Trading homes VS stocks

Discussion in 'Trading' started by axeman, Feb 20, 2004.

  1. Ok... a serious question.

    Do you think most people would do far better buying realestate
    as an investment instead of investing in the market?

    You often read how over the long run, the market beats everything
    incuding owning a home.

    But im not so sure they are looking at this correctly.

    Hypothetical example:

    Two people have $100,000 to start with.
    Time period: 30 years - starting in 1973, ending in 2003

    PERSON A - invests in the DOW
    PERSON B - buys homes and rents them out

    Person B puts 20% down on 5 homes, with $100K each.

    Results After 30 years

    PERSON A - Dow increased 994%
    100K turned into $994,000

    PERSON B - 5 homes paid off.
    Assuming NO appreciation: Value: $500K


    Now lets look at this another way:

    If Person B put 10% down on 10 homes, he would be at 1 million
    with NO apprecation.

    We could also say, that any appreciation is offset by the maintenance
    and sweat equity he had to put into managing the homes,
    as well as paying a little each month during the first few years
    to cover the gap between the mortgage payment and the rent.

    Hmmmmmmmmm.... seems historically, the market is still
    better over all, especially considering the ZERO effort it
    takes to get into the market.

    But, if you do your homework and choose homes that appreciate
    well, then you can beat the market with solid home appreciation.


  2. In the long run as an investment real estate is much better in terms of risk/reward, taxes and wealth generation. Some of the rasons why people don't invest in it are:

    higher monetary barriers to entry (unless you can use other peoples' money)

    like you said more sweat involved

    personal liability

    property management headaches

    don't bother to understand how it works

    generally less liquid than moany other markets

    commission costs/wide spreads

    The market seems easier because people feel that they know enough about it and it trends higher over the long run as well.

    I personally like being involved in both markets for diversification. The time and expertise I lack when it comes to real estate I can outsource to better informed friends/colleagues.

    Just my two cents. I'm sure some think differently...
  3. Another angle to this....

    The massive leverage of homes could be very risky.
    Say you own 5-10 homes, and WHAM a serious depression hits
    and you have NO renters.

    Now is the worst time to unload and you cant make the payments.
    Your toast.

    Further.... if instead of spending all that additional time it takes
    to manager the properties (significant), you instead worked
    a side job or overtime and put THAT money into the market,
    I think you would come out ahead nicely.


  4. you have to also assume not every month will be rented and how about money needed on hand to fix things, not to mention liquidity issues....
  5. Why homes? Why not land or building lots in resort areas. A 191,000 dollar annual tax cut, to the rich guys, buys a lot of beach property. Going gangbusters now.

    Some building lots selling for 20k in 1975 are worth over a cool million bucks now. Recently, someone, here on the Outer Banks, just tore down a million dollar beach house for the lot so they could build a bigger one and a friend of mine just bought a lot for 375,000 bucks and has already turned it over for a big profit.
  6. If you bot 10 years ago just before the housing boom the equity capital alone would take care of that problem.
    Buying now, however, is different..

    As regards the stock market, what would've happened if you took the period 1935-1965: I believe there wasn't much movement in the "market" so returns = very low. The returns from 1973-2003 were some of the best ever so need to be careful about making future estimates based on the past.

    Also the return in the market is only true if you buy the 'market' index eg. QQQ, SPY (weren't around pre 1998). And people here are not likely to be closet indexers for sure..

  7. i dont know how it is in your area but here in this overheated real estate market its hard to find single family homes that will cash flow.
  8. Pretty damn horrible in many parts of california.


  9. I got into real estate construction as a consequence of an argument on learning with a sheriff. In maricopa county we wanted to improve a reading program for the incarcerated. we came down to two problems: changing the sheriff's rules and changing the management.

    I did a public alternative. I hired those leaving incarceration to work on a construction corp. I set up with the first guy coming out.
    I gave 100% of corp to the guys(8) after three years including all capital items. They were doing 2500SQFT stuff at a cost of 150K and grossing 350K. 120 day cycle. You can see the ramp up on this I'm sure. Everyone was a 12 stepper, got library cards, rejoined their families and all kids were at honor roll level if possible. I signed for their rent, phones, power and water.

    My investment cycle in equities is a nominal 10% every 6 to 8 days personally (not everyone can do this, 4 out of 5 will not even consider it).

    It looks like real estate and investing come out the same if you use a god approach for each.
  10. Sorry about the typo. god=good.
    #10     Feb 20, 2004