Author Topic: real estate vs. stock  (Read 7140 times)

goodrookie

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real estate vs. stock
« on: January 24, 2015, 10:54:19 PM »
I am sure you guys have debated this many times earlier. But I need some guidance as which is better. As I see it:

Real estate: assuming 20% down payment = you get 5x leverage. Unless it's in Florida or California, housing price is unlikely to go down. The price of renting is also being directed to investment. When you consider FHA loans, it looks even more attractive.

But someone please prove me wrong.
« Last Edit: January 24, 2015, 10:57:19 PM by goodrookie »

waltworks

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Re: real estate vs. stock
« Reply #1 on: January 24, 2015, 11:51:18 PM »
Yep, you're right. We, and generations before us have debated it. Many, many times. Do a search.

Long story short: in some cases RE is better, in some cases it's not. I guess I'd say that for most people, most of the time, stocks are a better bet.

RE values do not generally rise faster than inflation, but leveraged investments in cash flowing rentals, or a purchase in the right place/at the right time for appreciation can do great. Overhead costs and transaction costs are high, however, unless you're talking about REITs which I sort of consider like buying bonds.

Stocks as an asset class historically kick the crap out of everything and these days transaction costs are basically nil - but they're volatile.

If you have an interest in RE investing, toodle on over to the RE board and start reading up. It's not as simple as just buying houses that are "unlikely to go down" and then letting the money roll in, but if you're a hands-on kinda person and you are willing to hunt down good deals, you can make good money.

-W

I am sure you guys have debated this many times earlier. But I need some guidance as which is better. As I see it:

Real estate: assuming 20% down payment = you get 5x leverage. Unless it's in Florida or California, housing price is unlikely to go down. The price of renting is also being directed to investment. When you consider FHA loans, it looks even more attractive.

But someone please prove me wrong.

clifp

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Re: real estate vs. stock
« Reply #2 on: January 25, 2015, 12:02:45 AM »
All real estate is local and leverage works both ways.   

The leverage point is lesson that we shouldn't forget from 2007/2008 crisis. I bought 4 properties in Vegas in 2011/2012 and made offers on 20 additional properties.  In every case, some person before me bought those same properties for at least twice and more often three to four times more than I did sometime between 2002 and 2007. Everyone of them lost their down payment, and all the interest and principal they paid to their mortgage and many cases trashed their credit. You can lose all your money in the stock market, but unless you are exceedingly foolish and foolhardy you can not get your credit rating trashed.

In a deflationary environment it is entirely possible that housing prices could go back to their 2007 levels.  With low inflation, oil prices collapsing, a recession looming  in Europe,and slow down in China that is pretty plausible scenario. My personal bet is a period of high inflation (which would be great for housing), but I've been wrong about that for 5 years.

That said I think real estate in the right market makes sense.  I also think it is easier for somebody with decent skill to do better in than average. There are teams of PHd in finance and computer science trying to constantly make sure stocks prices are fairly value, that for most part doesn't exist in the real estate market.

arebelspy

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Re: real estate vs. stock
« Reply #3 on: January 27, 2015, 09:37:01 AM »
Long story short: in some cases RE is better, in some cases it's not. I guess I'd say that for most people, most of the time, stocks are a better bet.

+1.  Real estate is great if you know what you're doing.  Otherwise you can get in a lot of trouble.

See GoCurryCracker's latest post (and comments) for examples: http://www.gocurrycracker.com/rental-hell/

In a deflationary environment it is entirely possible that housing prices could go back to their 2007 levels.  With low inflation, oil prices collapsing, a recession looming  in Europe,and slow down in China that is pretty plausible scenario. My personal bet is a period of high inflation (which would be great for housing), but I've been wrong about that for 5 years.

I've been thinking the same as you for the last 6 years, but now I'm wondering if we don't see a long period of slow/no growth, and perhaps deflation.  Ugh.

There are teams of PHd in finance and computer science trying to constantly make sure stocks prices are fairly value, that for most part doesn't exist in the real estate market.

An inefficient market is a great thing to exploit if you have the knowledge to do so.
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Bobberth

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Re: real estate vs. stock
« Reply #4 on: January 27, 2015, 02:24:47 PM »
Stocks = Investment = Apples
Real Estate = Business = Oranges

You really can't compare the two.  Even if you use a property manager you still have to run direct ownership in real estate like a business-acquisition decisions, hiring of a property manager, reviewing property manager, capital outlays, repairs and tenant screening.  Or manage everything yourself, which is even more work.  Stocks you choose an investment, invest money and watch. 

SpicyMcHaggus

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Re: real estate vs. stock
« Reply #5 on: January 27, 2015, 02:55:59 PM »
Realestate returns are the only place I know of you can get a $1000 monthly income stream from a $40,000 down payment. If you are doing the math, and following the 2% monthly rent to purchase price valuation of a rental house, you can probably exceed stock returns.  Problem is houses are not liquid and require upkeep and work finding tenants. If you have the time and ability to do these things, then give it a thought.

Careful with stocks; easy to lose money if you are speculating. Best to buy and hold ETFs and funds.

Read the Investor alley section and the Landlording section. Other forums of use are Bogleheads for stocks and biggerpockets for landlords.

goodrookie

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Re: real estate vs. stock
« Reply #6 on: January 28, 2015, 10:43:44 PM »
@arebelspy @Bobberth: By real estate, I meant buying a condo or a small house for myself and living in it. Nothing fancy like having 6 tenants or commercial real estate.

@SpicyMcHaggus: Thank you for the references. I will check them out.

Dodge

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Re: real estate vs. stock
« Reply #7 on: January 28, 2015, 10:56:03 PM »

@arebelspy @Bobberth: By real estate, I meant buying a condo or a small house for myself and living in it. Nothing fancy like having 6 tenants or commercial real estate.

@SpicyMcHaggus: Thank you for the references. I will check them out.

In that case, you will almost certainly end up with more money by investing in stocks. Even if the mortgage is equal to the renting price. Housing in general appreciates with inflation, you'll likely end up way ahead with stocks, especially after the down payment is factored in.

Give us the numbers (expected total mortgage loan, and expected rent price) and we'll show you the math.

innerscorecard

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Re: real estate vs. stock
« Reply #8 on: January 28, 2015, 10:57:55 PM »
Some people are inherently more comfortable with things that are relatively illiquid but more tangible. Things like local private businesses and residential real estate. Other people are more comfortable with things that are liquid and quotable, like common stocks.

I am the latter, but there's obviously good reason for people to be the former, as well. It's pointless to argue about personal preferences on this matter.

Jeremy

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Re: real estate vs. stock
« Reply #9 on: January 29, 2015, 07:22:17 AM »
@arebelspy @Bobberth: By real estate, I meant buying a condo or a small house for myself and living in it. Nothing fancy like having 6 tenants or commercial real estate.

@SpicyMcHaggus: Thank you for the references. I will check them out.


If you want best of both worlds, buy a condo and rent it out.  And rent a condo in the same building for your own living

You become a renter, with all of the freedom that implies, and a landlord, with all of the advantages on tax/leverage/etc...

Terrestrial

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Re: real estate vs. stock
« Reply #10 on: January 29, 2015, 07:54:04 AM »
I am sure you guys have debated this many times earlier. But I need some guidance as which is better. As I see it:

Real estate: assuming 20% down payment = you get 5x leverage. Unless it's in Florida or California, housing price is unlikely to go down. The price of renting is also being directed to investment. When you consider FHA loans, it looks even more attractive.

But someone please prove me wrong.


1 - RE is unlikely to go down except in CA/FL.  Come on...seriously?  Were you in a nuclear bunker insulated from all news between 2007-2012??  There are few markets in the whole country that didn't go down to some extent.  Yes those two states were among the hardest hit but many markets even outside of CA/FL dropped substantially...Las Vegas, Phoenix/Tucson metros, Chicago suburbs, etc.  Many still haven't recovered to their previous highs.

2 - Even assuming the 'unlikely to drop' thing is true (it's not), leverage is only good if something is moving up (or bad if it's moving down).  What if prices are stagnant?  Leverage on 0% is still zero.  Leverage on 1% is only 5%.  The long term appreciation rates for real estate historically have not been great...slightly above inflation.

3 - Why would FHA loans matter if someone is putting 20% down.  Ah I see...for MORE LEVERAGE!!   All I can say about that is leverage cuts both ways.  It COULD make you alot of money, just like buying stocks on margin can.  It also COULD make you lose your ass, and quickly.   FHA loans require what, 3.5% down?  Over 25x Leverage!  To each their own depending on your risk profile.


Investing in RE is fine, many people are successful at making money at it.  I think it has it's place in a diversified investment portfolio and I do own a rental property, but from personal experience I would focus on the income/cash flow metrics first and foremost.  If rental demand is decent and you have good cash flow it's great insulation from what actual prices are doing.  If the property appreciates, great, but for RE that's much harder to predict than a steady rent check coming in that covers your expenses and provides some income.  During the meltdown the actual value of my property plummeted...and that had zero effect on the cash flow I was receiving.  It actually improved it because my prop taxes dropped.

If you are thinking about buying as a personal residence, buying CAN make sense, it can also be less advantageous from a purely monetary perspective.  It's very market/situation dependent.  I would run a cost comparison between equivalent renting costs and owning and decide from there. Don't fall for the 'renting is just throwing away money' schitick that realtors trot out...it all depends on what rent costs vs what your total buying costs are.  You can include some modest RE appreciation and some tax benefits, but you also have to factor in the returns your down payment would generate in another investment, plus if renting is cheaper the savings that generates, plus maintenance when you own, and also the fairly high transaction costs associated with real estate which can have a sizable effect depending on how often you will need/want to move.  I ran a fairly detailed analysis of this when we decided to buy our last house and was surprised...buying won but it was far from a landslide.
« Last Edit: January 29, 2015, 05:30:33 PM by Terrestrial »

SunshineGirl

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Re: real estate vs. stock
« Reply #11 on: January 29, 2015, 08:06:24 AM »
I own both and am glad I do vs. only owning one or the other.

arebelspy

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Re: real estate vs. stock
« Reply #12 on: January 29, 2015, 09:51:53 AM »
@arebelspy @Bobberth: By real estate, I meant buying a condo or a small house for myself and living in it. Nothing fancy like having 6 tenants or commercial real estate.

Oh, then you're doing the wrong comparison.

If you want to compare investments, you need to compare real estate to stocks.

If you're comparing living situations, you need to compare owning to renting.

Since you need somewhere to live, and that's what you meant by real estate investing, you should compare it versus renting (and the opportunity cost of owning).  Many areas of the country it'd be stupid to rent.  In others, it'd be stupid to own.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

RapmasterD

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Re: real estate vs. stock
« Reply #13 on: January 29, 2015, 10:29:58 AM »
@arebelspy @Bobberth: By real estate, I meant buying a condo or a small house for myself and living in it. Nothing fancy like having 6 tenants or commercial real estate.

Oh, then you're doing the wrong comparison.

If you want to compare investments, you need to compare real estate to stocks.

If you're comparing living situations, you need to compare owning to renting.

Since you need somewhere to live, and that's what you meant by real estate investing, you should compare it versus renting (and the opportunity cost of owning).  Many areas of the country it'd be stupid to rent.  In others, it'd be stupid to own.

Yup. So much of it has to do with where you live and what long run price tendencies are in that area. Price of the house I grew up in....back in New England...has increased by 10X....in 52 years. IMHO, that's not so good relative to frothy areas like where I now live.

But ultimately I don't know why this discussion has to be a "versus." Why not both?

goodrookie

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Re: real estate vs. stock
« Reply #14 on: January 30, 2015, 12:07:42 AM »
@Terrestrial: Seriously dude you need to focus on reading comprehension. since you are not even reading i am not even going to bother with grammar or syntax. so here we go... point for point
1) Currently, the only areas of possible real estate bubble are CA, FL, "Oil towns" (e.g. North Dakota), areas of chronic decays (Detroit) and maybe NYC. In other areas bubble has already busted. Houses can't go down in the near future because people still needs to live in them (i.e. demand = supply). 
2) You forget the money you save in rent. Only parts of the mortgage payments (30-40%) are interests. What other investment would allow you to generate $5-6k per year on an investment of $20k?
3) FHA = less APR = more savings (higher yield in a sense)

@RapmasterD: Why not both? Money can be tight. If you have only 30k, you don't have much room for both. (Not my situation; for illustrative purpose only.)



Terrestrial

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Re: real estate vs. stock
« Reply #15 on: January 30, 2015, 05:52:12 AM »
FHA backed loans are an insurance program from the government whose main benefit is that they require small down payments and are available to less qualified buyers (lower credit/income ratio qualifying standards).  They come from normal lenders just like any other mortgage, they exist to get less advantaged people into homes because they can't meet traditional bank lending guidelines, so the govt came up with a program to back them since the buyers are risky.  I have nothing against the program for those it was intended, but claiming they result in savings for most people is false.

These 'FHA perks' don't come for free...you have to pay an upfront insurance closing premium and then ongoing PMI....these costs can be substantial over the life of the loan.  I have never seen FHA loan rates substantially better than traditional conforming and why would they be...the borrowers are generally of lower lending quality.  The govt does not set these rates, the banks do.  In fact looking at Wells Fargo's current rates page, the base rates are exactly the same. 

https://www.wellsfargo.com/mortgage/rates/

Given that calculating the APR on a loan should include it's fees (and PMI premiums), if the base rates are the same an FHA loan is likely to logically have a higher APR than a traditional loan.  Wells Fargo is nice enough to calculate it for you and show you the FHA loan APR is around 1% higher than a normal loan for these reasons.

For well qualified buyers with full 20% down payments FHA loans aren't needed or generally advantageous.
« Last Edit: January 30, 2015, 06:07:54 AM by Terrestrial »

waltworks

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Re: real estate vs. stock
« Reply #16 on: January 30, 2015, 09:03:25 AM »
This just keeps getting better.

Go read some rent vs. buy threads. Seriously. You have no idea what you're talking about, you obviously have only a superficial knowledge of the subject, and you write so poorly that most of us didn't even understand that you meant buying a house to *live in* rather than a rentals vs. stocks scenario of some kind.

-W

[MOD EDIT: Forum rule #1.]
« Last Edit: January 30, 2015, 09:33:45 AM by arebelspy »

Dodge

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Re: real estate vs. stock
« Reply #17 on: January 30, 2015, 09:22:29 AM »
@Terrestrial: Seriously dude you need to focus on reading comprehension. since you are not even reading i am not even going to bother with grammar or syntax. so here we go... point for point
1) Currently, the only areas of possible real estate bubble are CA, FL, "Oil towns" (e.g. North Dakota), areas of chronic decays (Detroit) and maybe NYC. In other areas bubble has already busted. Houses can't go down in the near future because people still needs to live in them (i.e. demand = supply). 
2) You forget the money you save in rent. Only parts of the mortgage payments (30-40%) are interests. What other investment would allow you to generate $5-6k per year on an investment of $20k?
3) FHA = less APR = more savings (higher yield in a sense)

@RapmasterD: Why not both? Money can be tight. If you have only 30k, you don't have much room for both. (Not my situation; for illustrative purpose only.)

"Houses can't go down in the near future because people still needs to live in them (i.e. demand = supply)."

Did people not need to live in them in 2008?  You cannot predict the future.  This has been a common theme with your posts.  It's important that any newbies reading here understand this point.  It might look easy in hindsight, but you cannot predict bubbles, and you cannot predict the future.  If you try, you are almost statistically guaranteed to lose.

"Only parts of the mortgage payments (30-40%) are interests."

I recommend plugging some numbers into an amortization calculator:

http://www.amortization-calc.com

For a $2,000 monthly mortgage payment, this is what your first year of payments looks like in terms of interest:



Yes you "gained" $5,000 in home equity (assuming the home doesn't depreciate), but you paid $18,900 in interest to get there.  This is a net loss. If you got the mortgage today, the interest payment wouldn't match the principle payment until the year 2031.

"What other investment would allow you to generate $5-6k per year on an investment of $20k?"

Give us your numbers (renting vs buying), and the math behind your assertions (stock appreciation vs house appreciation), and we will show you where you're wrong.
« Last Edit: January 30, 2015, 09:25:02 AM by Dodge »

NoraLenderbee

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Re: real estate vs. stock
« Reply #18 on: January 30, 2015, 03:42:17 PM »
@Terrestrial: Seriously dude you need to focus on reading comprehension. since you are not even reading i am not even going to bother with grammar or syntax. so here we go... point for point
1) Currently, the only areas of possible real estate bubble are CA, FL, "Oil towns" (e.g. North Dakota), areas of chronic decays (Detroit) and maybe NYC. In other areas bubble has already busted. Houses can't go down in the near future because people still needs to live in them (i.e. demand = supply). 


No, no--CA is the place where real estate only goes UP! There is never a bubble--just a temporary retrenchment.

Seriously, dude.

RapmasterD

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Re: real estate vs. stock
« Reply #19 on: January 30, 2015, 06:11:00 PM »
Except when they can't afford their mortgage because of massive job losses within an industry -- say...the oil industry, and they sell, or they're foreclosed upon.

Houston? I think we have a problem. No really....HOUSTON!

whiskeyjack

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Re: real estate vs. stock
« Reply #20 on: January 30, 2015, 07:50:43 PM »
Is Florida real estate poison?    I've got an inherited property there that I'm renting out while I decide what to do with it.