Real estate vs. Stocks long term: stocks win by a landslide?

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JL13
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by JL13 » Wed Nov 04, 2015 7:57 am

Chad wrote:Staying away from bonds myself.
Yes, with all this hate against RE and equities, it's the bond that truly deserves some hate right now.

SilverElephant
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by SilverElephant » Wed Nov 04, 2015 3:13 pm

Thanks J_L13 and Jacob. Math isn't my problem, insight is. Just trying to collect as much as possible.

SimpleLife
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by SimpleLife » Wed Nov 04, 2015 8:43 pm

Riggerjack wrote:This thread is comparing apples to bananas. The returns on rental RE are in rent, not appreciation. Not factoring that in is like not factoring in dividends from a dividend portfolio.
I bought a house in Everett, earlier this year, and covered the Numbers here viewtopic.php?f=3&t=6542

In short, factoring appreciation to be only inflation, I expect inflation plus 5.52%, excluding the value we created fixing the place up. This is not a part time job, but then I put in work early, and leave money on the table, to not work very hard at landlording.

RE was a great investment, but now you need cash, buy distressed, and fix to get returns. Too many enthusiastic couples looking to be homeowners. So now is a good time to sell, if you aren't in for a long term investment. My renters make this too easy to sell now. Closer to retirement, I'll move into the rentals before selling, and not even have to pay capital gains. Try that with stocks!

Might want to read the "apples to bananas" comparison again, as I've stated before, it includes rents. I even calculated the rent dividend vs. the stock dividend in my OP, as well as the long term growth of each asset.

You don't have to be a mathematician to figure out that an asset that AT BEST keeps pace with inflation doesn't grow as much as one that far outpaces inflation. That compound growth on the latter over a long period of time with the higher interest rate allows for a higher ultimate dollar amount after compounding, which when using a 4% SWR, is a far better dividend to live off. I'd rather have a 4% SWR on a 2 million dollar portfolio that compounds at a rate faster than my spending and inflation, than a rental that keeps pace with inflation.

In any case, meanwhile, over the holding period, compound interest in equities makes more and more money, while the initially superior cash on cash returns on real estate lose their advantage as the leverage wears off and the price increases. Return on equity in the house continues to drop as the house is paid off and "increases in value" due to inflation. So the asset price is barely keeping pace with inflation and your returns are less than stocks the longer you hold the property. As such, in the long run, the index fund outperforms the rental property that requires far more work over 30-70 years.

Your statement that the returns on RE are purely in rent and not in appreciation is doing exactly what you erroneously accuse me of doing, only count one part of the asset gain. With any asset you count the dividend and price appreciation combined for an accurate comparison. When I compared RE to Index funds, I compared the rents and real estate appreciation to stock dividends and growth.

Your thread above proves that you are getting a sub 4% return on your money on that house based on rents with a house that just keeps up with inflation over the long run. You assume that it gets better the longer you hold it in your post because made a mistake in your calculations when you calculate your profits due to rising rents. You kept your asset price at 275K. Your asset price increases as well, and you have to calculate based on equity you have in the property, not what you originally bought it for. It is not possible for an asset that only keeps pace with inflation to outperform one that far exceeds the pace of inflation, and the SWR is based on the compound aggregate of the asset over long periods of time. Your rents may rise with inflation, but I'd rather have a 4% SWR on an asset that, over the same holding period, turns into millions.

As another poster pointed out to you in that thread, and as I noted in my OP, you could make that and then some with less work. You can call it a hobby if you like, but at the end of the day, as your post illustrates with 72 days of labor involved, it takes a lot more work to manage a portfolio of properties than a portfolio of index funds, and in the long run the house doesn't increase in value enough to actually put you ahead, just maintain purchasing power. Furthermore, as your leverage wears off and the house price goes up, your returns actually shrink drastically, leaving you with an asset that only keeps pace with inflation, and pays a subpar dividend compared to an index fund, and with more work involved.

People can call it an apples to bananas comparison all they want, but it is not. The outcome we are comparing is the wealth created in the long run, and the dividend each creates in the long run, while comparing the inputs. Index funds leave you with far more money, and provide a higher dividend, in the long run. Real estate over the long run leaves you with less money and a lower dividend, for more work.
Last edited by SimpleLife on Wed Nov 04, 2015 9:10 pm, edited 2 times in total.

SimpleLife
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by SimpleLife » Wed Nov 04, 2015 8:49 pm

jacob wrote:This is somewhat of a Pepsi Challenge or an academic exercise.

There are just too many unknowns to decide a winner here.

If you do want to argue for the sake of arguing, I suggest comparing indexes and otherwise leaving me out of it ;-) The preferred ones would be SP500 vs NAREIT since they are representative of real estate (residential and commercial) and the US stock market for someone who is price-insensitive and adding zero value in terms of information-interpretation.

(I presume we're talking US comparisons?! This is important, because single country results rarely generalize due to a combination of tax laws and cultural biases.).

Here's a graph. If you disagree, go find your own graph with some other starting years. I don't care. This is what popped up on google.

http://aimanagellc.com/wp-content/uploa ... t_perf.jpg

Yeah, it surprised me too! :o

Note that this is an index comparison. In either case, selective picking---where you're adding information-interpretation---may do substantially better (if you're smart) or substantially worse (if you're stupid) than either index in either product. So I guess what everybody should really ask themselves is what THEY THEMSELVES can beat whatever with; not what the average beats the average with. Isn't this obvious already?! :?

In particular, with residential RE in particular, people usually have access to way more leverage (sometimes up to infinity .. but Fannie Mae often offers 33x leverage from time to time with their 3% down loans) than they do in stocks (restricted to 2x since the great depression)... AND they get to do value-adding because they're usually a 100% owner rather than a 0.000001% owner as with most stocks.

In any case, as far as I'm concerned loyalty to an asset class for the long run is a foolish approach ... or at least that's how I see it---what I mean to say is that what's the point of picking something and sticking to it for multiple decades?!? Please convince me about the rationale behind this?! So that one only has to think for 10 minutes to prepare for the next 70 years? Hmmm ... I'm about 3 or 4 Wheaton levels away from this mentality. But that's okay. It's not like I've signed up for astronaut school about to embark on a trip to Saturn in a rocket with no radio built in :roll:

As far as I'm concerned ... 1.5 years ago I sold 1/3 of my stocks because I predicted (correctly if I may add) that the market would proceed to stagnate. I used that money to buy a house that has since then appreciated by 75% (if those silly online comparative sales data mining thingies are to be trusted.) I am happy about that. I'm even confident that it wasn't luck on my part. And that's saying a lot for a cynical scientist :-P

So ... I don't really care about what any one particular asset does the long run. Especially not when I'm able to change my mind in the medium run, eh? :mrgreen:

That is a pretty amazing chart. I too expected the slow down in the markets, but not based on CAPE and all that stuff. I just looked at the economic fundamentals and cycles. We are due for a slow down and down turn. Real Estate should take another dip in 2-3 years, but nothing like the last dip.

I kind of wondered if you pulled money out of your index funds to buy the house while the market was up. I kept thinking to myself, that is what I would do in this situation if I didn't already own a house. Cash out a little and get a hard asset that drastically fixes/reduces my cost of living and diversify in the process.

Riggerjack
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by Riggerjack » Wed Nov 04, 2015 11:59 pm

There's already a fine thread here about the assumptions that went into the 4% SWR studies. I recommend that you read up on it.

I wish you good luck with your stocks. I'm pretty happy with how my houses have worked out so far. If you've lost faith in yours, now is a good time to be selling.

jbrown79
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by jbrown79 » Sat Jan 09, 2016 3:27 pm

Buying real estate for appreciation is always risky because you cannot forecast the future appreciation. For a retiree, I would suggest buying homes in an area with lower appreciation but high cash on cash returns (e.g. 8%). There are markets like this. If you add in leverage, the returns are even better. Take a look at the facts here: http://www.retirementincome.net/retirem ... investing/ The other thing to consider is lending against real estate. I get just about 10% annually from a fund that lends against property (first position, low LTV loans). The advantage of being a lender is nothing to manage.

NPV
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by NPV » Sun Jun 12, 2016 1:26 pm

I have a newbie (and possibly stupid) question on RE investment for which I did not want to open a new topic - this seemed to be close enough.

If I get a non-recourse mortgage loan with relatively little amount down (say 20%), am I essentially getting close to 100% of the RE appreciation upside potential for close to 20% (rising over time as I pay more of it off) of the downside risk, with the bank happily taking the short stick of the deal? The way I see it, if at any point of having the mortgage:
1. Home market value < outstanding principal -> I stop payments, the bank has to eat the delta
2. Home market value > outstanding principal -> I keep doing payments and keep ownership, I capture the upside

Let's also assume it is fixed rate to keep rate risk out of it (although variable rate might make sense here as well - if rates rise to the point it does not make sense to keep paying, you have the option to default on the loan while all your other assets are safely shielded).

Something I am fundamentally missing here?

Dragline
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by Dragline » Sun Jun 12, 2016 2:21 pm

Yeah, mortgages are not "non-recourse." You are personally on the hook for the whole amount, and the property is just the collateral.

Banks want to get paid no matter what happens with the property. This is why you hear about people being "underwater" and owing more than the property is worth. This led to a lot of personal bankruptcies in the last big real estate downturn.

NPV
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by NPV » Sun Jun 12, 2016 4:30 pm

Seems like in multiple states mortgages are non-recourse: http://www.financialsamurai.com/non-rec ... -mortgage/

drbl
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by drbl » Mon Jan 28, 2019 1:42 pm

jacob wrote:
Tue Nov 03, 2015 2:00 pm
The reason for buying the house was not that I believed that RE would outperform but simply that local NAVs were much below rent. Also the neighbors upstairs were getting exasperating getting up and trampling around at 5am every morning. The area we bought in has a high rate of immigrant/subprime in a traditionally blue collar (deeply networked, everybody knows each other) and thus has a foreclosure rate at 6x above normal. Clearing those out was what eventually lifted the prices. But I had no idea about the timing there. All I was fairly sure of was that prices wouldn't/couldn't go much lower. Incidentally, we caught our house nearly at the bottom of the evaluation curve.
Reviving this after several years of dormancy since I'm considering renting vs. buying.

@Jacob: I'm wondering how you were confident that "prices wouldn't/couldn't go much lower"?

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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by jacob » Mon Jan 28, 2019 1:56 pm

Number of foreclosures in the area were not increasing. Life support (QE) was taken off of the stock market. And rent/mortgage ratio was making owning a no-brainer for those who had the cash/down payment/credit rating.

The more reasons one can add, the higher the confidence. I'm not so much looking for the quality of one reason pointing one way or the other as the quantity of many reasons pointing the same way.

Augustus
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by Augustus » Mon Jan 28, 2019 4:42 pm

In my area renting is currently much cheaper than owning, not even including things like maintenance, 2800/mo to rent, 3300+/mo with 20% down to own. I'm hoping that changes in the next year or two because I'd also like to buy soon.

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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by jacob » Mon Jan 28, 2019 5:10 pm

Here, currently, renting offers a slightly advantage over buying. I'm seeing foreclosures popping up again. Probably due to the Fed hiking rates and homeowners being on ARMs or similar weak sauce.

Campitor
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by Campitor » Tue Jan 29, 2019 8:40 am

Personally I prefer stocks over real estate by a wide margin. There was a decade when some family property had a string of bad tenants which ended in non-payment of rent and lengthy evictions; you can't just toss a family with children out on the street - something that I think is a compassionately reasonable but abused by tenants. There was a combined total of 5 years of non rental payments for 2 units because children were involved.

As a landlord it sucks to start eviction proceedings on a family with children. And it sucks even more when no rent is paid for 2 years on a rental unit while eviction proceedings are underway; 2 years is the time the state gives a family with children to move out before you can forcibly evict them. Funny how each family found a new apartment in the last month before forceful eviction.

Being a landlord is no joke and renters wonder why we charge so much - it's to cover the cost of bad tenants that damage property or those who don't pay rent. Owning a single family home that you live in changes the calculations. But from my own personal experience I can't see any real estate property surpassing stocks in performance unless gold/oil is discovered underneath and you own the mineral rights.

I understand that stocks aren't a sure thing either but at least there's no law that prevents the selling of underperforming stocks for 2 years.
Last edited by Campitor on Mon Jul 22, 2019 10:03 am, edited 2 times in total.

TheRedHare
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by TheRedHare » Tue Jan 29, 2019 11:17 am

SimpleLife wrote:
Mon Oct 26, 2015 11:26 pm
I'm not being inconsistent at all. Rents in my area are cheaper than the cost of owning. 3% of say 2k rent is only $2,060 in a one year increase.

6% interest on a 300k house has a larger payment increase than the inflation adjusted return on a small amount of rent. They don't increase proportionally to each other...the rates and dollar amounts are significantly different.

Again, I stand by my statememt. Rents may not rise enough to justify the new payment. Price to rent ratios in my area suck. It's cheaper to rent than own. Cost of owning rises faster than rents.
Could you break this down? I'm a noob at RE investment and would be interested in learning how this works.

thebbqguy
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by thebbqguy » Sun Jul 21, 2019 6:10 pm

It's hard to compare. Buying raw land for the right price and developing it in the right location at the right time probably beats stock returns.

I have seen some phenomenal returns on land where my in laws live in Tennessee

FIRE 2018
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Re: Real estate vs. Stocks long term: stocks win by a landslide?

Post by FIRE 2018 » Mon Jul 22, 2019 4:14 am

Rented for a 2 years right after college and at the same time working my butt off , 2 jobs , saving investing in market and looking for the state (FL) and part of town I wanted to live in. Even though renting was money down the drain I needed to rent for 2 years. Owning real estate for me is the way to go. However my index stock mutual funds over the long term which way outperformed my real estate is what triggered me to FIRE. There was a TIME magazine article pre internet days talking about the Death of Equities. How that article was so wrong.

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