Author Topic: Real Estate vs Stock Market  (Read 10182 times)

BarkyardBQ

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Real Estate vs Stock Market
« on: February 25, 2015, 11:18:15 AM »
http://forum.mrmoneymustache.com/investor-alley/discussion-unless-you're-retired-dividends-are-an-inefficent-drag-on-portfolio/
I suppose the main draw is the same reason why the average Joe extols the idea of owning a rental property.
The easy to grasp concept of cash flow generating investments is easier to get your head around than the idea of a growth stock portfolio with no distributions.

We have begun the process of looking for a new primary residence to rent out our current home. With the intention that we will eventually rent out the new one and buy a 3rd. Comments like the above, and even Warren Buffet has said that over the long term investing in the stock market will have better returns. So I played around with the math on investing a $20,000 downpayment/lump sum for 15 years and 30 years. The comment above irritated me a bit, as the immediate cash flow is not the only benefit my brain can grasp. So I wasted a piece of printer paper on the following. PLEASE correct me if I'm wrong so I can see any errors and make adjustments.

Assumptions
Investment: $20,000 downpayment or lump sum investment
Term: 15 years (the approximate time when this single investment would turn over and be liquidated for future plans)
Modest: I have assumed very modest numbers here as to not get carried away with expecting unreal returns. Specifically, Rental Price is a bit lower than what we think we can get in our market; Home Value Appreciation is essentially set to inflation.
Inflation: I do not account for 1) raising rent, 2) property taxes, or 3) insurance increasing with inflation, and simply assume that if 2 or 3 go up that I will eventually be able to increase the income from the rent.

$20,000 Lump Sum Investment in 100% Equities
Interest Rate 7%
15 Years
Growth: $35,180
Total Value: $55,180

Investable difference if we stay put*
$338/month @ 7% for 15 years
Growth: $45,471
Total Value: $105,231
*assume that we'd be investing this in the market anyway, but let's add it for fun

Rental #1
180 Months/15 Years
Rent: $1100
Mortgage Payment: $525
Rental Income: $575
Principal Paid (by renter) During Term: $32,388
Income During Term: $103,500
Home Appreciation @ 3.5%: $94,548
Total Value: $230,336

New Primary Residence
Price: $175,000
Down: $20,000
Mortgage: $155,000
Monthly PITI: $857
Difference in Old vs New: $332

Second Residence
Equity Paid During Term: $56,291
Home Appreciation @ 3.5%: $118,886
Home Value: $293,186
Total Growth: $175,177

Investable Rental Income
$575-332
$243/month @ 7% for 15 years
Growth: $33,281
Total Value: $77,021

-------------RESULT-------------

Stock Market
Lump Sum Investment: $55,180
Invested Monthly Mortgage Difference: $105,231
Total: $160,411

Real Estate/Rental
Rental - Income, Equity, Appreciation: $230,336
Primary - Equity, Appreciation: $175,177
Invested Rental Income: $77,021
Total: $482,534

So, we are not only considering cash flow; we are considering income, appreciation, and boosting our monthly investable cash. The difference of return on $20,000 here is MASSIVE! Our ability to turn our home into a cash cow is a combination of perfect timing and luck, but we'll eventually want to buy a 3rd and rent out #2. The cash flow on that will be less, but I think equity, appreciation, and investing even with moderate growth and return beats 7% interest in the stock market. I also love the idea and feel very comfortable with being diversified in more than stocks and like the idea of a renter chasing down our debt. I feel like this is taking total advantage of allowing a dollar to earn more dollars.
« Last Edit: February 25, 2015, 11:42:33 AM by zdravé »

Northerly

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Re: Real Estate vs Stock Market
« Reply #1 on: February 25, 2015, 11:42:17 AM »
Having a little rental income is great. Having a lot is better. Just keep in mind that you're comparing leveraged real estate investments to unleveraged stock market investments. Not exactly apples to apples.

Risk is a very real and personal thing. Bad things will happen to you (as well as good things!), and leverage will magnify the effects. Buffet's comment, certainly, referred to an apples to apples comparison: cash in RE vs cash in the stock market.

dadeg

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Re: Real Estate vs Stock Market
« Reply #2 on: February 25, 2015, 11:48:19 AM »
3.5% growth on house value seems high. And are you taking in to consideration the savings of the new home into your original stock calculation? I see you compare buying a house and renting to staying put and investing in stock market. You should compare the rental to buying the new house, selling the old house, and investing that money in the stock market as well as the monthly savings on buying the cheaper house.

Dodge

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Re: Real Estate vs Stock Market
« Reply #3 on: February 25, 2015, 12:19:08 PM »
Indeed, rentals can beat the market, but with both more risk and more work required.  You should put this thread in the Real Estate forum, I believe they'd cut down a lot of your assumptions regarding maintenance, home appreciation, vacancy, how to calculate projected income (I think they use a 50%-75% rule), taxes, and transaction costs.  Also, as Northerly mentioned, you're comparing owning 20,000 companies worldwide with 0 leverage, to owning a single home, in a single country/state/city/town/neighborhood, with something like 400-500% leverage.  This is inherently more risky.

Letj

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Re: Real Estate vs Stock Market
« Reply #4 on: February 25, 2015, 12:39:36 PM »
Half of your cash flow pays the mortgage and the remaining have to account for repairs and maintenance. Your real income after all of that is actually negative. You have to assume that maintenance and repairs over the long term will be 50 percent of rent.

FarmerPete

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Re: Real Estate vs Stock Market
« Reply #5 on: February 25, 2015, 01:03:31 PM »
I can confirm what others are saying.  Maintenance, repairs, and vacancy will all add up over time.  What you have outlines is what I like to refer to as a "Best case scenario"...except that even the best case will have some value on repairs and upkeep.  You also have a great risk of depreciating assets.  Back test your hypothesis.  If you had bought a house in 2000 and sold it today, would you have gotten 3.5% annually?  Not likely.  Yes, I know that the housing crash was hopefully a once in a lifetime thing, but if it had happened in YOUR timeframe, you'd be screwed.  The stock market rebounded in just a few years.  Around me, house prices are still down about 25% from the 2007 prices.  That's 8 years of stagnation/loss.

BarkyardBQ

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Re: Real Estate vs Stock Market
« Reply #6 on: February 25, 2015, 01:55:54 PM »
@Letj, Half of the income? I really doubt we'd have to spend >$50,000 on repairs in 15 years. Yes it's possible, unlikely.

@dadeg, 3.5% is slightly more than inflation and between and afaik the accepted 3-5% annual appreciation average. I played with your second suggestion... while the repairs/maintenance subtracted result is comparable (see below) it does not allow for diversification. In The Millionaire Next Door, it states that the average self made millionaire only holds 30% of their wealth in stocks. We are trying to build something more evenly spread between stocks, real estate, passively generated fixed income (not bonds) and eventually pensions/SS.

@FarmerPete, My wife bought the house at the very bottom of the local market during the crash. So even if we saw another crash, and held onto the house, we still have the potential to continue renting it out and continue holding on to it. We've actually seen 15% returns since it was bought and our market is still lower than it was.

All good considerations and concerns, and I'm am not forgetting things like maintenance, time, and risk.

Even if appreciation was 2%...

#1
Principal paid by renter: $32,388
Income: $103,500
Appreciation: $48,421
#2
Equity: $56,291
Appreciation: $60,526

Total: $301,126

Then let's just say that Letj has a point, and we spend 50,000 on repairs for a house in 15 years. We have 2, so lets subtract $100,000. That still leaves us with >200K vs 160K. Every investment comes with risk and time involved. How much time do you spend researching investing and early retirement, or time spent keeping track of expenses, rebalancing, churning; all of it's technically maintenance. Likewise, the argument for expected returns also applies to the stock market, and it seems to make sense to be diversified across the two, especially when someone else's cash is funding the potential for your growth. All for 10-20% down payment, it seems the return on investment far exceeds the market for the defined term.

In his podcast interview, arebelspy stated something like I'll retire when I'm a million in debt. This has recently played very strongly in our thinking as we build our portfolio and are seeking more opportunities. We kind of like the idea of chasing $0 net worth and every time we go positive buying another property, leveraging the investment and banking on someone else's income, while we continue to build our portfolio balance and finally cashing out of real estate down the road.

In any case, my original question has only partially been answered... Why do so many market investors keep arguing that rental income is a lost return vs capital gains. Capital appreciation on real estate and the income generated is solid and at least as normalized as the stock market.


BarkyardBQ

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Re: Real Estate vs Stock Market
« Reply #7 on: February 25, 2015, 02:11:07 PM »
If you had bought a house in 2000 and sold it today, would you have gotten 3.5% annually?  Not likely.  Yes, I know that the housing crash was hopefully a once in a lifetime thing, but if it had happened in YOUR timeframe, you'd be screwed.  The stock market rebounded in just a few years.  Around me, house prices are still down about 25% from the 2007 prices.  That's 8 years of stagnation/loss.

2003-2014, our zip code has an average of 5.7% appreciation. Which includes a 50% drop in 2008 and subsequent 21% loss during the next 3 years.

waltworks

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Re: Real Estate vs Stock Market
« Reply #8 on: February 25, 2015, 02:19:08 PM »
Historically, RE appreciates with inflation. It has to, or at some point we'd all be unable to afford houses.

Everything in your house has a lifespan. Roof, paint, flooring, HVAC, landscaping, driveway, etc. They will all eventually need to be repaired/replaced, and you will have vacancies, bad tenants, lawsuits, natural disasters, management costs, etc. Hence 50% rule. It is a conservative set of assumptions and you may do better, but it's good to be conservative with a highly leveraged illiquid investment!

-W

BarkyardBQ

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Re: Real Estate vs Stock Market
« Reply #9 on: February 25, 2015, 05:02:32 PM »
Thanks for all the thoughts and pointers. We will do some more evaluation, but definitely still leaning toward diversifying with real estate.

The idea of taking out the equity to invest it in stocks really had me thinking for a second, but it's an extremely hard sell to increase our mortgage payment for similar stock market returns while decreasing our diversification.

Retired To Win

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Re: Real Estate vs Stock Market
« Reply #10 on: February 25, 2015, 05:58:33 PM »
Thanks for all the thoughts and pointers. We will do some more evaluation, but definitely still leaning toward diversifying with real estate.

The idea of taking out the equity to invest it in stocks really had me thinking for a second, but it's an extremely hard sell to increase our mortgage payment for similar stock market returns while decreasing our diversification.


The rental real estate would give you another financial advantage I did not see covered in your breakdowns.  And that is that depreciation and other deductible expenses for income tax purposes will materially increase the actual in-your-pocket cash flow that you will derive from your gross rents.

And your use of the term "diversifying" points out another important fact.  It doesn't have to be either/or stocks or real estate.  Does it?

waltworks

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Re: Real Estate vs Stock Market
« Reply #11 on: February 25, 2015, 06:12:56 PM »
Go read all the threads on the RE board for the last 6 months or so. You are dangerous uninformed about this. RE can be great, but if you just randomly buy properties, you are going to get badly burned eventually.

-W

Thanks for all the thoughts and pointers. We will do some more evaluation, but definitely still leaning toward diversifying with real estate.

The idea of taking out the equity to invest it in stocks really had me thinking for a second, but it's an extremely hard sell to increase our mortgage payment for similar stock market returns while decreasing our diversification.

Dodge

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Re: Real Estate vs Stock Market
« Reply #12 on: February 25, 2015, 07:13:44 PM »
Thanks for all the thoughts and pointers. We will do some more evaluation, but definitely still leaning toward diversifying with real estate.

The idea of taking out the equity to invest it in stocks really had me thinking for a second, but it's an extremely hard sell to increase our mortgage payment for similar stock market returns while decreasing our diversification.

From everything I've read, owning rental real estate is more like owning/running a business, than a passive investment.  While "diversification" might still technically fit the description, I doubt that's what you're thinking when you use it.

BarkyardBQ

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Re: Real Estate vs Stock Market
« Reply #13 on: February 25, 2015, 07:32:02 PM »
Go read all the threads on the RE board for the last 6 months or so. You are dangerous uninformed about this. RE can be great, but if you just randomly buy properties, you are going to get badly burned eventually.

-W

We aren't just trying to randomly buy a house and rent it out, we are looking to buy a new house for ourselves (closer to work) and rent out our current one. We are doing lots of reading, research, and evaluation to weigh the benefits and make sure we do so correctly.

The rental real estate would give you another financial advantage I did not see covered in your breakdowns.  And that is that depreciation and other deductible expenses for income tax purposes will materially increase the actual in-your-pocket cash flow that you will derive from your gross rents.

And your use of the term "diversifying" points out another important fact.  It doesn't have to be either/or stocks or real estate.  Does it?

I did not put in those deductions, but it has not been missed in our research/understanding. Also, we are not looking at either/or, we are investing in our retirement accounts and taxable accounts, but also want to invest in real estate. Look back at my second post about chasing a $0 net worth: equities vs mortgages.

From everything I've read, owning rental real estate is more like owning/running a business, than a passive investment.  While "diversification" might still technically fit the description, I doubt that's what you're thinking when you use it.

Probably not. Simply holding some investments in real property vs everything in the stock market. We also understand the time and effort involved in renting property and it's business-like nature. My parents have been doing so for 25+ years, and renting our their previous homes as they move to new ones. I'm well acquainted with the benefits, issues, and hassle. With that in mind, my parents have never spent 50% of the rental income maintaining or repairing any of their properties, obviously results may vary.


Aside from the real estate/rental crowd, I'd still like to know why the sentiment amongst the pro-market crowd is that real estate income is 'chasing fixed income'. The rental income is a benefit, but so is the principal payment made by the renter and the appreciation of the property. The argument suggesting that returns on real estate cannot be predicted is the same for the stock market not being dependent on past returns. Even with appreciation stuck at inflation rates, the principal/equity built and the income (even partially) reinvested in stock (during the accumulation phase) allows for more equities investing and growth.
« Last Edit: February 25, 2015, 07:34:14 PM by zdravé »

goodrookie

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Re: Real Estate vs Stock Market
« Reply #14 on: February 25, 2015, 10:20:18 PM »
If you are middle class, real estate in a stable area is the best because it gives you leverages (at least 5x) and rent (which is essentially a big dividend).

waltworks

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Re: Real Estate vs Stock Market
« Reply #15 on: February 25, 2015, 10:31:28 PM »
If one of your criteria for buying your current house was not that it make sense as a rental property, then actually, yes, you have selected an investment property randomly. It might be a great one, but it *probably* isn't.

I post this on every RE thread now, because it should be required reading:
http://forum.mrmoneymustache.com/real-estate-and-landlording/examples-of-rentals-you-own-that-perform-well-financially/

-W

We aren't just trying to randomly buy a house and rent it out, we are looking to buy a new house for ourselves (closer to work) and rent out our current one. We are doing lots of reading, research, and evaluation to weigh the benefits and make sure we do so correctly.

Mighty-Dollar

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Re: Real Estate vs Stock Market
« Reply #16 on: February 26, 2015, 03:51:31 AM »
I don't think you have enough in stocks and bonds. Only 20K and all in stocks? And if you need more income then just sell off some of that stock ETF / bond ETF principal that's been growing and compounding.
Also real estate can be risky, ESPECIALLY when you are BORROWING money to buy real estate.  Remember the 2006 housing bubble?

According to Fidelity Research Institute real estate averaged a 5.9% annual return from 1963 to 2006.
According to a study by Jack Francis and Roger Ibbotson, real estate grew by 8.6% per year from 1972 to 1999.

DavidAnnArbor

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Re: Real Estate vs Stock Market
« Reply #17 on: February 26, 2015, 07:56:30 AM »
I'm probably not qualified to respond to this post but I think if you know your local real estate market well, you should know which areas have been providing good returns as rentals. What areas in your neighborhood are gentrifying and which areas might be getting shadier? Just anticipate what would happen if we had another recession in 2017/2018. Let's say your house went vacant for 6 months how would that affect the profitability? What if a water pipe burst causing a lot of water damage? What if your tenant turned out to be a cigarette smoker and damaged the property in various ways? What if the tenant had a dog you didn't know about which damaged the walls? What if your tenant up and left and stole some of the appliances? Do you fully know what the property tax bill would be for the property? What if the carpenter you hired and paid up front to fix things just up and disappeared from the contracted work? You have a million variables to consider. You'll need to consider them all and have plans in place.

BarkyardBQ

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Re: Real Estate vs Stock Market
« Reply #18 on: February 26, 2015, 09:24:06 AM »
@waltworks, We bought or current residence at the bottom with the idea of being able to rent it out. It wasn't just a house we bought to live in.

@Mighty-Dollar, no where did I ever say I was going to liquidate 20k of stock and buy a house or that 20k is the sum of our equity holdings. We have the cash for our new home down payment.

I'm no longer responding to this thread. I have been attempting to create a debate about why so many people argue that real estate and renting is a fools errand chasing cash flow. I was trying to use a personal example to establish that debate. You are all assuming I'm ignorantly jumping into something I know nothing about and am not actively researching. The purpose was to generate thoughts and arguments about this mentality not to have everyone pick through a strategy which I never posted, I wanted to compare capital gains and rental income/appreciation.
« Last Edit: February 26, 2015, 09:28:57 AM by zdravé »

GoCubsGo

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Re: Real Estate vs Stock Market
« Reply #19 on: February 26, 2015, 10:44:40 AM »
zdrave- I believe the is room for both and the ability to easily use leverage on Real estate has always made it attractive to me. Just like any other form of investing, if done prudently and researched thoroughly it absolutely has a place in my portfolio.  I don't see it as one versus the other as they are "different" enough to provide me with some diversification.  I also agree that it is more work than a purely equities based portfolio, but I also like that I have some control and a tangible asset that I can directly affect it's value and the way that it is run.

As to people who bring up the the bubble crash, it didn't affect me at all because I DIDN'T SELL my rentals.  If anything it helped, because in my area (as well as many markets) rental prices shot up.  Add to it rates crashed and I was able to refi a 1.25% lower rate.  The price of the property plummeted but now that it's come back significantly in price it really didn't affect me much.  When the stock market crashed I was nervous like everyone else but my rentals just kept chugging along generating free cash (which allowed me coincidentally to buy some stocks that I liked that were bargain priced).

There are inefficiencies in real estate that can be taken advantage of just like anything else.  If you happen to live in an area with above average appreciation (like I do) it can be a great way to diversify and grow your overall portfolio. Just do your research and do what you feel is best (without worrying about other peoples thoughts or strategies).

rmendpara

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Re: Real Estate vs Stock Market
« Reply #20 on: February 26, 2015, 10:50:31 AM »
Having a portion of your assets in physical real estate makes sense... if you understand the market, are willing to manage it, and are very liquid to weather any major repairs/vacancy. It helps if your cost basis is lower than current market value so that you are also fairly liquid to sell in a reasonably quick period of time.

Ignoring the whole leverage component, the equity returns (aftertax net income - expected long term maintenance) as a % of the net realizable value (price if sold - selling costs) is likely in a similar range of stocks that have a similar income growth profile and volatility as physical real estate.

The great gains come from local market knowledge and the ability to take advantage of inefficiencies in pricing. Cash flow is nice, but remember that there are drawbacks to that cash flow from real estate properties. With that said, if you are liquid enough to weather any expected turbulence, it can be a solid effort.

For what it's worth, I have a condo I used to live in that's paid off now, and probably nets ~4.5% pretax (as a % of net realizable value). Not bad, but it definitely requires a bit of time and effort. It has also appreciated substantially since 2012, but I don't expect more than 2%/yr going forward. If I hire a property manager, that pretax yield probably goes down to ~3.5%. Again, not bad for the diversification it provides, but at that point lower than what a stock portfolio would provide... even after adjusting for stocks that pay out dividends/distributions and grow 2-3% per yr.

I'm thinking big energy, telecom, REITs, utilities, etc that pay a mixed equivalent of ~4 to 4.5% and grow 1-3% per year... if you want something that's reasonably comparable from an income basis. Like the property, few of these stocks would cut payouts in the event of another downturn, although prices would likely decline.

Is the property worth the effort and illiquidity at the time in 2012? Absolutely... mostly because it appreciated 50%+ in 3 years.

Is the property worth the effort and illiquidity today? Not sure... maybe? I'm also weighing options today.

If I sold the property, invested everything in the "comparable" portfolio, and considered the aftertax dividends as a "discount" on my future rent, would i come out similar to owning the property? Tough decision, since I do want to hold onto it, but the numbers don't suggest a strong benefit to keeping it.

Seems like you did a great job purchasing your properties and managing them so far, but the big gains are past. Up to you whether you want to count your winnings and move on.

Another alternative: Keep the existing properties and work to pay them off. Having 1-2 liquid properties (all equity... no more debt) takes away a lot of the liquidity risk so long as you have a cushion between your cost and the market value. You can then reinvest the cash flow to equities, REITs, bonds, whatever, and dilute their share over time. Just a thought. You don't have to go from multiple properties to zero. There are some ways to meet in the middle over the next few years.

Good luck on what you decide!

El Marinero

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Re: Real Estate vs Stock Market
« Reply #21 on: February 26, 2015, 11:00:13 AM »
Indeed, rentals can beat the market, but with both more risk and more work required. 

I've always considered long-term ownership of rental real estate a fairly sure way to build wealth, but not an easy way.  Unmaintained properties go downhill quickly.

As others have mentioned,  the availability of low cost financing for leverage and the regular cash flow are key.  Lots of folks have amassed wealth in their 20s through this means.

At this point in my life, I am happy to no longer be a landlord.  So much easier to cash dividend checks, or sell shares.

BarkyardBQ

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Re: Real Estate vs Stock Market
« Reply #22 on: February 26, 2015, 11:25:41 AM »
@GoCubsGo, We totally understand the extra work. But just like with our portfolio and it's IPS, our real estate investing will have it's own set of rules. Like you, we would also hold onto those properties if they dropped in a crash, just like stocks and would likely buy more. We definitely like the idea that in many cases housing/rental could be up while the market is down and visa versa, that (and not selling anyway) has it's own benefits.

@rmendpara, Thanks for sharing your experience. I have held utilities and REITs (only REITS) now, as a 'stable' part of the portfolio, watching many times as equities have fallen and they stay steady. While there are market strategies for this, we like the idea of leveraging debt, knowing the local market, and even putting in work on the properties. The liquidity has its benefits down the road when we want to consolidate to buy our 'homestead'. It's easy to sit at my desk and understand how investing in equities is a vehicle for wealth accumulation and FIRE, and I feel the same is needed get where we want with real estate, we must be active in it to understand it, not only for investing in properties but for managing/fixing them up. We will be in a position to be liquid enough to handle any vacancies, repairs etc, while taking advantage of investing some of the cash flow.

@El Marinero, it's likely that after we FIRE we'd feel the same, but while we HAVE to work and are building out stache it makes sense to understand and possibly take advantage of everything we can.

I appreciate these replies.

Anyone have any math based numbers behind how their rental income, appreciation, and expenses returned less or more than their portfolio over a given term?

FrugalEE

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Re: Real Estate vs Stock Market
« Reply #23 on: February 26, 2015, 12:17:57 PM »
There are a number of serious flaws in your numbers.  To start with the most obvious give away look at your total 15 year return numbers.  In the rental case you are showing a 20k investment growing to $482,534 over 15 years.  To do that you would need a CAGR of 21.4% and yet your are claiming your numbers are conservative.  Something is obviously wrong.

The largest problem is your assumed 3.5% home appreciation in real dollars.  Historically homes increase in value at the rate of inflation. 
"The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation!" http://observationsandnotes.blogspot.com/2011/07/housing-prices-inflation-since-1900.html

Any hope of greater appreciation is merely speculation and can not be planned for.  So right off the bat you're numbers are over inflated by $94,548+$118,886=$213,434.

Your next mistake is in calculating your "rental income".

Quote
Rental #1
180 Months/15 Years
Rent: $1100
Mortgage Payment: $525
Rental Income: $575
Principal Paid (by renter) During Term: $32,388
Income During Term: $103,500
Home Appreciation @ 3.5%: $94,548
Total Value: $230,336

I am not sure why you think your rental income would be as simple as rent minus mortage payment.  Do you not pay taxes?  Do you not have to perform maintenance?  Do you not have vacancy?  I am not in real estate so others can and did provide you with realistic estimates of those costs but you scoffed at them.

You're next mistake comes on your new house.

Quote
Second Residence
Equity Paid During Term: $56,291
Home Appreciation @ 3.5%: $118,886
Home Value: $293,186
Total Growth: $175,177

Why would you include the equity you paid into the house as part of your total growth?  I'm assuming that money came from a day job and it can't be included in the overall rate of return of a real estate deal.  The stock equivalent of what you did would be buying 1k worth of stocks on January 1st, having them stay flat all year, then buying another 1k on December 31 and claiming you achieved a 100% return on your investment over the year.  It obviously doesn't work that way.

Your next mistake is how you compared the two end scenarios.

Quote
-------------RESULT-------------

Stock Market
Lump Sum Investment: $55,180
Invested Monthly Mortgage Difference: $105,231
Total: $160,411

Real Estate/Rental
Rental - Income, Equity, Appreciation: $230,336
Primary - Equity, Appreciation: $175,177
Invested Rental Income: $77,021
Total: $482,534

Why is home equity and appreciation counted for in the the rental case but not in the first case?  In the first case you still own a home that you are putting equity into and is appreciating.  Why did you exclude it from the balance sheet in your final results.

These flaws in your analysis are why people suggested you might need to brush up on your fundamentals before you start investing a lot of money.  Instead of getting angry at them you should heed their advice.  I'll go back to the first point I made.  You calculated that you would achieve a 21.4% CAGR over 15 years.  That should have been a dead giveaway to you that something was wrong with your numbers.  If real estate could truly net a 21.5% return with "conservative" assumptions no one would invest in stocks.

To answer your original question about stocks versus real estate the correct answer is that the return is probably about the same.  You might make a little more in real estate but most consider that extra income to be a result of the additional work which goes into managing a rental.  You have to decide yourself if that the extra work is worth the extra reward.  Just make sure that you are aware the extra reward will not be a 21.4% return.

BarkyardBQ

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Re: Real Estate vs Stock Market
« Reply #24 on: February 26, 2015, 01:30:58 PM »
@FrugalEE, I specifically ASKED for correction of my calculations, you are the first to actually break down the calculations and show me. Thank you. Others saying I'm 'dangerously uninformed' is not helpful. When I'm asking for data (you provided) to correct my calculations and assumptions is much more informative than people telling me that I'm going to incur repair costs and vacancies. Simply put, I wanted people to break down the numbers behind the returns where some people suggest cash flow is pointless. I had not thought about including the appreciation and equity in the first scenario, or removing equity from a primary residence, again thank you! I totally understand that I'd have expenses and pay taxes on the income. I was merely trying to calculate average returns, before taxes and expenses.

FrugalEE

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Re: Real Estate vs Stock Market
« Reply #25 on: February 26, 2015, 02:00:55 PM »
I'm glad you appreciated my feedback.  If you want people to provide a better analysis to your situation you need to provide more information such as:

  • Value of current home
  • Interest rate on mortgage for current home
  • Remaining balance on current home
  • Taxes on current home
  • Insurance on current home
  • Age of current home(useful for estimating expenses)
  • What rent you are likely to get for the current home

There is really no point in tossing the second home into the analysis of whether or not your better off renting or selling the first home.  It just confuses the problem.  Treat each home as its own individual problem recognizing that regardless of what you decide you still need a place to live.

The real estate forum will probably get you better answers about your specific situation.

If you just want to have a generic discussion on the merits of real estate vs stock in vesting it has been discussed extensively in the past.  From my reading the general consensus is what I stated in my previous post.  They return about the same.  You might be able to earn slightly more in real estate but it comes from putting in additional work.

Dividend Youngster

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Re: Real Estate vs Stock Market
« Reply #26 on: February 28, 2015, 06:24:58 PM »
Im currently in both rentals and the stock market. However you arnt really comparing apples to apples. You are comparing a highly leveraged real estate investment vs. non leveraged equity investment... the returns are obviously going to vary drastically.