Which do you think is the better investment: real estate or the stock market?

[barberakb]

I think the stock market is a better investment than real estate.

I'm genuinely perplexed by (or perhaps ignorant of) how it's possible that real estate, with all of its associated costs (property taxes, everyday maintenance, etc.), could be a better investment than stocks.

It is mainly due to leverage, and the tax breaks you get when you invest in RE

[nisiprius]

Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real...

And, in the Herengracht 400-year data series, at one point crashed and stayed down for over one hundred years before recovering.

[barberakb]

I did a direct comparison. My house vs the S&P. From January 1992, to today, my house has tripled in value. (woo hoo!). The S&P? 10 times. How much property tax, roof repairs, repainting and new garage doors did the S&P require? (rhetorical). So I call "bunk" to buying real estate instead of stocks.

But you say "whoa! Did you buy your house at a peak?" Answer: Nope. January of 1992 was near the low of Boston are real estate following the "Massachusetts miracle" of the mid 80's. Our house was initially listed at $380k. We negotiated and won it at $226.5k. So the house had the best possible chance to grow in value. Say that today, it was actually double the value I found. The S&P would still laugh at its value, still being nearly double.

This is because you are looking as a property owner, not an investor...

For most people their home really isn't an investment. But if you are an investor with a rental property all the things you mention like repairs etc.. don't matter because the tenant pays for all that. Did you pay for your house with cash? Most people don't, they use a loan. So you need to look at how much you put down in 1992, not how much your house cost.

[barberakb]

It’s like asking: which one is better: apple or orange? We all have something to say about that. At the end of the day, it’s still apple and orange.

Orange.

But yes, profitable real estate requires work.

LOL I want both, but I probably want more oranges than apples.

Investing in index fund is so easy. Investing in real estate is a lot of work for us.

I do not own real estate because the work is too much (even my flexible-hours WFH job is too much some days). My income from my investments is far more rewarding because I did not have to do anything to make it happen. Sadly, it is not enough to retire off of by any means.

This just shows how people are interestingly different. And thats ok. In fact its great.
My work/gain from my rental properties is much more rewarding than my no work/gain from my stocks.
I always appreciated and got more out of anything in my life if their was work involved.
Doesn't matter if that was sports, relationships, jobs or investments.

[secondopinion]

It’s like asking: which one is better: apple or orange? We all have something to say about that. At the end of the day, it’s still apple and orange.

Orange.

But yes, profitable real estate requires work.

LOL I want both, but I probably want more oranges than apples.

Investing in index fund is so easy. Investing in real estate is a lot of work for us.

I do not own real estate because the work is too much (even my flexible-hours WFH job is too much some days). My income from my investments is far more rewarding because I did not have to do anything to make it happen. Sadly, it is not enough to retire off of by any means.

This just shows how people are interestingly different. And thats ok. In fact its great.
My work/gain from my rental properties is much more rewarding than my no work/gain from my stocks.
I always appreciated and got more out of anything in my life if their was work involved. Doesn't matter if that was sports, relationships or investments.

I am used to working hard with my brain; 4.0 GPA, graduate degree, multiple majors. I work in software engineering and things are hard due to my health (which impacts my thinking abilities at times); so, anything that does not press me yet even further into the ground is worth it to me. I respect the rewarding feeling of hard work deeply, but I have only so much I can do; it is a fine balance. The balance I strive to find is rewarding; earning money whether I am well or ill is always a good feeling.

[Robin1234]

In what world is it advisable to forego investing in stocks in favor of real estate? I personally think Mr. Malm's approach to investing is highly risky, but I don't work in finance. What do other Bogleheads think?

A close friend does the same thing. All his retirement 401K is invested in real-estate he manages himself. And he is ahead of me, and I have great respect for him. He has a similar logic. I however do not follow him. My preference is to go with VTI+VGT+VBTLX. My wife does a portion of our investment in RE. She has the same logic as my friend - both feel clueless about stocks, and more comfortable dealing with rental properties they own.

[Apathizer]

Orange.

But yes, profitable real estate requires work.

LOL I want both, but I probably want more oranges than apples.

Investing in index fund is so easy. Investing in real estate is a lot of work for us.

I do not own real estate because the work is too much (even my flexible-hours WFH job is too much some days). My income from my investments is far more rewarding because I did not have to do anything to make it happen. Sadly, it is not enough to retire off of by any means.

This just shows how people are interestingly different. And thats ok. In fact its great.
My work/gain from my rental properties is much more rewarding than my no work/gain from my stocks.
I always appreciated and got more out of anything in my life if their was work involved. Doesn't matter if that was sports, relationships or investments.

I am used to working hard with my brain; 4.0 GPA, graduate degree, multiple majors. I work in software engineering and things are hard due to my health (which impacts my thinking abilities at times); so, anything that does not press me yet even further into the ground is worth it to me. I respect the rewarding feeling of hard work deeply, but I have only so much I can do; it is a fine balance. The balance I strive to find is rewarding; earning money whether I am well or ill is always a good feeling.

I hate to admit this, but I've always been fairly lazy and as I get older (almost 51) I get even lazier. One reason I'm selling my house is that owning is so much more work and complexity than renting. I love that with an apartment I just have a couple simple, very predictable expenses of rent and electricity. The work, complexity, and expenses of homeownership sucks, and the older I get the more it sucks.

[khodge]

In what world is it advisable to forego investing in stocks in favor of real estate? I personally think Mr. Malm's approach to investing is highly risky, but I don't work in finance. What do other Bogleheads think?

A close friend does the same thing. All his retirement 401K is invested in real-estate he manages himself. And he is ahead of me, and I have great respect for him. He has a similar logic. I however do not follow him. My preference is to go with VTI+VGT+VBTLX. My wife does a portion of our investment in RE. She has the same logic as my friend - both feel clueless about stocks, and more comfortable dealing with rental properties they own.

I own 4 mobile home parks in my Roth 401k. They spin off about $110k annually combined. I love having real estate in my retirement account. It works for me because I also own another 19 mobile home parks outside of my 401k. So having 23 communities totaling about 1,800 pad sites I have systems and teams in place that allow me to work maybe 20 hours a week. It’s honestly a hobby for me, but I know a ton of people would hate owning this. I’ve been dollar cost averaging into a 2 fund portfolio for a few years with my cashflow. The stock market never excites me because I can’t manipulate it and make it more valuable. But I know the long term gains will benefit me, so I just VTSAX/VTIAX $5k/week and ignore it.

I prefer private real estate over the stock market. I was a truck driver making $16/hour when I bought my first piece of real estate. I was able to quit my W2 job at 30 and am 36 now with a net worth of around $20m depending on real estate valuations. So I’m kind of biased.

[Northern Flicker]

Private equity is de facto stock that is not publicly traded. It is investing in some fractional share of a business activity. The activity described has little bearing on how you should evaluate the benefits and risks of stock and real estate investments for yourself.

[Apathizer]

In what world is it advisable to forego investing in stocks in favor of real estate? I personally think Mr. Malm's approach to investing is highly risky, but I don't work in finance. What do other Bogleheads think?

A close friend does the same thing. All his retirement 401K is invested in real-estate he manages himself. And he is ahead of me, and I have great respect for him. He has a similar logic. I however do not follow him. My preference is to go with VTI+VGT+VBTLX. My wife does a portion of our investment in RE. She has the same logic as my friend - both feel clueless about stocks, and more comfortable dealing with rental properties they own.

I own 4 mobile home parks in my Roth 401k. They spin off about $110k annually combined. I love having real estate in my retirement account. It works for me because I also own another 19 mobile home parks outside of my 401k. So having 23 communities totaling about 1,800 pad sites I have systems and teams in place that allow me to work maybe 20 hours a week. It’s honestly a hobby for me, but I know a ton of people would hate owning this. I’ve been dollar cost averaging into a 2 fund portfolio for a few years with my cashflow. The stock market never excites me because I can’t manipulate it and make it more valuable. But I know the long term gains will benefit me, so I just VTSAX/VTIAX $5k/week and ignore it.

I prefer private real estate over the stock market. I was a truck driver making $16/hour when I bought my first piece of real estate. I was able to quit my W2 job at 30 and am 36 now with a net worth of around $20m depending on real estate valuations. So I’m kind of biased.

I think your situation is pretty unique. Direct real estate is an undiversified asset unless you own properties all over the world. As such the returns are locally dependent and risky. Sometimes it works really well other times it can be a disaster or anything in between.

As a counterexample for stocks, in the early 2000s Amazon employees got stock options before it went gangbusters. Many employees who held fairly mundane positions like receptionist or other office staff positions were able to buy significant shares when it was really cheap and then sell them five or six years later when they were worth several hundred thousand dollars or maybe even a few million dollars.

To me the major appeal of being well diversified in stocks and bonds is that returns are more likely to be consistent and are not locally dependent. Someone who has the same allocation that lives in one area will have the same returns as someone who lives in a different area. That appeals to me because I want the freedom to live where I want when I'm retired, wherever it's most affordable and practical.

[khodge]

In what world is it advisable to forego investing in stocks in favor of real estate? I personally think Mr. Malm's approach to investing is highly risky, but I don't work in finance. What do other Bogleheads think?

A close friend does the same thing. All his retirement 401K is invested in real-estate he manages himself. And he is ahead of me, and I have great respect for him. He has a similar logic. I however do not follow him. My preference is to go with VTI+VGT+VBTLX. My wife does a portion of our investment in RE. She has the same logic as my friend - both feel clueless about stocks, and more comfortable dealing with rental properties they own.

I own 4 mobile home parks in my Roth 401k. They spin off about $110k annually combined. I love having real estate in my retirement account. It works for me because I also own another 19 mobile home parks outside of my 401k. So having 23 communities totaling about 1,800 pad sites I have systems and teams in place that allow me to work maybe 20 hours a week. It’s honestly a hobby for me, but I know a ton of people would hate owning this. I’ve been dollar cost averaging into a 2 fund portfolio for a few years with my cashflow. The stock market never excites me because I can’t manipulate it and make it more valuable. But I know the long term gains will benefit me, so I just VTSAX/VTIAX $5k/week and ignore it.

I prefer private real estate over the stock market. I was a truck driver making $16/hour when I bought my first piece of real estate. I was able to quit my W2 job at 30 and am 36 now with a net worth of around $20m depending on real estate valuations. So I’m kind of biased.

I think your situation is pretty unique. Direct real estate is an undiversified asset unless you own properties all over the world. As such the returns are locally dependent and risky. Sometimes it works really well other times it can be a disaster or anything in between.

As a counterexample for stocks, in the early 2000s Amazon employees got stock options before it went gangbusters. Many employees who held fairly mundane positions like receptionist or other office staff positions were able to buy significant shares when it was really cheap and then sell them five or six years later when they were worth several hundred thousand dollars or maybe even a few million dollars.

To me the major appeal of being well diversified in stocks and bonds is that returns are more likely to be consistent and are not locally dependent. Someone who has the same allocation that lives in one area will have the same returns as someone who lives in a different area. That appeals to me because I want the freedom to live where I want when I'm retired, wherever it's most affordable and practical.

When I first started investing I did it locally, but as I scaled and moved into commercial properties I was able to invest throughout the US. So I do have a bit of safety built in by diversifying locations. Historically, mobile home parks are recession resistant, but who knows what the future holds. The closest property that I own is about 2,200 miles away from my home, so it can be done remotely. Probably would be more difficult with just a few single family homes. I recently read the term Digital Landlord, which I kind of feel like I fall into that category.

Again, it works for me and my personality. I would consider myself risk adverse because I did not syndicate in order to grow. 50/50 partnership and around 45% debt to value. So I sleep well at night, but understand any good thing can go to pot.

[Apathizer]

In what world is it advisable to forego investing in stocks in favor of real estate? I personally think Mr. Malm's approach to investing is highly risky, but I don't work in finance. What do other Bogleheads think?

A close friend does the same thing. All his retirement 401K is invested in real-estate he manages himself. And he is ahead of me, and I have great respect for him. He has a similar logic. I however do not follow him. My preference is to go with VTI+VGT+VBTLX. My wife does a portion of our investment in RE. She has the same logic as my friend - both feel clueless about stocks, and more comfortable dealing with rental properties they own.

I own 4 mobile home parks in my Roth 401k. They spin off about $110k annually combined. I love having real estate in my retirement account. It works for me because I also own another 19 mobile home parks outside of my 401k. So having 23 communities totaling about 1,800 pad sites I have systems and teams in place that allow me to work maybe 20 hours a week. It’s honestly a hobby for me, but I know a ton of people would hate owning this. I’ve been dollar cost averaging into a 2 fund portfolio for a few years with my cashflow. The stock market never excites me because I can’t manipulate it and make it more valuable. But I know the long term gains will benefit me, so I just VTSAX/VTIAX $5k/week and ignore it.

I prefer private real estate over the stock market. I was a truck driver making $16/hour when I bought my first piece of real estate. I was able to quit my W2 job at 30 and am 36 now with a net worth of around $20m depending on real estate valuations. So I’m kind of biased.

I think your situation is pretty unique. Direct real estate is an undiversified asset unless you own properties all over the world. As such the returns are locally dependent and risky. Sometimes it works really well other times it can be a disaster or anything in between.

As a counterexample for stocks, in the early 2000s Amazon employees got stock options before it went gangbusters. Many employees who held fairly mundane positions like receptionist or other office staff positions were able to buy significant shares when it was really cheap and then sell them five or six years later when they were worth several hundred thousand dollars or maybe even a few million dollars.

To me the major appeal of being well diversified in stocks and bonds is that returns are more likely to be consistent and are not locally dependent. Someone who has the same allocation that lives in one area will have the same returns as someone who lives in a different area. That appeals to me because I want the freedom to live where I want when I'm retired, wherever it's most affordable and practical.

When I first started investing I did it locally, but as I scaled and moved into commercial properties I was able to invest throughout the US. So I do have a bit of safety built in by diversifying locations. Historically, mobile home parks are recession resistant, but who knows what the future holds. The closest property that I own is about 2,200 miles away from my home, so it can be done remotely. Probably would be more difficult with just a few single family homes. I recently read the term Digital Landlord, which I kind of feel like I fall into that category.

Again, it works for me and my personality. I would consider myself risk adverse because I did not syndicate in order to grow. 50/50 partnership and around 45% debt to value. So I sleep well at night, but understand any good thing can go to pot.

That's much more complicated than anything I want to be involved with. With well diversified stocks and bonds, there's almost no maintenance or anything to think about once you reach a certain amount.

There's a good chance I'll be able to quit my current job in about three or four years when I'm 55 or 56. By then I should have enough to comfortably last until I'm 65 when I'm eligible for my pension and I'll probably take social security no later than 65. Those sources of income will be enough to live on for me, and I'll probably have some of my investment money left if there are significant expenses.

If I make it to 80 everything is off the table. At that point I'll have lived long enough but I won't take extraordinary means to keep myself alive if I develop a significant illness.

[TitanT2]

I did a direct comparison. My house vs the S&P. From January 1992, to today, my house has tripled in value. (woo hoo!). The S&P? 10 times. How much property tax, roof repairs, repainting and new garage doors did the S&P require? (rhetorical). So I call "bunk" to buying real estate instead of stocks.

But you say "whoa! Did you buy your house at a peak?" Answer: Nope. January of 1992 was near the low of Boston are real estate following the "Massachusetts miracle" of the mid 80's. Our house was initially listed at $380k. We negotiated and won it at $226.5k. So the house had the best possible chance to grow in value. Say that today, it was actually double the value I found. The S&P would still laugh at its value, still being nearly double.

I think rent should be added to your today's house price, for the comparison with SP500 to be valid.
That is an obvious and huge part of real estate returns,

And that rent over a 30 year period would really add up, since it's something like 4% per year or 5% per year, adding to your CAGR (as opposed to just multiplying monthly rent times 12 times 30).

[moneyflowin]

I did a direct comparison. My house vs the S&P. From January 1992, to today, my house has tripled in value. (woo hoo!). The S&P? 10 times. How much property tax, roof repairs, repainting and new garage doors did the S&P require? (rhetorical). So I call "bunk" to buying real estate instead of stocks.

But you say "whoa! Did you buy your house at a peak?" Answer: Nope. January of 1992 was near the low of Boston are real estate following the "Massachusetts miracle" of the mid 80's. Our house was initially listed at $380k. We negotiated and won it at $226.5k. So the house had the best possible chance to grow in value. Say that today, it was actually double the value I found. The S&P would still laugh at its value, still being nearly double.

I think rent should be added to your today's house price, for the comparison with SP500 to be valid.
That is an obvious and huge part of real estate returns,

And that rent over a 30 year period would really add up, since it's something like 4% per year or 5% per year, adding to your CAGR (as opposed to just multiplying monthly rent times 12 times 30).

He also needs to calculate RE's ROI factoring in leverage. It's doubtful he bought the house with 100% cash. This is the biggest error people make when calculating RE's return then comparing it to equities. If that $226k house was purchased with 20% down, then his investment went up 15-fold. (Minus expenses, interest, etc.)

[SashaWalpole]

Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real. Stocks from a market perspective are 4-6%/yr real.

Equities are a better bet. That said, if you want to be a real estate investor and are willing to work hard at it, it's possible you will do well. It generally requires a lot more capital to get started than say investing in something like VT, where you can invest in (essentially) every public company in the world, for under $100 for a single share.

So, i've already posted a response to this thread, but i just wanted to chime in one more time. This is a forum on index fund investing, and as such there's naturally going to be a bias towards index funds. If someone comes here and asks whether real estate or index funds are better, people will say index funds. On the other hand, if someone goes on a real estate forum and asks which is better, people will say real estate. I'm not going to argue one way or the other, but i do think that there are some misconceptions being made here.

First, you've got to understand that most real estate is bought with leverage. You can't calculate the returns as if it was bought in cash. Lets say you buy a property for $200k and it appreciates by 2%/ year. It'll be worth $204k the next year, and sure that's probably a real return of 0% historically. However, if you'd put 20% down ($40k), paid $5k for closing costs, and $5k- 15k for repairs, then you're actually making a 6- 8% return on the money you invested, and keep in mind that this is only the return on appreciation.

Second, your returns probably aren't only based on appreciation. I've bought small multi family properties in the past, and i'd always estimated at least an 8% return from rental income alone (after all expenses are paid). This, again, is a return based on buying with leverage, not with cash. I make a return in three different ways- from appreciation, from rental income, and from paying off the loan. I've never actually bought a property for it's appreciation. That's always just been the cherry on top.

Third, a big deal has been made about the fact that risk is concentrated in real estate. Now, this is true. However, reward is also concentrated. You can buy in an area that you know is experiencing growth and appreciation. You can purchase properties that are undervalued, or force appreciation by fixing them up. Index fund investors focus only on the upside of being diversified and the downside of being concentrated, and tend to ignore the reverse.

[MathWizard]

Stock market.

Real estate is not as liquid.

[llmgwc]

I did a direct comparison. My house vs the S&P. From January 1992, to today, my house has tripled in value. (woo hoo!). The S&P? 10 times. How much property tax, roof repairs, repainting and new garage doors did the S&P require? (rhetorical). So I call "bunk" to buying real estate instead of stocks.

But you say "whoa! Did you buy your house at a peak?" Answer: Nope. January of 1992 was near the low of Boston are real estate following the "Massachusetts miracle" of the mid 80's. Our house was initially listed at $380k. We negotiated and won it at $226.5k. So the house had the best possible chance to grow in value. Say that today, it was actually double the value I found. The S&P would still laugh at its value, still being nearly double.

There is a very large difference between a personal residence and a cash-flowing rental property.

[zie]

Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real. Stocks from a market perspective are 4-6%/yr real.

Equities are a better bet. That said, if you want to be a real estate investor and are willing to work hard at it, it's possible you will do well. It generally requires a lot more capital to get started than say investing in something like VT, where you can invest in (essentially) every public company in the world, for under $100 for a single share.

So, i've already posted a response to this thread, but i just wanted to chime in one more time. This is a forum on index fund investing, and as such there's naturally going to be a bias towards index funds. If someone comes here and asks whether real estate or index funds are better, people will say index funds. On the other hand, if someone goes on a real estate forum and asks which is better, people will say real estate. I'm not going to argue one way or the other, but i do think that there are some misconceptions being made here.

First, you've got to understand that most real estate is bought with leverage. You can't calculate the returns as if it was bought in cash. Lets say you buy a property for $200k and it appreciates by 2%/ year. It'll be worth $204k the next year, and sure that's probably a real return of 0% historically. However, if you'd put 20% down ($40k), paid $5k for closing costs, and $5k- 15k for repairs, then you're actually making a 6- 8% return on the money you invested, and keep in mind that this is only the return on appreciation.

Second, your returns probably aren't only based on appreciation. I've bought small multi family properties in the past, and i'd always estimated at least an 8% return from rental income alone (after all expenses are paid). This, again, is a return based on buying with leverage, not with cash. I make a return in three different ways- from appreciation, from rental income, and from paying off the loan. I've never actually bought a property for it's appreciation. That's always just been the cherry on top.

Third, a big deal has been made about the fact that risk is concentrated in real estate. Now, this is true. However, reward is also concentrated. You can buy in an area that you know is experiencing growth and appreciation. You can purchase properties that are undervalued, or force appreciation by fixing them up. Index fund investors focus only on the upside of being diversified and the downside of being concentrated, and tend to ignore the reverse.

I don't disagree with the general idea you are presenting, but you are talking about short periods of time, I'm talking about longer periods of time. You can't hold leverage for 100+ years on the same property.

Again, I'm not saying you are wrong, I think for shorter time frames, your idea is totally accurate, even if the math may not be quite accurate out in the real world(you seem to have forgotten about the cost of the leverage, though I didn't double check that). If one chooses to become a professional RE investor, one can definitely make money, but you can't easily become a successful RE investor. To become a successful equity investor, you buy VT and ignore it for 30 years. There is no way you can ignore a direct RE investment for 30 years and assume you will come out ahead, it just won't happen.

As for risk vs reward, why would anyone take on extra risk with zero reward possibilities? That's just stupid. Nobody is incentivized to take risk(s) that have no possibility for reward.

[toomanysidehustles]

I'd say the stock market is a much better long-term investment than real estate. I think our impression of real estate returns is heavily influenced by the accumulation phase of the long-term debt cycle we've been in since the war. Real estate can't really outpace inflation over very long periods, without housing becoming unaffordable. And rents are capped by what people can afford. So I don't think you can get stock-market-like exponential long-term growth – once we factor in that, at some point, we have to mean revert. If we were always in an accumulation phase, real estate probably could return more. I think it has/had since the 80s, at least?

Private equity healthcare. Certainly potential for very strong long-term profits with ageing demographics, etc.

Investing in index funds, 401k's and pensions is truly passive investment, whereas real estate isn't. In our life, both feed off of one another. We first invested in Roth IRA's starting in 2002, along with our 401k's and pensions. We bought our first home in 2006 for 224k right before the Great Recession. 9 years later, we sold that house for 224k I remember sitting in an airport in 2008 looking at the TV and the Dow was something like 8000, I was like holy crap. We moved to a different city and bought a home for 280k. Who would have known that for the next 12 years the stock market would have one of the best runs of all time until 2021, when we hit another recession. 2022 was an awful year and the Dow was down over 20% (Bear Market). What a terrible year for most of our portfolios, you would have done better just having cash in a bank making 1%. We bought a duplex in 2014 for 180k when prices were still low. We did a lot of value adds and were making 1.8% rents on the market value, so cash flow was good, after all expenses, we were bringing in $995 a month which was awesome. The advantage real estate investors had who rented their units to tenants, is that during Covid and the current Bear Market, those whose tenants paid, still made a killing, while those in the stock market lost over 20% of their portfolio. Lastly, in April of 2022 when the Real Estate market was still hot in our area, we sold the duplex and after all taxes, depreciation were paid, we ended up with a check for 200k, which we put towards our primary and a vehicle for my wife. So while others lost over 20%, we made around 4% on paying towards our primary mortgage. So what I'm saying is that you can use both to acquire wealth, you just have to strategize. Sometimes you lose, but overtime you'll eventually come out ahead if you go for the long term.

I would agree with this. I'd also add starting businesses has been the biggest wealth driver (for our family) - more so than anything else...both real estate and index fund investing. Right now our mid and short term rentals are pushing over 15-20% returns, and we have a couple of storage units also 25% returns. Real estate is a lot of work, but it's an alternative wealth driver that pays big, especially in depressed stock market years like we are in now.

[SmileyFace]

I think the stock market is a better investment than real estate.

I'm genuinely perplexed by (or perhaps ignorant of) how it's possible that real estate, with all of its associated costs (property taxes, everyday maintenance, etc.), could be a better investment than stocks.

Unless someone has massive capital, it's practically impossible to be nearly as well diversified with real estate. Almost anyone can use one auto rebalancing fund to invest globally in stock, bonds, and real estate with little or no maintenance or oversight. Even if I had massive capital I wouldn't bother with direct real estate at all.

I feel the same way, but one hears so much about the upside of real estate that it almost sounds tempting.

Funny.
I have heard so much about the downside that I have stayed away.

[SashaWalpole]

Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real. Stocks from a market perspective are 4-6%/yr real.

Equities are a better bet. That said, if you want to be a real estate investor and are willing to work hard at it, it's possible you will do well. It generally requires a lot more capital to get started than say investing in something like VT, where you can invest in (essentially) every public company in the world, for under $100 for a single share.

So, i've already posted a response to this thread, but i just wanted to chime in one more time. This is a forum on index fund investing, and as such there's naturally going to be a bias towards index funds. If someone comes here and asks whether real estate or index funds are better, people will say index funds. On the other hand, if someone goes on a real estate forum and asks which is better, people will say real estate. I'm not going to argue one way or the other, but i do think that there are some misconceptions being made here.

First, you've got to understand that most real estate is bought with leverage. You can't calculate the returns as if it was bought in cash. Lets say you buy a property for $200k and it appreciates by 2%/ year. It'll be worth $204k the next year, and sure that's probably a real return of 0% historically. However, if you'd put 20% down ($40k), paid $5k for closing costs, and $5k- 15k for repairs, then you're actually making a 6- 8% return on the money you invested, and keep in mind that this is only the return on appreciation.

Second, your returns probably aren't only based on appreciation. I've bought small multi family properties in the past, and i'd always estimated at least an 8% return from rental income alone (after all expenses are paid). This, again, is a return based on buying with leverage, not with cash. I make a return in three different ways- from appreciation, from rental income, and from paying off the loan. I've never actually bought a property for it's appreciation. That's always just been the cherry on top.

Third, a big deal has been made about the fact that risk is concentrated in real estate. Now, this is true. However, reward is also concentrated. You can buy in an area that you know is experiencing growth and appreciation. You can purchase properties that are undervalued, or force appreciation by fixing them up. Index fund investors focus only on the upside of being diversified and the downside of being concentrated, and tend to ignore the reverse.

I don't disagree with the general idea you are presenting, but you are talking about short periods of time, I'm talking about longer periods of time. You can't hold leverage for 100+ years on the same property.

Again, I'm not saying you are wrong, I think for shorter time frames, your idea is totally accurate, even if the math may not be quite accurate out in the real world(you seem to have forgotten about the cost of the leverage, though I didn't double check that). If one chooses to become a professional RE investor, one can definitely make money, but you can't easily become a successful RE investor. To become a successful equity investor, you buy VT and ignore it for 30 years. There is no way you can ignore a direct RE investment for 30 years and assume you will come out ahead, it just won't happen.

As for risk vs reward, why would anyone take on extra risk with zero reward possibilities? That's just stupid. Nobody is incentivized to take risk(s) that have no possibility for reward.

Rate of return is based on the original amount invested. With real estate, it actually becomes better over a longer time horizon, not worse. If you have a fixed rate 30 year mortgage, your monthly mortgage payment stays the same even as the amount you can charge for rent slowly rises due to inflation. Furthermore, with mortgages you're paying a greater portion of the interest during the beginning of your mortgage, and a bigger portion of your principle towards the end. As a result, towards the end of your mortgage, your rate of return from debt pay down will be higher than it was during the beginning. And once your mortgage ends completely?... well, then if you still want to be leveraged at that point, you can simply refinance.

So, lets say i bought a $200k property. My downpayment was $40k (20%), i had $5k in closing costs, and put $15k into repairs. I've invested $60k total. Over the next 30 years, i'll pay off the $140k loan. That averages out to $4,660/ yr, which comes to a 7.7% rate of return, although a disproportionate amount of that will come towards the end of the mortgage.

The following seems pretty reasonable. Over the life of the loan... a 7.7% rate of return from debt pay down, a 6% rate of return from appreciation (assuming inflation of 2%), and a 10% rate of return from rental income (which will actually increase over time with inflation). Only the rental income can be reinvested. The rest exists as equity which just sits in the property until you refinance or sell, and which is therefore less valuable. I think this is a reasonable estimate of a decent (not exceptional) real estate investment.

In purely numeric terms and potential upside, real estate's the winner. In terms of time, hassle, and risk, index funds are the winner. If i was a high earner with great wealth and limited free time, I'd invest solely in index funds. As someone with limited means, but plenty of time, I like having real estate to get the most bang for my buck.

[khodge]

A close friend does the same thing. All his retirement 401K is invested in real-estate he manages himself. And he is ahead of me, and I have great respect for him. He has a similar logic. I however do not follow him. My preference is to go with VTI+VGT+VBTLX. My wife does a portion of our investment in RE. She has the same logic as my friend - both feel clueless about stocks, and more comfortable dealing with rental properties they own.

I own 4 mobile home parks in my Roth 401k. They spin off about $110k annually combined. I love having real estate in my retirement account. It works for me because I also own another 19 mobile home parks outside of my 401k. So having 23 communities totaling about 1,800 pad sites I have systems and teams in place that allow me to work maybe 20 hours a week. It’s honestly a hobby for me, but I know a ton of people would hate owning this. I’ve been dollar cost averaging into a 2 fund portfolio for a few years with my cashflow. The stock market never excites me because I can’t manipulate it and make it more valuable. But I know the long term gains will benefit me, so I just VTSAX/VTIAX $5k/week and ignore it.

I prefer private real estate over the stock market. I was a truck driver making $16/hour when I bought my first piece of real estate. I was able to quit my W2 job at 30 and am 36 now with a net worth of around $20m depending on real estate valuations. So I’m kind of biased.

I think your situation is pretty unique. Direct real estate is an undiversified asset unless you own properties all over the world. As such the returns are locally dependent and risky. Sometimes it works really well other times it can be a disaster or anything in between.

As a counterexample for stocks, in the early 2000s Amazon employees got stock options before it went gangbusters. Many employees who held fairly mundane positions like receptionist or other office staff positions were able to buy significant shares when it was really cheap and then sell them five or six years later when they were worth several hundred thousand dollars or maybe even a few million dollars.

To me the major appeal of being well diversified in stocks and bonds is that returns are more likely to be consistent and are not locally dependent. Someone who has the same allocation that lives in one area will have the same returns as someone who lives in a different area. That appeals to me because I want the freedom to live where I want when I'm retired, wherever it's most affordable and practical.

When I first started investing I did it locally, but as I scaled and moved into commercial properties I was able to invest throughout the US. So I do have a bit of safety built in by diversifying locations. Historically, mobile home parks are recession resistant, but who knows what the future holds. The closest property that I own is about 2,200 miles away from my home, so it can be done remotely. Probably would be more difficult with just a few single family homes. I recently read the term Digital Landlord, which I kind of feel like I fall into that category.

Again, it works for me and my personality. I would consider myself risk adverse because I did not syndicate in order to grow. 50/50 partnership and around 45% debt to value. So I sleep well at night, but understand any good thing can go to pot.

That's much more complicated than anything I want to be involved with. With well diversified stocks and bonds, there's almost no maintenance or anything to think about once you reach a certain amount.

There's a good chance I'll be able to quit my current job in about three or four years when I'm 55 or 56. By then I should have enough to comfortably last until I'm 65 when I'm eligible for my pension and I'll probably take social security no later than 65. Those sources of income will be enough to live on for me, and I'll probably have some of my investment money left if there are significant expenses.

If I make it to 80 everything is off the table. At that point I'll have lived long enough but I won't take extraordinary means to keep myself alive if I develop a significant illness.

So I had a thought, are any of us really passive investors? Meaning, I have to work on my real estate investments to make sure they keep performing and producing cashflow. You have to keep working your W2 job in order to have capital to invest passively. So neither of us are truly passive, we can’t avoid that darned old work! Maybe passive is in the eye of the beholder?

[Apathizer]

So I had a thought, are any of us really passive investors? Meaning, I have to work on my real estate investments to make sure they keep performing and producing cashflow. You have to keep working your W2 job in order to have capital to invest passively. So neither of us are truly passive, we can’t avoid that darned old work! Maybe passive is in the eye of the beholder?

I don't know if anything is 100% passive, but some investment vehicles are pretty close. If you hold a well diversified automatic rebalancing fund like VSMGX or VSCGX, which are about 95% globally diversified stocks and bonds, and about 5% cash, once your balance is high enough you probably don't need to pay much attention at all. VSCGX is about 40% stocks/55% bonds/5% cash. Such a portfolio is unlikely to suffer draw-downs higher than about 15-20% for more than a year or so. If you have, say $700K in that fund, you're over 60, and your annual expenses are about $35K, you could probably automatically withdraw about $3K/monthly for the rest of your life without even thinking about it.

A 3-fund portfolio is only a little more complicated since it needs occasional re-balancing, but it's still really low maintenance. I'm trying to learn to resist constantly checking my portfolio since it's only necessary to re-balance at most 4-times annually.

[gtwhitegold]

As has already been discussed, anyone who owns their property is already invested in real estate, whether they recognize it as an investment or not. I personally own three properties, one I am currently living in, one for my mother, and a third that I kind of inherited by paying the back taxes on after my uncle passed away so that it would stay in the family.

I am by no means an active real estate investor, but I do plan on retaining at least two of these properties to use as rentals if my situation changes. I know that two of these properties would be cash flow positive as soon as I had a tenant, but I have no interest in going much further with real estate investing.

I feel like the biggest issue with people who invest in real estate is one of two things, trying to flip houses assuming that they will continue to be cash flow positive after few updates or repairs or people who are over-leveraged and are unable to keep up with payments if there's a gap in residency.

You can probably avoid both by having sufficient cash on hand or by having sufficient other cash flow to cover you through the likely lulls you will have when renting out your properties.

[AnnetteLouisan]

It depends on the stock and on the real estate.

[Nathan Drake]

I own 4 mobile home parks in my Roth 401k. They spin off about $110k annually combined. I love having real estate in my retirement account. It works for me because I also own another 19 mobile home parks outside of my 401k. So having 23 communities totaling about 1,800 pad sites I have systems and teams in place that allow me to work maybe 20 hours a week. It’s honestly a hobby for me, but I know a ton of people would hate owning this. I’ve been dollar cost averaging into a 2 fund portfolio for a few years with my cashflow. The stock market never excites me because I can’t manipulate it and make it more valuable. But I know the long term gains will benefit me, so I just VTSAX/VTIAX $5k/week and ignore it.

I prefer private real estate over the stock market. I was a truck driver making $16/hour when I bought my first piece of real estate. I was able to quit my W2 job at 30 and am 36 now with a net worth of around $20m depending on real estate valuations. So I’m kind of biased.

I think your situation is pretty unique. Direct real estate is an undiversified asset unless you own properties all over the world. As such the returns are locally dependent and risky. Sometimes it works really well other times it can be a disaster or anything in between.

As a counterexample for stocks, in the early 2000s Amazon employees got stock options before it went gangbusters. Many employees who held fairly mundane positions like receptionist or other office staff positions were able to buy significant shares when it was really cheap and then sell them five or six years later when they were worth several hundred thousand dollars or maybe even a few million dollars.

To me the major appeal of being well diversified in stocks and bonds is that returns are more likely to be consistent and are not locally dependent. Someone who has the same allocation that lives in one area will have the same returns as someone who lives in a different area. That appeals to me because I want the freedom to live where I want when I'm retired, wherever it's most affordable and practical.

When I first started investing I did it locally, but as I scaled and moved into commercial properties I was able to invest throughout the US. So I do have a bit of safety built in by diversifying locations. Historically, mobile home parks are recession resistant, but who knows what the future holds. The closest property that I own is about 2,200 miles away from my home, so it can be done remotely. Probably would be more difficult with just a few single family homes. I recently read the term Digital Landlord, which I kind of feel like I fall into that category.

Again, it works for me and my personality. I would consider myself risk adverse because I did not syndicate in order to grow. 50/50 partnership and around 45% debt to value. So I sleep well at night, but understand any good thing can go to pot.

That's much more complicated than anything I want to be involved with. With well diversified stocks and bonds, there's almost no maintenance or anything to think about once you reach a certain amount.

There's a good chance I'll be able to quit my current job in about three or four years when I'm 55 or 56. By then I should have enough to comfortably last until I'm 65 when I'm eligible for my pension and I'll probably take social security no later than 65. Those sources of income will be enough to live on for me, and I'll probably have some of my investment money left if there are significant expenses.

If I make it to 80 everything is off the table. At that point I'll have lived long enough but I won't take extraordinary means to keep myself alive if I develop a significant illness.

So I had a thought, are any of us really passive investors? Meaning, I have to work on my real estate investments to make sure they keep performing and producing cashflow. You have to keep working your W2 job in order to have capital to invest passively. So neither of us are truly passive, we can’t avoid that darned old work! Maybe passive is in the eye of the beholder?

When you reach your FI number you don't need to work any longer, so yes, it is far more passive than holding a bunch of real estate and managing it, and has far less risk than owning a bunch of trailer parks with a high amount of debt, so the worry factor is far less. Just set an AA and withdraw 3%.

Your situation obviously involves a ton of luck and a good degree of risk tolerance, but could far more easily blow up than investing in boring market based funds and fixed income. If it was such an easy road to $20m by investing in trailer parks, surely everyone would do it, so maybe survivorship bias is slanting your perspective.

[8301]

I did a direct comparison. My house vs the S&P. From January 1992, to today, my house has tripled in value. (woo hoo!). The S&P? 10 times. How much property tax, roof repairs, repainting and new garage doors did the S&P require? (rhetorical). So I call "bunk" to buying real estate instead of stocks.

But you say "whoa! Did you buy your house at a peak?" Answer: Nope. January of 1992 was near the low of Boston are real estate following the "Massachusetts miracle" of the mid 80's. Our house was initially listed at $380k. We negotiated and won it at $226.5k. So the house had the best possible chance to grow in value. Say that today, it was actually double the value I found. The S&P would still laugh at its value, still being nearly double.

Didn't the Massachusetts miracle turn out to be a Massachusetts mirage?

[JackoC]

1. Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real. Stocks from a market perspective are 4-6%/yr real.

2. Equities are a better bet. That said, if you want to be a real estate investor and are willing to work hard at it, it's possible you will do well. It generally requires a lot more capital to get started than say investing in something like VT, where you can invest in (essentially) every public company in the world, for under $100 for a single share.

1. Over long periods of time the *appreciation* of real estate might be roughly estimated as 0% real (though various studies have found more or less). There is no reason to think there's any central tendency to 0% real return on unlevered investment real estate *including net rental income*. And 6% expected real pre tax return for stocks is too high an estimate IMO, 4% is more like it*. Which you'd have to consider in comparing the going rental yields*.

2. If one were strictly better than the other, that would be a huge and IMO non-plausible statement of market inefficiency. People invest $trillions worldwide in an asset class that's strictly inferior to another asset class risk for risk. Which would be true whichever one you name as 'the better bet' in some overall sense, whether it was stocks or investment real estate. Does that sound right? I don't think so.

If you believe in even very rough market efficiency they should tend toward at least roughly equal return (investment real estate, you buy and rent to other people) risk for risk. And though it's not easy to cleanly quantitatively compare the risk of unlevered real estate to stocks (which are inherently levered by the corporation's own borrowing), because of data issues, it's pretty plainly lower so qualitatively clearly you need some degree of leverage of real estate to equal the risk of unlevered stocks.

The attractiveness of one or other to a given individual can vary, and it's not easy to think of personal situations where investment real estate is suitable but stocks aren't; whereas there are common situations where direct real estate investment isn't suitable to given individuals. But No. 2 would be pretty mind bending as a broad statement. Ignorance or stupidity is needed to explain why anyone anywhere would be a landlord?

*long term expected unlevered investment RE return would tend to be lower than appreciation+net rental yield, because NRY by convention only includes recurring expenses (tax, insurance, maintenance ,'repair'), not periodic renovation that counts as 'capital' buy only sustains real rents. Though stocks have a parallel issue. The reason 4% is a reasonable estimate for stock expected return is that E[r]=div yield+real div growth. VT's div yield is around 2%. Real div growth should track real EPS growth, but in the last 100+ years in the US real GDP grew in the low 3's but real EPS only around 1.5%. That's a similar issue: if companies could really sustain real earnings with no additional capital over what's accounted for as 'depreciation expense', real EPS over the long run should grow as fast as GDP. In reality extra capital is needed, there's been steady dilution of shareholders just for companies to stand still in real terms. Anyway 2%+1.5%=3.5%, assuming the *world* economic growth trend now is 3% something, and 1.5% EPS. Then have some debate about buybacks, realize the lack of evidence they've really had much impact on net dilution, and round to 4% in a spirit of optimism. Global stock E[r], but no reason to think the E[r] of US stocks is higher than global IMO. Expected return, realized return could be 12% or -12% or just about anything else. Past realized return started with higher div yields and has included a net speculative return as valuations increased, that's how it came out more like 6% real.

[international001]

To add on this:

viewtopic.php?t=277535

RE over time has 0% appreciation (after inflation). So all return is because of renting. It mentions also that RE has lower volatility than stocks (but I always doubted this is meaningful, because yearly volatility is meaningless when you don't have that index for housing; you'd have to look at 5-10 years periods). But the great advantage of RE is how easy is to use leverage on it (like getting a loan for your own house), what really increases return if you want to take the risk.

Now, if you have a crystal ball perhaps you can decide in which areas/moments you should do your RE investment. Apparently, markets are not efficient as stocks, so perhaps you have a shot.

[khodge]

I think your situation is pretty unique. Direct real estate is an undiversified asset unless you own properties all over the world. As such the returns are locally dependent and risky. Sometimes it works really well other times it can be a disaster or anything in between.

As a counterexample for stocks, in the early 2000s Amazon employees got stock options before it went gangbusters. Many employees who held fairly mundane positions like receptionist or other office staff positions were able to buy significant shares when it was really cheap and then sell them five or six years later when they were worth several hundred thousand dollars or maybe even a few million dollars.

To me the major appeal of being well diversified in stocks and bonds is that returns are more likely to be consistent and are not locally dependent. Someone who has the same allocation that lives in one area will have the same returns as someone who lives in a different area. That appeals to me because I want the freedom to live where I want when I'm retired, wherever it's most affordable and practical.

When I first started investing I did it locally, but as I scaled and moved into commercial properties I was able to invest throughout the US. So I do have a bit of safety built in by diversifying locations. Historically, mobile home parks are recession resistant, but who knows what the future holds. The closest property that I own is about 2,200 miles away from my home, so it can be done remotely. Probably would be more difficult with just a few single family homes. I recently read the term Digital Landlord, which I kind of feel like I fall into that category.

Again, it works for me and my personality. I would consider myself risk adverse because I did not syndicate in order to grow. 50/50 partnership and around 45% debt to value. So I sleep well at night, but understand any good thing can go to pot.

That's much more complicated than anything I want to be involved with. With well diversified stocks and bonds, there's almost no maintenance or anything to think about once you reach a certain amount.

There's a good chance I'll be able to quit my current job in about three or four years when I'm 55 or 56. By then I should have enough to comfortably last until I'm 65 when I'm eligible for my pension and I'll probably take social security no later than 65. Those sources of income will be enough to live on for me, and I'll probably have some of my investment money left if there are significant expenses.

If I make it to 80 everything is off the table. At that point I'll have lived long enough but I won't take extraordinary means to keep myself alive if I develop a significant illness.

So I had a thought, are any of us really passive investors? Meaning, I have to work on my real estate investments to make sure they keep performing and producing cashflow. You have to keep working your W2 job in order to have capital to invest passively. So neither of us are truly passive, we can’t avoid that darned old work! Maybe passive is in the eye of the beholder?

When you reach your FI number you don't need to work any longer, so yes, it is far more passive than holding a bunch of real estate and managing it, and has far less risk than owning a bunch of trailer parks with a high amount of debt, so the worry factor is far less. Just set an AA and withdraw 3%.

Your situation obviously involves a ton of luck and a good degree of risk tolerance, but could far more easily blow up than investing in boring market based funds and fixed income. If it was such an easy road to $20m by investing in trailer parks, surely everyone would do it, so maybe survivorship bias is slanting your perspective.

I agree Nathan, reaching ones FI number, then drawing 3% is truly passive. Maybe I’ll sell everything I own at 65 and invest it all in a 3 fund portfolio to retire.

My thought process was that I manage my RE (job), using cashflow to live off of and fund my passive investment accounts. The person I was replying to works a W2 job, using paychecks to live off of and fund their passive investment accounts. So I was making the humorous observation that neither of us are truly passive yet. We both are doing something to enable us to become passive investors one day. But for now, we keep working towards our goal of FI.

And yes, I didn’t do anything more special than the next real estate investor. To claim that I am superior because of some kind of natural born skill would be ridiculous. Lots of people offered guidance along the way. Lots of cards fell right for me.

I will admit that I am more risk tolerant than others, but I am very comfortable with my debt load. All of it is fixed rate for 10+ years and 100% non recourse. It’s a good fit for me and my personality. And if it blows up as you say, I’m back to where I started.

[Nathan Drake]

When I first started investing I did it locally, but as I scaled and moved into commercial properties I was able to invest throughout the US. So I do have a bit of safety built in by diversifying locations. Historically, mobile home parks are recession resistant, but who knows what the future holds. The closest property that I own is about 2,200 miles away from my home, so it can be done remotely. Probably would be more difficult with just a few single family homes. I recently read the term Digital Landlord, which I kind of feel like I fall into that category.

Again, it works for me and my personality. I would consider myself risk adverse because I did not syndicate in order to grow. 50/50 partnership and around 45% debt to value. So I sleep well at night, but understand any good thing can go to pot.

That's much more complicated than anything I want to be involved with. With well diversified stocks and bonds, there's almost no maintenance or anything to think about once you reach a certain amount.

There's a good chance I'll be able to quit my current job in about three or four years when I'm 55 or 56. By then I should have enough to comfortably last until I'm 65 when I'm eligible for my pension and I'll probably take social security no later than 65. Those sources of income will be enough to live on for me, and I'll probably have some of my investment money left if there are significant expenses.

If I make it to 80 everything is off the table. At that point I'll have lived long enough but I won't take extraordinary means to keep myself alive if I develop a significant illness.

So I had a thought, are any of us really passive investors? Meaning, I have to work on my real estate investments to make sure they keep performing and producing cashflow. You have to keep working your W2 job in order to have capital to invest passively. So neither of us are truly passive, we can’t avoid that darned old work! Maybe passive is in the eye of the beholder?

When you reach your FI number you don't need to work any longer, so yes, it is far more passive than holding a bunch of real estate and managing it, and has far less risk than owning a bunch of trailer parks with a high amount of debt, so the worry factor is far less. Just set an AA and withdraw 3%.

Your situation obviously involves a ton of luck and a good degree of risk tolerance, but could far more easily blow up than investing in boring market based funds and fixed income. If it was such an easy road to $20m by investing in trailer parks, surely everyone would do it, so maybe survivorship bias is slanting your perspective.

I agree Nathan, reaching ones FI number, then drawing 3% is truly passive. Maybe I’ll sell everything I own at 65 and invest it all in a 3 fund portfolio to retire.

My thought process was that I manage my RE (job), using cashflow to live off of and fund my passive investment accounts. The person I was replying to works a W2 job, using paychecks to live off of and fund their passive investment accounts. So I was making the humorous observation that neither of us are truly passive yet. We both are doing something to enable us to become passive investors one day. But for now, we keep working towards our goal of FI.

And yes, I didn’t do anything more special than the next real estate investor. To claim that I am superior because of some kind of natural born skill would be ridiculous. Lots of people offered guidance along the way. Lots of cards fell right for me.

I will admit that I am more risk tolerant than others, but I am very comfortable with my debt load. All of it is fixed rate for 10+ years and 100% non recourse. It’s a good fit for me and my personality. And if it blows up as you say, I’m back to where I started.

That's true, the road to FI is quite active regardless of which path you take. But the key is once you achieve FI, the only thing that isn't passive about it is your own emotional tolerance to moves in the market. Maybe RE can be passive in that way if you have someone else manage it 100% for you, and you only check in on it as frequently as you check in on your stock portfolio.

I'm not really sure how one goes from 0 to $20m working on a normal salary in real estate in around a decade. There's only so much you can lever up to juice the returns. So I would say you have been extremely fortunate to achieve that. If you truly have that much in real estate, you could easily liquidate it and then put everything into passive and reliably withdraw $600,000 every single year without worry or any management at all.

[khodge]

That's much more complicated than anything I want to be involved with. With well diversified stocks and bonds, there's almost no maintenance or anything to think about once you reach a certain amount.

There's a good chance I'll be able to quit my current job in about three or four years when I'm 55 or 56. By then I should have enough to comfortably last until I'm 65 when I'm eligible for my pension and I'll probably take social security no later than 65. Those sources of income will be enough to live on for me, and I'll probably have some of my investment money left if there are significant expenses.

If I make it to 80 everything is off the table. At that point I'll have lived long enough but I won't take extraordinary means to keep myself alive if I develop a significant illness.

So I had a thought, are any of us really passive investors? Meaning, I have to work on my real estate investments to make sure they keep performing and producing cashflow. You have to keep working your W2 job in order to have capital to invest passively. So neither of us are truly passive, we can’t avoid that darned old work! Maybe passive is in the eye of the beholder?

When you reach your FI number you don't need to work any longer, so yes, it is far more passive than holding a bunch of real estate and managing it, and has far less risk than owning a bunch of trailer parks with a high amount of debt, so the worry factor is far less. Just set an AA and withdraw 3%.

Your situation obviously involves a ton of luck and a good degree of risk tolerance, but could far more easily blow up than investing in boring market based funds and fixed income. If it was such an easy road to $20m by investing in trailer parks, surely everyone would do it, so maybe survivorship bias is slanting your perspective.

I agree Nathan, reaching ones FI number, then drawing 3% is truly passive. Maybe I’ll sell everything I own at 65 and invest it all in a 3 fund portfolio to retire.

My thought process was that I manage my RE (job), using cashflow to live off of and fund my passive investment accounts. The person I was replying to works a W2 job, using paychecks to live off of and fund their passive investment accounts. So I was making the humorous observation that neither of us are truly passive yet. We both are doing something to enable us to become passive investors one day. But for now, we keep working towards our goal of FI.

And yes, I didn’t do anything more special than the next real estate investor. To claim that I am superior because of some kind of natural born skill would be ridiculous. Lots of people offered guidance along the way. Lots of cards fell right for me.

I will admit that I am more risk tolerant than others, but I am very comfortable with my debt load. All of it is fixed rate for 10+ years and 100% non recourse. It’s a good fit for me and my personality. And if it blows up as you say, I’m back to where I started.

That's true, the road to FI is quite active regardless of which path you take. But the key is once you achieve FI, the only thing that isn't passive about it is your own emotional tolerance to moves in the market. Maybe RE can be passive in that way if you have someone else manage it 100% for you, and you only check in on it as frequently as you check in on your stock portfolio.

I'm not really sure how one goes from 0 to $20m working on a normal salary in real estate in around a decade. There's only so much you can lever up to juice the returns. So I would say you have been extremely fortunate to achieve that. If you truly have that much in real estate, you could easily liquidate it and then put everything into passive and reliably withdraw $600,000 every single year without worry or any management at all.

I truly do have that much. I’ll PM you my website if you’d like to take a look. Long story, but I would be happy to tell it to you if you want to hear it. You already hit the nail on the head earlier though….. lots of luck involved.

And yes, I’ve considered selling it all. But I really like what I do, it only takes maybe 20 hours a week, I’m only 36, and I have a partner who doesn’t want to sell.

[Nathan Drake]

So I had a thought, are any of us really passive investors? Meaning, I have to work on my real estate investments to make sure they keep performing and producing cashflow. You have to keep working your W2 job in order to have capital to invest passively. So neither of us are truly passive, we can’t avoid that darned old work! Maybe passive is in the eye of the beholder?

When you reach your FI number you don't need to work any longer, so yes, it is far more passive than holding a bunch of real estate and managing it, and has far less risk than owning a bunch of trailer parks with a high amount of debt, so the worry factor is far less. Just set an AA and withdraw 3%.

Your situation obviously involves a ton of luck and a good degree of risk tolerance, but could far more easily blow up than investing in boring market based funds and fixed income. If it was such an easy road to $20m by investing in trailer parks, surely everyone would do it, so maybe survivorship bias is slanting your perspective.

I agree Nathan, reaching ones FI number, then drawing 3% is truly passive. Maybe I’ll sell everything I own at 65 and invest it all in a 3 fund portfolio to retire.

My thought process was that I manage my RE (job), using cashflow to live off of and fund my passive investment accounts. The person I was replying to works a W2 job, using paychecks to live off of and fund their passive investment accounts. So I was making the humorous observation that neither of us are truly passive yet. We both are doing something to enable us to become passive investors one day. But for now, we keep working towards our goal of FI.

And yes, I didn’t do anything more special than the next real estate investor. To claim that I am superior because of some kind of natural born skill would be ridiculous. Lots of people offered guidance along the way. Lots of cards fell right for me.

I will admit that I am more risk tolerant than others, but I am very comfortable with my debt load. All of it is fixed rate for 10+ years and 100% non recourse. It’s a good fit for me and my personality. And if it blows up as you say, I’m back to where I started.

That's true, the road to FI is quite active regardless of which path you take. But the key is once you achieve FI, the only thing that isn't passive about it is your own emotional tolerance to moves in the market. Maybe RE can be passive in that way if you have someone else manage it 100% for you, and you only check in on it as frequently as you check in on your stock portfolio.

I'm not really sure how one goes from 0 to $20m working on a normal salary in real estate in around a decade. There's only so much you can lever up to juice the returns. So I would say you have been extremely fortunate to achieve that. If you truly have that much in real estate, you could easily liquidate it and then put everything into passive and reliably withdraw $600,000 every single year without worry or any management at all.

I truly do have that much. I’ll PM you my website if you’d like to take a look. Long story, but I would be happy to tell it to you if you want to hear it. You already hit the nail on the head earlier though….. lots of luck involved.

And yes, I’ve considered selling it all. But I really like what I do, it only takes maybe 20 hours a week, I’m only 36, and I have a partner who doesn’t want to sell.

I would definitely appreciate it - I've never been a RE investor myself, but have been very intrigued by some of the stories I've heard. I'm curious how you've done so well.

I think your approach right now is a good one, turn your cash flow from RE into passive funds for more diversification and lower risk. I assume you don't think there are good deals in the RE market right now that could expect to cashflow significantly more than index funds?

If it's only 20 hours a week and you're generating that much, why not still work? I work like 50 hours a week for a modest income in comparison and am thinking about retiring on far less just because it consumes so much of my mental energy and there's no path to a "part time" type job in this career.

[khodge]

When you reach your FI number you don't need to work any longer, so yes, it is far more passive than holding a bunch of real estate and managing it, and has far less risk than owning a bunch of trailer parks with a high amount of debt, so the worry factor is far less. Just set an AA and withdraw 3%.

Your situation obviously involves a ton of luck and a good degree of risk tolerance, but could far more easily blow up than investing in boring market based funds and fixed income. If it was such an easy road to $20m by investing in trailer parks, surely everyone would do it, so maybe survivorship bias is slanting your perspective.

I agree Nathan, reaching ones FI number, then drawing 3% is truly passive. Maybe I’ll sell everything I own at 65 and invest it all in a 3 fund portfolio to retire.

My thought process was that I manage my RE (job), using cashflow to live off of and fund my passive investment accounts. The person I was replying to works a W2 job, using paychecks to live off of and fund their passive investment accounts. So I was making the humorous observation that neither of us are truly passive yet. We both are doing something to enable us to become passive investors one day. But for now, we keep working towards our goal of FI.

And yes, I didn’t do anything more special than the next real estate investor. To claim that I am superior because of some kind of natural born skill would be ridiculous. Lots of people offered guidance along the way. Lots of cards fell right for me.

I will admit that I am more risk tolerant than others, but I am very comfortable with my debt load. All of it is fixed rate for 10+ years and 100% non recourse. It’s a good fit for me and my personality. And if it blows up as you say, I’m back to where I started.

That's true, the road to FI is quite active regardless of which path you take. But the key is once you achieve FI, the only thing that isn't passive about it is your own emotional tolerance to moves in the market. Maybe RE can be passive in that way if you have someone else manage it 100% for you, and you only check in on it as frequently as you check in on your stock portfolio.

I'm not really sure how one goes from 0 to $20m working on a normal salary in real estate in around a decade. There's only so much you can lever up to juice the returns. So I would say you have been extremely fortunate to achieve that. If you truly have that much in real estate, you could easily liquidate it and then put everything into passive and reliably withdraw $600,000 every single year without worry or any management at all.

I truly do have that much. I’ll PM you my website if you’d like to take a look. Long story, but I would be happy to tell it to you if you want to hear it. You already hit the nail on the head earlier though….. lots of luck involved.

And yes, I’ve considered selling it all. But I really like what I do, it only takes maybe 20 hours a week, I’m only 36, and I have a partner who doesn’t want to sell.

I would definitely appreciate it - I've never been a RE investor myself, but have been very intrigued by some of the stories I've heard. I'm curious how you've done so well.

I think your approach right now is a good one, turn your cash flow from RE into passive funds for more diversification and lower risk. I assume you don't think there are good deals in the RE market right now that could expect to cashflow significantly more than index funds?

If it's only 20 hours a week and you're generating that much, why not still work? I work like 50 hours a week for a modest income in comparison and am thinking about retiring on far less just because it consumes so much of my mental energy and there's no path to a "part time" type job in this career.

Sent

[helloeveryone]

A recent article in the Wall Street Journal describes an investor named David Malm buying properties on Martha's Vineyard and Nantucket worth almost $100 million. (For those who can view it, here's a link to the article: https://www.wsj.com/articles/investor-b ... 1674675814.) One quotation jumped out at me: "'I don’t invest in the stock market,' said Mr. Malm, a private-equity investor in the healthcare sector."

In what world is it advisable to forego investing in stocks in favor of real estate? I personally think Mr. Malm's approach to investing is highly risky, but I don't work in finance. What do other Bogleheads think?

Long term stocks win

There is a spreadsheet that gets updated annually at the Stern Business School (NYU)

https://pages.stern.nyu.edu/~adamodar/p ... tretSP.xls

[zie]

1. Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real. Stocks from a market perspective are 4-6%/yr real.

2. Equities are a better bet. That said, if you want to be a real estate investor and are willing to work hard at it, it's possible you will do well. It generally requires a lot more capital to get started than say investing in something like VT, where you can invest in (essentially) every public company in the world, for under $100 for a single share.

1. Over long periods of time the *appreciation* of real estate might be roughly estimated as 0% real (though various studies have found more or less). There is no reason to think there's any central tendency to 0% real return on unlevered investment real estate *including net rental income*. And 6% expected real pre tax return for stocks is too high an estimate IMO, 4% is more like it*. Which you'd have to consider in comparing the going rental yields*.

2. If one were strictly better than the other, that would be a huge and IMO non-plausible statement of market inefficiency. People invest $trillions worldwide in an asset class that's strictly inferior to another asset class risk for risk. Which would be true whichever one you name as 'the better bet' in some overall sense, whether it was stocks or investment real estate. Does that sound right? I don't think so.

Well, better can be given across many different metrics, but I think you said it pretty well yourself, paraphrased: It's hard to find a case where equity investing doesn't make sense, but it's pretty easy to find a reason for RE investing to not make sense

As for your number 2, they invest those trillions because they are happy to take the concentration risk, just like there are plenty of people happy to try and catch the next hot new winner out in the public stock markets. Trying to compare something like VT to RE is not a fair comparison, as RE is a subset of what VT invests in. Owning RE is like tilting to SCV, they hope for higher expected return due to the concentration in a subset of the overall market.

Is there something inherently unique about RE investing that gives it some advantage in expected returns over any other business? As far as I can see, mostly no. One could argue, an individual investor might be able to get away with some tax and leverage benefits, but as one grows larger those advantages tend to diminish, as commercial lending in RE is an entirely different beast from the tax advantaged personal mortgage lending, with different rates, risks, etc.

[JohnFromPNW]

I'd say the stock market is a much better long-term investment than real estate. I think our impression of real estate returns is heavily influenced by the accumulation phase of the long-term debt cycle we've been in since the war. Real estate can't really outpace inflation over very long periods, without housing becoming unaffordable. And rents are capped by what people can afford. So I don't think you can get stock-market-like exponential long-term growth – once we factor in that, at some point, we have to mean revert. If we were always in an accumulation phase, real estate probably could return more. I think it has/had since the 80s, at least?

Private equity healthcare. Certainly potential for very strong long-term profits with ageing demographics, etc.

I'm not sure the bolded part is completely accurate due to (a) density and (b) geographic expansion. There is obviously a limit to both, but consider a geographically constrained area such as San Francisco: as population grows, those with the means will continue to increase what they pay to be 'in the city' (next to work, next to amenities, etc.), while geographic sprawl will occur (i.e. Concord, Antioch, Pittsburgh, etc.) that will provide more affordable, but less proximate housing. If Franciscan's incomes grow faster than inflation, there is no reason their value of proximate housing wouldn't grow in-line (i.e. greater than inflation) while geographic sprawl continues to produce affordable housing.

An alternate approach is increasing the density. Seattle has experienced a large wave of this with 'micro units', 'apodments', 'SROs', or whatever other term that applies to essentially market-rate, congregate housing with shared living areas and private bedrooms. The land owner may have previously had a single family house, a duplex, or even a four-flex, but then it was torn down and 20+ 'micro units' were built in its place. The land owner's property is now worth substantially more, far more than an inflation increase - more sq. ft. to rent and generally much higher rent/ft for this tiny units. Perhaps that's the final stop, or perhaps, someday, the new micro-unit becomes simply a bed in a tube, and you get 100 beds onto this piece of land.

Now, of course anything could happen. Shifting trends driving outmigration from cities would minimize the density, permanent remote work, global catastrophe, any number of who knows what's... but ultimately, land is finite, population, in theory is not (notwithstanding slowing birth rates, degrading planetary conditions, etc.).

Just to be clear, I'm not arguing for or against either, but I think both are suitable (stock market / real estate). I personally, due to my work being in real estate and because the stock market doesn't bring any tenant specific risks (i.e. VTI will never sue me...), choose not to invest in real estate (at least directly, other than my house).

[Logan Roy]

I'd say the stock market is a much better long-term investment than real estate. I think our impression of real estate returns is heavily influenced by the accumulation phase of the long-term debt cycle we've been in since the war. Real estate can't really outpace inflation over very long periods, without housing becoming unaffordable. And rents are capped by what people can afford. So I don't think you can get stock-market-like exponential long-term growth – once we factor in that, at some point, we have to mean revert. If we were always in an accumulation phase, real estate probably could return more. I think it has/had since the 80s, at least?

Private equity healthcare. Certainly potential for very strong long-term profits with ageing demographics, etc.

I'm not sure the bolded part is completely accurate due to (a) density and (b) geographic expansion. There is obviously a limit to both, but consider a geographically constrained area such as San Francisco: as population grows, those with the means will continue to increase what they pay to be 'in the city' (next to work, next to amenities, etc.), while geographic sprawl will occur (i.e. Concord, Antioch, Pittsburgh, etc.) that will provide more affordable, but less proximate housing. If Franciscan's incomes grow faster than inflation, there is no reason their value of proximate housing wouldn't grow in-line (i.e. greater than inflation) while geographic sprawl continues to produce affordable housing.

An alternate approach is increasing the density. Seattle has experienced a large wave of this with 'micro units', 'apodments', 'SROs', or whatever other term that applies to essentially market-rate, congregate housing with shared living areas and private bedrooms. The land owner may have previously had a single family house, a duplex, or even a four-flex, but then it was torn down and 20+ 'micro units' were built in its place. The land owner's property is now worth substantially more, far more than an inflation increase - more sq. ft. to rent and generally much higher rent/ft for this tiny units. Perhaps that's the final stop, or perhaps, someday, the new micro-unit becomes simply a bed in a tube, and you get 100 beds onto this piece of land.

Now, of course anything could happen. Shifting trends driving outmigration from cities would minimize the density, permanent remote work, global catastrophe, any number of who knows what's... but ultimately, land is finite, population, in theory is not (notwithstanding slowing birth rates, degrading planetary conditions, etc.).

Just to be clear, I'm not arguing for or against either, but I think both are suitable (stock market / real estate). I personally, due to my work being in real estate and because the stock market doesn't bring any tenant specific risks (i.e. VTI will never sue me...), choose not to invest in real estate (at least directly, other than my house).

Absolutely. There are lots of reasons land and real estate can fluctuate in value. Density and our responses to it can be a wildcard. e.g. in Tokyo, they'll convert a 2 bedroom house into a dozen tiny flats. Beds that leave your head a foot away from a ceiling. Toilets awkwardly positioned next to dishwashers.

But, over really long periods - centuries .. the kind of periods that see the stock market turn $1 into $10,000 into $10m, etc. you can't really have a persistent rate of growth above inflation. Because it compounds so quickly. The cost of a house relative to gold hasn't changed much in 1,200 years.

[JackoC]

1. Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real. Stocks from a market perspective are 4-6%/yr real.

2. Equities are a better bet. That said, if you want to be a real estate investor and are willing to work hard at it, it's possible you will do well. It generally requires a lot more capital to get started than say investing in something like VT, where you can invest in (essentially) every public company in the world, for under $100 for a single share.

1. Over long periods of time the *appreciation* of real estate might be roughly estimated as 0% real (though various studies have found more or less). There is no reason to think there's any central tendency to 0% real return on unlevered investment real estate *including net rental income*. And 6% expected real pre tax return for stocks is too high an estimate IMO, 4% is more like it*. Which you'd have to consider in comparing the going rental yields*.

2. If one were strictly better than the other, that would be a huge and IMO non-plausible statement of market inefficiency. People invest $trillions worldwide in an asset class that's strictly inferior to another asset class risk for risk. Which would be true whichever one you name as 'the better bet' in some overall sense, whether it was stocks or investment real estate. Does that sound right? I don't think so.

1. As for your number 2, they invest those trillions because they are happy to take the concentration risk, just like there are plenty of people happy to try and catch the next hot new winner out in the public stock markets. Trying to compare something like VT to RE is not a fair comparison, as RE is a subset of what VT invests in. Owning RE is like tilting to SCV, they hope for higher expected return due to the concentration in a subset of the overall market.

2. Is there something inherently unique about RE investing that gives it some advantage in expected returns over any other business?

But as often these points are depending on an assumption you're not explicitly stating. Which is that the real estate investment is highly concentrated and to the exclusion of stocks. Neither are necessarily true.

1. This is the wrong way around. 'Investable' world stock market cap like VT is something like $70tril*, world RE cap ca. $200tril. Investing something in real estate is not like concentrating in s subset of the stock market, it's diversifying somewhat away from concentration in a relatively small proportion of the world's risk assets, 'investable stocks' (of which a small sliver in turn is traded REIT's).

2. No but nothing special about the assets of relatively big companies either (the tiniest stocks are big companies compared to a large portion of the world's businesses and vast majority of cap weight is very big companies). The other built in assumption to these RE v stock discussions being one or the other has to be superior. The right answer is that if the market is even roughly efficient, it's doubtful the expected return RE or stocks, risk for risk (which would mean leveraging RE to some degree at least) is greatly different.

The benefit of direct RE is diversification into a risk asset that doesn't correlate very highly with stocks, especially at the mom and pop property level (SFH, small apt building or commercial). Plus in a somewhat (but not grossly) less efficient RE market it's more plausible to believe you can do better than your local competition. They will not be dumb, but the idea in the stock market (which has at least some validity) that it's a waste of time to try to pick winners unless you're a genius, doesn't hold to the same degree. However, this diversification isn't feasible for everyone to access. People with a long hours job with lots of income growth potential, people who are not very bright or commercially inclined (they'll do just as well with index funds as anyone else, but in direct real estate own savvy matters more), people without the resources to create a diversified position in stocks and RE, etc.

You started saying that the long term expected return of investment RE is 0% real, not correct. Now your point attempting to compare investing in RE to concentrating in a 'hot' sector of the stock market is also not correct. OTOH we agree and it's obvious that direct RE investment is not equally desirable for everybody.

*numbers from Ilmanen, Investing Amid Low Expected Returns, sidebar p 39-40.

[EddyB]

Looks like he started out in investment banking, which generally makes the real money from the stock market.

But not from “investing in the stock market.”

[tibbitts]

You can purchase properties that are undervalued, or force appreciation by fixing them up. Index fund investors focus only on the upside of being diversified and the downside of being concentrated, and tend to ignore the reverse.

Only if you believe your analysis of the properties you buy and their pricing is superior to that of competing investors, and that you have the ability to renovate them at a lower cost than competing investors.

[JackoC]

I'd say the stock market is a much better long-term investment than real estate. I think our impression of real estate returns is heavily influenced by the accumulation phase of the long-term debt cycle we've been in since the war. Real estate can't really outpace inflation over very long periods, without housing becoming unaffordable. And rents are capped by what people can afford. So I don't think you can get stock-market-like exponential long-term growth – once we factor in that, at some point, we have to mean revert. If we were always in an accumulation phase, real estate probably could return more. I think it has/had since the 80s, at least?

Private equity healthcare. Certainly potential for very strong long-term profits with ageing demographics, etc.

I'm not sure the bolded part is completely accurate due to (a) density and (b) geographic expansion.

The reason that statement is wrong was already pointed out a previous time on this thread (not to mention dozens of other threads). Price appreciation of real estate might be estimated as roughly 0% real over long periods, but there's no reason to think the expected total return of RE including net rental yield is anywhere near zero real. And also consider a realistic estimate of stock expected return, say 4% real total. In most places net rental yields are more than that. However, as mentioned before over long periods more capital usually has to be put into properties to maintain real rent, that's not counted as 'repair' in 'net rental yield' (NRY doesn't by convention include the new roof you'll need every few decades spread out per year, for example). And the actual expected appreciation is difficult to gauge actually.

The bottom line though is that saying stocks are 'superior' based on 0% real price appreciation of RE is a basically wrong analysis leaving out a major component of RE return, rental yield. It's like when naive people make conclusions about past stock returns using the index value and forget about dividends.

[EddyB]

If I had to make only a diversified investment, I’d take a stock market index fund every time. If you told me I had to invest in a single asset, I’d probably favor direct real estate over investing in a very small percentage of a single public company.

[SashaWalpole]

You can purchase properties that are undervalued, or force appreciation by fixing them up. Index fund investors focus only on the upside of being diversified and the downside of being concentrated, and tend to ignore the reverse.

Only if you believe your analysis of the properties you buy and their pricing is superior to that of competing investors, and that you have the ability to renovate them at a lower cost than competing investors.

Index fund investors think of the market as being efficient, and for stocks i'd agree that it mostly is. That's not true of real estate however. When i make an offer on a property, I'm only competing against other potential buyers in my local area who've gotten prequalified and seen the property, and that's if it's listed on the MLS. If it's an off market property, i might not be competing against anyone at all. It's just me and the owner. The price of Apple stock is public knowledge, the price and condition of some random property in some random little town is not.

[petulant]

JackoC is 100% correct. Measuring real estate performance includes rental yields in addition to appreciation. I would also add leverage and tax interactions of all factors. With RE, it is possible to borrow 70-80% of purchase price, deduct depreciation and interest, and pay little or no tax on economic income provided by rent. Further, since no tax is paid on appreciation until a realization event, the RE owner can avoid any tax by borrowing more and then passing away with a step-up. Note that while stocks can use the latter to avoid taxes, RE is better for both due to greater ability to borrow a high % of asset value on better terms plus accumulated depreciation getting wiped away on step-up basis. Hence, what looked like a 4% (nominal) rental yield and net 0% real appreciation can become a 7% (nominal) IRR or greater depending on parameters. At best unlevered stock with an expected return of (nominal) 7% will stay at 7%; if realizing dividends or capital gains outside of federal-only 0% bracket it will be worse. People who argue RE can't keep up in some abstract sense are deeply mistaken about the American system. That said, RE is a business and takes work, so many commenters highlighting practical differences are very correct.

[tibbitts]

You can purchase properties that are undervalued, or force appreciation by fixing them up. Index fund investors focus only on the upside of being diversified and the downside of being concentrated, and tend to ignore the reverse.

Only if you believe your analysis of the properties you buy and their pricing is superior to that of competing investors, and that you have the ability to renovate them at a lower cost than competing investors.

Index fund investors think of the market as being efficient, and for stocks i'd agree that it mostly is. That's not true of real estate however. When i make an offer on a property, I'm only competing against other potential buyers in my local area who've gotten prequalified and seen the property, and that's if it's listed on the MLS. If it's an off market property, i might not be competing against anyone at all. It's just me and the owner. The price of Apple stock is public knowledge, the price and condition of some random property in some random little town is not.

The pool of competing investors may be smaller and if you operate in a tiny market it might be non-existent, although if the pricing is favorable enough it's almost inevitable that others will discover it. In an inefficient market, the odds of you making a bad decision and paying more than what you should for a property or renovation are equal to the odds of you making a good decision, unless you're saying - as I said - that you believe your analysis of pricing is superior.

[H-Town]

JackoC is 100% correct. Measuring real estate performance includes rental yields in addition to appreciation. I would also add leverage and tax interactions of all factors. With RE, it is possible to borrow 70-80% of purchase price, deduct depreciation and interest, and pay little or no tax on economic income provided by rent. Further, since no tax is paid on appreciation until a realization event, the RE owner can avoid any tax by borrowing more and then passing away with a step-up. Note that while stocks can use the latter to avoid taxes, RE is better for both due to greater ability to borrow a high % of asset value on better terms plus accumulated depreciation getting wiped away on step-up basis. Hence, what looked like a 4% (nominal) rental yield and net 0% real appreciation can become a 7% (nominal) IRR or greater depending on parameters. At best unlevered stock with an expected return of (nominal) 7% will stay at 7%; if realizing dividends or capital gains outside of federal-only 0% bracket it will be worse. People who argue RE can't keep up in some abstract sense are deeply mistaken about the American system. That said, RE is a business and takes work, so many commenters highlighting practical differences are very correct.

Have you considered depreciation recapture in the exit event? It could sting a lot of people who are not aware.

[petulant]

JackoC is 100% correct. Measuring real estate performance includes rental yields in addition to appreciation. I would also add leverage and tax interactions of all factors. With RE, it is possible to borrow 70-80% of purchase price, deduct depreciation and interest, and pay little or no tax on economic income provided by rent. Further, since no tax is paid on appreciation until a realization event, the RE owner can avoid any tax by borrowing more and then passing away with a step-up. Note that while stocks can use the latter to avoid taxes, RE is better for both due to greater ability to borrow a high % of asset value on better terms plus accumulated depreciation getting wiped away on step-up basis. Hence, what looked like a 4% (nominal) rental yield and net 0% real appreciation can become a 7% (nominal) IRR or greater depending on parameters. At best unlevered stock with an expected return of (nominal) 7% will stay at 7%; if realizing dividends or capital gains outside of federal-only 0% bracket it will be worse. People who argue RE can't keep up in some abstract sense are deeply mistaken about the American system. That said, RE is a business and takes work, so many commenters highlighting practical differences are very correct.

Have you considered depreciation recapture in the exit event? It could sting a lot of people who are not aware.

Yes, that is why I pointed out that the step-up in basis covers accumulated depreciation.

[SashaWalpole]

1. Over long periods of time(100+ years), historically real estate averages around 0%/yr real. Certainly people can and do get lucky and make lots of money in real estate. I'm just saying the average from a market perspective is around 0%/yr real. Stocks from a market perspective are 4-6%/yr real.

2. Equities are a better bet. That said, if you want to be a real estate investor and are willing to work hard at it, it's possible you will do well. It generally requires a lot more capital to get started than say investing in something like VT, where you can invest in (essentially) every public company in the world, for under $100 for a single share.

1. Over long periods of time the *appreciation* of real estate might be roughly estimated as 0% real (though various studies have found more or less). There is no reason to think there's any central tendency to 0% real return on unlevered investment real estate *including net rental income*. And 6% expected real pre tax return for stocks is too high an estimate IMO, 4% is more like it*. Which you'd have to consider in comparing the going rental yields*.

2. If one were strictly better than the other, that would be a huge and IMO non-plausible statement of market inefficiency. People invest $trillions worldwide in an asset class that's strictly inferior to another asset class risk for risk. Which would be true whichever one you name as 'the better bet' in some overall sense, whether it was stocks or investment real estate. Does that sound right? I don't think so.

Well, better can be given across many different metrics, but I think you said it pretty well yourself, paraphrased: It's hard to find a case where equity investing doesn't make sense, but it's pretty easy to find a reason for RE investing to not make sense

As for your number 2, they invest those trillions because they are happy to take the concentration risk, just like there are plenty of people happy to try and catch the next hot new winner out in the public stock markets. Trying to compare something like VT to RE is not a fair comparison, as RE is a subset of what VT invests in. Owning RE is like tilting to SCV, they hope for higher expected return due to the concentration in a subset of the overall market.

Is there something inherently unique about RE investing that gives it some advantage in expected returns over any other business? As far as I can see, mostly no. One could argue, an individual investor might be able to get away with some tax and leverage benefits, but as one grows larger those advantages tend to diminish, as commercial lending in RE is an entirely different beast from the tax advantaged personal mortgage lending, with different rates, risks, etc.

The reason i invest in real estate isn't because i prefer to be concentrated rather than diversified. In fact, i'm not sure i'm even concentrated compared to index fund investors given that i invest in both. The reason is that with average real estate investments i feel like i can make the same returns as index funds thru just my rental income while also building up equity due to appreciation and paying down the mortgage.

To your next point, is there something unique about real estate investing? Well, compared to stock market investing, it's much safer to use leverage (which i always do). Compared to starting most individual businesses, it's much less risky and time intensive. If you start your own restaurant, you'll be spending all your time there and your restaurant is statistically likely to go out of business anyway.

Your comment that tax and leverage benefits diminish as one expands seems puzzling to me. Sure, there are a limited number of residential mortgages that you can have. You can have 4 or 5. If they're all triplexes or quads, that's 12- 20 units, which seems like plenty to me. Even if you had to switch to commercial loans, i think that having a 6 unit on a commercial loan is actually preferable than a 4 unit on a residential loan. You'd be paying down the mortgage much faster and the extra income from the greater number of units would compensate for the larger monthly mortgage payment and the risk of having a mortgage rate that adjusts in 5 or 10 years. The more units you have, the more leverage you have to negotiate costs like insurance, property management, trash disposal, etc. The depreciation you can write off on your taxes might be a little different between residential and commercial, but that's the only disadvantage i can think of.

[petulant]

Here's an analogy to help people get why some love RE. Think about TIPS. TIPS have a real return plus CPI adjustments. The CPI adjustments increase principal value, which then gets multiplied by the real return. However, the real return and the CPI adjustments to principal value get taxed (the principal value one is the dreaded phantom tax). Hence, if the investor goes in expecting TIPS in a taxable account to keep up with inflation, they face disappointment. For example, if a 30-year TIPS starts at 1.5% for real return and CPI is expected to run 2.5%, the expected nominal return is 4%. But the IRR after tax over 30 years will be 3.12% using a 22% bracket--much less than the expected real return. (That assumes using the real return coupons to pay tax on both coupons and CPI adjustment with no reinvestment of remainder, meaning investor is pocketing about .50% per year and then cashing in the adjusted principal at the end.)

Imagine if instead we got to treat the real return coupons as a return of capital with no phantom tax on CPI adjustments. Let's keep the 1.5% real return and 2.5% inflation. After 30 years, the investor has pocketed much more income but has driven the cost basis of the TIPS to 34.15 per 100. Here, the IRR turns out to be 3.45% in the 22% bracket. The investor got more money up front plus a higher return! Yet, assume next we could instead have a step-up in basis at year 30 (a modeled date of passing away). Now, that would mean the investor received real return and never paid tax, while heir can cash in tax-free. That results in an IRR of 4%.

Further, imagine we can borrow against this magically taxed TIPS at a favorable rate of 3% nominal. Let's say we buy 5x the TIPS and borrow 4x, only interest payments are due, and at the end the heir gets a clean step-up basis and pays off the debt. In this example, we have a curious situation where the interest is greater than the coupons, so the investor has to kick in a bit more capital in the early years. At any rate, despite this headwind, the IRR turns out to be 5.52%. If the borrowing rate was 4%, the IRR would only be 4%. If the borrowing rate was 5%, the IRR would be 2.65%. Here, if the investor did need income before passing away, the nominal value at say year 20 would have been 819 compared to debt of 400, so additional (untaxed) borrowing could just be completed for income.

Finally, let's increase the real return to 4%, but keep the 2.5% inflation figure and the leverage ratio. We can let the borrowing rate climb up to 6%. Here, the IRR over 30 years with a step-up basis at the end is 7.31%.

That's a rental property. Rental properties have a rental yield that adjusts with the property value via the "cap rate" relationship. Taxes are deferred through depreciation and other means. Interest payments are deducted against income. It can be held until step-up in basis. It assumed no net real appreciation. Debt can be beneficial even if the interest rate exceeds the rental yield, so long as it is less than yield plus appreciation.

This is a highly simplified and stylized take on the generic rental property value proposition. Of course, in real life, there is much more risk and it takes considerable planning to watch tax liabilities and cash flows. But that is what people are doing.