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Real Estate
Reply to "Better investment options than Real Estate?"
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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]If you had to pay a ~ transaction cost of ~6% when buying/selling AND pay ~1% of the portfolio value every year, just to hold it, AND spend ~0.25-0.5% on "maintaining" them every year... Guess where the S&P 500 would be if those were the rules....One guess. Down in the dumps. Now, rental properties are different. The math on them gets seriously complex, but if all you are looking for is "investment", equities, and other financial products are MUCH better investments. But, you know why most people don't do the above but "invest" in real estate instead?? One word. LEVERAGE. If you're putting down 5% and are able to get a house, that's a 20x leverage. Show me a stock broker that will allow that level of leverage and I'll show you the bridge I'm selling. This is the ONLY reason "small" investors play more in the real estate markets. Blackrock? It goes out and sells a bond for $30B and has fun with the proceeds.[/quote] These are all very good points. [/quote] Agree. I inherited rental properties that were not leveraged, and it just didn’t pencil out. Rental property makes sense if they are [b]highly leveraged and in an area that is appreciating in value[/b]. If you want to be diversified from equities, REITS are better, because your money is spread across multiple properties and you don’t have landlord hassles. [/quote] Also good points. I just wanted to add that in addition to highly leveraged and appreciation, it also needs to have substantial positive cash flow. And actually, if you get that, you can make money without appreciation. Unfortunately, the only way it looks like people can do this right now is to be a Section 8 landlord and not a lot of people want to do that. So instead people are gambling on appreciation and think that if the rent covers the mortgage then everything is good.[/quote] But I’d rent covers the mortgage, aren’t you building equity in the home? So even if it doesn’t appreciate, someone else is building your equity. It’s not as good a return as stocks, but isn’t that still valuable? [/quote] Leverage helps, in theory, we it’s not just the mortgage — when I did the math, by the time I included taxes, maintenance, management fees (or hassle of doing it yourself), insurance, and depreciation, plus some allowance for the the house to sit empty every now and then (for refurbishment, if nothing else), the payback was very low. Add in interest on a mortgage, and it would have been negative, even with a smaller amount of capital invested. At best, it came nowhere close to the returns I could make in the stock market with no management hassles. Maybe there is some magic place where rents are high, but that wasn’t the case in the area I was in, even though it was a very hot real estate market. It can also be great if you get lucky — e.g., if you had bought in Southern California 40 years ago. I had a relative who did that, and did very well. But (a) the timing was mostly luck, and (b) once you’ve seen the majority of the increases, it doesn’t necessarily make sense to leave your equity there. I agree with pp that buying rentals can be a good way for people without much capital to build wealth via leverage, but if you have lots of capital already, there are better and easier ways to produce returns. Also, if you’re looking for exposure to the real estate sector, REITS are an easier and more diversified way to do that (vs. putting all your chips into one single investment). [/quote]
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