BiggerPockets

When comparing Real Estate to other investments, what numbers do you use? For example, do you use any particular numbers for stock market returns? Do you assume any appreciation for your real estate holding?

That's because this is a difficult question and numbers can be manipulated to say whatever you want. For example, let's consider cash on cash return. If you buy a $100,000 house on Monday with a $10,000 down payment and sell it for $150,000 on Tuesday, you've made $50,000 in one day (less taxes of course). In fact, if you were an unscrupulous guru, you would multiply that $50,000 profit by 365 and say that this was an annualized profit of $18,250,000 (even though you probably don't have a prayer of doing a deal like this every day)! At any rate, a $50,000 profit on the $10,000 cash you invested is a 500% cash on cash return. Not bad.

Now, let's say that you buy another $100,000 house and sell it the next day for $101,000 but put down none of your own money. Your profit is $1,000 in one day, for an annualized return of $365,000 (again, which will be very difficult to achieve as you won't do one of these deals every day). However, the cash on cash return on this deal is INFINITE because you have no cash in the deal.

An infinite cash on cash return beats everything else hands down.... or does it? Would you rather have a $50,000 profit in one day or a $1,000 profit in one day. I would take this lower cash on cash return every time in a situation like this.

All I'm trying to say in this post is that common sense is required when evaluating the numbers on a property. Numbers and assumptions associated with the numbers can easily be manipulated to say just about anything!

Mike

Originally posted by reflex

When comparing Real Estate to other investments, what numbers do you use? For example, do you use any particular numbers for stock market returns? Do you assume any appreciation for your real estate holding?

The generally accepted practice to use when comparing any two possible investment choices is to use either the Internal Rate of Return or the Modified Internal Rate of Return on the cash flow series.

This works when you are comparing two real estate investments against each other or two stocks against each other or a stock verses a real estate deal. If you reduce it all down to the cash flow the investment represents, you can use the IRR or MIRR to eliminate variables and make an accurate comparison.

Where people run into to trouble first is they get tripped up on the purchase side because of the loans involved. Smart people do not buy stocks on margin, smart people do buy real estate on margin.

Another area where they get tripped up is in depreciation. We get to deduct it and then have to recapture it in real estate but it does not come into play with stocks.

Another area they usual fail to even consider is stocks move on emotions and speculative news minute by minute. That does not usually happen with real estate. If Joe Schmoe in Topeka KS gets scared about his real estate investment and dumps it as the local market tanks, it is not going to immediately affect the prices in my market in Atlanta. With stocks, the last sale transaction price IS the price, period.

Were you asking for general reference or are you considering investing in one of two potential asset classes?

Thanks all. Tim, I am trying to evaluate a purchase, and would like to compare it to what I might earn if I just took the initial investment and put it in stocks/mutual funds. I plan to buy and hold/rent.