Investing 102

[Vegas69]

I've been adding enough principal to the payments on the investments to pay them off in 18 or less. (All funded by the tenant ) I've also been adding a small amount to the primary for quite some time. I want to step it up and have it free and clear by 50 or sooner.

That's my goal, not to owe anybody a dime. I'm definitely the tortoise and don't have the cojones to play the stock market vs. free and clear property. I'll have plenty to play with in the market when I don't have debts.

[GregWeld]

Originally Posted by Vegas69

I've been adding enough principal to the payments on the investments to pay them off in 18 or less. (All funded by the tenant ) I've also been adding a small amount to the primary for quite some time. I want to step it up and have it free and clear by 50 or sooner.

That's my goal, not to owe anybody a dime. I'm definitely the tortoise and don't have the cojones to play the stock market vs. free and clear property. I'll have plenty to play with in the market when I don't have debts.

I get that..... but just use this "visualization" to help you get your head around the differences. BTW -- I've used my earnings/profits from STOCKS to invest/diversify into real estate not the other way around. Just say'n'.

[toy71camaro]

Boo... The "little man on Wall Street" seen your buy yesterday. and i think i even heard him yell out this morning "bring the market down boys! I dont think this guys got the guts to stick it out!"

[Vegas69]

Having trouble making any sense of that graph. Land bought for $100 in 1928 would be worth a whole big enchilada today. I've seen land in Vegas bought for 5k in the 70's that is worth over $500,000.

[GregWeld]

I can't defend the chart ---- I just googled "Real estate vs stocks" and that's what came up. I know that stocks have always been ahead of both real estate and bonds.... Housing is usually quoted as a 4% annualized gain -- Stocks usually are around 9% ---- and those differences over time are just gigantic.


Either way --- as long as a guy is salting away dough that is earning him money ---- I'm good with it!

[GregWeld]

So as usual --- here's the way the market works.


The minute I posted about Apple (AAPL) being in suck territory year to date.... it's been up every day since.


Adrienne (23 years old) is in line somewhere at an Apple store in Minneapolis as we speak... our family has 4 iPhones and 2 of them are available for upgrading... so you know we're ordering 2 "RIGHT NOW" --- > Mom and Adrienne! Dad can go suck wind.

[Woody]

Originally Posted by Vegas69

Having trouble making any sense of that graph. Land bought for $100 in 1928 would be worth a whole big enchilada today. I've seen land in Vegas bought for 5k in the 70's that is worth over $500,000.

I think the chart represents the average of the asset class as a whole. If you cherry pick one example of a piece of real estate that you know had a higher return, there are also examples of stocks that have had much higher returns than indicated on the chart.

A few years back I had done some research on long terms returns for stocks vs. real estate. The data that I found at that time indicated real estate and stocks have had pretty similar returns over the long term, with real estate having a slight edge. The figures I remember were close to 9% to 10% per year.

[GregWeld]

REASONS WHY STOCKS ARE BETTER THAN REAL ESTATE

1) Higher rate of return. Stocks have historically returned ~8% a year compared to 2-4% for real estate over the past 60 years. You can also go on margin to boost your returns, however, I don’t recommend this strategy given your brokerage account will force you to liquidate holdings to come up with cash when things go the other way. Your bank can’t force you to come up with cash or move out so long as you are paying your mortgage.

2) Much more liquid. If you don’t like a stock or need immediate cash, you can easily sell your stock holdings. If you need to cash out of real estate you could potentially take out a home equity line of credit, but it’s costly and takes at least a month.

3) Lower transaction costs. Online transaction costs are under $10 a trade no matter how much you have to buy or sell. The real estate industry is still an oligopoly which still fixes commissions at a ridiculously high level of 5-6%. You would think Zillow or Trulia would lower transaction costs, but unfortunately they’ve done very little to help lower expenses. They are in cahoots with the National Association of Realtors. This is part of the reason why I don’t trust Zillow.

4) Less work. Real estate takes constant managing due to maintenance, conflicts with neighbors, and tenant rotation. Stocks can literally be left alone forever and pay out dividends to investors. Without maintenance you’re able to focus your attention elsewhere such as spending time with family, your business, or traveling the world. You can easily pay a mutual fund manager 0.5% a year to pick stocks for you or hire a financial advisor at 1% a year.

5) More variety. Unless you are super rich, you can’t own properties in Honolulu, San Francisco, Rio, Amsterdam and all the other great cities of the world. With stocks you can not only invest in different countries, you can also invest in various sectors. A well diversified stock portfolio could very well be less volatile than a property portfolio.

6) Invest in what you use. One of the most fun aspects about the stock market is that you can invest in what you use. Let’s say you are a huge fan of Apple products, McDonald’s cheeseburgers, and Lululemon yoga pants. You can simply buy AAPL, MCD, and LULU. It’s a great feeling to not only use the products you invest in, but make money off your investments.

7) Tax benefits. Long term capital gains and dividend income are taxed at lower rates than the top three W2 income rates (28%, 33%, 35%). If you can build your financial nut large enough so that the majority of your income comes from dividends, you could lower your marginal tax rate by as much as 20% or so, depending on the current legislation.

[GregWeld]

REASONS WHY REAL ESTATE IS BETTER THAN STOCKS

1) You are more in control. Every physical real estate investment you make puts you in charge as CEO. As CEO, you are able to make improvements, cut costs (refinance your mortgage), raise rents, and market accordingly. Of course you are still at the mercy of the economic cycle, but overall you have much more leeway in making wealth optimizing decisions. When you invest in a public or private company, you are a minority investor who puts his or her faith in management. Sometimes managers commit fraud or blow their companies to smithereens. Nobody cares more about your investment than you.

2) Leverage with other people’s money. Leverage in a rising market is a wonderful thing. Even if real estate only tracks inflation over the long run, a 3% increase on a 20% downpayment is a 15% return. In five years you will have more than doubled your equity at this rate. Leverage also kills on the way down, but real estate is very difficult to trade so you will most likely stay put unless things get really dire.

3) Tax advantageous. Not only can you deduct the interest on up to $1.1 million in mortgage indebtedness on your primary home, you can also sell your primary home for tax free profits up to $250,000 for singles and $500,000 for married couples if you live in the home for the last two of a five year period. If you are in the 28% or higher tax bracket, it behooves you to own property. All expenses associated with managing your rental properties are also deductible towards your income. Income limits do apply however, so make sure you don’t make much more than ~$166,000 a year total.

4) Tangible asset. Real estate is something you can see, feel, and utilize. Stocks aren’t event pieces of paper anymore, but ticker symbols and numbers. When the world comes to an end, you can seek shelter in your property. Real estate is one of the three pillars for survival, the other two being food and shelter.

5) Easier to analyze and quantify If you can calculate realistic expenses and rental income that’s all you really need when it comes down to valuing a piece of property. If you can borrow at 4% and rent out for a 6% yield, you’ve likely found yourself a winner. Real estate is immediately arbitrageable if you have the financial means to invest. There’s not only the cash flow component but the underlying equity component that helps investors build wealth. Stocks require you to trust what the company reports. There are countless ways for companies to massage their numbers to make things look better than they really are e.g. adjusting accounts receivables, adding one off gains, and using various amortization or depreciation strategies to name a few.

6) Less visible volatility. Your house value could be tanking and you would never know it since there isn’t a daily ticker symbol. During bad times, the utility of your home really helps soften the blow as you enjoy your home and create great memories. During the 2008-2009 downturn, I still got to enjoy my vacation property in Lake Tahoe 15-20 days a year even though values were plunging. Meanwhile, looking at the TV or computer screen just made me mad. When your investment is less volatile, it’s much easier to stay the course and not sell at the bottom.

7) A source of pride. Making money for money’s sake is a pretty empty feeling. Every time I drive by my rental properties I feel proud to have made the purchases years ago. I know that my money is working as hard as possible so I don’t have to. Real estate is a constant reminder that taking calculated risks over time pays off. There is an indescribable feeling nobody tells you once you’ve closed on your property. Even though the bank probably owns most of it in the beginning, you literally feel like the King or Queen of your castle. When you die, you can pass on your pride to your children or closest companions to let them create their own memories.

8) More insulated. Real estate is local. If you’ve made a good decision to buy in an economically strong region, you will be more insulated from the national economy or the global economy. Spain blowing up is likely not going to affect the rent you can charge. Look at prices in superstar cities such as Manhattan, Hong Kong, Singapore, London, Paris, and San Francisco. They fall the least, recover the soonest and gain the most. Of course, industries in your area could suddenly disappear and leave you broken as well.

9) The government is on your side. Not only do you get generous mortgage interest tax deductions and tax free profits, you get bailouts if you can’t pay your mortgage. The government also aggressively went after banks to force them to extend loan modifications to bad and good creditors. I even got a free loan mod recently to my surprise. Programs such as HARP 1.0 and HARP 2.0 are allowing folks without hefty downpayments to get in on the action. There are plenty of non-recourse states such as California and Nevada which don’t go after your other assets if you decide to stop paying your mortgage and squat for months. When was the last time the government bailed individual investors out of their stock investments?

[Vegas69]

Originally Posted by Woody

I think the chart represents the average of the asset class as a whole. If you cherry pick one example of a piece of real estate that you know had a higher return, there are also examples of stocks that have had much higher returns than indicated on the chart.

A few years back I had done some research on long terms returns for stocks vs. real estate. The data that I found at that time indicated real estate and stocks have had pretty similar returns over the long term, with real estate having a slight edge. The figures I remember were close to 9% to 10% per year.

My point is the chart is inaccurate. The median home price in America is $212,000.

Now, if you calculate $100 over 80 years with compound interest at 9%. It's right at $100,000.

Where I think they meant to go with the chart is that same $100 invested in real estate wouldn't have grown at the same rate. Not even close.

In my opinion the median home price in 1928 vs. today would be a better example. Then you have to factor in costs over the years and it gets tricky. Is it an investment covering it's own cost for the most part or primary residence. etc...

The average home price in 1930 was $7800.

With the $7,800 and $212,000 in mind, there is no doubt the $100 in the stock market is superior.

Just for fun let's factor a free and clear property after say 30 years that generates income for 50 years. At only $500 a month for rent over 50 years, that's $300,000. Then you add the appreciation of $204,200 for a total of $504,200.

To put the nail in the coffin, if you would've invested the same $7,800 in the stock market in 1928, you would have over $7,000,000 today.

Case closed....