property versus stocks

[Ray Zee]

today i am closing on a sale of a house i bought 15 years ago for $20,000. i have averaged 5,000 a year net from rent. have written off depreciation every year. and have taken deductions for other expenses like vehicle and travel, home office and such. selling price is 150,000. nice return. but it shows that real estate can compete well as an investment if not solely for the extras you get from it. plus if you care to take on extra risk of a loan, the leverage you get is tremendous.
thats why i say the second best investment is the house next door to where you live.

[adios]

I would think that location, location, location is still important but I agree, real estate can be an excellent way to invest money. I would also think you have to have a business plan like any other business in anticipation of maintenance and unexpected problems. Even though it's not owning property directly and even though I'm not leveraged to the max quite a bit of my portfolio is essentially real estate and real estate related investments (like mortgage REITs).

[GeorgeF]

I calculate you made 14.4% over the 15 years. These are my rambling thoughts.

Old adage: never invest in anything you have to feed or paint regularly.

What you did not state was how much time and money you put into the house. My guess is that the time you would have saved by renting would have allowed you to write another book. If that book was a cross over best seller in the mainstream market it could have been worth many millions. To get a proper internal rate of return vs renting you need to compare the costs and benefits of owning vs renting.

Another annoyoing fact is that DIY home remodeling projects cause a fair amount of injuries. Not many injuries associated with stock ownership.

I would also point out that after the sale your success is a certain fact. For the buyer of your property to be as succcessfull they would have to sell it 15 years form now for $1.13 million. The new buyer probably has a higher loan to value ratio than you got 15 years ago. I have to wonder if a total 30 years of 14% gains in a single real estate market is possible. For example if you live in vegas you picked the right market and the right time. I have trouble believing that vegas can keep growing. Water alone will start being a problem.

Loosing money in realestate is also possible. I see properties in Buffalo NY selling for so little that they are auctioned on ebay.

Residential realestate is also non diversified. You are borrowing money and putting 100% of it on one house in one market in one city in one state in one country.

[Ray Zee]

its just an example george. but you didnt read the post well. 14% is low if you add in the rent which i said was net. then look at the result

[Wildbill]

George, you are making a huge mistake here. Vegas hasn't been much of a return at all compared to other western markets, but the concept of water might actually be EXACTLY what it will take to bump up those returns. My buddy came out in 94 and bought a house for $120k. He sold it in one day on the market (yeah the resale market in Vegas is scorching) for only $188k. Yes a decent return, but nothing spectacular. Another buddy of mine bought a house in San Francisco back in 95 when everyone was saying that is it, the market can't possibly get much higher especially in the lower income area they bought in. Him and his buddy forked out just enough to get the loan and turned it into a rental. Their price was $306k. It was sold 2 years ago for $620k and the area is now considered a cool place for families to buy "more affordable" houses. They had the house 3 less years and still had a much higher return, really high when you consider they scraped together relatively little, about $9k each for the down and closing costs to get a $160k return each!

Bottom line is that while Vegas has had a reasonable return, the big money has been and probably will for awhile continue to go to real estate on the coasts, places where demand is strong and land is just not available anymore. I think CA is getting overpriced for a shorter time frame, but give it 10-15 years and it probably will have good returns.

If I were an investor here are the markets I would look at (believe me I look at a lot of these in the course of my work):

1. Baltimore
2. Inner Phoenix (within 5-10 miles of downtown only)
3. Portland
4. Miami
5. Philadelphia (maybe wait until they give some income tax relief, then it would be #1)
6. DC
7. Seattle

These places all have serious constraints on land or will soon, except Phoenix but traffic will cause land that people want to be in demand. Any of these places and I think you will get the benefit of a big runup in the next 5-10 years. The hot markets of CA just limited in how much they can charge, same for NYC and Boston. DC I still like just because the incomes there are just shockingly high as long as you stay close-in. The high cost of DC will drive people to Baltimore and make it my number one choice. Baltimore is getting an amazing amount of interest from high paying industries these days, people that don't need to be near the feds are thinking of moving up the road. For now a lot of the people working in Baltimore come up from DC, but as traffic continues to get worse and more business comes in and creates a better and safer atmosphere that whole area is going to take off.

Well for what its worth I think you should still not get too tied into real estate. Nothing else you own is likely to put you in trouble than your house, especially those that are obsessed with paying it off and creating equity. I always say keep your payment as low as possible, even if you stretch out your loan and never put more equity into it than you have to. Keep what you would put into in savings instead and then the house will never get you in trouble and you can be flexible about getting out of it should you get an unsustainable return in it or get a great offer in another city. Then again as bad as many people are at saving money and investing, its no wonder almost every average person loves their house and their returns from it. I once joked the book "Investing for Dummies" could be a one page affair, just tell them to buy a house and never take an equity loan on it and you would beat the returns of 9 out of 10 "average" investors.

[adios]

"I calculate you made 14.4% over the 15 years."

How did you figure that one? Say he put 20% down which would be $4000. After 15 years he's made a profit of $146,000 saying that rent made the loan payments. If this is true I calculate a return of about 27% compounded. I think your mistake is that you figured he invested the full $20,000 up front which he didn't. That's one of Ray's points about leverage. If he put $2000 down which is 10% he made something 33% compounded.

[scalf]

/images/graemlins/blush.giflol...well i did buy a second home, amazingly ez due to widow needing to sell; immediate credit available; and bank/brokers that wanted the deal to go....lol...they complain about physician fees....take a look at closing costs..lol....anyway, i own two houses now, am after taxes paying less than high end rent, and hey...you can actually see it...lol

but i refuse to admit i did thid because zee advised...it just was a smart thing to do, especially tax wise...lol...

now if i watch another nfl game...and see motorola on coaches headsets, well, then,,,lol...i guess i'll just have to purchas mot...nothing to do with ray at all...jmho gl....

oooooh, by the way...#2 insider of rmbs bought oct calls for 2 million shares...something is brewing lol...gl /images/graemlins/grin.gif /images/graemlins/club.gif

[Ray Zee]

sure the leverage really raises your return. and real estate is the only thing you can get such large leverage at without a time penalty.

but all that aside. even paying cash of 20,000 making 75,000 in rent profit plus 130,000 in capital gain puts around 200,000 over 15 years. close to 40% per year plus add in the extras and writeoffs and you get way out returns.

now if you buy a house to live in even for all cash. you still need to figure the appreciation plus the rent you saved in calculating your return.

[slavic]

Ray-

I think you are leaving the aspect of "this is a second job" out of your calculations. There is a lot to be said for the use of "your time" or others time that does not occure with a stock market investment.

You are also fortunate to live in an area were home prices have apreciated over the last 15 years. There are several areas around the country were this is not the case and you have to be carefull about claiming this as a general rule. You also have not stated if you owned the house outright (I assume you did) and if you were getting a profitable rental rate on the structure, again things that could take away from the overall EV.

If these items are all in your favor, why sell it? Refinace the structure, take that gained equity and invest it (in the market, or in other properties) and keep the money pump going. That $150K should be running a nice $500K+ worth of property investment for you.

In your case however, your earn at the tables probably outpasses the earn from this venture. (you know the old guns and butter thing)

With all of that said I still think one of the best things you can do as a young person is buy a duplex and rent out the other half. In general if you are going to do rentals multi-family has a higher EV.

[slavic]

oops Rental was a net figure. Ok why did you sell this little gold mine? I would have purchased the block.

[Ray Zee]

why did i sell. one i liked my renter and he is kinda a friend. and he wanted it. also i have very many of these things and sooner or later it gets to be time to pursue other things.
also single family houses are ususally a better investment than multifamily. one is you dont have much of the costs of multi. like yard costs and plowing and such. and when it comes time to sell, you get to sell to someone that is loving it rather than someone who must have it pencil out.

yes many areas dont appreciate. and that is for an investor to decide. same as with securities. with real estate you have control with securities you merely are along for the ride.

[slavic]

with real estate you have control with securities you merely are along for the ride.

Ahh must be nice over in Montana. In Washington the people over here gave control away a long time ago. I can't add dirt to my front yard without a papal blessing, and a diversity program.

[GeorgeF]

The actual return is not important since it is a past return. The real estate vs stocks question is about predicting the future.

Owning real estate is a business not an investment. Depending on the situation you may be well remunerated for your time or you might not. I have met people who own small rental buildings in declining industrial towns that put alot of work into them and don't seem to get much in terms of appreciation.

The current policy of the Bush admin and the Fed is to create inflation. They seem to be successfull in that commodity prices have increased in US dollar terms (not euro or yen), salaries and real estate prices in selected markets are going up. The problem of course is if the inflation gets out of control. Needless to say that owning a highly mortgaged property during an inflation and paying the mortgage back with a devalued currency is a good thing to do.

It is also possible that improvements in transportation might give people lower cost options as to where they can live. For example South West style airlines allow people to live outside of a 'hub' city. High speed trains, Regional jets and sci-fi things like the vertical lift off V22 Osprey could allow many more people to live away from urban areas.

What I am trying to say is that the future is unpredictable, 20 years from now people will be surprised at what turned out to be the clever investments.

Free Flight: From Airline Hell to a New Age of Travel
http://www.amazon.com/exec/obidos/tg/detail/-/1586480405/002-5072624-1629606?v=glance

US Navy V22 site:
http://pma275.navair.navy.mil/