WatchWhat type of issues should one consider when deciding whether to invest in either Housing or Stocks/Bonds over the next 25 yrs.
These benefits come to mind:
Housing - Leverage, monthly return (rent), prop 13, $500k profit tax free for a couple
Stocks/Bonds - supposed better rate of return (7% ?), yearly return (Dividends), 15% Capital Gains tax, easy liquidity
Anything else?
Which one would you choose to invest in?
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A few points:
-Stocks and bonds are much more liquid (easier to buy and sell)
-Stocks and bonds are much easier to diversify (unlike sinking all of your wealth into a plot of land or two)
-Taxes tend to favor housing rather than stocks and bonds
-You don't have to pay property taxes, insurance, or maintainence on stocks and bonds (but do watch those fees)
-You might have problems with tenants. Being a landlord is at least a part-time job.
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Landlording is not for everyone, but the return is phenomenal in the current climate IMHO. This is the cheapest real estate has ever been in my lifetime. With 20% down, you're leveraging 5:1. So an average annual increase of 2% would give you a 10% return on your money. Can u leverage with bonds or stocks?
Taking into account the write-off like cell phone bills, umbrella insurance, depreciation and some other deductions, you're essentially don't pay any rental income. When u sell your rentals sometimes down the road, although u have to recapture the depreciation, u pay long-term capital gain like stocks and bonds.
If u know how to buy properties at the steps for 70-80 cents on the dollar, your return is almost infinity since you're essentially playing with 100% of the house's money.
When real estate appreciates, u can do cash-out refinance, and u don't have to any taxes on the cash-out money. Can u do this with stocks & bond?
Of course, the key is not invested in an alligator asset. Real estate is a liability if it doesn't produce income exceeding your monthly expenses.
Needless to say, I love real estate and heavily weighted in it.
Cheers.
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The appreciation of real estate is just wage inflation. If you borrow to have this asset, eventually you hope to collect rent free and clear, but this might take a while.
If you have enough cash to buy the building outright, it's wiser and safer to just buy assets that produce income (if you want income).
Many people don't know why they are investing. Is it "more money" or income, or to beat inflation, to grow capital, etc?
Most of us need to 1. grow capital first 2. hope to turn some of this grown capital into cash flow or income when we are older.
If I were rich enough to pay cash for an apartment building, I would not buy one since it's so much trouble.
If I were not rich I would buy stocks in mutual funds to acummulate or grow capital.
I wish I had the strength of my conviction a few years ago. I bought some AAPL but kept to my "rule" of mostly owning mutual funds for safety.
If I had put just put a bit more into AAPL in 2008 than I did, I would be able to buy several houses here for cash.
I keep remembering my businesswoman grandmother. She was a feminist before such a word existed I guess. She was doing several kinds of business begininning in the 20's until the 60's or so. She rented houses but I never knew she rented them until I was older.
She however was not as rich as my little lady neighbor who is in her 90's and has owned stocks forever. She is richer than God because she has owned stocks and kept them.
Owning a rental property if you are rich may also tie you down. Why mess around with tenants and toilets if you don't have to?
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In general stocks outperform housing by a long shot. Over the last 100+ years or so, stocks have on average over the long term delivered a median return of between 7-10% versus real estate, which returns around 3-4%.
One last thing... stocks don't require down payments, paint, light bulbs, plumbing, carpet, new roofs, lawn care, or 12:00 at night emergency repairs.
Disclaimer:
* Not financial advice.
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edvard2 says
Ed, :)
I'll let the readers be the judge since we've been down this road before. If you keep on insisting this fallacy in your analysis, let me show you the light and you tell me where I'm wrong.
I buy properties at the courthouse steps. Say on average, I get it for 75 cents on the dollar. Then I get financing for the property at 75%-80% fair market value. Essentially, I'm putting no money down, and in some cases, I put money in my pocket.
So what is the ROI, when I got all of my cash-out of the property, tenant is paying my PITI, and I still have cash left over in my pocket each month? Isn't my return is infinity? Isn't this beat the stock market?
With respect to maintenance, everything is negotiable. My tenants take care of the lawn, change the light bulbs and smoke detector batteries. Everything is spelled out in the rental agreement. Plumbing is being taken care of by plumbers. Roof and wood floor are being taken care of by contractors. No carpet in any of my rentals. All the maintenance's money came from my beloved tenants.
My job? Go pick up rents once a month. Some of them mail their rent checks to my house. If they call me for something, I just have a contractor take care of it. What's the big deal? No tenant in their right mind call a landlord at 2:00pm over a toilet clog. How many of you on this board have ever done that? I didn't think so. :)
Like many people on this board, I have way over six figures invested in the stock market. I'm not anti-owning stocks. Many frequent readers know what I buy and sell since I post them on here. However, one can make so much money investing in R.E, financing it with OPM. Of course, it's not for everyone, but repeatedly saying stocks return higher than real estate without much context is just ludicrous. :)
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E-man says
I don't have to back up anything I claim. What I mention is very plain and very well understood basic econ-101. There aren't exactly many Billionaires in this world that got rich buying wooden boxes.
The OP asked a question that was extremely broad, which is what performs better? Real Estate or Stocks? The answer is stocks. Your argument is that:
" oh yeah? Well I do well buying and selling houses, so there!" But- the context is more like what if you took X number of millions of investors and compared them to whatever they invested in. That's why statistics are such wonderful things. Take millions of house investors and millions of stock investors. The stock investors will come out ahead and hence the numbers I mentioned before.
I could just as easily counter by saying: " Oh yeah? Well I bought XXX Stock and it took off and I made millions, so my experience dispproves your statistics because surely everyone bought the exact same stocks... right?"
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edvard2 says
You choose to ignore the housing dividend again.
If I bought a house for investment for 200K and rent is 1,300 bucks a month on the get-go, historicaly over 100 years, that 200K house had returned 3%-4% appreciation, well below equity.
But the caveat is the housing dividend that are not counted:
Annual rent: 15,600
Property tax: (2,500)
Provision for maintenance (2,000)
Insurance and other Cost (1,500)
Return 9,600
Housing Dividend 4.8%
If you bought a house for investment historically, in addition to the actual appreciation, the home owner pocketed about 5% as well. Actual return is on par with equity. If you bought a home to live, the 200K investment saved you (15,600 bucks in rents avoided less direct cost) 9,600 bucks in rent as well, another form of dividend.
How does an apartment REIT make their money? They make money on the cash return from operations and the cash return from appreciation. A mortgage doesn't change that fact as leverage offsets the cash flow reduction. You would know housing did better because REIT's peformed better than the stock market historically.
I'll let the readers judge as well, no need to respond as that is the end of this.
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I'm not going down this road again. I've already proven these points repeatedly.
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SFAce you are assuming that you get to own that money spent as equity.
Jimbo you are better off investing into stocks on small scale, investing into housing usually involves buying a deal at an auction and flipping it. Incredibly risky if you don't know what you are getting into.
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edvard2 says
:)
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Jimbo in SF says
Portibility, homes you cant take it with you. Stocks travel well.
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Jimbo in SF says
Fortwayne,
Just in case u missed what Jimbo said above. I guess there is no risk investing in stocks or bonds. :)
Merry Christmas.
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E-man is making a comparision where you must assume that the "investor" is already rich.
How much money does it take to invest in stocks? $0 at T.Rowe Price, if you sign up for automatic contribution of $50/month from your checking account.
How much money does it take to buy a foreclosed house on the steps of the courthouse? A little bit more.
Stocks 1. appreciate capital 2. can be owned fractionally via mutual funds 3. can be bought with little money to begin 4. are very liquid and trading mutual funds has no commission. 5. can grow to produce dividends which can be reinvested into more shares, or income.
If you have already a lot of capital, then you have more options and maybe being a landlord appeals to you.
I like the idea of being a landlord in an inexpensive place, e.g. Baja Mexico. The little house is inexpensive but you can rent it out for a few hundred bucks, so your yield is very good.
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Clambo. :)
If u open up your mind a little bit and expand your horizon, u will realize that real estate can be bought with no money or 0% down NOW. Huh, in this environment? Yes, in this tight credit environment.
Can u invest and make money with $0? I didn't so. R.E. offers so much opportunities compared to stocks. If u had money, your return would be exponentially in R.E. because u could leverage it many times. How many times can u do that with your mutual funds, bonds and stocks?
The OP asked a very good question so I just want to share my 2 cents. Investing in stocks or R.E. is all about timing. Jimbo, ask yourself this question, is the stock market currently under-valued, fairly valued, or over-valued by historical standard? Then ask the same question about R.E. If I'm not mistaken, the HAI (home affordability index) is at at record level, which corresponds well with my neck of the woods. However, R.E. is local so do your due diligence for your neck of the woods.
If you want to learn how to by properties at the steps, invest $5k in your education. The return is phenomenal. People are paying me 4-5% commission to help them buy properties at the steps. U do the math on the ROI.
Different strokes for different folks, but saying stocks and bonds outperform R.E. without much context is ludicrous.
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I like both i like the leverage of real estate and i like the low barrier of entry to stocks and bonds. I wouldnt feel diversified with only one or the other.
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The entry level for a mutual fund is $0. You must have a checking account however and this must have a few dollars in it.
I'm suspicious of anything "educational" that costs $5000.
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E-man says
I find it interesting how all the stock market cheerleaders seem so readily willing to overlook how their 401k or their IRA or their Vanguard fund is most likely entirely invested in multinational companies whose collective infractions against human rights, labor and the environment are being subsidized and even vindicated by their dollars. Think about it: your own hard earned wages are being deployed in opposition to the goal of the greater commonwealth. At the very least, it must require an incomprehensible level of cognitive dissonance in order to put so much energy/wealth behind underwriting your own gradual demise.
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E-man says
Put another way, if you can somehow lick down your hackles and relax your natural and totally wholesome aversion to the concepts of larceny and perpetuating hollowed-out rentier economies, then you too can become a landlord!
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clambo says
It's good until that gang of criminal thugs comes into town and burns the little house down.
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E-man says
Using lots of leverage is a great idea when speculating in risky assets.
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Austinhousingbubble says
That's not really much of an argument seeing as how that every single person in the US at this point has a home, car, wardrobe, and even pantry chok-full of goods, wares, and foodstuffs imported from various overseas countries that are also owned by the very companies that are part of most any common investor's slew of international funds. So what's the difference? Either you buy cheap electronics, T-shirts, shoes, and food or you buy stocks. SAME thing...
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Austinhousingbubble says
God bless capitalism.
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wthrfrk80 says
Yup, and you haven't even talked about how housing hurts trees, is destructive to the environment, employees illegals to works long hours with little wages, benefits, etc. etc. My point is that each side has it problems. The only way you can have as small a footprint as possible on the earths resources is to stop living. If you decide to keep living then you are impacting this place. Every decision you make throughout the day can lighten your footprint slightly, but it will always be there. To post how bad stocks are for the world is unfair if you don't also analyze the opposing subject (housing). It has many problems as well.
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edvard2 says
You've just pointed to another facet of our collective cognitive dissonance, which actually supports rather than diminishes my argument; of course consumers cast a vote against themselves and in support of corporate welfare and banker greed every single day. Many American's seem to have muscle memory for the over-the-barrel position. Maybe they like getting fucked; maybe they're used to it. I don't know...but here's the good news: I'm seeing a growing cottage industry movement in America, primarily among younger men and women who seem to suffer from Stockholm Syndrome a little less than previous generations. More people today seem to think and care about where and how something was made than even six or seven years ago. I'm optimistic.
FWIW neither my pantry or my closets or my shed are chock-full of imported crap; I read the labels and I spend a little extra time and money if I need to in order to vote with my wallet. (I'm actually sitting here looking around my place and the only thing I can see or think of that might have fed the beast is my antique laptop that my wife donated to me when she upgraded five years ago.) I'm concerned about quality but I'm also not blinkered enough to think that, if it can happen over there, it can NEVER happen over here. Buying up Apple this and Nike that is a tacit vindication of basic human rights abuses and labor arbitrage. For similar reasons, I also haven't used a bank in over twelve years.
Americans have more power with their dollars than they do at the ballot box, and yet, they constantly vote against their own interests, while often times spouting off about how much they hate the system. It's fucking remarkable, to say the least.
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RentingForHalfTheCost says
I see your point, though I think it's tangential to mine. Besides, we are nature. Our footprint is part of the natural ecology, not alien from it. It's our gift of discernment (right/wrong) that we seem ready to discard whenever it is more immediately equitable or even just plain convenient to our needs and desires.
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wthrfrk80 says
It isn't capitalism.
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Austinhousingbubble says
No? I don't understand.
Capitalism is all about profit, not how those profits are obtained.
That said, the commie's are full of shit too. I don't think anyone has managed to create a good system yet.
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wthrfrk80 says
Well, at least one of the basic precepts of capitalism as I understand it is competition. To have real competition requires a level playing field, which we sent to the scrapheap decades ago. I would say what we have today is extreme crony capitalism if we have anything like capitalism at all. Corporatism would better describe it.
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Austinhousingbubble says
Amen to that.
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E-man says
Everything has a risk, but...
to clarify my position, as I did assume obvious did not need to be stated:
- Housing has very poor liquidity, almost non existent.
- Housing has no diversification.
- Housing requires very risky high leveraging.
- Lots of cash simply given up during a purchase.
- Housing has ongoing costs for maintenance, taxes, insurance, etc..
- And lastly closing costs on a loan which are much much higher than transaction cost of $2 - $4 per trade.
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Austinhousingbubble says
While I mostly agree, you think coal-fired powerplants giving you energy to post on blogs is a part of nature, or an aberration?
The question being, does man participate, a la "the state of nature" or has man, with the birth of consciousness, transcended nature?
Do beasts have the atom bomb?