To be more specific what happens if you can't rent it for a period of time? What happens if you get tenants that trash it, or don't pay the rent? What about if you become ill and cannot manage the property for a period of time? What about accounting for the expenses of repairs (most will say 10-20% of the per month rents). All of these things and others eat into the returns over time and will defy your original assumptions.
All of those were accounted for in my numbers. Did you read the scenario? I didn't just take gross rents, I subtracted out vacancy (your first question), repairs (second question), management (3rd question), repairs again, etc.
Of course those numbers eat into your return, but they don't "defy" my original assumptions, because I assumed they would happen and accounted for them.
Also the liquidity of the house is much lower then that of stocks. In addition if you are just renting the house out like you mention and not treating it like a business, you are opening yourself up to a great deal of personal liability, not the case with stocks.
Yes, liquidity is lower. Irrelevant if you aren't selling. And might even be a good thing--how many people panic sell stocks over bad feelings in the market and lose on returns? A little illiquidity could help prevent that. And insurance was included in the numbers for liability purposes.
Second in you original comparison you make some assumptions about what you can get for rent. By doing that you are in essence setting some value criteria on which you would or would not buy a house (the 1% rule). 1% of the house price per month is a 12% annualized return , then you add in the leverage and the 3% appreciation of course the house will come out ahead.
12% gross return, but with half going to expenses, it's a 6% net on the rents. You seem (with this comment, and the above) to have missed all the money going to expenses.
The problem is that when people go to buy the house, they must find a house with the correct criteria, if they can't then they will be missing out on the returns in the interim. So that is another risk, maybe call it deal risk? What happens if you can't find a deal that meets your criteria?
You don't buy it.
There's no "deal risk" as you term it, because if you can't find a property that meets that minimum criteria, you don't invest. Plenty of markets offer it, but if you can't find it, you go with the equities scenario. Why would you buy into a suboptimal deal? To claim the scenario doesn't work because it doesn't account for people buying bad deals is like claiming my stock comparison doesn't work because it doesn't account for the fact that most people buy high and sell low, so I should compound at a number closer to 2-3% real instead of 7% real.
No, I'd rather do a pure comparison and not assume my investor is an idiot. :)
Also to apply leverage interest rates are obviously a factor, what about interest rate risk? A corollary to that is there are stocks that can offer the same or better return unleveraged, if like the house you select companies based specific criteria, which obviously entails more risk and specific knowledge.
It was a fixed interest rate. There is no interest rate risk in this scenario.
Third, Tax efficiency, the building but not the land can be depreciated over the useful life of the property, shielding some income from tax depending on your tax bracket.
Yes, I didn't even count that benefit for real estate. It would certainly help the RE scenario.
However when that is used up you are liable for more tax on the rental income. Because a large part of the return from the house is from the rental income you are paying more tax over the life of the investment. When you have capital appreciation in stocks, and don't sell the stock there is no tax, allowing the money to compound tax free which is very powerful.
You get depreciation for 27.5 years. In our 30 year scenario it's almost the full time, enough that it will much more help than hurt the RE case.
Not to mention the transaction cost of buying and selling the house compared to stocks.
I counted the buying transaction costs (see: closing costs paid in the scenario), but not selling because they never sold.
Most of the criticisms on the thread have been complaints from people who didn't read, or didn't understand, the scenario.
Complaints about not taking into account things that actually were taken into account, or complaints about it not being apples to apples. It's not supposed to be. See earlier reply to this Dr Pepper guy. :)