Author Topic: Real Estate Returns vs. Stock Returns: The Maths  (Read 27578 times)

mr_orange

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #100 on: November 22, 2015, 10:12:25 AM »
All of this is true. And also irrelevant to this thread. Relevant to a "how to speculate on real estate" thread, absolutely.  Relevant to a scenario of someone wanting to buy a single rental property for cash flow if and only if it puts them ahead of that same money in index funds (while using a mortgage)?  Not so much. :)

I'm not following this.  Appreciation, amortization of a loan, and tax shields are all relevant considerations with even a single rental.  Where was it specified that we're only considering cash flow?  It's your thread so make up whatever rules you want, but it was not clear to me that these were constraints. 

Just because something is not throwing off big cash flows doesn't mean it is speculating either.  Small cash flows (or even break even ones) that are fully shielded by paper losses also get even small appreciation upside and loan amortization.  Many of these properties don't meet the "2% rule" threshold and are BETTER investments than D class rentals that blindly meet the rule and people feel are "good investments."  The investment needs to fit with the person's individual strategy and needs as an investor. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
-The future ain’t what it used to be ~Yogi Berra

arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #101 on: November 22, 2015, 10:19:15 AM »

All of this is true. And also irrelevant to this thread. Relevant to a "how to speculate on real estate" thread, absolutely.  Relevant to a scenario of someone wanting to buy a single rental property for cash flow if and only if it puts them ahead of that same money in index funds (while using a mortgage)?  Not so much. :)

I'm not following this.  Appreciation, amortization of a loan, and tax shields are all relevant considerations with even a single rental.  Where was it specified that we're only considering cash flow?  It's your thread so make up whatever rules you want, but it was not clear to me that these were constraints. 

Because it was specified a 100k property, with a certain return, etc. etc.

Then you went on about how people invest for different reasons, may have large depreciations, 100k may not be normal for some areas, yadda, yadda (all the stuff I quoted last post).

Which is all true, but irrelevant to this thread. :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
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mr_orange

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #102 on: November 22, 2015, 11:23:31 AM »
Oh...okay.  I thought we diverted to talking about stuff in the abstract.  Forgive me. 

Carry on. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
-The future ain’t what it used to be ~Yogi Berra

Frugancial Advisor

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #103 on: November 28, 2015, 05:29:56 PM »
Sounds like comparing apples to oranges. This thread consists of an infinite amount of hypothetical comparisons between two completely different asset classes which have unlimited variables which could brand either as the obvious winner.

First, can we elaborate on the definition of 'returns' for the purpose of this thread? Does this mean yield? Growth? Net Growth? Deferred Growth? Risk-adjusted growth? Leveraged growth? Passive return?

I mean, really, throw $100k into VTSAX and wait 30 years vs. throw $100k at a condominium and never post an ad for tenants? Or throw $100k into one individual stock versus $100k as a down payment on a 4plex in an up-and-coming area of town?

The most important considerations are going to be knowledge, experience, tolerance, leverage, risk tolerance, patience, activity, and tax-efficiency.

For the passive and tax-efficient return I'm seeking, my choice would be stocks :)

mr_orange

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #104 on: November 28, 2015, 07:15:24 PM »
First, can we elaborate on the definition of 'returns' for the purpose of this thread? Does this mean yield? Growth? Net Growth? Deferred Growth? Risk-adjusted growth? Leveraged growth? Passive return?

None of these definitions matter if you simply look at the cash flows.  A simple IRR calculation can be used to compare the two.  You, of course, have to make hundreds of assumptions when you do this and thus what is optimal will vary based on the individual and the scenario. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
-The future ain’t what it used to be ~Yogi Berra

clarkfan1979

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #105 on: November 29, 2015, 06:18:46 PM »

The most important considerations are going to be knowledge, experience, tolerance, leverage, risk tolerance, patience, activity, and tax-efficiency.

For the passive and tax-efficient return I'm seeking, my choice would be stocks :)

For the same reasons I choose rental real estate.

DarinC

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #106 on: December 01, 2015, 11:09:18 AM »
Thoughts?  Math I screwed up?  Quibbles with assumptions?
I don't think there's anything wrong with your assumptions, but you can restructure them to get a different picture as well.

The stock market, presumably an index fund or other broad slice, won't have as much variability as a single home, so having a range of values/probabilities for rental returns would probably provide a wider view. I'd suggest using real market returns (S&P is 5+% over the past 50 years IIRC), but that's difficult because there's no record of comparable home prices/rental returns that I'm aware of.

Maybe you could model what would happen if you bought at a local maximum in prices (both for housing and the market) rather than assuming you'll see the same average returns yoy? There are probably a bunch of other things you could do too. Anything that models some kind of variable you'd see irl could be useful.

mr_orange

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #107 on: December 01, 2015, 11:35:08 AM »
The broad stock market has lost 50% of its value twice in less than the last few decades.  If you were unfortunate enough to need liquidity during these times I would say the likelihood that the volatility was drastically higher in this type of investment than it is with real estate in your area is pretty good.  In my neck of the woods real estate lost about 15% of value during the mortgage crisis.  Rents on my properties dipped a bit, but it paled in comparison to the lunacy going on in the stock market. 

I do agree that there are risks with each type of investment, but real estate debt is not callable if you get the right financing.  This combined with a long time horizon and focusing on rents instead of appreciation makes the risk dynamics much different than they are with margin accounts purchasing publicly-traded securities.  You could, of course, combine them in some fashion and borrow against the real estate via HELOC or something else and invest that money in the market instead of using a margin account. 

I also agree that there are too many variables and the ones selected in the OP are a small subset of the considerations one should have when deciding which strategy is best for their situation.  If you learn to do things properly you can purchase real estate with very little money and enjoy a lot of the upside.  This allows you to continue investing in index funds as well and do BOTH.  You do have to trade off time and effort for this and thus some people claim it is "a job."  This is a pretty trivial analysis to me, but everyone needs to decide how they allocate their money limited resource; their time. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
-The future ain’t what it used to be ~Yogi Berra

arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #108 on: December 01, 2015, 12:10:01 PM »

Thoughts?  Math I screwed up?  Quibbles with assumptions?
I don't think there's anything wrong with your assumptions, but you can restructure them to get a different picture as well.

The stock market, presumably an index fund or other broad slice, won't have as much variability as a single home, so having a range of values/probabilities for rental returns would probably provide a wider view. I'd suggest using real market returns (S&P is 5+% over the past 50 years IIRC), but that's difficult because there's no record of comparable home prices/rental returns that I'm aware of.

Maybe you could model what would happen if you bought at a local maximum in prices (both for housing and the market) rather than assuming you'll see the same average returns yoy? There are probably a bunch of other things you could do too. Anything that models some kind of variable you'd see irl could be useful.

Good idea. Basically my assumption was to give a baseline (1% rule) and if your area met that, you could use this comparison as a basis.

If your area was better, you'll do better than this rough estimate, if your area's worse, you'll do worse.

Naturally you'll want to run more specific numbers of your own scenarios, but this was just a generic comparison with bland numbers.

Good point though that it's very dependent on your area.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

sol

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #109 on: December 01, 2015, 01:44:51 PM »
The broad stock market has lost 50% of its value twice in less than the last few decades. 

I call bullshit, sorry.  Why would you make something like that up when it's so easy to disprove?  The rest of your otherwise solid argument loses credibility when you lead with such an obviously misleading statement.

The recent "Great Recession" crash of 2007-09 was a little over 50% peak to trough, very briefly.  The only other market loss of that size or larger was the "Great Depression" of 1929, at over 80%, but that was almost 90 years ago.  Maybe you meant "in the entire history of the US stock market" instead of "in the last few decades"?  Otherwise, you're grossly overestimating the risks to a 100% equity investor, of which we have very few.  Mixed portfolios are much more muted.

I think part of the reason why real estate losses appear more muted than stock losses is that stocks are exactly priced daily.  Real estate "value" is significantly more subjective and we retroactively tend to measure losses by average price trends in the relevant area or neighborhood.  If you were to sell you real estate TODAY in the same way that you can sell your stocks today, at today's price on five minutes of advance notice, I'm sure the RE price would be much more volatile.  For all of the same reasons.  I'm just not sure you can defensibly compare the volatility of the two markets when one has second to second volatility but huge liquidity and the other has no fixed measure of value and extremely low liquidity.  I suspect the net effect is that RE looks significantly less volatile.

BBub

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #110 on: December 01, 2015, 04:31:12 PM »
The S&P was down 49% between 2000-2002.  Peaked out at 1,527 on March 24, 2000 and bottomed at 777 on Oct 9, 2002.

I wouldn't call BS.  Mr. O may be off by a point, but that's close enough to 50% to count.  IMO.

clifp

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #111 on: December 01, 2015, 10:32:30 PM »
I thought I'd add my $.02 primarily as a stock guy, but I do now have a few years of real estate investing under my belt and have been paying attention to RE price for 35 years.

I think Arebelspy has done a very good job laying out the financials for real estate. 
Obviously assumptions matter a ton, probably for real estate more than practically any other investment so figuring out what the likely return of an RE investment is really hard. The only thing that would be comparable is to develop an intrinsic value calculation of a large corporation. It is certainly easier to make an estimate for index equity investing, by using historical average, or a consensus of experts like Bogle etc going forward.

Regarding volatility. I don't see how people believe that real estate is more volatility.  By any statistical measure, the volatility of S&P is much higher than an RE index like Case-Shiller.  The peak in CS from 2006 to trough (2011) drop of 34% (inflation adjusted) was by far the worse in any history. Historical a 10% drop in a year is rare and 22% is the worse 2 year period I could find 1909/1910. In contrast, 10% drops in the market happen severals times in a decade, and we have had 25 bear markets since 1929.

While I suspect Sol is right that RE volatility would be higher if we could buy or sell houses in 5 minutes, but we can't. I think the volatility of RE is lower because it is inherently easier for the average person to figure out the intrinsic value of a property.  The value of a property has two parts, it is utility function (i.e. a source of housing for family) and its investment potential how much in might appreciate in the future.  If a property cost $150K, and an identical property rents for $1,000/month, the only question is how much am I willing to pay for the potential appreciation.  In depressed markets, that number maybe 0 or even negative (depreciation/wear and tear and expectations that prices will decline). In contrast, most individuals and probably more than few money managers think that stocks have little or no intrinsic value.  "It is a casino, stocks are all valued on the greater fool theory".   I think it's worth noting that despite the terrific liquidity of stocks, and the crappy liquidity of RE, it is still much cheaper to borrow money for real estate than on with a  well-diversified stock portfolio. This says something about the relative risk associated with each asset class.

Now there are certainly risks to buying a single property, but think these fall into diversification risk rather than the inherent risk in real estate.

My biggest disagreement with Arebelspy is the 1% rule and perhaps more specifically his characterizing investing properties cash flow positive as being investing and investing in areas where you get say less than 1% as being speculating.

If never lived in an area where you could get close to 1%. The only time I even saw it was buying properties in Vegas in 2011,2012.  The current property I'm buying there has .83% (10%/year) rent. 

I bet  on the coasts more money has been made in real estate in the last 30-year from  appreciation than collecting rents.  I know my first house I bought 30 years ago is now worth almost exactly 10x what I paid for it in 1985.  That works to 8%/year in appreciation, I think it. would have taken about 5 years, the house to turn cash flow positive (thanks primarily to huge drop interest rates and doing a refi).  Zillow says it could rent for $4,500/month, which is small compared to the $150K/year it's appreciated over the last 5 years. Somebody buying the house today with 20% down is looking at a negative cash flow of at least $2,500/month. 
 
Yet it is still possible that it's a great investment.  You put $300K down on $1.5Mill house lose $30K/year in cash flow, but you are making $150K or even 100K/year  in appreciation that is a terrific cash on cash return.

To me, it is the difference between investing in dividend stocks vs growth stocks.  You can make money in both, dividend stocks are less volatility over the short run, but don't necessarily do any better over the long term. It is in this high appreciation areas were the benefits of leverage really shine.


markbrynn

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #112 on: December 02, 2015, 03:58:10 AM »
Quote
it is still much cheaper to borrow money for real estate than on with a  well-diversified stock portfolio. This says something about the relative risk associated with each asset class.

I think the reason is because the bank can take the house from you to cover their costs AND they typically demand a down payment to ensure that they get most of their money back even if the price has gone down in the meantime.

Not to mention, I seem to have read (I'm not American nor do I live there) that government policy has pushed for housing loans to be made widely available. Wasn't there a government program that "bailed out" home owners from bad mortgages. Sounds like protection for the banks as much as the home owners.

mr_orange

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #113 on: December 02, 2015, 04:16:19 AM »
I call bullshit, sorry.  Why would you make something like that up when it's so easy to disprove?  The rest of your otherwise solid argument loses credibility when you lead with such an obviously misleading statement.
Well at least you apologized for being wrong.  Maybe you can go do a bit of research and get back with us.  Someone else above has already pointed out that you're wrong so I won't bother writing any more about it. 

The recent "Great Recession" crash of 2007-09 was a little over 50% peak to trough, very briefly.  The only other market loss of that size or larger was the "Great Depression" of 1929, at over 80%, but that was almost 90 years ago.  Maybe you meant "in the entire history of the US stock market" instead of "in the last few decades"?  Otherwise, you're grossly overestimating the risks to a 100% equity investor, of which we have very few.  Mixed portfolios are much more muted.
Nope....I meant exactly what I wrote.  Again, go do a bit of research and get back with us.  It is "very easy to disprove" (by your own admission) that what I wrote is accurate to within 1%. 

I think part of the reason why real estate losses appear more muted than stock losses is that stocks are exactly priced daily.  Real estate "value" is significantly more subjective and we retroactively tend to measure losses by average price trends in the relevant area or neighborhood.  If you were to sell you real estate TODAY in the same way that you can sell your stocks today, at today's price on five minutes of advance notice, I'm sure the RE price would be much more volatile.  For all of the same reasons.  I'm just not sure you can defensibly compare the volatility of the two markets when one has second to second volatility but huge liquidity and the other has no fixed measure of value and extremely low liquidity.  I suspect the net effect is that RE looks significantly less volatile.
Real estate gets priced daily too.  There are people that trade in these submarkets and know what comparable sales should be each day.  Sure, the trades don't clear daily and there is obviously less liquidity and are higher transaction costs. 

I don't have any studies to point to, but I do have experience.  The submarkets I trade real estate in are far less volatile than the stock market is over my investing lifetime.  YMMV.  Again, it depends on how you bound your analysis and what assumptions you make.  In general I still believe real estate is less volatile than the index funds are in most areas of the country.  This may not be the case for many submarkets on the coasts or in select other spots.  This thread is primarily aimed at "1-2%" type deals which are likely to be highly correlated with low appreciation areas and thus I'd argue that for the purposes of this discussion the markets are probably FAR less volatile than index funds. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
-The future ain’t what it used to be ~Yogi Berra

mr_orange

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #114 on: December 02, 2015, 04:19:23 AM »
Quote
it is still much cheaper to borrow money for real estate than on with a  well-diversified stock portfolio. This says something about the relative risk associated with each asset class.

I think the reason is because the bank can take the house from you to cover their costs AND they typically demand a down payment to ensure that they get most of their money back even if the price has gone down in the meantime.

Not to mention, I seem to have read (I'm not American nor do I live there) that government policy has pushed for housing loans to be made widely available. Wasn't there a government program that "bailed out" home owners from bad mortgages. Sounds like protection for the banks as much as the home owners.

The bigger reason for cheap money financing real estate is that the government interferes in the market and makes rates much lower than they would be absent guarantees, etc.  These "private companies" are backed by implicit government assistance as we saw during the crisis and thus the price of debt is far lower than it would be absent this distortion. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
-The future ain’t what it used to be ~Yogi Berra

clifp

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #115 on: December 02, 2015, 01:29:06 PM »
Quote
it is still much cheaper to borrow money for real estate than on with a  well-diversified stock portfolio. This says something about the relative risk associated with each asset class.

I think the reason is because the bank can take the house from you to cover their costs AND they typically demand a down payment to ensure that they get most of their money back even if the price has gone down in the meantime.

Not to mention, I seem to have read (I'm not American nor do I live there) that government policy has pushed for housing loans to be made widely available. Wasn't there a government program that "bailed out" home owners from bad mortgages. Sounds like protection for the banks as much as the home owners.

Banks/Brokerage use your stock portfolio as collateral when making margin loans. If the stock value falls they typically give you only a day or two to come up with more money, or they sell your stock to get their money back.  In contrast repossessing a house is an expensive and time-consuming process for banks typically taking 6 months.  Borrowing says 400K from Schwab on margin loan I'll pay 6.875% vs 2.75% for 15-year loan.  Now its true that government policy interferes with the free market. which accounts for some of the price disparity. However, much of the reason that home mortgage rates are so low in the country, is up until the great recession, they have been very very safe loans for banks to make.
 
In Canada, which doesn't have the nearly the government support for home loans,  it looks like mortgage rates are about 2% for a 5 year variable mortgage vs margin rates of 4.25% (TD Ameritrade).

Since you don't live in the US could you tell us what mortgage rates vs margin loans are in your country?
« Last Edit: December 02, 2015, 01:37:57 PM by clifp »

markbrynn

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #116 on: December 03, 2015, 03:13:13 AM »

Quote
Since you don't live in the US could you tell us what mortgage rates vs margin loans are in your country?

Live in the Netherlands. I don't use margin loans. A quick look on the internet showed a rate of around 6%, but also very few places that even offer the service. Mortgage rates are around 4% (though I don't pay much attention to those either).

Quote
However, much of the reason that home mortgage rates are so low in the country, is up until the great recession, they have been very very safe loans for banks to make.

Why do you think they became less safe?

clifp

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #117 on: December 03, 2015, 04:03:59 AM »

Quote
Since you don't live in the US could you tell us what mortgage rates vs margin loans are in your country?

Live in the Netherlands. I don't use margin loans. A quick look on the internet showed a rate of around 6%, but also very few places that even offer the service. Mortgage rates are around 4% (though I don't pay much attention to those either).

Quote
However, much of the reason that home mortgage rates are so low in the country, is up until the great recession, they have been very very safe loans for banks to make.

Why do you think they became less safe?

The short version is.
During the Great Recession hundreds of banks and shadow banks went bankrupt due to people who stopped paying their mortgage, generally due to people simply not being able to afford them, (lost jobs etc.) but in many case because the price of the house dropped so much that the mortgage balance was much higher than the value of the house.  So even after the bank repossessed the house they took massive losses. The properties I bought in Vegas in 2009-2011 all mortgages for more than twice what I paid for them. Now in many cases the taxpayers ended up directly or indirectly absorbing the loss.

I'm not sure if mortgage loans are actually less safe than they were in the past, what has changed is the perception.  Prior to 2007/2008 nobody believed we could have a large nationwide decline in housing prices, now we know differently.

Left

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #118 on: December 03, 2015, 07:30:38 AM »
I don't think that the price crash is what makes them risky...

banks wouldn't have so much problem if they could have unloaded the foreclosed homes to new buyers... the price was something they could have eaten. But there were no buyers... which is why they took such a big hit.

I mean, a banks "profit" model is to keep money changing hands, not sitting in place or holding inventory... The actual value doesn't seem to matter as much, the fed kind of props real estate up so they don't lose all that much money on foreclosures.

zephyr911

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #119 on: December 03, 2015, 08:17:34 AM »
Why do you think they became less safe?
The short version is.
*snip*
Here's the even shorter, actual root cause: lenders lowered standards to extend a run of high profits.

That's what produced the conditions for the widespread defaults you mention, triggering the sequence of events detailed above. After the stock shakeup in the early 2000s, rate cuts produced a favorable environment for real estate financing, and once mortgage companies had adjusted to the new level of income in what should have been a temporary boom, they set about developing new programs to keep the deals turning. At some point the only way to keep clients flooding in was to turn an increasingly blind eye to - or even actively conceal - more and more risk factors in those clients' financials. The standard practice of packaging and selling loans virtually eliminated their own exposure to that risk, so it became a systemic issue that poisoned whole asset classes.

Interestingly enough, there were investors who saw this coming and tried to profit from it, but many made the wrong plays and lost money. Michael Lewis' book The Big Short goes into much of this. (I bought it before I rediscovered libraries and, in classic form, have yet to read it)
« Last Edit: December 03, 2015, 08:21:35 AM by zephyr911 »
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zephyr911

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #120 on: December 03, 2015, 08:36:00 AM »
Also, more on topic, thanks to ARS for posting this thread because the really simple big-picture principles it illustrates are helping to inform strategic discussions this week with my investing partners.

The biggest one for me is the illustration of how leverage gives real estate the edge over passive stock investing. My partners are debt-averse - a bit of the broad-brush Dave Ramsey "debt bad cash good" approach has rubbed off on them - but with an affordable local market, multiple high-margin units throwing off cash, and another $1k/mo from our continued contributions, leverage-based risks are strongly mitigated. I've been working on my own models lately to illustrate how much faster we can grow our portfolio with higher leverage, and this helps me get past the self-doubt that creeps up when all I have is my own math to make the case.

Second, reducing rental investing to a passive approach and still finding the right characteristics to make this all work - that is key to formalizing our strategy as we grow beyond our self-management/maintenance capability and outsource those functions.

So, thanks again ARS.
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arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #121 on: December 03, 2015, 10:17:39 AM »
Thanks. I'm glad someone got some use out of it. :)
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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #122 on: December 03, 2015, 02:27:50 PM »
[
Here's the even shorter, actual root cause: lenders lowered standards to extend a run of high profits.



Interestingly enough, there were investors who saw this coming and tried to profit from it, but many made the wrong plays and lost money. Michael Lewis' book The Big Short goes into much of this. (I bought it before I rediscovered libraries and, in classic form, have yet to read it)

Read Lewis book, afterwords you'll realize it's more complicated than that. To Big to Fail, by NY/CNBC reporter Aaron Sorkin, Hank Paulsons On The Brink , and Tim Geitner's Stress Test are all worth reading.  One of the great things about retirement is you have to time to read extensively on subjects!.   The Big Short, is the best written of the bunch Michael Lewis has knack for turning even the most arcane subjects into Clancy thrillers.

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #123 on: December 03, 2015, 06:43:10 PM »
Thanks. I'm glad someone got some use out of it. :)

Interesting thread topic.  But this is just an assumption right?  It doesn't mean stocks will outperform long term or real estate short term right? 

We're assuming that past 30-50 years is the same as the next 30-50 years right?  But nothing suggests the case that stocks/RE will deliver returns like they have in the past.

And doesn't this vary by area as well?  I'm in NJ, and RE and property taxes are ridiculously high.  A whole year's rent just covers property taxes in some cases, it's not even paying the mortgage or barely paying it.  A 300K house rents less than 2K/month w/property taxes in 7-9K.  Would you consider real estate rental to be worthy in this case?  Or would you pick stocks? 

Plus real estate rentals are a lot of work.  The time and effort you put into it could be used for working more hours or doing more Mustachian things to cut costs.  Investing in index funds is pretty simple and doesn't take long at all, no hours of research, labor, maintenance, etc. There's too much variability to account for. 

And correct me (since I'm not so familiar w/real estate) but aren't real estate prices being propped up by the Fed buying mortgages through Freddie/Fannie Mae? (it's what Shiller said but I want to know your opinion)

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #124 on: December 03, 2015, 09:29:37 PM »
And doesn't this vary by area as well?  I'm in NJ, and RE and property taxes are ridiculously high.  A whole year's rent just covers property taxes in some cases, it's not even paying the mortgage or barely paying it.  A 300K house rents less than 2K/month w/property taxes in 7-9K.  Would you consider real estate rental to be worthy in this case?  Or would you pick stocks? 

Varies by region, neighborhood, national RE market situation, etc etc.  (My very simplified example) During the middle of the downturn (2009-2011) I picked up three bank foreclosure SFR's I then turned into rentals.  It took between $2k-$6k each to get them to a good condition.  They were quickly rented and gave me an average positive cashflow of ~$400/month/property (after property tax, insurance, mortgage, property management).  For the three properties combined, it was approximately $75k for the down payments, closing costs and repairs.  They returned an immediate $14.4k annual cash flow (19.2% return!!!).

I can not find a deal today anywhere close to as good.  Property prices have doubled but rents have gone up maybe 10%-20%.  If I try to buy in the same area now, I would have a clear negative monthly cash flow.

That said, it is certainly easier to rent for cash flow in some areas over others.  Some areas (NY/NJ/DC) with high property tax, high property cost and mediocre rent make it almost impossible to get a positive return.  I'm just trying to point out you can stay in the same area but have a significantly different situation year by year.

Also, if you are trying to compare versus other long-term investment vehicles (such as an index fund) you have to do a lot more research and include a bunch of factors.  Property appreciation, rent appreciation, paying off the principal, tax implications, vacancy rate, maintenance, etc etc.  When I did the above properties, I only considered the monthly cash flow.  5 years later, the cash flow has almost fully returned everything I put into the properties.  However, the principal reduction adds about another $27k, I get to depreciate the buildings which helps lower my taxes and, most importantly, the properties have appreciated in value by more than all the other benefits I listed, combined.  :O

For my example, my real estate returns FAR FAR FAR outstripped what I would have received in an index fund.  However, that national real estate market was an abnormal situation.

* Real world example but greatly simplified

Plus real estate rentals are a lot of work.  The time and effort you put into it could be used for working more hours or doing more Mustachian things to cut costs.  Investing in index funds is pretty simple and doesn't take long at all, no hours of research, labor, maintenance, etc. There's too much variability to account for. 

Property managers solve this.  I pay about 7% of the monthly rents to the property manager.  In return, they do a very good job researching tenants and solving problems (if you do your research and pick a good property management company).  In the example above, I included the property management costs.

And correct me (since I'm not so familiar w/real estate) but aren't real estate prices being propped up by the Fed buying mortgages through Freddie/Fannie Mae? (it's what Shiller said but I want to know your opinion)

Close but I think that's a bit off.  In my opinion, real estate prices are being propped/driven by the current low interest rates.  The largest determining factor of mortgage interest rates is the 10-year Treasury Bond.  When the Federal Reserve was buying bonds through Qualitative Easing (QE), it drove down the interest rates.  Now that QE is over and the Fed is talking about raising some of the other interest rates they directly control (fed discount rate), 10-year Treasury (and thus mortgage rates) should start rising as well.  When those rates rise, I think the overall RE market will stagnate or even deflate.  Depends how quickly rates rise.

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #125 on: December 04, 2015, 01:04:25 AM »
Good idea. Basically my assumption was to give a baseline (1% rule) and if your area met that, you could use this comparison as a basis.

If your area was better, you'll do better than this rough estimate, if your area's worse, you'll do worse.

Naturally you'll want to run more specific numbers of your own scenarios, but this was just a generic comparison with bland numbers.

Good point though that it's very dependent on your area.
I think rentals, at least since 1970, are actually trailing inflation. Not by much, but it looks like rental prices are ~8% lower than inflation over the past 45 years.

https://research.stlouisfed.org/fred2/series/CUUR0000SEHA

The biggest difference though is the tax rates. If you're in the 15% income tax bracket, you'll have to pay that on earnings from a rental, but there aren't any taxes on qualified dividends in that bracket.

https://en.wikipedia.org/wiki/Qualified_dividend

The S&P 500 is also a little lower at a real 6.1%.

Like always, the devil's in the details.

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #126 on: December 04, 2015, 08:34:50 AM »
And doesn't this vary by area as well?
The markets vary, but the criteria don't. Yes, this means the feasibility of running this game varies dramatically by locale. More to follow.
Quote
I'm in NJ, and RE and property taxes are ridiculously high.  A whole year's rent just covers property taxes in some cases, it's not even paying the mortgage or barely paying it.  A 300K house rents less than 2K/month w/property taxes in 7-9K.  Would you consider real estate rental to be worthy in this case?  Or would you pick stocks?
This scenario begins with an assumed rent-to-price ratio (1%) and expense-to-rent ratio (50%), and shows that a rental can beat the market if these criteria are met.
In some markets, those metrics can be easily exceeded. In others, they can't. If your local market doesn't qualify, it doesn't mean you can't make money on rentals - but you're relying on appreciation to boost the total return, which makes it a speculative play, outside the bounds of this comparison.
Quote
Plus real estate rentals are a lot of work.  The time and effort you put into it could be used for working more hours or doing more Mustachian things to cut costs.  Investing in index funds is pretty simple and doesn't take long at all, no hours of research, labor, maintenance, etc. There's too much variability to account for. 
Management and maintenance by paid professionals are baked into the math here. As for market research... some of us are weird enough to actually enjoy that shit. If enough of my rentals beat the S&P, I can probably subtract a $50/hr wage from the whole proposition and still come out ahead, but I'm having so much fun that I don't actually care. If it turns you off - more opportunities and higher returns for the rest of us, and thank you! ;)
Quote
And correct me (since I'm not so familiar w/real estate) but aren't real estate prices being propped up by the Fed buying mortgages through Freddie/Fannie Mae? (it's what Shiller said but I want to know your opinion)
Find the discussion thread here on the possibility of a second real estate bubble, and you'll see that there are pro and con arguments. But massive runups in value are localized (many markets are unaffected) and they simply underscore the importance of cash-flow analysis. If higher prices and higher taxes in your market mean you can't find 1% rent/price and 50% costs/rent, then look elsewhere. 1.2% and even 1.5% are feasible where I live, but we're looking 100 miles away for 1.75% on our next buy. Even with pessimistic assumptions for overhead costs and debt service, it's a 15% leveraged cap rate, and that assumes no appreciation at all, ever. Tweak the numbers back to just "average" and it's 25-30%. What this illustrates is the same conclusion stated in the OP: real estate investors can beat average stock returns by selecting high-cashflow properties and leveraging them at a lower APR than they earn.

Or, if this is already sounding like too much of a chore, stick to index funds. Save enough and you'll FIRE either way.
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arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #127 on: December 04, 2015, 09:10:50 AM »
Great explanation Zephyr. Thanks.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #128 on: December 04, 2015, 09:20:28 AM »
Great explanation Zephyr. Thanks.
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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #129 on: December 04, 2015, 09:28:39 AM »
To me the upshot of this thread is:

1.  If you don't have much time to find the right projects or invest the effort to learn to work on real estate where you can deliver good returns you're probably better off indexing and forgetting about the marginal extra yield you will get

2.  If you do have the time and inclination to invest in real estate you'll clearly do better than investing in index funds using the proper leverage conditions

Item 2 could have a similar argument for several other types of small businesses as well, but you'd have to impute the value of your effort in each.  Real estate, done properly, doesn't require a ton of effort and this is less job-like than many other small businesses. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
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arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #130 on: December 04, 2015, 09:35:42 AM »
Yup. It's close either way. Get in a good market, use leverage, and you can easily get a high yield, beat index funds, and FIRE early.

In a bad market and don't want to invest outside your market?  Skip real estate, take the returns equities give you, and be happy. Don't try to force RE to happen, because it's not always the right call.

It's close enough that it depends on you hitting these assumptions--if you're way above or below, it makes it a lot more obvious which way you should go.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #131 on: December 04, 2015, 09:43:08 AM »
@orange, but then you'd have more than 1 rental to get the point of learning all that... that throws this entire thread out the window :D, imaginary guy only wanted one rental, but somehow didn't have any of the learning curve problems

though yes, I'd agree that real estate might return more in the "short" term, once you get a portfolio big enough, who cares? Does it really matter once you hit FI? If you want to keep growing portfolio with real estate, you'd have to keep buying more since leverage seems to be what gives real estate the advantage... because once paid off, it seems like rental return is about even with stocks but more money is tied up

real estate = get to FI faster (maybe?), stocks = enjoy FI life and still grow money without working at finding/buying new property?

Seem to be why most of the "wealthy" people in world are investors, just not enough properties they can buy up in large enough chunks to make it worth their time? And they rather not go looking for individual rentals for a good deal when they can just pick up entire companies. Though in that case, they might be treating the companies as rentals on a different scale? :D I wonder if Warren Buffet evaluates what companies to buy like how you guys would evaulate what rentals to buy.
« Last Edit: December 04, 2015, 09:47:37 AM by eyem »

arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #132 on: December 04, 2015, 09:47:03 AM »
Listen to one of my interviews on the Radical Personal Finance podcast on investing in real estate vs. Index funds for early retirement, eyem.  It may clarify some things go for you. :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #133 on: December 04, 2015, 09:47:59 AM »
ugh... link? I'm not familiar with that podcast, thanks in advance
all I got from google is this http://radicalpersonalfinance.com/archive/, and I don't know which one is yours

mr_orange

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #134 on: December 04, 2015, 09:51:45 AM »
@orange, but then you'd have more than 1 rental to get the point of learning all that... that throws this entire thread out the window :D, imaginary guy only wanted one rental, but somehow didn't have any of the learning curve problems

though yes, I'd agree that real estate might return more in the "short" term, once you get a portfolio big enough, who cares? Does it really matter once you hit FI? If you want to keep growing portfolio with real estate, you'd have to keep buying more since leverage seems to be what gives real estate the advantage... because once paid off, it seems like rental return is about even with stocks but more money is tied up

real estate = get to FI faster (maybe?), stocks = enjoy FI life and still grow money without working at finding/buying new property?

Seem to be why most of the "wealthy" people in world are investors, just not enough properties they can buy up in large enough chunks to make it worth their time? And they rather not go looking for individual rentals for a good deal when they can just pick up entire companies. Though in that case, they might be treating the companies as rentals on a different scale? :D I wonder if Warren Buffet evaluates what companies to buy like how you guys would evaulate what rentals to buy.

Fair points above.

I guess another thing I'd add is to me there is value in learning the skill because it will allow me to continually add duckets to my pile and incrementally increase what I can spend monthly.  I don't really buy into the minimalist approach and thus take a lot of heat about it on the site.  This comment is, however, independent of the fact that I think rentals done properly will get most people on this forum to FIRE faster if they're willing to invest the time in it. 
12/30/16                                       06/30/17
Fire Totals:                                   Fire Projections:
-$7k/month - 68.1% Funded             86.1% Funded
-$8k/month - 59.6% Funded             75.4% Funded
-$9k/month - 53.0% Funded             67.0% Funded
-$10k/month - 47.7% Funded           60.3% Funded

-Calculus gives speculation the deceptive guise of investment ~Benjamin Graham
-The future ain’t what it used to be ~Yogi Berra

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #135 on: December 04, 2015, 10:06:54 AM »
Interesting 'maths', I think what I learned is that you need about 10% annual net yield on a property to be about equal to investing in an index.  I really don't have the time or interest to look around at real estate to make it work, but it's nice to have a rule of thumb, if you can confirm that this is roughly what you would consider 'break even' between the two investments over a 30 year horizon.

Also, would you recommend being a landlord over flipping?  I am a bit more interested in the 'Cheddar-Flipper' model, and have the liquidity and desire to branch out and learn new skills. 
Transitioning to FIRE'd albeit somewhat cautiously...

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #136 on: December 04, 2015, 10:19:03 AM »

ugh... link? I'm not familiar with that podcast, thanks in advance
all I got from google is this http://radicalpersonalfinance.com/archive/, and I don't know which one is yours

Did you put in the word arebelspy into your google search?  On my phone, but if you still can't find it, I'll dig up the link. It's the first one, not the pay down debt or invest one.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
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arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #137 on: December 04, 2015, 10:21:07 AM »

Interesting 'maths', I think what I learned is that you need about 10% annual net yield on a property to be about equal to investing in an index.  I really don't have the time or interest to look around at real estate to make it work, but it's nice to have a rule of thumb, if you can confirm that this is roughly what you would consider 'break even' between the two investments over a 30 year horizon.

I wouldn't be investing in properties that didn't get me double digit returns, no.

Also, would you recommend being a landlord over flipping?  I am a bit more interested in the 'Cheddar-Flipper' model, and have the liquidity and desire to branch out and learn new skills.

Flipping is not real estate investing, that's a real estate job. Fine, if you want to do that, but very different things.

Cheddar, as the passive money partner, is more on the passive investing side, but because he's investing in other's flips. Flipping on your own is much more of a real estate business.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

Cheddar Stacker

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #138 on: December 04, 2015, 10:52:42 AM »
Interesting 'maths', I think what I learned is that you need about 10% annual net yield on a property to be about equal to investing in an index.  I really don't have the time or interest to look around at real estate to make it work, but it's nice to have a rule of thumb, if you can confirm that this is roughly what you would consider 'break even' between the two investments over a 30 year horizon.

I wouldn't be investing in properties that didn't get me double digit returns, no.

Also, would you recommend being a landlord over flipping?  I am a bit more interested in the 'Cheddar-Flipper' model, and have the liquidity and desire to branch out and learn new skills.

Flipping is not real estate investing, that's a real estate job. Fine, if you want to do that, but very different things.

Cheddar, as the passive money partner, is more on the passive investing side, but because he's investing in other's flips. Flipping on your own is much more of a real estate business.

I'm trying to do both. Flipping for some (hopefully) quick capital so I can buy more rentals for long-term cash flow. Among the many problems with flipping is the fact that it's a quick hit. It's not a passive, sustainable cash flow source. You have to churn to make the profit, so you inevitably have to continue shopping. Not a bad thing, but if the inventory runs dry or the housing market declines or you can't find proper contactors, you can't rely on it as a constant flow of cash.

However, from my limited experience the returns (or maths) aren't even comparable to index investing. But I still buy the shit out of those indexes whenever I can for diversification and to stay invested all year.
Indecision may or may not be my problem.

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #139 on: December 04, 2015, 11:50:01 AM »
Thanks guys.  Either way, getting in to real estate will require some work for me.  Maybe I'm blinded by the excitement of flipping - making a profit in a reasonable time frame and making the world a slightly better place...  The only landlording I can see myself getting in to is buying a vacation property that I can hopefully rent out year-round.

A big advantage of Indexing is that it takes almost no real time to figure the expected return (7% real), set up a Vanguard account with automatic transfers, and a tiny amount of time to report dividends to the IRS each year (manually transferring a number from a statement, or getting the tax software to do it).  I am only considering getting into real estate (as someone who is already FI) for the benefits like diversification, stable cash flow, and hopefully enjoyment of learning a new skill or having a 'free' (or at least subsidized) place to stay in Hawaii or Italy...
Transitioning to FIRE'd albeit somewhat cautiously...

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #140 on: December 04, 2015, 11:57:12 AM »
If you want a place to to stay (ala vacation home you use sometimes) the math almost always pens out as better to just rent a place on vacation and invest your money somewhere more lucrative.
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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #141 on: December 04, 2015, 12:38:11 PM »
I found your podcast :D http://radicalpersonalfinance.com/78/ I'm listening to it. You need to tell him to get better music >.>

and I never realized your name was A Rebel Spy >.> I kept reading it as are-bel-spy as well

glad to hear that you made mistakes on first rental as well... so I'm still not sure of your use of example in starting this thread, he didn't make a mistake in the calculations
« Last Edit: December 04, 2015, 01:02:26 PM by eyem »

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #142 on: December 04, 2015, 01:44:57 PM »
Thanks guys.  Either way, getting in to real estate will require some work for me.  Maybe I'm blinded by the excitement of flipping - making a profit in a reasonable time frame and making the world a slightly better place...  The only landlording I can see myself getting in to is buying a vacation property that I can hopefully rent out year-round.

Flipping seems like a very different skillset. One that I wish I had, since someone just flipped a house near where I live for a 1.2M profit before expenses in a year.

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #143 on: December 04, 2015, 01:50:00 PM »
Flipping seems like a very different skillset. One that I wish I had, since someone just flipped a house near where I live for a 1.2M profit before expenses in a year.
that's not really a skill if it was just timing... you could be the guy that timed the stocks as well, at least from my point of view on this one. Unless he is doing it consistantly...

Cheddar Stacker

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #144 on: December 04, 2015, 01:59:43 PM »
Flipping seems like a very different skillset. One that I wish I had, since someone just flipped a house near where I live for a 1.2M profit before expenses in a year.
that's not really a skill if it was just timing... you could be the guy that timed the stocks as well, at least from my point of view on this one. Unless he is doing it consistantly...

There's a lot of skill. It's no different than what mr_orange said here:
To me the upshot of this thread is:

1.  If you don't have much time to find the right projects or invest the effort to learn to work on real estate where you can deliver good returns you're probably better off indexing and forgetting about the marginal extra yield you will get

2.  If you do have the time and inclination to invest in real estate you'll clearly do better than investing in index funds using the proper leverage conditions

Item 2 could have a similar argument for several other types of small businesses as well, but you'd have to impute the value of your effort in each.  Real estate, done properly, doesn't require a ton of effort and this is less job-like than many other small businesses. 

You don't just pick a house, buy it, make a few changes, then sell it while hoping the real estate market has produced a nice return. You get to know the market, find a wholesaler (or do some marketing on your own) to purchase a house at substantially under market value less rehab costs. You make your money when you buy. Then you either do the work yourself which takes tremendous skill, or you find, negotiate with, and supervise contractors to do the work which takes a whole different set of skills.

There is some timing/luck, but not as much as you'd think.
Indecision may or may not be my problem.

Vilgan

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #145 on: December 04, 2015, 03:25:42 PM »
Flipping seems like a very different skillset. One that I wish I had, since someone just flipped a house near where I live for a 1.2M profit before expenses in a year.
that's not really a skill if it was just timing... you could be the guy that timed the stocks as well, at least from my point of view on this one. Unless he is doing it consistantly...

There is pretty clear skill involved. Need to be able to assess the state of the house, organize the various remodeling, stage it well, sell it at or above market rate. There is no way I would have been able to flip that house for that amount of profit, I could not have made it look as nice or found someone willing to pay as much. Its pretty clear that the person or people responsible for that flip know what they are doing. As a result, they are handsomely rewarded, although I imagine even they were probably surprised by the ~1M profit.

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #146 on: December 04, 2015, 06:01:04 PM »
Great explanation Zephyr. Thanks.

+1  And thank you Vee2001.  Helped clarify RE for me.  Lol you can enjoy RE, I'm too busy to be able to manage properties but still learn for the future when I hope to have more time.

arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #147 on: December 04, 2015, 08:24:03 PM »

I found your podcast :D http://radicalpersonalfinance.com/78/ I'm listening to it. You need to tell him to get better music >.>

and I never realized your name was A Rebel Spy >.> I kept reading it as are-bel-spy as well

glad to hear that you made mistakes on first rental as well... so I'm still not sure of your use of example in starting this thread, he didn't make a mistake in the calculations

The mistake was not buying with strict enough criteria--I didn't quite meet the 1% rule on that first one. The imaginary person in our OP is starting with that as a baseline. :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #148 on: December 04, 2015, 11:36:18 PM »
How Trump Stacks Up Against Vanguard 500 Index (VFINX)

I recently ran across an interesting Trump story at NationalJournal.com, where they suggest the famous billionaire could have been even richer by “doing nothing.”

Here are some of the key points in the story (taken verbatim):
•While many Trump sup­port­ers be­lieve he is a self-made man, it was ac­tu­ally his fath­er, Fred Trump, who built the real-es­tate em­pire that Don­ald Trump took over in 1974.
•If he’d in­ves­ted the $200 mil­lion that For­bes magazine de­term­ined he was worth in 1982 in­to that in­dex fund, it would have grown to more than $8 bil­lion today.
•(That $8 billion) ex­ceeds by bil­lions re­cent es­tim­ates of Trump’s worth by fin­an­cial publications.
•Co­in­cid­ent­ally, there was a self-made busi­ness­man who was also worth about $40 million in 1974: War­ren Buf­fett. Had Trump al­lowed Buf­fett to man­age his for­tune, too, Trump might also be worth what Buf­fett is today: about $67 bil­lion — or about 22 times more.

Currently, the Forbes net worth for Donald Trump is pegged at $4 billion. That’s half what he could have produced by simply investing in a mutual fund like Vanguard S&P 500 Index.


Source: http://investorplace.com/2015/09/donald-trump-vs-vanguard-500-index-vfinx/#.VmKEehtdE5s
« Last Edit: December 04, 2015, 11:38:24 PM by Bearded Man »

arebelspy

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Re: Real Estate Returns vs. Stock Returns: The Maths
« Reply #149 on: December 05, 2015, 02:01:42 AM »
Yeah there's a thread discussing that article.

IIRC: Basically that timeframe is assuming he invested in RE from 74 to 82, then switched to index funds, perfectly timing the markets.  Probably not realistic. If he had done RE or index funds straight from 74, apparently he'd have had about the same as now.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."