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Then maybe you just didn’t know what you were doing when you bought the real estate. I understand why you would sell it and throw it in vanguard and be done with it. But to say the market beats rentals as an absolute is incorrect, especially when you say it’s a 1% return.
I did not say the market beats rentals as an absolute. I specifically called out that some rental markets beat the stock market.
As to the 1% real appreciation rate, it was demonstrated by Robert Shiller when analyzing real estate values since the late 19th century. Here is his data, in linked spreadsheet at the bottom of the page: Online Data - Robert Shiller. Here is the trend graphically.
There are regional variations and inflations and deflations through time, but in the long, long term real estate just doesn't appreciate as well as stocks. You can definitely catch one of these temporary, regional appreciation trends long enough to make money, but they are rarer than the slow 1% appreciation that I cited.
Home prices average about the rate of inflation unleveraged ..remember every home that eventually gets paid off is unleveraged ....as well as everyone who has the money to buy cash but takes a mortgage and invests is just as much buying equities leveraged as the house ..
It all comes from the same pocket ....we can just as easily say the cash went for the house and it is the mortgage money that is invested in equities .
We like to say it is the house being bought on mortgage and the equity investment is our money ..but that is really a mind game we play ...in the end we borrowed money and what went where is irrelevant .. it all comes from the same pocket.
We have cash of our own and cash the mortgage gave us ...what went where in the scheme of things is only how we think about it .. we can even say it’s 50/50 in both.. we can say we put half our own money in the house and half in our investments, and we put half the mortgage money in the house and half in our investments..at the end of the day it is the same thing
Last edited by mathjak107; 09-03-2019 at 02:02 PM..
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by Avondalist
I did not say the market beats rentals as an absolute. I specifically called out that some rental markets beat the stock market.
As to the 1% real appreciation rate, it was demonstrated by Robert Shiller when analyzing real estate values since the late 19th century. Here is his data, in linked spreadsheet at the bottom of the page: Online Data - Robert Shiller. Here is the trend graphically.
There are regional variations and inflations and deflations through time, but in the long, long term real estate just doesn't appreciate as well as stocks. You can definitely catch one of these temporary, regional appreciation trends long enough to make money, but they are rarer than the slow 1% appreciation that I cited.
The problem is you are only looking at sitting on a property and waiting for appreciation. As I mentioned the advantage of RE is being able to do something with it and manipulate it to increase value and at a faster rate.
Now if we are talking someone's personal home, that might well be the case, but now we are talking about rental properties. I could say lets use the market and not count dividends.
BTW while your market is doing 6%, don't forget to deduct the cost of rent you have to pay since you didn't buy a house plus any tax benefits you may have lost.
Let's clear this up once and for all... had an argument with a friend who insists that stocks just cannot beat buying a home (for personal purposes). His argument is that because it is bought on leverage you can get massive gains by just putting a small amount down. This makes no sense to me for the following reasons:
- Taking on leverage means you are paying for the cost of capital (interest at 4% or so). There is no free lunch like he is describing. One could do the exact same thing by buying stocks on margin.
- Even a paid off house has a cost - i.e. opportunity cost. That capital that is locked in your home is not working for you, rather if you sold the house and put it in the stock market you would get a return which is the lost opportunity cost. That has to be balanced with the rental equivalent yield that the home is producing and the ongoing expenses to get the net positive or negative. Add in annual appreciation which is historically 1% above inflation as a positive.
So, just because you've paid off your house you're not necessarily living in it for just the taxes and maintenance - that is an illusion. I did some analysis here for the SoCal market - a $1M house rents for around $4,000/month, at 7% market returns you are losing $70,000/yr in potential gains, rental value is $48,000/yr, you're still losing $22,000/yr. You would have to deduct maintenance, HOAs and property and local taxes as well since a renter would not have to pay that. Add in 3% appreciation to the equation and the results are not that impressive when all is said and done.
In a very high tax locale such as SoCal the ongoing taxes and HOA expenses can make this a losing proposition even after the house is paid off. This may work much better in MCOL or LCOL areas.
- He said he ran the numbers and buying a home came out way ahead. I am really skeptical of that. With all the overhead from owning a home I seriously doubt one could outdo stocks.
- He further argues that the ability to reverse mortgage homes gives them unique benefits, this makes no sense at all. First off, reverse mortgages are terrible and most experts caution against them. Secondly, a good balanced portfolio is infinitely more accessible with very minimal transaction costs, if any at all. This argument is nonsense in my opinion.
- The biggest source of confusion is that people tend to confuse personal real estate with dedicated real estate investing which is a totally different thing. McMansions bought for personal consumption tend to make for very poor cash flow efficiency compared to the type of real estate investors buy (smaller apartment type that maximize cash flow efficiency). Buying a McMansion as a real estate investment is akin to starting a high volume car rental business using a fleet of Mercedes S class vs Toyota Corollas.
In addition, the equivalent rental yield generated from the McMansion is consumed by yourself which is a lifestyle expense not generated income.
Buying a home for personal consumption is in most cases NOT "investing in Real Estate".
Time to repost the classic JL Collins "Why your home is a TERRIBLE Investment" article:
I haven’t read through the thread, but here’s the real life numbers I’m currently looking at:
Rent a $4000/mo Brooklyn co-op or:
Buy the equivalent co-op (both in sq footage and finishes) for $1 million, with a monthly maintenance fee of about $1200/mo. This includes everything that would be included in the rent, and none of it would be useful as a tax deduction, since I have very low income and thus don’t have an income tax liability.
I have the ability to put, theoretically, anywhere from 0% to 100% down.
I clearly favor renting as the best financial decision, even if I plop all the “saved” down payment and monthly differential into a CD. I was surprised the numbers were so slanted in one direction.
Well here's the thing-that's the advantage of real estate-using leverage. Do you think comparing athletes that one should have one arm tied behind the back?
The other thing is I bought all my rentals with cash, no leverage and it still beat the market.
As far as diversification, ever hear of a guy who invests in the market named Warren Buffet? I'm pretty sure he's done better than you. His belief is "diversification is protection against ignorance. It makes little sense if you know what you are doing." In Buffet's view, studying one or two industries in great depth, learning their ins and outs, and using that knowledge to profit on those industries is more lucrative than spreading a portfolio across a broad array of sectors so that gains from certain sectors offset losses from others."
So if you are a lazy person and ignorant, invest in a mutual fund and wait 20 to 30 years and you should be able to retire.
You clearly don't know anything about investing in real estate. Ever hear of forced appreciation? How about the ability to change real estate to it's highest and best use? How much can you control in the market short of buying or selling? You are at the whim of the market, nothing you can do to make a stock go up yourself personally. At least with real estate you have the ability to change value.
You are just buying a piece of real estate and letting it sit waiting for appreciation, much like buying in the market and just waiting for it to go up.
I have several rentals that I bought, fixed up, and in 40 to 60 days had a cash flow coming in and value 50% more than I put into it. That easily beat what my money would have done in the market in 60 days. That's not 1% in a year, that's 50%, 49% more than your 1% you claim, and in 1/6th the time. If I add the rent received after operation costs for a full year like your 1% you claim, it goes to 62% return. Show me where in the market you get that for a year.
What Buffett said about diversification is spot on. If you were working in tech in the late nineties, you would have been a fool to put your money in the S&P 500 with all the low hanging fruit all around you.
That's understandable. We are all invested (pun intended!) in our own particular way of doing things. To be shown that our approach is suboptimal, or more about luck than skill, feels like a personal insult. Also, once we do choose a particular method, we come to feel a tribal allegiance with our fellow-travelers. That carries all of the baggage of tribalism... namely, a reflexive suspicion of members of opposing tribes.
Hopefully we can agree that real wealth is built not through incremental climbing or dedicated but unimaginative personal exertion. It's built by leveraging - using other people's labor, capital, ideas and connections. We amass wealth via an imbalance of effort and reward, were we ourselves exert the minority of effort, but garner the majority of the reward. For most people, even if they're smart and hard-working and generally sociable, such leveraging isn't tractable. It's beyond their ken and orbit.
Presumably we exclude day-trading from the ambit of investment. Instead, by passive-income from the stock market we mean the aggregate of gains (equity appreciation and dividends) that we earn "passively", because we're not involved in the management of the underlying companies, and perhaps don't even engage in any trading or stocks selection... that is, buy-and-hold of index-funds.
Never listen to anyone who doesn’t admit good fortune was a part of her/his investing success.
Persons with high net-worth, but low discernible income, have their own peculiar situation, which in my experience is rarely mentioned in either the financial-press or in retail-advice offered by brokerages etc. “The system” simply assumes that anything beyond a 10:1 assets/income ratio is weird and pathological. But being in such a position, all sorts of “normal” rules may not apply.
As concerns the particular question of whether to buy or to rent, buying may still make sense, if market conditions are such, that long-term local real-estate appreciation handily beats not only your CD rate, but also the cost of maintenance and so forth. In some markets this is very much the case. In other markets, it’s completely the reverse.
Quote:
Originally Posted by BigCityDreamer
I thought most people understood that the home you live in is not an investment property.
But I guess a lot of people are not clear on that.
In Los Angeles, a generic single-family house in lower-middle neighborhood might have been available for $150K, 25 years ago. Today that house is worth $750K... an increase by a factor of 5. To not regard that as an investment, would, I think, be a bit prejudiced.
Similarly, we're conditioned to think of cars as mere items of consumption, or even worse, as money-pits. But suppose that somebody bought a Datsun 240Z for $3000, 25 years ago, in decent (but not pristine) condition. Today that car goes for $15K on Craigslist. Maybe I'm a fool, but to me, that car definitely qualifies as an investment.
The point is, that we may find large and substantial capital-appreciation in stuff that we own and use. Normally that stuff isn't classed as an "investment", but with enough capital-appreciation, it's hard to regard it as mere consumer-stuff, let alone as liabilities.
Ben Felix has a good argument here... 5% of the value of a house is the unrecoverable cost using reasonable metrics. We can't cherry pick time periods but rather go with long term history of how Real Estate has performed.
An entry level home in a nice neighborhood in Orange County, California costs $800,000. So 5% is $3,333 which is the break even point. One can rent an equivalent much less than that, probably around $2200-2400, that's 50% higher than what it should be.. so yes, there is a MASSIVE bubble in this area in my opinion.
Also, he did not take into account HOAs and Mello Roos which are additional fees and taxes, most of them astronomically high so make that not a BIG bubble but an EPIC bubble.
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