Joe 401k?

[Raybyrnes]

Surveyor

I understand your formula but you have not included any expenses for managing the property, upkeep, insurance, etc. These costs far exceed the 10th of 1% management fee that one could pay for an ETF. Additionlly if one wants to participate in Leverage you could buy options or buy on margin. The bottom line is that if you are looking to optimize real estate you better be willing to get your hands dirty.

Property mangement companies don’t exist because they save owners money. They exist because owners get tired of doing everything themselves.

[surveyor]

upkeep, insurance, maintenance

upkeep, insurance, maintenance, property taxes, utilities, fees, and all other expenses are usually accounted for in the cash flow. I am sure there will be instances when you budget $2000 or so a year for maintenance and it exceeds that, but there will be years when you have budget 4% appreciation and you get 6% appreciation. So it all works out. Still, I only anticipate 4% appreciation.

true, you can leverage in the stock market, but that requires a high level of skill, knowledge, and expertise that I and most other investors do not have. I’m pretty sure I can figure it out, but I’d rather kind of go into real estate, let everything fly on automatic and then kind of check back into it when I feel like it, as opposed to having to check the stock market every hour.

Like I said earlier, real estate is kind of like individual stock picking. I still understand real estate better than the stock market though and its slow moving nature tends to be more conducive to predictability as opposed to the stock market’s gyrations.

I agree that property management companies (they are charging me 10% of income btw) are not trying to save you money. However, their primary purpose is to let you keep an eye on the big picture. After all, you don’t expect the CEO of Ford to actually do the data entry and filing for his affiliiate in Hokanokee, Florida, do you? The property management is there to let you delegate and keep an eye on the bottom line – profitability. As a real estate investor, your job is to look for more properties and to do research, not to do gruntwork. When you start handling dozens of properties, you’ll be inundated with paperwork and you will have to hire other people to do it anyways.

Finally:

The bottom line is that if you are looking to optimize real estate you better be willing to get your hands dirty.

This statement is absolutely correct. Believe me, real estate has its advantages, and the stock market has its advantages. I actually invest in both! I still like real estate more though.

[surveyor]

upkeep, insurance, maintenance

upkeep, insurance, maintenance, property taxes, utilities, fees, and all other expenses are usually accounted for in the cash flow. I am sure there will be instances when you budget $2000 or so a year for maintenance and it exceeds that, but there will be years when you have budget 4% appreciation and you get 6% appreciation. So it all works out. Still, I only anticipate 4% appreciation.

true, you can leverage in the stock market, but that requires a high level of skill, knowledge, and expertise that I and most other investors do not have. I’m pretty sure I can figure it out, but I’d rather kind of go into real estate, let everything fly on automatic and then kind of check back into it when I feel like it, as opposed to having to check the stock market every hour.

Like I said earlier, real estate is kind of like individual stock picking. I still understand real estate better than the stock market though and its slow moving nature tends to be more conducive to predictability as opposed to the stock market’s gyrations.

I agree that property management companies (they are charging me 10% of income btw) are not trying to save you money. However, their primary purpose is to let you keep an eye on the big picture. After all, you don’t expect the CEO of Ford to actually do the data entry and filing for his affiliiate in Hokanokee, Florida, do you? The property management is there to let you delegate and keep an eye on the bottom line – profitability. As a real estate investor, your job is to look for more properties and to do research, not to do gruntwork. When you start handling dozens of properties, you’ll be inundated with paperwork and you will have to hire other people to do it anyways.

Finally:

The bottom line is that if you are looking to optimize real estate you better be willing to get your hands dirty.

This statement is absolutely correct. Believe me, real estate has its advantages, and the stock market has its advantages. I actually invest in both! I still like real estate more though.

[bsrsharma]

kewp: That would have been good advice 5 years back (but buying RE would have been a better advice, provided you sold 2 years back!). But going forward, say 5 -10 years, do you think Canada is sufficiently decoupled from US to survive a USD fall without CAN $ falling in tandem? I don’t think Canadian economy can survive without a friendly trading regime in US. I think when USD falls a lot, Canadian $ has to fall to survive. The 3000 mile long (and 100 mile wide) hip is hard to separate.

[bsrsharma]

kewp: That would have been good advice 5 years back (but buying RE would have been a better advice, provided you sold 2 years back!). But going forward, say 5 -10 years, do you think Canada is sufficiently decoupled from US to survive a USD fall without CAN $ falling in tandem? I don’t think Canadian economy can survive without a friendly trading regime in US. I think when USD falls a lot, Canadian $ has to fall to survive. The 3000 mile long (and 100 mile wide) hip is hard to separate.

[SD Realtor]

Surveyor I think you have captured the essence of what it takes very thoroughly. I can honestly say that I have known people who have both made and lost alot of money in the stock market and with property investment. However those that lost money in the real estate market did so because they did not put in the time and effort needed to find success. As you have pointed out, your individual needs should dictate what/where you buy. Conversely it does take alot of time and effort. My wife and I purposely have not taken the step to buy out of state because of this. Thus we are being lazy and just piling up cash to plunk down on the next home we buy. However I have done the research to identify the markets that we believe will fit our goals and the returns LOOK great. Yet I know that it requires alot more work beyond that so I cannot pull the trigger until I have the time to go get dirty. I am not anti stock market and have investments in it… still though… I do believe with the time and effort (which I do not have right now), personally I would get a more secure yield that I could rely on with diligent RE investing.

SD Realtor

[SD Realtor]

Surveyor I think you have captured the essence of what it takes very thoroughly. I can honestly say that I have known people who have both made and lost alot of money in the stock market and with property investment. However those that lost money in the real estate market did so because they did not put in the time and effort needed to find success. As you have pointed out, your individual needs should dictate what/where you buy. Conversely it does take alot of time and effort. My wife and I purposely have not taken the step to buy out of state because of this. Thus we are being lazy and just piling up cash to plunk down on the next home we buy. However I have done the research to identify the markets that we believe will fit our goals and the returns LOOK great. Yet I know that it requires alot more work beyond that so I cannot pull the trigger until I have the time to go get dirty. I am not anti stock market and have investments in it… still though… I do believe with the time and effort (which I do not have right now), personally I would get a more secure yield that I could rely on with diligent RE investing.

SD Realtor

[Bloat]

Surv,

I guess I did cause a SM/RE comparison, but I was really just addressing the negativity toward the stock market.

Your example is somewhat idyllic as out of state does produce the best early results with the smallest investment %, but it’s not for everyone (myself included). Your formula don’t work in SD with huge neg returns of late for those who tried. In SD it now might take 50% down or more to get a positive and let’s call appreciation zero for the next 5 years.

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). At year 10 your rate is something like 6%. (point- cashflow should become material by then, but still not much help). Also, you applied no leverage to the Index fund.

HLS,

The S&P has had a cagr of +10%/year for the last 100 years. Actully, I think it is 11.5% (not 7%). Much more than 900x with total return, before taxes, fees.

Agreed that more have made money in RE, particpation is greater, it is a place to live, has favored tax treatment and is more understood. Fewer buy stocks or understand them.

I say do both, be diversified, and if you can, do as Surveyor has and invest in a favorable state (currently not CA).

[Bloat]

Surv,

I guess I did cause a SM/RE comparison, but I was really just addressing the negativity toward the stock market.

Your example is somewhat idyllic as out of state does produce the best early results with the smallest investment %, but it’s not for everyone (myself included). Your formula don’t work in SD with huge neg returns of late for those who tried. In SD it now might take 50% down or more to get a positive and let’s call appreciation zero for the next 5 years.

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). At year 10 your rate is something like 6%. (point- cashflow should become material by then, but still not much help). Also, you applied no leverage to the Index fund.

HLS,

The S&P has had a cagr of +10%/year for the last 100 years. Actully, I think it is 11.5% (not 7%). Much more than 900x with total return, before taxes, fees.

Agreed that more have made money in RE, particpation is greater, it is a place to live, has favored tax treatment and is more understood. Fewer buy stocks or understand them.

I say do both, be diversified, and if you can, do as Surveyor has and invest in a favorable state (currently not CA).

[surveyor]

On and On

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.

On and on and on….

[surveyor]

On and On

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.

On and on and on….

[Bloat]

On and On is fine, more to learn,

“I am still willing to say that my real estate investing will beat the S&P”

I don’t doubt it, probably a good return on the work involved.

$200k @ 4% compounded for 20 years is $440k.

I don’t think you can do too much refi’ng with 4% appreciation. A refi maybe every 5 years with that rate and added risk of leverage and the cost each time. A 24% cagr is just not sustainable unless you are a successful/flipper developer. Like that Real Deal guy, Richard Davis (also in one of the Carolina’s?), flipping a house a week & making big $$. But then it is a business.

I’ll admit I’m a little warm and fuzzy on the stock market right now, it’s been really good since ’03. I haven’t bought a house since ’98 and, even better, became a renter in ’05 saving $150k (and counting).

[Bloat]

On and On is fine, more to learn,

“I am still willing to say that my real estate investing will beat the S&P”

I don’t doubt it, probably a good return on the work involved.

$200k @ 4% compounded for 20 years is $440k.

I don’t think you can do too much refi’ng with 4% appreciation. A refi maybe every 5 years with that rate and added risk of leverage and the cost each time. A 24% cagr is just not sustainable unless you are a successful/flipper developer. Like that Real Deal guy, Richard Davis (also in one of the Carolina’s?), flipping a house a week & making big $$. But then it is a business.

I’ll admit I’m a little warm and fuzzy on the stock market right now, it’s been really good since ’03. I haven’t bought a house since ’98 and, even better, became a renter in ’05 saving $150k (and counting).

[what_a_disasta]

Thanks for the interesting insights. Food for thought.

[what_a_disasta]

Thanks for the interesting insights. Food for thought.

[Author]

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