Is Real Estate Still the Best Asset Class?
Real estate is harder than it's been in more than a decade -- we all know this. High prices + high mortgage rates + low inventory is making this a challenge. So my question is -- in an era where you can get a 5% CoCR from bonds, money market accounts, or a high-yield savings account is RE still the best place to put your money?
I'll give you my opinion below, but curious to hear what you all think.
Here's my take, and you probably won't find this shocking, but RE is still the best asset class. I am what I would call a 'total return investor' -- which is that I don't care as much about cashflow, or tax benefits, or appreciation in particular -- I'm in it for the whole package. And when you look at it that way, RE is still the clear winner.
I just put a deal under contract that was on market. It will generate about 4% CoCR, and 2% in amortization. Even with a very modest expectation of 2% annual appreciation, I will earn about 6% there (thanks leverage!), and tax benefits will give me another 1.5%. If I add that all up, I am getting somewhere between a 12-15% annualized return, for an on-market deal that just needs some cosmetic upgrades.
Compare that to bonds (5%), or the average return in the stock market (8-10% depending on who you ask) and REI is a no-brainer to me. Am I missing something here?!?
Sure you could say that RE is at all-time highs and is going to come down. It's possible, but a big correction in residential RE is not likely, and over a long hold period, RE will appreciate. Plus, I am generating modest cashflow now + amortization and tax benefits. Also, the same can be said about the stock market. It's also at all-time highs, and its historical far more volatile than RE.
Now you may be thinking that owning RE is more work than the stock market, and that is undoubtedly true. But the difference between 10% and 12% over a long hold period is enormous. For an investment of $100,000, over a 10 year hold the difference in total return between a 10% annualized rate, and 12% is $51,000. For some that might be worth the work of REI, for others not so much. BUT -- if your hold period is 30 years the difference grows to $1.25M!! Gotta love compounding.
So, back to my original question. Is RE still the best asset class? For me -- a 36 year old who plans to keep working for the next several decades -- there's no doubt in my mind. I will gladly take on the extra work of owning RE, given that, even with more difficult conditions, RE still has a very high probability of delivering me outsized returns over my investing career.
What do you all think?
