Why not Real Estate instead of Stocks?
Re: Why not Real Estate instead of Stocks?
I think as of right now this really depends on the location. In my metro area investors/flippers are saying it’s no longer cost effective to buy single family homes at the current time because home prices are too high and thus are not attractive when they have figure in maintenance, home insurance, property taxes, etc... right now.
I’m going to assume because of this, in other metro areas with this similar issue a lot of investors may be sitting on cash waiting for housing to pop so they can swipe them all.
In my opinion the U.S is going to need to figure out the housing situation otherwise we will end up like places like Germany where 5% of the population owns 50% of the housing.
I’m going to assume because of this, in other metro areas with this similar issue a lot of investors may be sitting on cash waiting for housing to pop so they can swipe them all.
In my opinion the U.S is going to need to figure out the housing situation otherwise we will end up like places like Germany where 5% of the population owns 50% of the housing.
Last edited by Priam on Sun Oct 04, 2020 12:14 pm, edited 1 time in total.
Re: Why not Real Estate instead of Stocks?
+1willthrill81 wrote: ↑Sun Oct 04, 2020 10:07 am I deem that there is significant and increasing legal risk with being a landlord.
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
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Re: Why not Real Estate instead of Stocks?
You're accounting for property tax and insurance?Sasquatch1 wrote: ↑Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.
One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!
One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.
The cash flow is hard to beat in my eyes.
Ex. I paid cash for a single family home, 125k
I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation
That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems
The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!
If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
Bogle: Smart Beta is stupid
Re: Why not Real Estate instead of Stocks?
Agreed. I am strategic in what states I have properties in.willthrill81 wrote: ↑Sun Oct 04, 2020 10:07 amFurther, without getting into politics, it seems to me that our culture is strongly tilting in favor of 'protections' for renters, regardless of what happens to landlords. I deem that there is significant and increasing legal risk with being a landlord.Bobby206 wrote: ↑Sun Oct 04, 2020 10:05 amI agree with you for the most part. Everybody's circumstances are different though. Some people like that "mail box money" that rentals supply and don't mind the low return of such a place. If it's a low maintenance type property that attracts high quality tenants it's really not so bad. A lot of times return look incredible on paper but don't pan out. For example, I have seen lots of deals for $50k for a $800 or $900 per month rent. Problem is those tenants don't seem to stay long and having a vacancy every 6-12 months KILLS returns. The tenants might pay higher rent due to bad credit or stuffing two families into the house which isn't good for the landlord generally. Also, a $50k property is probably pretty old and thus maintenance issues can be problematic. I like in the middle. Maybe $100k for a $1k/month rent (i.e. 1%) or even $125k for a $1k rent but the property is in good condition and in a decent neighborhood.ohboy! wrote: ↑Sat Oct 03, 2020 11:40 pmI've had 3 rentals. A $300k place that rents for $1,600 is in my opinion no good and I would sell it. Many people are going in for similar returns because they can get in on low mortgage rate leverage. It's a risky game. Although the last recession had a lot of get out of jail free cards, and whatever we are in now has had a lot of free passes. I would not count on it going forward.Bobby206 wrote: ↑Sat Oct 03, 2020 9:31 pm I would say diversify and have some of each. We are about half cash/equities and half real estate. We are probably heavier real estate than I want but it's fine for now. You can make it as much of a job as you want but, even at it's best, is more time intensive than a stock portfolio.
Our real estate ranges from .5% to over 1% on rents. That is I have a $300k property in one place that rents for $1,600 and I have a $100k house in another region that rents for $1,200. Property taxes and insurance are higher in the latter. Also, costs of turnover tends to be a bit more on the cheaper house. The $300k property is in a region that tenants seem to be very easy on properties, often stay longer term, and don't complain a lot. The lower level one is in a region where people move every 12-18 months so it has more vacancies. Just some data points for consideration.
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Re: Why not Real Estate instead of Stocks?
YeaJack FFR1846 wrote: ↑Sun Oct 04, 2020 12:19 pmYou're accounting for property tax and insurance?Sasquatch1 wrote: ↑Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.
One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!
One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.
The cash flow is hard to beat in my eyes.
Ex. I paid cash for a single family home, 125k
I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation
That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems
The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!
If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
Re: Why not Real Estate instead of Stocks?
My family and I own 9 single family homes as rental properties and the result has been phenomenal. Rentals require more work but that is why you get a better return than stocks.
Here is the math: let’s say you own $400 k rental (20% down payment = $80 k) and it appreciates 4%/year (16 k). If your tenants pay for all expenses including a property manager and long term repairs, you would make $16 k/80 k = 20% return on the appreciation in the first year (more as time goes by). Even with a modest 3% appreciation, you would make 12% return.
I have not included extra rent, mortgage pay down by tenants, buying it below market value which would further increase your return.
Is rental for everyone? Certainly not but I believe it is for people who have high income (low debt) and don’t mind putting in the extra work in identifying a good rental market.
There is a right and wrong way of doing things. Common mistakes I see:
1) Not everywhere is a good rental market.
2) Not hiring a property manager.
3) Didn’t do a background check on tenants like eviction history, credit score, current income
4) Buying properties based on some arbitrary “rules“ like the 1% rule. They don’t realize more rent comes at the expense of quality tenants.
5) Converting their former home into a rental property (“accidental landlord”). Not every home is a good rental.
6) Didn’t put away a portion of rent toward long term repairs and vacancy.
7) Didn’t buy cash flow properties
Rental properties are not totally passive but it is pretty close. I probably spend 1-2 hours each year talking to my property manager.
Did I mention the generous tax benefits? Cash out refinance, 1031 exchange, leaving the rental to your children (tax free for most).
Do rental properties give you a superior return? Yes. Do they require more work? Yes. Should everyone buy a rental? No. You need to have high income (low debt) and need to do your homework.
You are going to find a lot of people here who are totally against buying rental properties. Some don’t even think you should make a living off rental properties.
Here is the math: let’s say you own $400 k rental (20% down payment = $80 k) and it appreciates 4%/year (16 k). If your tenants pay for all expenses including a property manager and long term repairs, you would make $16 k/80 k = 20% return on the appreciation in the first year (more as time goes by). Even with a modest 3% appreciation, you would make 12% return.
I have not included extra rent, mortgage pay down by tenants, buying it below market value which would further increase your return.
Is rental for everyone? Certainly not but I believe it is for people who have high income (low debt) and don’t mind putting in the extra work in identifying a good rental market.
There is a right and wrong way of doing things. Common mistakes I see:
1) Not everywhere is a good rental market.
2) Not hiring a property manager.
3) Didn’t do a background check on tenants like eviction history, credit score, current income
4) Buying properties based on some arbitrary “rules“ like the 1% rule. They don’t realize more rent comes at the expense of quality tenants.
5) Converting their former home into a rental property (“accidental landlord”). Not every home is a good rental.
6) Didn’t put away a portion of rent toward long term repairs and vacancy.
7) Didn’t buy cash flow properties
Rental properties are not totally passive but it is pretty close. I probably spend 1-2 hours each year talking to my property manager.
Did I mention the generous tax benefits? Cash out refinance, 1031 exchange, leaving the rental to your children (tax free for most).
Do rental properties give you a superior return? Yes. Do they require more work? Yes. Should everyone buy a rental? No. You need to have high income (low debt) and need to do your homework.
You are going to find a lot of people here who are totally against buying rental properties. Some don’t even think you should make a living off rental properties.
Last edited by tomtoms on Sun Oct 04, 2020 1:13 pm, edited 1 time in total.
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Re: Why not Real Estate instead of Stocks?
Can any more experienced members than myself speak to how much of the better returns would be attributable to the extra work that goes into rentals vs how much is simply from using leverage?
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Re: Why not Real Estate instead of Stocks?
It seems to me that rental estate's potentially higher returns than publicly traded equities are mainly driven by three potential factors: (1) higher risk, (2) 'sweat equity', and (3) leverage.case_of_ennui wrote: ↑Sun Oct 04, 2020 1:12 pmCan any more experienced members than myself speak to how much of the better returns would be attributable to the extra work that goes into rentals vs how much is simply from using leverage?
The higher risk comes from the fact that it's difficult for most landlords to have more than a handful of properties for a variety of reasons. A small number of rental properties, especially if they are all in a single city or state, are not very diversified, hence, there is concentration risk, somewhat analogous to sector risk with stocks.
While it's admittedly possible to pay someone to do most of the 'sweating' with rental properties, there is still effort involved in selecting a property, selecting a property manager, dealing with the property manager, approving work done to the property, etc. Most of the landlords with outsized returns seem to be either earning a lot through sweat equity and/or selecting 'C' level properties, where the rent to property value ratio can be very high.
Leverage can definitely be a source of higher returns, but this also ramps up risk. Many landlords were over-leveraged in 2008 and went bankrupt. I know some experienced real estate investors who judge their returns on the basis of them paying cash for the property, even though they use leverage to purchase the property. They refuse to try to 'make a bad property good' on the basis of leverage.
The Sensible Steward
Re: Why not Real Estate instead of Stocks?
My last real estate agent has four rental properties. She's says those are her retirement. She manages them. Of course, she comes from a place of knowing the industry and having contacts to get stuff done. Another one of friends also owns four properties. Neither of them invest in the stock market.
It's really a personal choice. Just make sure the math the works.
It's really a personal choice. Just make sure the math the works.
Re: Why not Real Estate instead of Stocks?
When you talk about leverage, you need to talk about interest rate.case_of_ennui wrote: ↑Sun Oct 04, 2020 1:12 pmCan any more experienced members than myself speak to how much of the better returns would be attributable to the extra work that goes into rentals vs how much is simply from using leverage?
This is what Buffett said:
“Warren Buffett says along with equities, single-family homes are a very attractive investment right now.
Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "a couple hundred thousand" single family homes if it were practical to do so.
If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.“
https://www.cnbc.com/id/46538421
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Re: Why not Real Estate instead of Stocks?
+1 ^ thiswillthrill81 wrote: ↑Sun Oct 04, 2020 1:22 pm Leverage can definitely be a source of higher returns, but this also ramps up risk. Many landlords were over-leveraged in 2008 and went bankrupt.
Real estate investors like myself made a killing in 2009-2012
Class A and B properties sold for less than replacement value
Returns on these properties completely destroyed what the stock market gave me, and the US index gave me 14-16% average annual returns for 10+ years
Investing in both the US stock market and US real estate has been amazing for me. I can’t complain about either asset class. Both have contributed to my retirement while still in my 40s
Truth be told, investing in either US market is very simple. Investing is NOT a difficult game tbh
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Re: Why not Real Estate instead of Stocks?
Think real estate like international funds. It must be there but don’t expect any returns.
Re: Why not Real Estate instead of Stocks?
my friend that article is nearly 9 years old. you have missed the window.tomtoms wrote: ↑Sun Oct 04, 2020 1:26 pm
When you talk about leverage, you need to talk about interest rate.
This is what Buffett said:
“Warren Buffett says along with equities, single-family homes are a very attractive investment right now.
Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "a couple hundred thousand" single family homes if it were practical to do so.
If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.“
https://www.cnbc.com/id/46538421
Re: Why not Real Estate instead of Stocks?
and many landlords have made a fortune off the 2008 crash. If anything, the crash has made real estate more secure due to regulations. No more funny money.willthrill81 wrote: ↑Sun Oct 04, 2020 1:22 pmMany landlords were over-leveraged in 2008 and went bankrupt. I know some experienced real estate investors who judge their returns on the basis of them paying cash for the property, even though they use leverage to purchase the property. They refuse to try to 'make a bad property good' on the basis of leverage.case_of_ennui wrote: ↑Sun Oct 04, 2020 1:12 pmCan any more experienced members than myself speak to how much of the better returns would be attributable to the extra work that goes into rentals vs how much is simply from using leverage?
Re: Why not Real Estate instead of Stocks?
Interest rate is lower now than ever.tmcc wrote: ↑Sun Oct 04, 2020 1:35 pmmy friend that article is nearly 9 years old. you have missed the window.tomtoms wrote: ↑Sun Oct 04, 2020 1:26 pm
When you talk about leverage, you need to talk about interest rate.
This is what Buffett said:
“Warren Buffett says along with equities, single-family homes are a very attractive investment right now.
Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "a couple hundred thousand" single family homes if it were practical to do so.
If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.“
https://www.cnbc.com/id/46538421
Re: Why not Real Estate instead of Stocks?
The “2% rule” is code for one and only one thing: slum lord.
Let’s be real. If you have a $500k property it does not rent for $10,000/mo. The economics make so sense.
But you might, might find an inner city dump that costs say $50,000 that will rent for $750-$1000/mo.
Let’s be real. If you have a $500k property it does not rent for $10,000/mo. The economics make so sense.
But you might, might find an inner city dump that costs say $50,000 that will rent for $750-$1000/mo.
Re: Why not Real Estate instead of Stocks?
sure but purchase prices are up 2-3x vs 2010 (ten years ago). in certain areas, price is up WAY moretomtoms wrote: ↑Sun Oct 04, 2020 1:37 pmInterest rate is lower now than ever.tmcc wrote: ↑Sun Oct 04, 2020 1:35 pmmy friend that article is nearly 9 years old. you have missed the window.tomtoms wrote: ↑Sun Oct 04, 2020 1:26 pm
When you talk about leverage, you need to talk about interest rate.
This is what Buffett said:
“Warren Buffett says along with equities, single-family homes are a very attractive investment right now.
Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "a couple hundred thousand" single family homes if it were practical to do so.
If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.“
https://www.cnbc.com/id/46538421
who cares about interest rates when you have to spend $1M in purchase price on some shanty that needs to be gutted.
Re: Why not Real Estate instead of Stocks?
If you bought stocks 10 years ago, they would be cheaper too. Does that mean you shouldn't buy stocks today?tmcc wrote: ↑Sun Oct 04, 2020 1:57 pmsure but purchase prices are up 2-3x vs 2010 (ten years ago). in certain areas, price is up WAY moretomtoms wrote: ↑Sun Oct 04, 2020 1:37 pmInterest rate is lower now than ever.tmcc wrote: ↑Sun Oct 04, 2020 1:35 pmmy friend that article is nearly 9 years old. you have missed the window.tomtoms wrote: ↑Sun Oct 04, 2020 1:26 pm
When you talk about leverage, you need to talk about interest rate.
This is what Buffett said:
“Warren Buffett says along with equities, single-family homes are a very attractive investment right now.
Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "a couple hundred thousand" single family homes if it were practical to do so.
If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.“
https://www.cnbc.com/id/46538421
who cares about interest rates when you have to spend $1M in purchase price on some shanty that needs to be gutted.
Buffett's principle still applies today - buy real estate at low interest and hold it for long term.
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Re: Why not Real Estate instead of Stocks?
+1 Warren Buffett is the best advisor imotmcc wrote: ↑Sun Oct 04, 2020 1:35 pmmy friend that article is nearly 9 years old. you have missed the window.tomtoms wrote: ↑Sun Oct 04, 2020 1:26 pm
When you talk about leverage, you need to talk about interest rate.
This is what Buffett said:
“Warren Buffett says along with equities, single-family homes are a very attractive investment right now.
Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "a couple hundred thousand" single family homes if it were practical to do so.
If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.“
https://www.cnbc.com/id/46538421
I’ve done really well buying when Buffett says to buy stocks, real estate, or Berkshire Hathaway
That man is a Legend
I’m going to miss him when he’s gone
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Re: Why not Real Estate instead of Stocks?
Long term I just haven't found real estate to be quite that profitable.Sasquatch1 wrote: ↑Sun Oct 04, 2020 12:47 am I like both. I do think real estate may have an advantage if you wanna deal with it.
One thing I seem to notice get ignored on the real estate side is monthly cash flow!!!
One could generate enough cash early on to get you out of clocking in everyday for the man. The other requires you to put your 20-30 years in to THEN retire.
The cash flow is hard to beat in my eyes.
Ex. I paid cash for a single family home, 125k
I collect 1150 per month. After bills etc and subtracting 1 month rent for upkeep I make 10k per year not counting appreciation
That same 125k put In the market I’d need a consistent 8%, which has been average. So let’s say I get that 8% so the two are equal in relation it seems
The BIG difference Is one DONT put 10k in my pocket every year or say $850 per month in my pocket! It relies on leaving the money in there to sustain. If you invested 125k in the market but took 10k in distributions to equal the cash flow, it would likely deplete itself eventually!
If I lost my job the rental at least gives me something to help sustain living vs the money in the market.
I will add I pay a property manager as my time is more valuable doing my day job so I pay out 6-10% depending on which city. So perhaps you are self managing.
Property taxes are probably $1k - $3k per year depending on where you are. That is there are a few places less than 1% a year but most (when combining city and county taxes) is at least 1% and some places like parts of Texas are 3%.
Insurance is probably $500 - $1,000.
Let's say you spend $500 fixing misc items during the year.
Let's say you have vacancies at some time!? You tell me how frequent and what duration but they happen to all landlords at some point.
Every flip costs money because the security deposit never covers everything that needs to be done.
Let's say the HVAC, roof, driveway, etc... needs replacing eventually. Most landlords don't save for a rainy day but it will come!
While I know your $10k per year is possible I think over the long haul it would be a little lower than that. Just my two cents.
Good for you if I am wrong!
Re: Why not Real Estate instead of Stocks?
Your estimate shows 3.6% cap rate and 2% appreciation per year. That appreciation is way too low even for some flyover states.Addy wrote: ↑Sun Oct 04, 2020 11:43 amNot sure if this is true, even with 4x initial leverage my model in OP cannot get anywhere close to 27%.gougou wrote: ↑Sun Oct 04, 2020 10:55 am There are some researches done showing that SFHs in the US typically returned around 9% per year (around 4% to 5% net rental income + 4% to 5% appreciation) unlevered over a long period of time (30+ years), meaning that if you apply a 4x leverage at 3% interest rate you would expect to make around 27% per year. But then historical return might not repeat so it's always a bet.
Also, if this were true then why would anyone invest in anything else other than leveraged Real Estate?
This research article is where I got my data:
https://www.nber.org/papers/w21804.pdf
So assuming a 9% total return and 3% interest cost and a constant 4X leverage, your expected return is 27% a year.
Why people don't invest in RE? First, the interest rates were never this low before so people could not get cheap leverage and we don't know whether the returns are going to be the same in the future. Second, you can get at most 10 mortgages backed by the government, after which you can't get cheap and high leverage financing, so you can't scale with 4X leverage.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Re: Why not Real Estate instead of Stocks?
A quick scan of the paper seems to indicate that these values are after leverage, the paper seems to apply a constraint of DSCR (Debt Service Coverage Ratio) = 1.2.gougou wrote: ↑Sun Oct 04, 2020 3:11 pm Your estimate shows 3.6% cap rate and 2% appreciation per year. That appreciation is way too low even for some flyover states.
This research article is where I got my data:
https://www.nber.org/papers/w21804.pdf
So assuming a 9% total return and 3% interest cost and a constant 4X leverage, your expected return is 27% a year.
Why people don't invest in RE? First, the interest rates were never this low before so people could not get cheap leverage and we don't know whether the returns are going to be the same in the future. Second, you can get at most 10 mortgages backed by the government, after which you can't get cheap and high leverage financing, so you can't scale with 4X leverage.
Not sure how much leverage that would translate to, the OP example has DSCR=1.1 and initial leverage of 4x.
PS:
- Following example has DSCR ~1.2 and 4x initial leverage for a total return of 12%: https://www.calculator.net/rental-prope ... =&x=47&y=8
- As to why I am choosing appreciation as 2%, want to assume a conservative number for the next 10 years
Last edited by Addy on Sun Oct 04, 2020 6:37 pm, edited 4 times in total.
Re: Why not Real Estate instead of Stocks?
I don't think a lot of people here, definitely not me, object to making a career out of rental real estate, any more than we'd object to owning any other business. It's just that some people present it as an equivalent alternative to investing in funds or other passive investments, while they don't consider owning a convenience store or restaurant or dental practice or gym or some other business as an equivalent alternative.
Re: Why not Real Estate instead of Stocks?
Lets make it clear then. Owning rental properties is not an equivalent alternative to investing in stocks (not as passive) but it is also not equivalent to owning a restaurant. I think we can conclude...rental properties give a better return than stocks but require more work. Some people here refuse to even acknowledge the better return from rental properties.tibbitts wrote: ↑Sun Oct 04, 2020 6:24 pmI don't think a lot of people here, definitely not me, object to making a career out of rental real estate, any more than we'd object to owning any other business. It's just that some people present it as an equivalent alternative to investing in funds or other passive investments, while they don't consider owning a convenience store or restaurant or dental practice or gym or some other business as an equivalent alternative.
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Re: Why not Real Estate instead of Stocks?
That's a doozy of a generalization . Might do well to throw "may" in there a few times.
Re: Why not Real Estate instead of Stocks?
Those are definitely unlevered returns if you read more carefully (the author was only discussing DSCR requirements for institutional investors in order to highlight some cities with higher yields). Nationwide 4.4%/yr average appreciation during the past 30 years looks entirely reasonable.Addy wrote: ↑Sun Oct 04, 2020 6:08 pmA quick scan of the paper seems to indicate that these values are after leverage, the paper seems to apply a constraint of DSCR (Debt Service Coverage Ratio) = 1.2.gougou wrote: ↑Sun Oct 04, 2020 3:11 pm Your estimate shows 3.6% cap rate and 2% appreciation per year. That appreciation is way too low even for some flyover states.
This research article is where I got my data:
https://www.nber.org/papers/w21804.pdf
So assuming a 9% total return and 3% interest cost and a constant 4X leverage, your expected return is 27% a year.
Why people don't invest in RE? First, the interest rates were never this low before so people could not get cheap leverage and we don't know whether the returns are going to be the same in the future. Second, you can get at most 10 mortgages backed by the government, after which you can't get cheap and high leverage financing, so you can't scale with 4X leverage.
Not sure how much leverage that would translate to, the OP example has DSCR=1.1 and initial leverage of 4x.
PS:
- Following example has DSCR ~1.2 and 4x initial leverage for a total return of 12%: https://www.calculator.net/rental-prope ... =&x=47&y=8
- As to why I am choosing appreciation as 2%, want to assume a conservative number for the next 10 years
Anyways I agree a 27% expected return is a bit unrealistic. With a 3X constant leverage you can get about 20%/yr return, which is not bad, but it's also not going to make you rich quickly.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Re: Why not Real Estate instead of Stocks?
Historical data from increasing population time does not seem relevant if we experience decreasing or flat population.
i.e. there would not be increasing demand for homes.
Just something to consider.
i.e. there would not be increasing demand for homes.
Just something to consider.
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Re: Why not Real Estate instead of Stocks?
I completely avoid listening to any and all stock market forecasts from anyone (they are always wrong).
Instead, I only invest in VFIAX/VTSAX.
I am very happy with my investment results.
Instead, I only invest in VFIAX/VTSAX.
I am very happy with my investment results.
Re: Why not Real Estate instead of Stocks?
+1. I guarentee you the those numbers will come put dead wrong for the next decade. They have been wrong quite some time now.Trader Joe wrote: ↑Sun Oct 04, 2020 7:30 pm I completely avoid listening to any and all stock market forecasts from anyone (they are always wrong).
Instead, I only invest in VFIAX/VTSAX.
I am very happy with my investment results.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
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Re: Why not Real Estate instead of Stocks?
Increasing population/demand/consumption helps the stock market
Just something to consider
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Re: Why not Real Estate instead of Stocks?
People can buy more stuff even if there aren't more people.flaccidsteele wrote: ↑Sun Oct 04, 2020 7:55 pmIncreasing population/demand/consumption helps the stock market
Just something to consider
Just something to consider.
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Re: Why not Real Estate instead of Stocks?
And even if they do come out correct, it won't be from skill, it will be the blind pig finally finding the acorn.1789 wrote: ↑Sun Oct 04, 2020 7:35 pm+1. I guarentee you the those numbers will come put dead wrong for the next decade. They have been wrong quite some time now.Trader Joe wrote: ↑Sun Oct 04, 2020 7:30 pm I completely avoid listening to any and all stock market forecasts from anyone (they are always wrong).
Instead, I only invest in VFIAX/VTSAX.
I am very happy with my investment results.
Re: Why not Real Estate instead of Stocks?
Thanks for the correction. I guess if we assume greater appreciation then we can get close to the 20% leveraged return. But not sure with the high valuations and low expected inflation, if we are going to see such appreciation.gougou wrote: ↑Sun Oct 04, 2020 7:19 pm
Those are definitely unlevered returns if you read more carefully (the author was only discussing DSCR requirements for institutional investors in order to highlight some cities with higher yields). Nationwide 4.4%/yr average appreciation during the past 30 years looks entirely reasonable.
Anyways I agree a 27% expected return is a bit unrealistic. With a 3X constant leverage you can get about 20%/yr return, which is not bad, but it's also not going to make you rich quickly.
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Re: Why not Real Estate instead of Stocks?
Yes. That’s what consumption means000 wrote: ↑Sun Oct 04, 2020 7:56 pmPeople can buy more stuff even if there aren't more people.flaccidsteele wrote: ↑Sun Oct 04, 2020 7:55 pmIncreasing population/demand/consumption helps the stock market
Just something to consider
Just something to consider.
Just something to consider.
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Re: Why not Real Estate instead of Stocks?
the last 6 months have shown the importance of diversification
i am a firm believer of doing everything
Having some form of W-2 wage income
Do Index investing either through accessible 401K, IRA, or Roth IRA, etc
Have some cash flowing real estate
Maybe even a side hustle that generates some cash flow
i am a firm believer of doing everything
Having some form of W-2 wage income
Do Index investing either through accessible 401K, IRA, or Roth IRA, etc
Have some cash flowing real estate
Maybe even a side hustle that generates some cash flow
Re: Why not Real Estate instead of Stocks?
That is exactly right. I have all four - job (not affected), business (down 15-20%), stocks (up 7%), and rental properties (up big time). RE (single family homes) is the big winner this year.RJ5 wrote: ↑Sun Oct 04, 2020 9:13 pm the last 6 months have shown the importance of diversification
i am a firm believer of doing everything
Having some form of W-2 wage income
Do Index investing either through accessible 401K, IRA, or Roth IRA, etc
Have some cash flowing real estate
Maybe even a side hustle that generates some cash flow
I tell my friends...if I go bankrupt then that means the US economy has also collapsed.
Re: Why not Real Estate instead of Stocks?
1% ($100k place with $1k rent) is workable. Anything less is a speculation on appreciation and a gamble with the banks money.Bobby206 wrote: ↑Sun Oct 04, 2020 10:05 amI agree with you for the most part. Everybody's circumstances are different though. Some people like that "mail box money" that rentals supply and don't mind the low return of such a place. If it's a low maintenance type property that attracts high quality tenants it's really not so bad. A lot of times return look incredible on paper but don't pan out. For example, I have seen lots of deals for $50k for a $800 or $900 per month rent. Problem is those tenants don't seem to stay long and having a vacancy every 6-12 months KILLS returns. The tenants might pay higher rent due to bad credit or stuffing two families into the house which isn't good for the landlord generally. Also, a $50k property is probably pretty old and thus maintenance issues can be problematic. I like in the middle. Maybe $100k for a $1k/month rent (i.e. 1%) or even $125k for a $1k rent but the property is in good condition and in a decent neighborhood.ohboy! wrote: ↑Sat Oct 03, 2020 11:40 pmI've had 3 rentals. A $300k place that rents for $1,600 is in my opinion no good and I would sell it. Many people are going in for similar returns because they can get in on low mortgage rate leverage. It's a risky game. Although the last recession had a lot of get out of jail free cards, and whatever we are in now has had a lot of free passes. I would not count on it going forward.Bobby206 wrote: ↑Sat Oct 03, 2020 9:31 pm I would say diversify and have some of each. We are about half cash/equities and half real estate. We are probably heavier real estate than I want but it's fine for now. You can make it as much of a job as you want but, even at it's best, is more time intensive than a stock portfolio.
Our real estate ranges from .5% to over 1% on rents. That is I have a $300k property in one place that rents for $1,600 and I have a $100k house in another region that rents for $1,200. Property taxes and insurance are higher in the latter. Also, costs of turnover tends to be a bit more on the cheaper house. The $300k property is in a region that tenants seem to be very easy on properties, often stay longer term, and don't complain a lot. The lower level one is in a region where people move every 12-18 months so it has more vacancies. Just some data points for consideration.
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Re: Why not Real Estate instead of Stocks?
As with everything, there is no free lunch. There are higher current yields available with commercial real estate compared to corporate bonds. Well-located properties with credit tenants regularly trade at 5.5-6.5% yields in my area (large SE city). Personally, I think those yields look pretty good on a relative basis for the next decade, especially with loans available in the 3-4% range. My portfolio is roughly 50/50 between single tenant CRE and index funds.
- Will do good
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Re: Why not Real Estate instead of Stocks?
We used to own 3 apt buildings in the midwest, some for over 20+ years, we never come close to make 9%, much less.
In fact we realized much later we were making more on our index funds, and without any work or complaint calls.
We ended up selling all buildings. Perhaps if our buildings were in hot areas we would have done better.
YMMV.
In fact we realized much later we were making more on our index funds, and without any work or complaint calls.
We ended up selling all buildings. Perhaps if our buildings were in hot areas we would have done better.
YMMV.
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Re: Why not Real Estate instead of Stocks?
The US Don’t need to solve problems for irresponsible people! It’s now easier then ever to purchase houses! The issue is people and their massive WANTS vs needs.Priam wrote: ↑Sun Oct 04, 2020 11:57 am I think as of right now this really depends on the location. In my metro area investors/flippers are saying it’s no longer cost effective to buy single family homes at the current time because home prices are too high and thus are not attractive when they have figure in maintenance, home insurance, property taxes, etc... right now.
I’m going to assume because of this, in other metro areas with this similar issue a lot of investors may be sitting on cash waiting for housing to pop so they can swipe them all.
In my opinion the U.S is going to need to figure out the housing situation otherwise we will end up like places like Germany where 5% of the population owns 50% of the housing.
Mortgages started out as a 5 year thing. Now they are 30 years and hardly require much down, with historical low interest rates. The problem is people have 1 kid and want a 4k sq ft house. Along with brand new giant SUVs, boats, swimming pools, etc et
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Re: Why not Real Estate instead of Stocks?
The price/sqft of new homes hasn’t changed much in over 50+ years
Americans just want bigger and bigger homes because they’re not financially literate, and think the home is an investment
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Re: Why not Real Estate instead of Stocks?
"Americans just want bigger and bigger homes because they’re not financially literate, and think the home is an investment"
As someone who is involved in real estate, this isn't exactly what is driving the direction that homes have taken.
Builders need to make a profit, and since the price per sq ft has remained basically the same, the only way to make a profit is to make bigger and bigger homes. The other way to make a profit is to scale (ie townhomes, triples, multi-family, which utilizes as much of the plot as possible, again to maximize the sq ft being sold in total). The profit margin on a single family development is so slim, that they have to build huge homes on as many plots they can fit in the development. The profit margin is so slim, that the jump in lumber prices in many cases has wiped out what little profit there was in existence on homes that were already on contract
There are plenty of people who are perfectly willing to buy a 1,800-2,000 sq ft 4BR 2 1/2 BA single family house. The problem is, the builder can't build them for the price that people are willing to pay.
As someone who is involved in real estate, this isn't exactly what is driving the direction that homes have taken.
Builders need to make a profit, and since the price per sq ft has remained basically the same, the only way to make a profit is to make bigger and bigger homes. The other way to make a profit is to scale (ie townhomes, triples, multi-family, which utilizes as much of the plot as possible, again to maximize the sq ft being sold in total). The profit margin on a single family development is so slim, that they have to build huge homes on as many plots they can fit in the development. The profit margin is so slim, that the jump in lumber prices in many cases has wiped out what little profit there was in existence on homes that were already on contract
There are plenty of people who are perfectly willing to buy a 1,800-2,000 sq ft 4BR 2 1/2 BA single family house. The problem is, the builder can't build them for the price that people are willing to pay.
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Re: Why not Real Estate instead of Stocks?
The median sq. ft. per person in newly built homes has doubled since 1970, bringing it to around 1,000 sq. ft. per person. Historically, that's beyond insane. Think of how few families have children that share a bedroom. That used to be the norm.flaccidsteele wrote: ↑Mon Oct 05, 2020 4:36 pmThe price/sqft of new homes hasn’t changed much in over 50+ years
Americans just want bigger and bigger homes because they’re not financially literate, and think the home is an investment
If builders can't build for that price, it's their own fault. The inflation-adjusted price per sq. ft. of homes hasn't changed materially in 50 years, so if builders could make them 50 years ago, they should be able to make them today.
A great many of the homes in our neighborhood are brand new or relatively new 3 and 4 bedroom homes with no more than about 2,200 sq. ft. The builder here must be able to make them profitably with no problem.
The Sensible Steward
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Re: Why not Real Estate instead of Stocks?
No matter what building takes, they still have the older homes go up for sale. Smaller average sized homes.willthrill81 wrote: ↑Mon Oct 05, 2020 7:54 pmThe median sq. ft. per person in newly built homes has doubled since 1970, bringing it to around 1,000 sq. ft. per person. Historically, that's beyond insane. Think of how few families have children that share a bedroom. That used to be the norm.flaccidsteele wrote: ↑Mon Oct 05, 2020 4:36 pmThe price/sqft of new homes hasn’t changed much in over 50+ years
Americans just want bigger and bigger homes because they’re not financially literate, and think the home is an investment
If builders can't build for that price, it's their own fault. The inflation-adjusted price per sq. ft. of homes hasn't changed materially in 50 years, so if builders could make them 50 years ago, they should be able to make them today.
A great many of the homes in our neighborhood are brand new or relatively new 3 and 4 bedroom homes with no more than about 2,200 sq. ft. The builder here must be able to make them profitably with no problem.
But noooo wayyy could today’s generation be caught dead in a 1500 sq ft house with 8’ ceilings! That’s for the peasants
Then on top of that, homes are no longer and life long hold. It’s very common for people to move 2-3 times before they even 40! People are never happy anymore! They don’t keep a home long enough to make it worth the closing cost they keep losing on rebuying over and over.
There will be people Now days that will pay for the value of one full house just in closing cost totals in their lifetime
Last edited by Sasquatch1 on Mon Oct 05, 2020 8:04 pm, edited 1 time in total.
Re: Why not Real Estate instead of Stocks?
Today's generation is lucky to afford rent in a clean, safe place.Sasquatch1 wrote: ↑Mon Oct 05, 2020 8:00 pm No matter what building takes, they still have the older homes go up for sale. Smaller average sized homes.
But noooo wayyy could today’s generation be caught dead in a 1500 sq ft house with 8’ ceilings! That’s for the peasants
Maybe you don't realize what life is like for most (young) people in America today.
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Re: Why not Real Estate instead of Stocks?
Honestly I don’t know what the future holds for commercial real estate in certain sectors such as retail and office space. Some may come back but it may be structurally different.
Hospitality will come back at some point.
This will be interesting in terms of REITS, private placement, and direct investment. Honestly, I would rather be more diversified with low cost index funds.
Hospitality will come back at some point.
This will be interesting in terms of REITS, private placement, and direct investment. Honestly, I would rather be more diversified with low cost index funds.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Why not Real Estate instead of Stocks?
agreed, the real estate ship has sailed.whereskyle wrote: ↑Sun Oct 04, 2020 11:47 amLow interest rates are keeping prices high and pushing them even higher. I see no free lunch in real estate. I bought a couple months ago, but I bought because I needed a new place to live. I would not want to be desperate to find a renter in this environment.Addy wrote: ↑Sat Oct 03, 2020 9:29 pmLet us, for now, not worry about specifics of rules which tell you which properties to buy.gwe67 wrote: ↑Sat Oct 03, 2020 9:23 pm A $450,000 property that rents for $2,500 monthly will never make it. Even the web site you linked says:
1% Rule—The gross monthly rent income should be 1% or more of the property purchase price, after repairs. It is not uncommon to hear of people who use the 2% or even 3% Rule – the higher the better
The IRR calculation shows that assuming that the numbers remain true, one can get this 9% return. The numbers are reasonable and even conservative and have been exceeded by many properties in the last few years.
The main point here is that with the expected returns on stocks low and mortgage rates low, Real Estate looks very attractive.
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Re: Why not Real Estate instead of Stocks?
000 wrote: ↑Mon Oct 05, 2020 8:04 pmToday's generation is lucky to afford rent in a clean, safe place.Sasquatch1 wrote: ↑Mon Oct 05, 2020 8:00 pm No matter what building takes, they still have the older homes go up for sale. Smaller average sized homes.
But noooo wayyy could today’s generation be caught dead in a 1500 sq ft house with 8’ ceilings! That’s for the peasants
Maybe you don't realize what life is like for most (young) people in America today.
Glad you said that. How could I not realize what it’s like? I’m a millennial! With nothing but a high school diploma
Diff is when in high school I was still working 2-3 jobs 7 days a week! I didn’t sit around and cry, I busted my ass and got somewhere
Re: Why not Real Estate instead of Stocks?
Congrats...Sasquatch1 wrote: ↑Mon Oct 05, 2020 9:12 pm Glad you said that. How could I not realize what it’s like? I’m a millennial! With nothing but a high school diploma
Diff is when in high school I was still working 2-3 jobs 7 days a week! I didn’t sit around and cry, I busted my ass and got somewhere
Re: Why not Real Estate instead of Stocks?
I don't think some of you guys realize how useful leverage is when you can take loans against your property
You can get a LOC against stock portfolio, sure, but what happens when your portfolio price fluctuates?
You can't get fixed rates for 30 years at these low rates
You don't get the depreciation expenses for tax purposes and deductions for the interest on the loans
Cash flow, appreciation (depending of course where the property is), tax benefits, and something you have control of (unlike equities)
Not saying go 100% real estate, but it has big pros, but it takes up much more time and you need to be experienced in that area
You can get a LOC against stock portfolio, sure, but what happens when your portfolio price fluctuates?
You can't get fixed rates for 30 years at these low rates
You don't get the depreciation expenses for tax purposes and deductions for the interest on the loans
Cash flow, appreciation (depending of course where the property is), tax benefits, and something you have control of (unlike equities)
Not saying go 100% real estate, but it has big pros, but it takes up much more time and you need to be experienced in that area