Real Estate vs. Stock Market (bonds, mutual funds, cash, fees)

[austin-steve]

I'd like to hear opinions and comments on the pros and cons of investing in real estate vs. the stock market. I'm not talking about owning a home but investing in rental property. For example, if I have $50K to invest, I can buy a $200K rental home or invest $50K in mutual funds. I know there are different opinions, and I am pro real estate, but I'd like to hear what the anti-real estate folks think also.

Steve

[Rakin]

Steve

I have bought about 4 homes worth about $100-120k each in the last 5 years and all are leased for about 1% of what I paid. I have been using all income to pay off loans and just sent Wells Fargo payment to pay off house number 2. I may buy a few more with the intent of paying them off over the next few years.

The 2 homes paid for now generate about $2200 a month extra and I'm paying extra toward my personal home. I am in my mid 50's and plan on having about $1.5 million in paid off real estate by the time I hit retirement.

Also, there are expense write offs & depreciation that reduces my current personal income.

The bad part - dealing with tenants which my wife handles. But she is very selective (as much as possible) who we lease to.

Just as in sales remember when you buy - schools & location.

[maf763]

It depends on how active you want to be with your investments. RE is probably a smart investment at this time, but from what you describe, you'll be taking on $150K in debt to buy a rental. This means there is added pressure to make sure the property always has paying tenants who aren't needing costly repairs. If the thing goes bad, you are out your $50K but also possibly a lot more. In the market, you can park things in a diverse set of funds and leave it be - your $50K will either grow or not.

Bottom line, real estate can provide income and equity, but not without a lot of effort and, in your case, without accruing a lot of debt. You really have to look at the income potential of the property - can it yield $2500 a month realistically, or can it only yield $1500 a month? That's a big part of your answer.

[Jonotastic]

Originally Posted by austin-steve

I'd like to hear opinions and comments on the pros and cons of investing in real estate vs. the stock market. I'm not talking about owning a home but investing in rental property. For example, if I have $50K to invest, I can buy a $200K rental home or invest $50K in mutual funds. I know there are different opinions, and I am pro real estate, but I'd like to hear what the anti-real estate folks think also.

Steve

People who have to get a large loan on a property usually are LUCKY if they break even. Unless you pay in cash, you won't make money (may even loose money or possibly make a very small amount) once you add in property taxes, insurance etc plus your loan payments. There are some small condos for sale in Vegas and Phoenix for $50,000...the people you will deal with won't be great, but you could pay cash and rent it out for $750 and still make money.

I personally would choose to invest in the stock market, but if you aren't experienced now isn't exactly the best time to learn unless you are willing to buy and hold for 5 years.

[rubber_factory]

If I had $50k, was comfortable about retirement, kids' college, etc., and was already a homeowner -

I would probably start my own business. If not that, I'd invest in a local business.

If not that, I'd buy individual stocks & bonds, probably including an index fund.

I would not invest in a mutual fund.

Right now I would definitely not invest in real estate in my area. Home values are too high. More importantly, local rents were inflated by the debt & construction boom (bubble), and have fallen much farther than home values, much quicker. All things considered (PITI + upkeep), you pay a very significant premium to own property here. I don't know about Austin, Texas. That $50k would be a downpayment on a $225,000 3BR house that would rent for less than $1000/month, and would require coastal hurricane insurance and moderately high taxes. I'm too lazy to do the math but that doesn't sound so great to me.

[austin-steve]

That $50k would be a downpayment on a $225,000 3BR house that would rent for less than $1000/month, and would require coastal hurricane insurance and moderately high taxes. I'm too lazy to do the math but that doesn't sound so great to me.

No, that doesn't sound great. We still have investors buying in Austin, though definitely slower than before. In Austin, $200K will get you a house that rents for about $1,400. We tell investors that 30% or 40% down will get a cash flow property ($140K home that rents for $1100/mo.) but that once you properly factor in management and leasing fees, vacancy loos, repairs and maintenance, etc., you could end up with $300/mo +/- negative cash flow. In the "old days" (1990s and before) you'd pay $85K for a home in South Austin that would rent for $900/mo, and the numbers worked with 20% down and a 15 year loan.

Still, even with the tougher numbers, I keep buying real estate and it keeps doing well for us. I manage rentals professionally so taking care of my own is of minor additional effort.

Meanwhile the retirement accounts I do have are worth about the same as they were in 2001. We stopped adding money to them in 2004 and investing everything into housing instead. Austin didn't have a bubble though, so things might be different in other areas.

Steve

[rebaths]

Try this website, they have a discussion on Real Estate versus Stock Market investing: Should I Invest in Real Estate or Stocks??? | BigGreenPie.com

It seems like mostly regular people but they have some 'experts' that post good advice... I've stopped by a couple times.. I like it because it's dedicated to investing both stocks and real estate.

[triplenet]

I own many small single family homes in South Florida and you should get 6% +/- cash on cash from a rental property... Maybe a bit more if you apply some leverage.... But you have to manage and lease them on your own....

Real estate is a hedge against the stock market... You should invest in both...

[StealthRabbit]

Originally Posted by triplenet

...
Real estate is a hedge against the stock market... You should invest in both...

do this ^^^^

I try to keep 30% assets in RE, 30% in stocks and 30% in cash / liquid investments.

I would try to get a duplex or leverage into a multi family property. I'm not keen on single family residences UNLESS they are in an area that is gonna get rezoned to commercial use. Some types of commercial property would be good (storage rentals), as I like to spread out my risk. DO NOT invest in a restaurant facility (frequent vacancies, rough use of property, Liability exposure).

[debtmonger]

If you don't mind the hassle factor, RE is hard to beat and it is a great time to buy. As long as you pay cash and don't go into debt...