Like I said, I could go on and on and that still wouldn’t be enough.
The Real Estate Return on Equity (ROE) does go down if you do not take care of it. However, by re-leveraging the property, taking out the appreciation through re-financing, and then re-investing that money into more real estate, the ROE returns to its form of 24% and more. Gradually the cash flow improves, the tax basis goes down, but beyond that I do not have actual data. I’ll let you know next year! I am still willing to say that my real estate investing will beat the S&P.
The formula does actually work for San Diego. However, instead of a 24% return, San Diego gives an 11.5% return (there was someone else who asked for an evaluation of a condo property and it gave a 11.5% return with 0% appreciation). The big problem with San Diego of course is the big negative cash flow, but with the formula, it shows you why you shouldn’t buy San Diego’s properties (which return 11.5%) vs. out-of-state properties (which return 24% OR MORE).
In any case, I have always stated in my posts to AVOID CALIFORNIA. This does include San Diego.
Note: Leverage is not commonly used by most investors in the stock market. Leverage is used by most real estate investors.
Your 24% model is not compounded and diminishes every year. Otherwise your $40k down would be worth $3.5M in 20yrs (or $1B in 40yrs).
Your math is correct but your context is wrong. The $200k property, appreciating at 4% a year, becomes $960k over 20 years. However, it is correct to say that the initial $40k investment GREW AND GENERATED $3.5 MILLION worth of value over 20 years. Over the same time, your $40k in the stock market will have turned into only $270k. The 24% return of the real estate investing can be easily maintained through leverage and refinancing.
