Originally posted by @Shiloh Lundahl:
@Omar Khan you stated “Long term even index funds have performed better than RE (drawing broad strokes here, RE investing is local and market dependent). I have heard other people state that in the forums at different times two. But I just don’t understand how that is true number wise. For instance, here are the numbers of one of my lowest performing properties in Arizona:
Purchase price: $130,000
Rehab, carrying costs, and closing costs: about $21,000
Bank loan: about $104,000
Option fee collected from tenant/buyer: $5,000
My total investment into the property: about $42,000
Monthly rent: $1250
Mortgage: $667
Other expenses: $137 ( tenant takes care of all repairs)
Monthly cash flow: $446
Contracted for sale at $172,000 for a five-year lease option.
Total cash flow in five years: $26,760
Profit from sale of property in 5 years: $41,285
Total profit over five years: $68,045
ROI: 162%
Yearly ROI: 32%
And this is one of my lowest performing properties. Most of my ROIs are over 100% per year because I have a lot less of my own money into the other properties. I just wanted to use one of my lowest properties as an example.
I don’t mean to be argumentative, but I am trying to understand why people say that the stock market gets better returns than real estate.
Disclaimer: I don’t know anything about your investing acumen. I am assuming you are a better than average investor. You are also benefitting from investing in a fragmented, private market where you have informational alpha (i.e. information is not publicly available).
Now for my answer J
Historically (long-term) stock market returns have beaten most asset classes including RE. This is across the entire market and not based off one company/sub-market returns.
In your particular case, you are cherry picking data. The market has been on a tear since 2008. Like most posters (myself included), you really got going over the past 5-8 years. Hence, you are not accounting for returns over the entire business cycle.
Furthermore, you cannot base results off the returns of one market/sub-market where you’ve not taken into account all the various RE products. The index takes into account the entire market.
A counterpoint to this might be that your research has indicated that a particular type of RE investing – e.g. SFR – offers better risk-adjusted returns over multiple business cycles (historically). Hence, you could be justified in following that approach. But time and time again, research has shown that it is not the case.
It would be interesting to see returns over a 50-year period to better understand the risk-return profile. Luckily, for most of us, we avoided the 2008 crisis. It would be very interesting to see results if you include data from 2007 onwards.
For instance, see below for my cherry picked answer:
I would be very interested in seeing an approx. 8.5 year returns that equal or better 57,775% returns (in real estate or any other market). If you can create a process that is repeatable and guarantees even half these returns, please, let me know where I can sign up. As a bonus, you will also become my best friend… lol.
Another example of cherry picked data:
Do you think most investor’s real estate portfolio returns are more robust or of higher quality than Amazon’s returns of 446.49% over 5 years?
As a side note, you could also be a great investor. The average does not account for that. All markets exhibits mean reversion when it comes to returns. Everything that rises must comes down.
Another perspective that investors, especially on BP, don’t consider is the liquidity premium that is attached to real estate (or any other private investing vehicle). If an investor is facing financial difficulties, they can quickly liquidate their stock market portfolio with minimal, if any, costs (this exacerbates the worst investor behaviors). That is not the case with real estate who by sheer accident (not because they are smarter than other investors) are unable to engage in this reckless behavior.
Furthermore, in private markets like RE, prices are not marked-to-market daily. Hence, there is a perception of lower price volatility. This contributes to perceived portfolio stability (from a valuation perspective), less volatility (as measured by standard deviation) and hence, better risk-adjusted returns (when using conventional measures of risk management).
This does not mean investing in RE is a bad option or that we should only invest in the stock market. The addition of RE (and other private market investing) has been shown to increase a portfolio’s risk-adjusted returns. This is, primarily, because of the decreased price volatility as well as the inability of the investor to make rash decisions by quickly liquidating their portfolio during a market downturn (behavioral economics 101).
Also, look at the list of the richest people in the world. The top 10 richest people in the world did not make their money in real estate. They park their money in real estate but they made the bulk of their fortune somewhere else. Why? Because successful businesses – the heartbeat of capitalism – have to offer way higher returns to compensate the entrepreneur for the massive amounts of risk they are taking.
Personally, I love real estate and will continue to invest in it. But facts are facts.
P.S. As @Sam Josh has pointed out that Kiyosaki made his money on the books. His investing career isn't stellar. Reason being that he created a business which generated amazing long-term returns (we're still talking about him) as well as afforded him the ability to leverage that into media appearances (which further generated more capital). His companies btw have declared bankruptcy and his co-author Sharon Lechter initiated legal proceedings against him.
This takes nothing away from his genius in writing and marketing his books.
