up faster than inflation.

Because you go from a paradigm where most people own a house to only some people owning a house to most people renting (we are not there yet). The driver of this is wealth concentration. That implies greater-than-inflation growth in real estate values.

3toesloth

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Re: Real estate vs. stocks
« Reply #17 on: October 21, 2020, 10:03:04 AM »
Nice way of thinking about it maizefolk.
I've been thinking about buying a cheap house or land to live in part of the year and never sell. Amazing what you can still get in much of the midwest for 50-100k. Great ROI for a bond if similar rents are 500 or more a month. Of coarse there are all those caveats, purchase costs, upkeep, insurance, other risks.

maizefolk

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Re: Real estate vs. stocks
« Reply #18 on: October 21, 2020, 11:33:40 AM »
Nice way of thinking about it maizefolk.
I've been thinking about buying a cheap house or land to live in part of the year and never sell. Amazing what you can still get in much of the midwest for 50-100k. Great ROI for a bond if similar rents are 500 or more a month. Of coarse there are all those caveats, purchase costs, upkeep, insurance, other risks.

Yes indeed. Depending on what the midwest means to you (some people think cornfields; some people think rust belt), I'd make the analogy to buying the bonds of troubled companies. The annual payout may be quite attractive, but there is a non-trivial risk that you won't be able to recover your principle at the end. Which of course is why the payouts are so good in the first place

From the numbers you're quoting I'm guessing you're looking more at the rust belt midwest where a lot of cities are actually shrinking year over year. Doesn't mean you might not still achieve an excellent return on investment, but I did want to clarify that the "prices grow with inflation" case in my post works when population is growing at least a little*, but may not hold up when the population is actually shrinking.

*So the marginal housing supply is provided by new construction, the cost of which itself grows along with inflation unless there is not enough land to build new houses and/or strict building permit laws that make it nearly impossible to build new units (in which case we'd be in case 2).

John Galt incarnate!

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Re: Real estate vs. stocks
« Reply #19 on: October 21, 2020, 06:33:20 PM »

 I also think property can be more work. I invest in stock indexes and I do nothing.

Knowing I own my home (no mortgage) provides me contentment and security.

I don't want all the bother and work of investing in  or owning  real estate other than my home so I prefer investing in stocks.

However, I am a "real estate investor" to the extent that FSKAX includes real estate.

« Last Edit: October 21, 2020, 06:38:24 PM by John Galt incarnate! »

John Galt incarnate!

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Re: Real estate vs. stocks
« Reply #20 on: October 21, 2020, 06:43:05 PM »
*Since 1930, the total return of the S&P 500 is ~14,962%.

Here's a question for anyone who knows the answer or cares to answer it.


Since 1930 has real estate delivered  anywhere near such an astonishing return?


*PUBLISHED SUN, MAR 22 202011:15 AM EDTUPDATED MON, MAR 23 20208:01 AM EDT
Pippa Stevens
@PIPPASTEVENS13


KEY POINTS
While it might seem counterintuitive to sit back and relax while stocks post swift and steep losses, for investors with longer-term time frames it typically pays to wait it out.


Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, strikingly below the 14,962% return for investors who held steady throughout the ups and downs.




 
« Last Edit: October 21, 2020, 06:58:24 PM by John Galt incarnate! »

waltworks

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Re: Real estate vs. stocks
« Reply #21 on: October 22, 2020, 07:20:35 AM »
If you just buy a house and it sits there, your return since 1930 won't come close when you go to sell it.

If you're comparing apples to apples, though, you're buying an investment property and renting it out. And when you accumulate enough rent money, you invest in more real estate (like reinvesting dividends).

If you assume that, RE returns match or maybe exceed those from stocks. But it's not possible to be precise about the return like you can with a stock investment, so the answer will depend on your assumptions about things like maintenance costs, vacancies, timing/location of rental purchases, etc, etc, etc.

-W

vand

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Re: Real estate vs. stocks
« Reply #22 on: October 22, 2020, 07:58:25 AM »
It's still a crap comparison because generally real estate lends itself well to and is bought with large amounts of leverage to the tune of several time your annual income. Try doing that with stocks and see how well you sleep at night.

yachi

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Re: Real estate vs. stocks
« Reply #23 on: October 22, 2020, 09:39:49 AM »
owning a house gives a lot of emotional security stocks don't

I don't feel this way, and I don't believe it's categorically true.  While I'm a homeowner because it suits my lifestyle, I derive much more security from the size of our nest egg invested in the stock market.  We have 800k in stock investments, but less than 200k in real estate, consisting only of the single family home we live in.  I would hate to reverse these two number for many reasons, but simply you should own as little non-income producing real estate as it takes you to enjoy life.

norajean

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Re: Real estate vs. stocks
« Reply #24 on: October 22, 2020, 09:44:34 AM »
Many, many people, including several I know, have been completely bankrupted by real estate. It doesnít happen often, but when the market collapses it can be underwater for a long time.  In the 1980s and 2000 the disaster was so bad it sank the banks as well.  The harder you speculate to earn a living in real estate the greater the risk, but I know many people who couldnít pay their mortgage and owed twice what the house was worth. They had to move to a place where they could work to subsidize the underwater house.

theoverlook

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Re: Real estate vs. stocks
« Reply #25 on: October 22, 2020, 10:41:42 AM »
It's still a crap comparison because generally real estate lends itself well to and is bought with large amounts of leverage to the tune of several time your annual income. Try doing that with stocks and see how well you sleep at night.
Leverage can and is accounted for in most real estate return scenarios. What many people fail to account for is that leverage in real estate cuts both ways just as it does with stocks. It increases your potential return and massively increases your risk. You should no more sleep well at night when highly leveraged on real estate than you do on stocks.

maizefolk

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Re: Real estate vs. stocks
« Reply #26 on: October 22, 2020, 11:24:01 AM »
The one advantage of real estate leverage over stock market leverage is that, at least for someone owning their own home and perhaps one or two others, the leverage is not callable.

When investing on margin in stocks and short term drop in the market can wipe you out, while with real estate the market would have to drop and stay low until you needed to sell to do the same.

That's not anything fundamentally superior about real estate, it's just a question of the finance options open to retail investors in the two spaces.

Like Yachi I own my home (with a mortgage), but that doesn't contribute to me sleeping well at night nearly as much as having many years worth of living expenses saved up in stocks has contributed to the same goal.

anonymouscow

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Re: Real estate vs. stocks
« Reply #27 on: October 22, 2020, 08:21:59 PM »
I didnít have time to read the paper, I wonder if they are including all the factors that go into home ownership and renting. Real estate taxes, repairs, home renovations, and for renting out a home, all the possible costs that go with that.

New roof, new Ac, etc. donít really add value to a home, they are just things that need done every so often.

waltworks

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Re: Real estate vs. stocks
« Reply #28 on: October 22, 2020, 09:07:48 PM »
I didnít have time to read the paper, I wonder if they are including all the factors that go into home ownership and renting. Real estate taxes, repairs, home renovations, and for renting out a home, all the possible costs that go with that.

New roof, new Ac, etc. donít really add value to a home, they are just things that need done every so often.

They did include that sort of stuff, of course. You can find endless stuff to nitpick because there's a lot going on (there's a lot to nitpick about trying to estimate stock returns over 150 years, too), but it's an honest effort to answer the question.

-W

vand

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Re: Real estate vs. stocks
« Reply #29 on: October 23, 2020, 02:26:18 AM »
There's the numbers, and then there's the empirical evidence.

Of course nothing has beaten the performance of the stock market over the long run - stocks are companies, and successful companies are the driving force behind ongoing real productivity rises and economic growth.

But from the quality sources that I would recommend to others (namely Financial Mentor, Radical Personal Finance) they regularly repeat that the empirical evidence is not there to show that stocks are the the overwhelmingly dominant player in building personal wealth, and that at least as many people build their wealth in real estate, and increasingly in business startup. 

Of course none of these are mutually exclusive, but if building wealth was just about finding the highest growth vehicle and plowing all your money into it then we'd all already be rich.


vand

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Re: Real estate vs. stocks
« Reply #30 on: October 23, 2020, 02:30:20 AM »
https://www.forbes.com/sites/rainerzitelmann/2020/06/22/most-rich-people-build-their-wealth-as-entrepreneurs-not-with-stocks/#73f3144931bc

"A scientific study published in Germany in 2012 surveyed 472 millionaires and showed that only 2.4% built their wealth with stock investments. One-in-ten of the surveyed millionaires stated that they had become rich with real estate investments. As with the Forbes list, however, most became rich as entrepreneurs."

anonymouscow

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Re: Real estate vs. stocks
« Reply #31 on: October 23, 2020, 11:39:18 AM »
I didnít have time to read the paper, I wonder if they are including all the factors that go into home ownership and renting. Real estate taxes, repairs, home renovations, and for renting out a home, all the possible costs that go with that.

New roof, new Ac, etc. donít really add value to a home, they are just things that need done every so often.

They did include that sort of stuff, of course. You can find endless stuff to nitpick because there's a lot going on (there's a lot to nitpick about trying to estimate stock returns over 150 years, too), but it's an honest effort to answer the question.

-W

Yeah, I guess that was a silly question on my part. Maybe more what I was thinking is the average person should keep those kind of things in mind. People brag about how much they paid for their house and how much itís appreciated and itís easy to overlook all the years of maintenance, lawn care, renovations, etc.

ChpBstrd

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Re: Real estate vs. stocks
« Reply #32 on: October 26, 2020, 08:20:58 AM »
I never understood this argument. Isn't it simpler to think of real estate more as a bond. Long term in the USA house value tends to match inflation. Many places you can buy for less than renting thus buying is probably the better option long term. Many places are the opposite. When buying and renting are not significantly different the math gets very difficult and can work out either way.

You can think of real estate as divided into two classes:

1) Places where it's straightforward to build more housing and the cost of housing rises along with inflation (most of the US excluding some big coastal cities)
2) Places where it's not straightforward to build more housing (no land and/or zoning restrictions) where housing rises significantly faster than inflation (SF, Manhattan, etc).

Class 1 behaves like a leveraged bond fund with high front end and back end loads that make it very expensive to trade into or out of.

Class 2 is a speculative bet that goes up or down with the economic prospects of the city in which the real estate is located (more like a leveraged stock fund) which is also very expensive to trade into or out of.

I'm guessing perhaps the UK has a much higher ratio of Class 2 to Class 1 real estate than we have here in the USA?

Iím intrigued by the idea that RE acts like a bond, with a yield matching investorsí collective expectations for long-term inflation. Thus, in todayís environment where basically everyone agrees inflation will be <2%, both long-duration treasuries and RE are priced very high, with low implied yields. (Note this is contrary to the idea that high inflation would raise the price of properties and low inflation would not. In the bond metaphor, value moves opposite inflation expectations, despite less change in the cost of construction. Realistic? Letís see.)

Unlike the treasuries though, RE investors can raise their yields if inflation increases. This would seem to make RE something like TIPS. That added inflation adjustment option adds value to RE just as it does for TIPS. Therefore one might expect the earnings yield on RE to be similar to TIPS, and somewhat lower than treasuries.

Yet, if we look at the earnings yields of REITs, we see a very rich risk premium compared to TIPS. For example, I can find many with double-digit ROEs, high single-digit ROAs, and sustainable dividends in the 3-6% range.

This risk premium may be due to the capital structure of REITs. They never pay off the cheap debt they use to purchase assets, and instead are dependent upon continually rolling over the debt forever. To actually pay off properties would involve a sharp reduction in returns. This means REITs are vulnerable to increases in inflation, which would raise their interest expenses. More risk ó more return.

Mom-and-pop RE investors who plan to lock in a mortgage and pay it off have a much better inflation hedge because they donít just hold an interest-only loan like the REITs do. Thus they escape the requirement to refinance in a potentially higher interest rate future, at the cost of diverting funds toward principal payoff.

The question is, which type of investors set the price of RE assets which can either be an inflation hedge or not? I suspect it is the REITs because they have more purchasing power due to not sending their cash flow into payoff of principal. Thus RE is priced as if it is not an inflation hedge, when in fact it can be, provided one is OK with lower cash returns during the loan term. The mom-and-pop investors paying off their loans are still earning much better than TIPS in most areas, just not the class 2 properties described above.

That said, I agree there are 2 types of RE market described above. The class 2 properties are a bit scary to me, because the pricing is set by REITs and other interest-only investors who expect little more than treasury-level returns with the speculative option to profit on appreciation. That appreciation would be a greater-fool process unless rents increased faster than interest rate expenses. That exact outcome can only occur in weird situations like weíre in now, where coastal housing prices are rapidly increasing at the same time as interest rates are falling. How long can that continue as we approach 0% interest rates and 10% unemployment?

More concerning is the question of how this can continue when technology is steadily eliminating the need to live within certain metro areas to earn lots of money, or get a good education. The successors to Zoom and Microsoft Teams will eventually make it possible, for example, to be an investment banker in Montana instead of being limited to NYC, or to be a tech worker in rural Louisiana instead of having to live near Silicon Valley. Thus the scarcity factor that pushed urban housing prices to 4x or more what rural properties go for is being reversed.

Class 2 properties could be an extra-bad investment if interest rates / inflation increase at the same time as tech eliminates the urban RE scarcity problem. I donít think class 1 escapes this scenario unscathed either; higher demand is offset by higher interest rates, and appreciation is capped by the cost of construction. In bond terms, class 1 canít appreciate and class 2 is at risk of downgrade.


vand

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Re: Real estate vs. stocks
« Reply #33 on: October 26, 2020, 09:02:28 AM »
Real estate and Bonds are nothing like one another... FFS.

Bonds are paper assets whose supply can and is continually increased at the press of a button.

RE is a real tangible asset. To increase the supply someone has to actually go through the faff of the construction process.

RE generally moves in line with the business cycle, whereas Bonds are seen as a safety asset where demand increases during periods of economic difficulty (that is why traditional stock/bond portfolios are so popular and tend to work well).

RE is generally more resilient asset class in the face of increasing inflation, whereas high inflation crushes real bond returns.

BicycleB

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Re: Real estate vs. stocks
« Reply #34 on: October 26, 2020, 04:45:35 PM »
In directly owned real estate, a certain amount of effort is the price of admission. Skill and effort usually affect the returns.

In stocks, you can buy low cost index funds and get healthy returns with nearly zero effort. A couple hours a year is enough to beat many of the full time pros, or at least the returns that they offer to investors. That also puts you in a return range similar to real estate in many scenarios.

You can work for your returns in real estate or collect them at your leisure in stocks. Why put in unneeded effort?

Archipelago

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Re: Real estate vs. stocks
« Reply #35 on: October 26, 2020, 07:50:00 PM »
My question is what should I do with investment money that is left over after I have maxed out retirement accounts. Put it in the stock market again, via a taxable account, or REIT, or get an apartment and start land lording? I have no prior experience in real estate investment. Is the additional work/hassle needed in investing in a rental property likely to yield gains that will outperform the stock market?

It depends on the deal. Make a topic in the real estate forum, and members will help you analyze specific deals.

vand

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Re: Real estate vs. stocks
« Reply #36 on: October 27, 2020, 04:51:37 AM »
In directly owned real estate, a certain amount of effort is the price of admission. Skill and effort usually affect the returns.

In stocks, you can buy low cost index funds and get healthy returns with nearly zero effort. A couple hours a year is enough to beat many of the full time pros, or at least the returns that they offer to investors. That also puts you in a return range similar to real estate in many scenarios.

You can work for your returns in real estate or collect them at your leisure in stocks. Why put in unneeded effort?

I would say that all those "negatives" are actually positives for most people.

The absence of having a ticker symbol telling you how much your real estate has gone up and down in value every minute of the day is not a negative, it's a positive for most people, who operate best by letting their wealth grow slowly in the background without the day to day changes in the forefront of their mind.

Likewise, the fact that it is illiquid and decisions are taken in big chunks usually means that you can't try to get in and out trying to time the market. This is a positive for most people, forcing them to leave their money firmly where it is without the possibility of sabotaging themselves. Decisions to buy and sell are large-scale decisions, usually given a lot of thought and forcing due dilligence.

And the ability to add your own improvements only exists in real estate. Buy a house for £5000/m2 and extend it at a cost of £2000/m2 and you have added your own value.. that seems like a good deal to me.

Oh, and did I mention leverage?

Stashaholic

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Re: Real estate vs. stocks
« Reply #37 on: October 28, 2020, 02:40:14 PM »
I get that the average return on RE from 1870-2015 between 16 countries is 7.05% and 6.89% on equities, but why would that matter to me as an investor that lives in the US who generally invest only in US RE and equities? We don't normally compare VTSAX with 15 other countries' total market, nor do we compare the property we own in the US vs those in Europe unless you plan to invest there, right?

If I want to look at how my investments have done in the US, the average return from 1870-2015 was 8.39% for equities and 6.03% for RE. Between 1980-2015 it was 9.09% in equities vs 5.66% on RE. That alone tells me the equities I have been investing on has been a much better investment. I have a good rental property (two before but sold one) so I know RE can have great returns, but if we go by 145 years of average in the US, it sure looks like equities are the better option long term. The research didn't even take in consideration the time investors had to put into closing the deal, phone calls between tenants, agents, project managers, lawn service, etc., just the costs associated with the service. If you priced in the per hour rate of doing those little things yourself (the calls, visits, looking for deals), I would think the average return would be lower.

Just my thoughts. I could be looking at this wrong.

 

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