Many investors have been questioning lately how they can afford to invest in real estate right now, while the economy is on the skids and the stock market is tanking.
My answer is how can you afford NOT to be investing in real estate right now?
The Federal Reserve is flooding the market with greenbacks! The Feds are literally printing dollars to pay off massive budget deficits and fund the multi-billion dollar bail out. Remember, the more dollars they print means the lower the value of the dollar will be. Inflation is about to get worse.
Stock prices are careening, but even worse is the fact that stocks are now paying the lowest dividends since 1955. Don’t take just my word for it. Look at this article printed today on Bloomberg.com
According to the above article, the stock market has returned an average of 6% a year since 1900. However, if you take away dividends the return is only 1.7%. Meanwhile, government bonds have returned an average of 2.1%. Anyone that is considering an investment in stocks, even at these dramatically lower prices needs to ask themselves whether they might be able to realize a higher investment return than 1.7% in real estate. Stocks are usually touted as a low risk investment and in most sales pitches for stocks you will see graphs of the S&P 500 slowly climbing higher of a period of 100 years. Of course these sales pitches for stocks rarely explain the impact that lower dividends will have on your portfolio. In fact according to Bloomberg, “Without dividends, investing in equities may not be worth the risk. Dividend income accounted for about 70 percent of average U.S. equity returns since 1900 after inflation, according to Elroy Dimson, Paul Marsh and Mike Staunton at the London Business School, in a study published by Zurich-based Credit Suisse this month.” Nor do stock promoters mention that if you buy at the wrong time, right before a protracted downturn in the market, your chances of seeing a long term positive return are greatly diminished. In fact it can take years or decades to make up for lost principal in a stock portfolio. These attributes of stock investing hardly seem conservative to me.
Yes, its true, real estate investing of all kinds is a risky endeavor. Interestingly, dividends can be compared to the rent payments you receive from an investment property. At least, if you own an apartment building or rental houses, you won’t have a board of directors deciding when and if you get paid.
Photo Credit: Helico
Article Author:
Ted KarschTed has written 60 articles for us.
Visit Ted's Website: http://www.apartmentbuildinginvestor.com
Joshua Dorkin
Charles Feldman
Ted Karsch.
{ 2 comments… read them below or add one }
They shouldnt stop investing in real eastate. It destroys working places.
But this is not the height of the market. You’d be nuts not be buying equities at this point, with whatever cash you have that you won’t need for the next ~15 years. You don’t state whether those are real or nominal returns, but it’s my understanding that RE roughly tracks inflation; meaning 0% real returns. That makes sense, house prices can’t outpace wage growth over the long-term.