Author Topic: Is real estate really a bad way to grow wealth compared to stocks? I'm confused.  (Read 4473 times)

moustacheverte

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I always thought that it's better for me to buy ETFs because they're relatively liquid and because the average returns are better whereas if you buy real estate you're getting rents/increasing your net worth but at the expense of that money being tied up and not accruing interest in the stock market.

However, consider this:

Property is worth 100K, rents for 1K/mo, and can be bought for 20% down. The result of this operation is that you're basically getting 1K in returns from your 20K cash, and it goes to pay the mortgage etc. So while your effective cash flow is close to 0 after mortgage, taxes, upkeep, etc; you're still having your 20K pay off the remaining 80K on the mortgage for "free". After the mortgage is up, your 20K is turning into 100K and your tenants paid it: your only "loss" was the interest you could have gotten on that 20K.

Please help me understand: is it really that simple? If so, that's a pretty good return on investment, how are stocks better?

Wrenchturner

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You can probably find the answers in a myriad of locations if you look a little bit.  This conversation has been had many times.  However, 1. I don't think you're renting anything with that type of return in Canada. 2. Real estate involves leverage. 3.  Stocks don't have carrying costs and are very liquid.

Those are probably the main points to focus on but there are more experienced property investors on this forum that could probably give a better answer if there is one.

moustacheverte

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You can probably find the answers in a myriad of locations if you look a little bit.  This conversation has been had many times. 

I'm sure. Could you point me in the right direction?

Maybe in Canada you don't get this kind of returns, but the world is pretty big, and I'm more interested in the general principle/reasoning than a specific country's situation.

srad

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how are stocks better?

Stocks don't call you on the weekend saying their plumbing is backed up.
Stocks don't need to be painted every few years.
Stocks don't need their floors replaced after a dog pisses everywhere.
I've never had a heater go out with my stocks.
You can't be sued for all of your net worth due to a slip and fall  - I've never actually heard of anyone being totally wiped out but at the company i work for, a non performing note fund we have had several cases where we paid out high 5 figures and one that was 175k.


I find for the largest return you can get on real estate its how much are you willing to do yourself?  You hire a property manager, its 8-10% of the rents, when you only have 20% down its HALF of your profits.  You buy a turnkey property, you will be paying top dollar so you won't make as much on the exit of selling. Now, if you go out and find an off market deal that needs some work.  You put in the work or at least put in as much as you can, and you manage the rental, then yes, you can make some money and probably beat the market.  But make no mistake.  its very very far from a passive investment.

Comes down to this, how much is your free time worth in order to beat the market?


Wrenchturner

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You can probably find the answers in a myriad of locations if you look a little bit.  This conversation has been had many times. 

I'm sure. Could you point me in the right direction?

Maybe in Canada you don't get this kind of returns, but the world is pretty big, and I'm more interested in the general principle/reasoning than a specific country's situation.

Search this forum.
Read the stickies.
https://www.investopedia.com/investing/reasons-invest-real-estate-vs-stock-market/
Google search "stocks vs. real estate"

I gave you some of the general principles, but specific countries/regions are critical since real estate is regional and cyclical.

John Galt incarnate!

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how are stocks better?

Stocks don't call you on the weekend saying their plumbing is backed up.
Stocks don't need to be painted every few years.
Stocks don't need their floors replaced after a dog pisses everywhere.
I've never had a heater go out with my stocks.
You can't be sued for all of your net worth due to a slip and fall  - I've never actually heard of anyone being totally wiped out but at the company i work for, a non performing note fund we have had several cases where we paid out high 5 figures and one that was 175k.


I find for the largest return you can get on real estate its how much are you willing to do yourself?  You hire a property manager, its 8-10% of the rents, when you only have 20% down its HALF of your profits.  You buy a turnkey property, you will be paying top dollar so you won't make as much on the exit of selling. Now, if you go out and find an off market deal that needs some work.  You put in the work or at least put in as much as you can, and you manage the rental, then yes, you can make some money and probably beat the market.  But make no mistake.  its very very far from a passive investment.

Comes down to this, how much is your free time worth in order to beat the market?

I've NEVER wanted to be a landlord for the reasons above to which I add: Stocks don't ruin a rented dwelling; some tenants do.


Papa bear

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Thereís some threads on here with a lot of maths done by @arebelspy. If I remember correctly, using assumptions such as the rental meeting the 1% rule, reinvesting your net income, leveraged around 80/20, and assuming a 7% annual return on equities, real estate wins over a 30 year time horizon, equities over a 50 year time horizon. 

This is all very hypothetical though, and is based on a LOT of assumptions. 

Iím doing phenomenally in real estate and my returns beat the pants off of equities. But I canít replicate that very often, and it is NOT passive.


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SwordGuy

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how are stocks better?

Stocks don't call you on the weekend saying their plumbing is backed up.
Stocks don't need to be painted every few years.
Stocks don't need their floors replaced after a dog pisses everywhere.
I've never had a heater go out with my stocks.
You can't be sued for all of your net worth due to a slip and fall  - I've never actually heard of anyone being totally wiped out but at the company i work for, a non performing note fund we have had several cases where we paid out high 5 figures and one that was 175k.


I find for the largest return you can get on real estate its how much are you willing to do yourself?  You hire a property manager, its 8-10% of the rents, when you only have 20% down its HALF of your profits.  You buy a turnkey property, you will be paying top dollar so you won't make as much on the exit of selling. Now, if you go out and find an off market deal that needs some work.  You put in the work or at least put in as much as you can, and you manage the rental, then yes, you can make some money and probably beat the market.  But make no mistake.  its very very far from a passive investment.

Comes down to this, how much is your free time worth in order to beat the market?

I've NEVER wanted to be a landlord for the reasons above to which I add: Stocks don't ruin a rented dwelling; some tenants do.

The companies the stocks are for can absolutely ruin the rented or owned property of others!    We've got a chemical plant in our county that poisoned the water supply for miles around itself.    They are on the hook for free water supplies, new water filtration systems, etc.   It isn't cheap and those lost profits show up in stock valuation and lower dividends.    Or they poison people or give them cancer with their products and get saddled with huge legal judgments against them.


SndcxxJ

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I'm all in in real estate, so my perspective is biased. 
As others are saying, real estate is not passive.  I've made a career out of it.  Your basic idea is correct, your money can go much further than stocks because of cheap leverage offered by banks.  In fact, it's even better than your basic idea because while you are paying down the mortgage the value of the $100k house is slowly creeping up due to inflation and population growth.  By the time the mortgage is gone the value of the house can be many times the original purchase price.  In the US there are tax benefits along the way that helps protect the income the real estate creates and can shelter other income you might have.
Your example of 1% gross rents per month can be found, but they they are often in depressed areas without a history of appreciating value, but money can be made in most areas.

Telecaster

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The companies the stocks are for can absolutely ruin the rented or owned property of others!    We've got a chemical plant in our county that poisoned the water supply for miles around itself.    They are on the hook for free water supplies, new water filtration systems, etc.   It isn't cheap and those lost profits show up in stock valuation and lower dividends.    Or they poison people or give them cancer with their products and get saddled with huge legal judgments against them.

Okay Mr. Red Herring.  Most people here recommend investing in the index.  Yes, one or maybe 100 companies can have a bad year, but that's why you invest in the index.

That's not the same as investing in an individual property, and you and I both know that.  At least I do.  I hope for your sake you do too.   

For the record, I have investments in real estate.  For reasons that completely baffle me, many people present stock vs. real estate as an either/or proposition.  It is not either/or.  They are different investments.

It is not a contest.  It is not Mac vs. PC.  Real estate and stocks are different investments that can be evaluated separately.  I have no idea why this concept is so difficult to grasp.

Michael in ABQ

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The more active your investment is, the greater your returns can be. There is generally a higher level of risk with active investments - though that can be somewhat offset by the fact that you have more control over the outcome through your efforts than a passive investment.

business > real estate > stocks > bonds > cash-equivalents

A $100,000 investment in a small business could potentially double your money in a year or two if you use leverage. That could be a 50-100% return. However, that probably means working full time to grow that business to the point where another buyer is willing to pay more than you bought it for - plus the cash flow you received in the interim.

Real estate can get a 20% annual cash on cash return in many cases, though of course that's not guaranteed. It will take some work as well, i.e. managing the property yourself, handling many of the smaller repairs, etc. Still, something that an certainly be done on evenings and weekends while you have a full time job.

Meanwhile a passive index fund will probably work to around 10% a year and since it's passive, there's really nothing you can do to influence that.


You can be very passive in real estate buying in a nice neighborhood with a management company that handles everything. But your returns will be lower than the person who puts in a bunch of sweat equity flipping a trashed house or dealing with lost of maintenance issues and problem tenants in a rough neighborhood. Same thing with stocks - if you're willing to spend a lot of time identifying those small opportunities that a large investor can't take advantage of (i.e buying a couple hundred shares in a thinly traded company), day-trading, options, etc. you can potentially beat the market and earn over ~10%. But it's not going to be passive and you're accepting a higher level of risk.

theoverlook

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Real estate is a job. Stocks are a passive investment. I own real estate and spend many hours a week managing it. I own stocks and spend zero hours a week managing it. My "per hour" take on the stocks is way higher. My overall gross on the real estate is way higher.

You're also underestimating costs if you think covering your mortgage is enough to make money long term in a rental. The long term costs of real estate are significant, and have a very large impact on your returns. I would say that the average small time landlord makes less than stock market returns on their real estate once all expenses are properly accounted for, even after leverage is taken into account. Will you be above average? Maybe, but thinking that banking $0 in cash flow until the house is paid off is good points to probably not.
« Last Edit: April 06, 2020, 07:07:31 AM by theoverlook »

Fishindude

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Real estate investing comes up and everyone immediately starts thinking about renting houses and apartments, which is probably the most competitive real estate market there is and requires the most work.   

There are a whole lot of other types of real estate to invest in.   I owned a commercial building for many years that we leased to a single tenant on a triple net lease; tenant did all the upkeep, paid taxes, etc. and we had the same renter for nearly 20 years before selling the property to them.   That was a great investment and we got our investment back many times over.

Currently own several farms and while they are not home run, sexy investments they kick off around 4% return year in / year out after taxes, etc.   Expenses to own are almost nothing, taxes are low and we just take land rental payments from a farmer a couple times each year.  The land will also gradually appreciate in value over time.   4% Feels pretty good right now with the way the stock market has been tanking and current CD and savings rates.

I think some investment real estate should be a piece of everyone's portfolio, and it sure as heck doesn't have to be residential rentals.

matchewed

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It is just a matter of efficiency. The real estate market can be less efficient and therefore provide you with greater returns as long as you can recognize those inefficiencies. If you cannot then you will probably get less returns. It is about learning how to run the numbers, how to recognize a good deal, and then how to execute the plan. Similarly if you cannot do those things you will not be able to have higher returns.

Full disclosure I do both forms of investment. I'm waiting on a new real estate investment by looking for a deal that fits my criteria. All the while I'm happily taking market returns on my regularly scheduled investments.

srad

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But I canít replicate that very often.

^^^

This is the most frustrating part for me.  I'm having a hard time finding deals that are worth my time and money.  Which is why i also invest in the market. i'm about 50/50 real estate/market.  That rent money has to go somewhere.


Tom Severston

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Difficult to say. Both have their own pros and cons. For example, real estate is less risky and more stable. The property portfolio is easier to control. But stocks also have some advantages like higher liquidity and it is easier to diversify them. So it depends on the investorís preferences. Some can combine both types of investing.
I think that this article can be interesting for those who want to know more about stocks and real estate investments: https://realtybundles.com/blog/real-estate-vs-stocks-investments-what-to-choose


martyconlonontherun

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The frustrating thing about stocks is how little you can do if you have core mushtaschian principles. Pile into index funds. That's it. Once you are out of cash, you just sit there. Yes, you can leverage, trade options, or pick individuals stocks, but that is frowned upon advice. Real estate is the opposite, you can make money work faster through leverage, speculating on areas, doing more hands on activity with sweat equity, etc and for some reason it is more acceptable in real estate.

waltworks

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It's more acceptable because it actually works, because RE is hyperlocal and not nearly as efficient of a market. It also has gov't-sponsored leverage at crazy low rates.

-W

Michael in ABQ

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Difficult to say. Both have their own pros and cons. For example, real estate is less risky and more stable. The property portfolio is easier to control. But stocks also have some advantages like higher liquidity and it is easier to diversify them. So it depends on the investorís preferences. Some can combine both types of investing.
I think that this article can be interesting for those who want to know more about stocks and real estate investments: https://realtybundles.com/blog/real-estate-vs-stocks-investments-what-to-choose

I'm not sure I would agree with that statement. I don't have to worry about my index fund losing value if a major local employers goes out of business, or if environmental contamination occurs. As we saw in the last recession real estate can be risky, even for normally stable properties like single-family homes in middle-class neighborhoods.


It's active versus passive investment. You can't add much sweat equity to a stock portfolio like you can with real estate. If you choose a passive real estate investment though you're not going to get the highest returns that someone who is active in flipping might earn for instance. But if they're buying with leverage there's additional risk that is not normally present in the stock market. When you take out a mortgage your equity position in real estate can go negative - that won't happen with the stock market unless you're buying on margin because the worst that will happen is a stock will go to zero. As long as you own multiple stocks (preferably in an index fund) a single one going bankrupt won't make a substantial difference.

clarkfan1979

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To echo was others have said, real estate returns can be higher because you are using leverage. It's also not typically 100% passive.

My step-father owns a majority share in a 39-unit with 3 other investors. This is mostly passive. He manages the manager. Because he owns a majority share, he is the most active investor. The other investors are very close to 100% passive.

I buy ugly single family homes, fix them up and then rent them out. This is much more active. The first 3-6 months involves a ton of work fixing up the house. After a few years of self-managing you get better and more efficient. The actual renting of the houses does not involve that much work for me. Maybe 20 hours/year per house. I will be at a house 4 days/year for about 5 hours to show to prospective tenants and do minor repairs and touch up paint.

I just got back from Florida two days ago to re-rent a house. My father lives 30 minutes away from my rental. Myself, wife and son stayed with my father (family vacation) and I spent 3 days at the rental (12 hours total), doing repairs and showing to prospective tenants. Because we used points for the flights for everyone, the entire trip cost $325 for travel (flights, parking, rental car & gas). We will do this trip again in December. However, I will probably only spend about one day at the house for about 4 hours.

I'm actually getting ready to remodel a rental that needs a face-lift. I will be repainting the entire inside of the house (50 hours), laying new flooring (50 hours), and painting the outside of the house (50 hours). This type of update happens every 13-15 years for me. I could hire this out, but I do not mind doing it myself.

Dicey

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To echo was others have said, real estate returns can be higher because you are using leverage. It's also not typically 100% passive.

My step-father owns a majority share in a 39-unit with 3 other investors. This is mostly passive. He manages the manager. Because he owns a majority share, he is the most active investor. The other investors are very close to 100% passive.

I buy ugly single family homes, fix them up and then rent them out. This is much more active. The first 3-6 months involves a ton of work fixing up the house. After a few years of self-managing you get better and more efficient. The actual renting of the houses does not involve that much work for me. Maybe 20 hours/year per house. I will be at a house 4 days/year for about 5 hours to show to prospective tenants and do minor repairs and touch up paint.

I just got back from Florida two days ago to re-rent a house. My father lives 30 minutes away from my rental. Myself, wife and son stayed with my father (family vacation) and I spent 3 days at the rental (12 hours total), doing repairs and showing to prospective tenants. Because we used points for the flights for everyone, the entire trip cost $325 for travel (flights, parking, rental car & gas). We will do this trip again in December. However, I will probably only spend about one day at the house for about 4 hours.

I'm actually getting ready to remodel a rental that needs a face-lift. I will be repainting the entire inside of the house (50 hours), laying new flooring (50 hours), and painting the outside of the house (50 hours). This type of update happens every 13-15 years for me. I could hire this out, but I do not mind doing it myself.
If the purpose of the trip is to work on your investment, why would you burn points that you could spend on trips that weren't tax deductible? Does your wife help with managing, maintaining the property or recordkeeping? Asking for a friend.

Bloop Bloop

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The rules have now changed in my country so you can no longer claim travel but you used to be able to claim travel deductions with a pretty loose leash so if you had an IP out of state you could just go there for a holiday and write off the airfare.

Anyway there are a few good ways to ameliorate some of the risks associated with investment properties. If you discriminate against tenants based on income, job type and previous references you can lessen the risk of a really shit person screwing up your IP. For example renting only to professional tenants with strong income history and a good previous reference will help modify risks. It's not illegal to discriminate against tenants based on any of those attributes so by all means discriminate.

There really ought to be a landlords' union that meets every now and then to discuss prices, discuss renting strategies, etc. I'm not suggesting landlords should collude or price fix or do anything illegal but they should meet in a social setting, the same way that employers' and employees' unions do. Just a thought.

SwordGuy

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The rules have now changed in my country so you can no longer claim travel but you used to be able to claim travel deductions with a pretty loose leash so if you had an IP out of state you could just go there for a holiday and write off the airfare.

Anyway there are a few good ways to ameliorate some of the risks associated with investment properties. If you discriminate against tenants based on income, job type and previous references you can lessen the risk of a really shit person screwing up your IP. For example renting only to professional tenants with strong income history and a good previous reference will help modify risks. It's not illegal to discriminate against tenants based on any of those attributes so by all means discriminate.

There really ought to be a landlords' union that meets every now and then to discuss prices, discuss renting strategies, etc. I'm not suggesting landlords should collude or price fix or do anything illegal but they should meet in a social setting, the same way that employers' and employees' unions do. Just a thought.

If you're meeting and discussing prices, you're probably colluding on price-fixing.

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."    Adam Smith in The Wealth of Nations -  the person who first wrote about the glories of capitalism

Bloop Bloop

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It doesn't matter whether you're colluding or not, but whether it's provable or not.

marty998

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It doesn't matter whether you're colluding or not, but whether it's provable or not.

Giving up a dollar in order to act ethically is not something that comes naturally to you does it.

There'll never be a landlords "union" in the way you describe. Try getting 10 people together to agree on anything, let alone 1000 landlords in your local area. It's just never going to happen.

We already have groups that advocate on our behalf, like the various real estate institutes who have done exceptionally well in sustaining government policies to keep housing valuations where they are.

FWIW I haven't reduced the rent on my older IP. I've seen a fair bit of discounting lately, but I see no reason to drop it if the tenant hasn't asked for a drop.


fishnfool

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Some real estate is a bad investment same as some stocks. Hopefully you spend time researching what you intend to invest in beforehand.

But sometimes its dumb luck!

SwordGuy

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The companies the stocks are for can absolutely ruin the rented or owned property of others!    We've got a chemical plant in our county that poisoned the water supply for miles around itself.    They are on the hook for free water supplies, new water filtration systems, etc.   It isn't cheap and those lost profits show up in stock valuation and lower dividends.    Or they poison people or give them cancer with their products and get saddled with huge legal judgments against them.

Okay Mr. Red Herring.  Most people here recommend investing in the index.  Yes, one or maybe 100 companies can have a bad year, but that's why you invest in the index.

That's not the same as investing in an individual property, and you and I both know that.  At least I do.  I hope for your sake you do too.   

For the record, I have investments in real estate.  For reasons that completely baffle me, many people present stock vs. real estate as an either/or proposition.  It is not either/or.  They are different investments.

It is not a contest.  It is not Mac vs. PC.  Real estate and stocks are different investments that can be evaluated separately.  I have no idea why this concept is so difficult to grasp.

I invest in multiple rental properties just like I invest in multiple stocks.   I don't put all my eggs in any one of those baskets!

I do object to your comment about "Mr. Red Herring".   I made a direct refutation of someone else's comment about tenants trashing your property value but stocks don't.    Bad management (the tenants in charge of your equity in the companies you invest in) can completely destroy your property value.   MCI and Enron are another two examples.

As for tenants trashing my rental properties, I've had one bad tenant in 6+ years of renting.   And insurance covered the repairs...

matchewed

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The companies the stocks are for can absolutely ruin the rented or owned property of others!    We've got a chemical plant in our county that poisoned the water supply for miles around itself.    They are on the hook for free water supplies, new water filtration systems, etc.   It isn't cheap and those lost profits show up in stock valuation and lower dividends.    Or they poison people or give them cancer with their products and get saddled with huge legal judgments against them.

Okay Mr. Red Herring.  Most people here recommend investing in the index.  Yes, one or maybe 100 companies can have a bad year, but that's why you invest in the index.

That's not the same as investing in an individual property, and you and I both know that.  At least I do.  I hope for your sake you do too.   

For the record, I have investments in real estate.  For reasons that completely baffle me, many people present stock vs. real estate as an either/or proposition.  It is not either/or.  They are different investments.

It is not a contest.  It is not Mac vs. PC.  Real estate and stocks are different investments that can be evaluated separately.  I have no idea why this concept is so difficult to grasp.

I invest in multiple rental properties just like I invest in multiple stocks.   I don't put all my eggs in any one of those baskets!

I do object to your comment about "Mr. Red Herring".   I made a direct refutation of someone else's comment about tenants trashing your property value but stocks don't.    Bad management (the tenants in charge of your equity in the companies you invest in) can completely destroy your property value.   MCI and Enron are another two examples.

As for tenants trashing my rental properties, I've had one bad tenant in 6+ years of renting.   And insurance covered the repairs...

I think that the red herring is that one or two companies typically can't tank whole indexes. While one bad tenant can cost you a great deal of money.

theoverlook

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There is a "union" of property owners - at least for commercial landlords - BOMA, the Building Owners and Manager's Association. I bet there's something similar for residential but I'm not familiar with it.

SeattleCPA

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@moustacheverte you might find it useful to look at the rate of return of everything research paper, which is available here: https://www.frbsf.org/economic-research/files/wp2017-25.pdf

I blogged on this paper here: https://evergreensmallbusiness.com/rate-of-return-on-everything-paper/

Also, I graphed out the stock versus real estate returns from the study here: https://evergreensmallbusiness.com/rate-of-return-of-everything-study-in-line-charts/

The TLDR summary: In most of the world, and looking back at roughly the last 150 years, real estate delivered a better return that equities but you can't easily diversify...

BTW, to add context to my remarks: I'm an index fund investor using David Swensen's asset allocation formula. Not a real estate fanatic... For what it's worth...

Bloop Bloop

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It doesn't matter whether you're colluding or not, but whether it's provable or not.

Giving up a dollar in order to act ethically is not something that comes naturally to you does it.

There'll never be a landlords "union" in the way you describe. Try getting 10 people together to agree on anything, let alone 1000 landlords in your local area. It's just never going to happen.

We already have groups that advocate on our behalf, like the various real estate institutes who have done exceptionally well in sustaining government policies to keep housing valuations where they are.

FWIW I haven't reduced the rent on my older IP. I've seen a fair bit of discounting lately, but I see no reason to drop it if the tenant hasn't asked for a drop.

Doctors, lawyers, engineers etc all have a cartel. Might as well join them.

The whole point of buying up investment property is to use the scarcity to try to rent seek. Like, if you're not trying to rent seek, why even bother investing?

Dicey

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I scanned the responses earlier today and saw nothing on this topic. Apologies if it's been raised since then.

There are a lot of barriers to entry in the RE market. One must have good credit, one must have a down payment, one must secure a lender willing to underwrite a loan on the property, one must have the income to support the property, one must have the reserves in case renters trash the place or major systems fail. Biggest gotcha of all? One must figure out how to buy the right property in the first place, which is damn hard for a rookie investor to do.

The stock market is a heckuva lot simpler. It's never been easier or cheaper to buy stocks. ETFs make buying the whole sector or entire market possible with a few keystrokes. You don't need good credit, a down payment or much of anything else. There are awesome investing resources (My personal favorite? Anything by jlcollinsnh.) You can even invest through your employer and get paid to do so.

Investing is so much easier than Real Estate, but one does not preclude the other. Start investing now. Now, as in today. You can always buy RE later, but you'll never regain years of missed matches and/or compounding. Get moving.

Bloop Bloop

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Biggest gotcha of all? One must figure out how to buy the right property in the first place, which is damn hard for a rookie investor to do.

Yeah. Personally, I think it's too easy (with both real estate and shares) to go for the bargain fixer-upper, the place with high upside. That usually comes with risk, too. You can ameliorate a lot of that risk if you think, "if I was a good decent family with young children where would I want to live?" and buy houses that fit that criteria.

srad

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I do object to your comment about "Mr. Red Herring".   I made a direct refutation of someone else's comment about tenants trashing your property value but stocks don't.    Bad management (the tenants in charge of your equity in the companies you invest in) can completely destroy your property value.   MCI and Enron are another two examples.


My comment about tenants trashing your place vs stocks was in regards to the OP asking about funds.  If there's one bad apple in a fund, it wont ruin the fund.  You get one bad tennant and you can get one ruined rental.  I've been in the game for 14 years and have never had a tenant destroy a unit, but I've had all kind of repairs needed on their departure (or  during their tenure) one of the largest tenant caused damage was having to spend over 8k replacing floors due to a cat and dog pissing everywhere...  That 8k loss was taken immediately out of my checking account.  Now if an ETF falls by 8k, i sit around and wait for a few months/years for it to recover and hopefully grow.  Homes, you can't sit on a ruined floor or busted furnace or leaky roof. 

jasman18

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I USED to favor stocks too.
I followed the boiler plate advice and invested 40-60% of my income for 7+ years. 50k+ a year saved
I didnt get anywhere close to FI.

Then I got into real estate in 2017 and already hit Lean FI this year because of it.
People say its a job....YEP. I do a bit of texting and phone calls, But not much more.

People say its a high barrier of entry, not necessarily. Iv'e done 3 no money down transactions.
A few weeks ago I completed another one that was another base hit:

235k sales price
8 units
80% from bank
20% from seller
only out of pocket was 2k closing costs
Net Cash 850 a month
All occupied and paying, but under rented by $100 per door.

Iv'e also noticed the people that yell the loudest against it are usually not involved in it.
There is a reason the majority of millionaires have a decent real estate exposure.....It works.
« Last Edit: June 24, 2020, 05:43:34 PM by jasman18 »

matchewed

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I USED to favor stocks too.
I followed the boiler plate advice and invested 40-60% of my income for 7+ years. 50k+ a year saved
I didnt get anywhere close to FI.

Then I got into real estate in 2017 and already hit Lean FI this year because of it.
People say its a job....YEP. I do a bit of texting and phone calls, But not much more.

People say its a high barrier of entry, not necessarily. Iv'e done 3 no more down transactions.
A few weeks ago I completed another one that was another base hit:

235k sales price
8 units
80% from bank
20% from seller
only out of pocket was 2k closing costs
Net Cash 850 a month
All occupied and paying, but under rented by $100 per door.

Iv'e also noticed the people that yell the loudest against it are usually not involved in it.
There is a reason the majority of millionaires have a decent real estate exposure.....It works.

Having more than $350k invested and set aside for FIRE didn't help you get close to the goal?

... I find that hard to believe.

jasman18

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Having more than $350k invested and set aside for FIRE didn't help you get close to the goal?

... I find that hard to believe.

Its close to 850k invested now. Its throws off about $1,500 a year in usable dividends because most of it is in 401ks and IRAs.
So yeah not very close to FI.
Roth Ladders arent viable because taxes would kill me right now.
72t would yield a whopping 30k per year. So not enough to raise the family on.



desert_phoenix

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I USED to favor stocks too.
I followed the boiler plate advice and invested 40-60% of my income for 7+ years. 50k+ a year saved
I didnt get anywhere close to FI.

Then I got into real estate in 2017 and already hit Lean FI this year because of it.
People say its a job....YEP. I do a bit of texting and phone calls, But not much more.

People say its a high barrier of entry, not necessarily. Iv'e done 3 no money down transactions.
A few weeks ago I completed another one that was another base hit:

235k sales price
8 units
80% from bank
20% from seller
only out of pocket was 2k closing costs
Net Cash 850 a month
All occupied and paying, but under rented by $100 per door.

Iv'e also noticed the people that yell the loudest against it are usually not involved in it.
There is a reason the majority of millionaires have a decent real estate exposure.....It works.

Would you have any advice to give to someone considering expanding into RE?  Things you wish you knew before you got in?

Dicey

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Having more than $350k invested and set aside for FIRE didn't help you get close to the goal?

... I find that hard to believe.

Its close to 850k invested now. Its throws off about $1,500 a year in usable dividends because most of it is in 401ks and IRAs.
So yeah not very close to FI.
Roth Ladders arent viable because taxes would kill me right now.
72t would yield a whopping 30k per year. So not enough to raise the family on.
You're conveniently forgetting the magic of compounding. If invested well, it will be a lot more than that when you need it. Also, as a LL myself, I can assure you there is an effort component to RE that owning index funds simply does not have. No toilets to break, no appliances to go out. Just saying, because I actually do have RE experience. I love it, because it's more tangible, but it isn't easier.

waltworks

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No way in hell would I want a $250k, 8 unit place that is only throwing off $800 a month (and I bet it's not if you account for all the hidden/infrequent costs)... your odds of having a disaster tenant/lawsuit/police seizure because someone is selling drugs/etc/etc... yikes.

Look, RE is a great way to invest. But if you have only been doing it for a few years, and you've never had a bad tenant or disastrous problem... you have not yet experienced what it really is.

-W

clarkfan1979

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To echo was others have said, real estate returns can be higher because you are using leverage. It's also not typically 100% passive.

My step-father owns a majority share in a 39-unit with 3 other investors. This is mostly passive. He manages the manager. Because he owns a majority share, he is the most active investor. The other investors are very close to 100% passive.

I buy ugly single family homes, fix them up and then rent them out. This is much more active. The first 3-6 months involves a ton of work fixing up the house. After a few years of self-managing you get better and more efficient. The actual renting of the houses does not involve that much work for me. Maybe 20 hours/year per house. I will be at a house 4 days/year for about 5 hours to show to prospective tenants and do minor repairs and touch up paint.

I just got back from Florida two days ago to re-rent a house. My father lives 30 minutes away from my rental. Myself, wife and son stayed with my father (family vacation) and I spent 3 days at the rental (12 hours total), doing repairs and showing to prospective tenants. Because we used points for the flights for everyone, the entire trip cost $325 for travel (flights, parking, rental car & gas). We will do this trip again in December. However, I will probably only spend about one day at the house for about 4 hours.

I'm actually getting ready to remodel a rental that needs a face-lift. I will be repainting the entire inside of the house (50 hours), laying new flooring (50 hours), and painting the outside of the house (50 hours). This type of update happens every 13-15 years for me. I could hire this out, but I do not mind doing it myself.
If the purpose of the trip is to work on your investment, why would you burn points that you could spend on trips that weren't tax deductible? Does your wife help with managing, maintaining the property or recordkeeping? Asking for a friend.

I had 147,000 Southwest points and the trip cost 30,800 points for all 3 of us. I do not plan on spending any money on flights in 2020. I honestly do not see myself spending any money on flights for 2021 either, but I am not 100% sure. It is also worth noting that we gain about 5,000 points/month with personal and business spending.

jasman18

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No way in hell would I want a $250k, 8 unit place that is only throwing off $800 a month (and I bet it's not if you account for all the hidden/infrequent costs)... your odds of having a disaster tenant/lawsuit/police seizure because someone is selling drugs/etc/etc... yikes.

Look, RE is a great way to invest. But if you have only been doing it for a few years, and you've never had a bad tenant or disastrous problem... you have not yet experienced what it really is.

-W

I can tell you didn't read the details the transaction. re-read and tell me the % ROI that would be. As a RE guy you would probably like it. 

That wasn't an 8 Unit complex It was 8 separate units, separate addresses. I took ownership of without a downpayment, so 100% financing and STILL throws off positive cashflow.





waltworks

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Cool, post a full set of costs and I'll let you know.

The low end is a terrible place to be if things go south.

-W

ender

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I can tell you didn't read the details the transaction. re-read and tell me the % ROI that would be. As a RE guy you would probably like it. 

That wasn't an 8 Unit complex It was 8 separate units, separate addresses. I took ownership of without a downpayment, so 100% financing and STILL throws off positive cashflow.

There's nowhere near enough details to calculate an ROI.

Based on the minimal information you posted here, it could be quite positive or negative. But there's not nearly enough details.

jasman18

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Wow, Guess I will have to post again.

235k sales price
8 units
80% from bank
20% from seller
only out of pocket was 2k in closing costs
Net Cash 850 a month
All occupied and paying, but under rented by $100 per door.


Gross Rents $3,970. Gross rents should be $4700 based on 10 other places I own in the immediate area.  ($575-$650 per door)
Total PITI $2,112
Capex expenses held back: $1000 per month ($125 per door per month)
NO CAPEX needed or deferred maintenance.
Cast Iron Drains are in great shape,New Roofs, 1/2 have original HVAC and in all working in great shape.


Doesn't really matter if the ROI is 100% or 500%. Its still great for cash on cash.

« Last Edit: June 29, 2020, 01:31:16 PM by jasman18 »

waltworks

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No, I mean, post actual and projected expenses. At the low end just keeping things painted/carpeted/standing up costs you a ton of your revenue, especially if it's 8 separate structures. That's going to cost a pretty penny to maintain in the long run.

FWIW, you *always* should have a Capex and maintenance set aside. You might not spend anything this year, but every part of those houses is slowly falling apart. You'll pay sooner or later.

-W

EricEng

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Property is worth 100K, rents for 1K/mo, and can be bought for 20% down. The result of this operation is that you're basically getting 1K in returns from your 20K cash, and it goes to pay the mortgage etc.
Good luck getting that 1% rate.  I have lots of friends renting that struggle in the .5-.6% range.  I haven't seen anyone get 1% in a long while.  I know that's the target, but super hard to find.

I regularly see $200-300k homes renting for $1,500-2200.  $350-550k renting for $2,200-4,000.  There are even $600k renting for $3,500-4,000...

theoverlook

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We just had someone smash a bunch of windows in our building. We spent about 5 hours late on a weekend night cleaning up broken glass and boarding up that part of the building. The tenant whose space was damaged has been very understanding and good to work with. The costs aren't enough to justify making an insurance claim, if it would even be covered, but it's still mid-high 4 figures.

I haven't had anyone smash windows on my index fund portfolio.