Most people, when looking at real estate as an investment, look only appreciation. However, appreciation is only one aspect to real estate investing. There are four aspects of real estate that contribute to its return:
1. Appreciation
2. Cash Flow
3. Loan Reduction (which tends to be really low, so it can be ignored)
4. Tax benefits
Cash flow and tax benefits tend to vary per person so it’s difficult to just plop them into a return. Appreciation, true it tends to follow inflation, but take a look at this calculation:
S&P: $40,000 stuffed into index fund. Average 10% per year.
Real Estate: $40,000 downpayment on a $200k property, at a tax rate of 25%, appreciation is 4% per year, cash flows at 0.
Year 1
S&P(10%)=40k*0.1=4000
Real Estate(4%)=$200k*0.04=8000
Real Estate even at inflation is giving you almost twice the amount of money as the S&P. Imagine that over ten years and the gap is actually quite large.
Let’s take it further:
Return on S&P (one year) = 10%
Return on real estate = (AP+CF+LR+TX)/DOWNPAYMENT =
(8000+0+0+200000/27.5*0.25) = 9818/40000 = 24%.
(by the way, these are numbers from my south carolina fourplex, so i’m not making up numbers. i did change the tax rate because my tax rate is actually at 33%).
So, S&P 10%, Real Estate 24%.
Still think the stock market makes your money work harder?
I’m not dissing the stock market. I still invest in it as much as I can. I just run the numbers and real estate performs better. Also, I understand real estate better than the stock market. So to each his own.
