Real estate has historically performed worse than stocks (Sunnyvale: real estate market, foreclosed)

[sliverbox]

You don't necessarily have to be "good" at investing in stocks. The key is diversity. As a general rule of thumb its a good idea to spread things out so that things hit on "all cylinders". On the other hand for those who pick individual stocks the rate of success is far, far lower. That is unless they're extremely good at it. Truth be known your typically boring stocks that represent companies that make things like toilet paper, food, and various everyday commodities are going to do fairly well long term.

[beb0p]

Originally Posted by sliverbox

You don't necessarily have to be "good" at investing in stocks. The key is diversity. As a general rule of thumb its a good idea to spread things out so that things hit on "all cylinders". On the other hand for those who pick individual stocks the rate of success is far, far lower. That is unless they're extremely good at it. Truth be known your typically boring stocks that represent companies that make things like toilet paper, food, and various everyday commodities are going to do fairly well long term.

I agree with everything you said.

Be that as it may, the average investor still get only 2.1% return from stock per the study I linked. We can speculate as to why they under perform by so much but the point is, they do. Someone who gets 7-10% return is basically outperforming the average investor by 3X to 5X, and outperforming the hedge fund. It just doesn't happen to most people.

That's not to say that if you follow a smart strategy investing in stock, you won't outperform real estate. But the average person's gain, for whatever reason, falls short.

[Sam I Am]

Please - this convo has to have something SF-O oriented in it or it's going to have to be moved to Great Debates or Real Estate. The state forums and subforums are for local topics only per the Administrator and Senior Mods. Thank you.

[Mack Knife]

Sorry but none of this works out.

Say your buy $500,000 worth of stock (not with hindsight mind you) and track it for ten years.

Then we take the $500,000 house, ten years ago.

Most people will then take the end result and compare the two and proclaim somehow that stocks outperform real estate. The flaw in the entire comparison is the value of the utility during that time. Discounting the utility of the house over ten years means you aren't comparing the full value.

Since there is no mortgage (we paid cash for the house just as we did for the stock) you now need to add to the $500,000 of equity in the house, the value of it's utility over that same amount of time. We do the same thing for the stocks.

In the SF area, the utility should easily come out to about $2500/month or $300,000. Lets be fair here, you are either living in it or renting it out because that is it's purpose.

Now take the stock and consider it's purpose. You really can't do much with it other than perhaps collect dividends and the appreciated share price at the end of the ten years. You could leverage it but that now brings a substantial risk and since you're comparing stocks to real estate, you are back to stocks. The house too could be leveraged at about an 80% LTV ratio and put into stocks. The difference being that if the leverages stocks collapse, you are finished. Done. If the house prices collapsed, so what, you could sell the stocks or in the case of use or rental, you continue to accumulate profit regardless of the value of the house. In fact, in the recent real estate fiasco, rentals didn't drop in the revenue they generated to any significant degree. In the SF Bay Area, rental prices have risen.

So that the end of ten years (or pick any number of years) that house has earned you a conservative $300,000 in utility alone.

Time to run the numbers again I think.

[Ultrarunner]

Originally Posted by sonarrat

Good numbers.

I've also sat down and figured something else out. If I was to do what most people do here and buy a starter, then trade up every couple of years, in order to achieve a gradually more tolerable standard of living, the resetting interest amortization means I would throw away just as much money as renting - only in the form of interest and taxes instead of lease payments. This is true even if I take the mortgage interest deduction into account (since I only count how much more it gets me compared with the standard deduction).

Add the fact that folks spend $10-15K on a new house just fixing things they don't like, and multiply that by moving every 5 years.. and I'm left scratching my head. All other things being equal, it seems like it's a wash at best, a certain loss at worst. But I guess that doesn't factor in luck.

My approach was slightly different...

I bought my Oakland starter and renovated over 18 months and then repeated... the difference is I rented the renovated homes and seldom sold... over time, I branched out to Castro Valley and Pleasant Hill plus others... eventually sold those because they were too valuable to be rentals.

Those that renovate and sell, usually are building equity by adding value through the improvements...

Some might just say they are always working a second job and they would be right... the big difference, at least for me is I was working for myself and found the process and comradery enjoyable...

It's not too hard to make a lot of friends and build a lot of goodwill when you transform the neighborhood eyesore into a little showplace... on a budget of course.

[Ultrarunner]

Bless those that have made a good return in the markets... I actually have a retired CPA and an ENT in Oakland that both do real well and have for as long as I have known them... they did loose some of the highs by selling... but, they also avoided the crash...

Anyway, I'm just not smart enough to do it on my own...

I have had to many stocks that went to zero... they went under, were delisted or just became worthless... some did really well for long periods and then tanked.

The only one that would have been a shinning star was the Apple stock I bought in 81... sold it to buy my first home...

Never had a piece of Real Estate become worthless... wish I could say the same for stock.

As I said... I admire those that can do it.

[sliverbox]

So that the end of ten years (or pick any number of years) that house has earned you a conservative $300,000 in utility alone.

The big hole in your argument is that the house you claim to have 'earned' money on is the house you would live in, right? As such how exactly useful is that? If you sell it you'd only have an option to move somewhere away from the Bay Area and probably California to realize any sort of gain because if you buy another high priced Bay Area home then its likely that "proft" will be mostly soaked up by another high priced house. The only way to realize that profit is to buy somewhere a LOT cheaper and simply cash out the rest. Many people do that and move to OR, NV, or AZ.

I'll just say this. the general saying out there as has been for years is that if you invest 10% of your income from the time you reach career age to the time you're 60, you will likely have over a million dollars by the age of 60. Real estate cannot come anywhere close to that. People I believe separate raw and cold financial fact with the warm and fuzzy, secure feelings they get from buying wooden boxes. Any noted economist will tell you investing in real estate is no comparison to investing in stocks and the general market. Like I said- I bought a house. But that's for me to live in. When I retire that house isn't going to fund my retirement as it shouldn't. Its for me to live in. My investments are what I will need to live off of.

I'll close by saying that most people also have no clue how much they need to retire with. If you assume you are going to live from age 60-100, then if you had saved 1 million dollars and that means 1 million in cash, you will have a yearly income of around 40k a year. In other words, not a whole lot for a place like the Bay Area. So in reality, you had probably save around 2 million dollars by then. Buying wooden boxes ain't gunna' do it.

[Ultrarunner]

As a young kid I looked around to see those customers frequenting a high end custom automotive shop...

Sure there were Doctors, Lawyers and airline pilots... there were also a lot of everyday individuals and almost all owned income real estate.

As a teen, they were quite willing to share advice... the most common advice I received was to build up a Real Estate portfolio and the most common regret was not doing it sooner.

So, at the very first possible moment, I bought my first home at 90th and B in Oakland... still have it today and since I moved, I'm on my second tenant...

I'm not saying Bay Area Real Estate is the be all and end all... just saying it has worked for me and the stock market has been a total disaster... blame it on my inexperience or temperament to hold on... either case, my losses were real.

I used to service a 1930 Model A that belonged to a widow on San Jose Street in Alameda... she was quite a woman... 45 year prior she was in a car accident that killed her husband and put her in the morgue... they called her miracle Mary because she was in the morgue when they found she was alive...

Anyway... she lived a very rich and full life and had only a very modest $600 social security... She did own and live in a grand Victorian and in WWII she and her husband converted the basement into 3 studio units... throughout it all, it was her income from the 3 studio units that supported her and her tenants looked after her in her final years... taking her to Doctors appointments, grocery shopping, etc...

[aslowdodge]

I haven't fully researched this, but I can believe that stocks could outperform real estate. But here in the bay area it is unlike 95% of the rest of the country. Real estate has gone up. If you bought 20 years ago even after the big drop it has come back and still worth more than what you paid.
I know one person had posted that he bought a house back in the 90's in Houston. He sold it about 10K less than what he paid for it. He said after adding up all the numbers in the end renting was probably a better option. No retirement nest egg in his home there.
But many people in the bay area expect their home to be part of their retirement nest egg. Some people buy investment property not expecting cash flow, but appreciation instead. In many parts of the country appreciation is not part of the equation.

So the big factors are local of real estate ( in our case the SF area) and the time window of tracking. If you track stocks over the last year they have done well. Over the last 5 years the rise is great. From the last big crash it's just breaking even.

[Ultrarunner]

If you can hold onto a parcel of Real Estate that cash flows... it's hard to go wrong unless you just don't have the temperament or commitment to doing the job of a Landlord.

I always looked at appreciation as the icing on the cake...