Real Estate vs Stock Market Investing
Mike GriffinPro Member
Investor · Greater Boston, MA · Member since 2019 · 77 posts · 9 votesReal Estate vs Stock Market Investing
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Rental Property Investor · San Francisco, CA · Member since 2015 · 18 posts · 31 votes
7yI worked as a financial advisor at a major Wall Street bank for years, and am now involved in venture capital + real estate (on my own) so have thought a lot on this question. I was once an equity research analyst and so there was a time I believed unfailingly in the superiority of stock investments, and then through meeting ultra-wealthy investors as an advisor came to see that many held a LOT of real estate and had done extremely well, which eventually led to something of a conversion on the matter. Here are my thoughts, and they're worth precisely what you're paying to read 'em:
As others have already said, the real question is what exactly are you trying to achieve. If you want to achieve "market-like" returns with the stock market over the next 30 years and not focus on investing, then I'd just buy the S&P 500 and call it a day. Take your money today, and assume average stock market returns (8-10% annualized) and see what that looks like in 30 years time and I think you'd be impressed. Compounding is an impressive force. And, I think, unless something goes really wrong with the West / Capitalism, you can in general rest assured that inflation will continue, and businesses will continue to grow, and therefore a stock portfolio should make money (with enough time).
However, there's a saying we often used in the advisory business - it takes concentration to create wealth, and diversification to preserve it (which again goes back to goals - if you just want a decent retirement, investing in the S&P 500 at an early age is fine. If you want to build wealth, then I think real estate can be a solid way to go, but there are risks.)
I think it must be stated that real estate is riskier in many ways (and also less risky in some ways - you own the asset, people need a place to live, etc.). Take a diversified stock portfolio (SPY) versus a single building. You have the POTENTIAL to make more money on that building, but also the POTENTIAL to lose a lot based on "idiosyncratic risks - a fancy term for one-off things that might not affect the economy at large", i.e. an earthquake, a riot, a flood, a fire in that building specifically, mold, etc. So from this perspective, it's much riskier than owning the US economy. What are other significant risks that get people?
- You make mistakes estimating costs, or have overly optimistic assumptions that will get you out of a bad opening situation (if your model depends on significant rent increases from prevailing rent rates [i.e. it's already market rent in the building] then I think it's more akin to speculation) then that could fail, and you could end up feeding cash into your project, which leads to ...
- Not maintaining sufficient reserves. If things do go south (which they do) and you can't keep alive during the lean times, you'll get your face ripped off
- And lastly, I think, taking on undo interest rate risk / refinance risk. Ask anybody whose balloon payments hit in 2008/2009 and couldn't refinance their building or who have to refinance into a much worse interest rate environment
So it must be stated that you don't face many of these above with the stock market (assuming you aren't investing "short-term" money with the intention of "making a quick buck" and then get crushed if the market goes into a correction). Anyway, all the major risks aside, why do I personally like real estate more?
- Emotionally, I like it - it feels like I'm running my own business. This is entirely my own thing, and nothing to do with the broader question here
- Generally more simple: I think it has been well proven that the vast majority of humanity cannot pick individual stocks, while it seems (SEEMS) to me that more people are able to find deals in real estate. Why? The reasons you can find a deal in RE abound - older owner is tired of managing the building, couple got divorced, somebody in financial distress, etc etc. These are all opportunities to create value. The business also seems to reward hustle and creativity. Hustle and creativity in stock market investing is sometimes referred to as "insider trading".
- Easier modeling: if you understand the fundamentals of real estate valuation, and are conservative (i.e. estimating a higher cap rate exit than when you entered, for instance, higher expenses than you estimate, lower rent increases than you think you could get, and still like the deal) then it's an easier job to estimate the potential return for an investment. Personally, I think doing this with stocks is more of a guessing game than with R/E. And if you're really conservative and the numbers STILL look really good, you can feel pretty confident you found a strong deal
- Leverage: it's a double edged sword, and I noticed in the comments people mentioning borrowing on margin to buy stocks. All true, but find me a margin borrower that doesn't issue margin calls. What's unique I believe in RE is that you can get fixed rate financing (with multi-family perhaps only for a set time, but if you set it long enough you can mitigate interest rate risk) and have no risk of an early margin call on your investment. What this means is that you can hold a leveraged position through bad times (assuming your loan doesn't balloon pay in the middle, which is a big if) and benefit from leverage over the lifetime of your holding. On this note, it was common in my experience to poo-poo real estate returns as "inflated" because of leverage, and oh to make them "risk-adjusted" one should just "leverage" stock returns too. But this is missing the point of margin calls entirely, which makes them in no way an apple to apple comparison
- Value-Add Potential: comes back to control, but you can directly influence the value of your investment in some way which you can't do - again, rewards hustle and creativity.
- Tax benefit: I've worked with a lot of people who had built incredible wealth through founding and taking companies public. The universal issue? big capital gains taxes at the end to actually use their money (or they could borrow against the money - fair enough). In RE you have interest rate shielding, plus depreciation shielding, plus you don't necessarily have to pay capital gains taxes.
So, in total, if you take the leverage factor in real estate and couple it with depreciation protection for income PLUS the fact that you don't necessarily have to pay capital gains taxes on your gains in order to recycle them into the next property, and determine the annualized return on real estate ASSUMING YOU PAID TAXES as you might have in a stock portfolio, I think the numbers will end up speaking for themselves (assuming you find the right deals - BIG assumption).
Buffet was quoted in this chain somewhere. Berkshire's annualized performance is around 20.8%. I doubt most of us can replicate that. Baupost (less well known, but look up Seth Klarman and his book - Margin of Safety -one of the most impressive books I've ever read, and he's known as the Oracle of Boston) posted maybe 19.1% annualized returns. Those are two of the most impressive investors of all times. I think achieving these returns for most of us is way out of reach. Yes, an individual project might do that, but you have to maintain that with "the capital under your control" for an extended period of time. That is not easy, in the slightest. However, there's a realm between stock market returns of 8-10% annualized (pre-tax) and Berkshire (20.8%) which is still a lot. If you invested $100k today in the S&P and earned a 10% annualized return in 30 years you'd have $1.74mm. If you invested $100k in RE and earned a "yes, levered, but not counting tax benefits" annualized return of 15% in real estate then you'd end in year 30 with ~ $6.61mm.
One final anecdote for this "numbers" section, which is extremely simplified but I think demonstrates my point. Let's assume you have a 10 unit building, and you have a 75% LTV loan on the building. The building is valued at 5% cap rate (I live int he West Coast, so bear with me). You bought it for $1mm and so the NOI is $50k. Total gross rent is $100k. You increase rents by 2%. Total gross rent = $102k, and assuming (big assumption) expenses stay the same your NOI is now $52k. at a 5% cap rate, your building is theoretically now worth $1.04mm, which is a $40k gain on your initial investment of $250k, which is a 16% return for that year (on equity). There are a lot of ways to pick this apart, but a 2% increase in rent being magnified through to the value of the building (without considering tax benefits, equity paydown, etc.) I think demonstrates that the numbers (if done right) can be significantly better.
Given I'm on a real estate website I doubt there'll be many detractors, but the biggest detraction to what I just said is this - everybody talks about their good deals and not their bad deals. The "average" return of all investments is what matters, and the inability to "find" the right deal while you're sitting on cash also hurts your return. But sitting in the stock market for the long term means you're always invested, you're not searching for that deal, and so real estate working out right depends on probably even better returns because unless you have a VERY robust pipeline of deals you probably have a lot of dead-time, and we all eventually have deals that don't work out for us (and therefor hurt our "overall" return). Somebody could probably use what I just said to make a very strong argument for the stock market.
28 Replies
Mike,
Welcome to the real estate community! I can only comment on my personal experiences so here goes.
1. Money in the stock market is definitely a safer long-term investment.
2. Real estate investing is wonderful, but it has its pitfalls and unfortunately most people don’t share those with you. If somebody tells you they haven’t lost any money in real estate it’s because they haven’t been doing this for long or they’re being untruthful. Too many people in this industry lead newbies to believe this is a get rich quick plan, that is a flat out lie.
3. A good positive real estate investment which is based on numbers and facts rather than emotions can be a very profitable endeavor. It does take time and a lot of effort. Many of your projects will make money and some will lose. It is true of all investments.
4. I believe in the old adage, don’t put all of your eggs in one basket. Pick a number within your financial portfolio that you are comfortable losing. That is the amount you are able to invest in real estate.
Good luck,
Sue Hough
- Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes7y
If you think about investing as the process of owning businesses (either whole or in part), there is no difference between stocks and real estate because both are businesses. The question you're really asking is about liquidity and degree of control. Generally speaking, the "stock market" is highly liquid with little control ("passive"), while "real estate" is typically non-liquid with a lot of control ("active"). You can participate in both passive and active investments because doing one does not exclude doing the other.
- LIQUIDITY. When the market is open, you can buy or sell a fractional ownership of a business in a matter of seconds. You might not like the price you get, but the process is fast. With non-liquid markets, it might take weeks or months or even longer to buy or sell a business. You might still not like the price you get, but the process is slow.
- CONTROL. The lower your ownership fraction of a business is, the less control you have over its operation. You depend on the actions of others you vote for to get things done for you. When you own the business entirely, you call the shots. If you like hands-on involvement, be ready to put up enough money to own and control the whole business.
A related aspect is regulation. When a business is listed on a public exchange, the SEC regulates the reporting of the business. Financial statements, for example, must adhere to strict standards. When a business is not listed on a public exchange (and is closely held), the SEC is usually not involved. You have the responsibility of doing the necessary due diligence to make sure you own what you think you own.
Because the prices of businesses listed on a public exchange are quoted so frequently, they often change in a manner based on investor sentiment rather than their true economic value. This "price volatility" is a value investor's friend because it makes it easier to buy low and sell high. Businesses such as real estate are not price-quoted as frequently and finding bargains to buy is more difficult.
- Investor · Greater Boston, MA · Member since 2019 · 77 posts · 9 votes7y
@Nate Shields Great! Looking forward to seeing that!
- Investor · Greater Boston, MA · Member since 2019 · 77 posts · 9 votes7y
@Sue Hough thank you. Yes, I’ll stay grounded and focused on the numbers.
- Investor · Greater Boston, MA · Member since 2019 · 77 posts · 9 votes7y
@Roger Steciak thank you. Yes I think the appeal here for me is I’d have more control with real estate. I’d be responsible for finding deals and controlling the management of projected and properties.
- Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes7y
@Mike Griffin always an interesting debate! For me, my focus is on real estate while being very selective in my stock investments. One of the reasons I love real estate is the acronym that makes it the I.D.E.A.L. investment. Income, Depreciation, Equity growth, Appreciation, and Leverage. I also know many many more people who have achieved financial freedom through real estate vs the stock market.
- Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes7y
The stock market is a zero sum game. For every dollar someone gains in the market someone loses the equal amount. This happens because money invested in the market, other than IPO's, does not go the company whose shares you might be buying. The money goes to someone who is selling those shares. They obviously don't want to keep them at the price you are prepared to buy them for. If they are correct in their assessment that the shares are at their highest price then you could see your value decline and lose money if you sold. However, if they are wrong in their assessment of the value of the shares they are selling then you could see the share price rise thereby increasing the value of your shares.
Similarly, buying real estate has the same result. Someone selling may sell because they believe that the value of their property is at its maximum. You, as a buyer, may think otherwise, so you buy believing that the property will rise in value. Once again a zero sum game.
The answer to your question then becomes where is the real value in these types of investments? When is an investment being offered for sale at a value less than what the market typically expects to pay? It is paramount to understand how to value these different types of assets, both property or shares. If you are not able to do this then I suggest some learning on valuation techniques would help.
When Warren Buffett buys large positions in companies he does so knowing from his own past performance that his method of valuing an asset is profitable, so he acts on those valuations. When he sees no value he does not make purchases. Likewise, experienced property investors buy assets when they see value based on their individual valuation technique that will have been proven and tested.
One of the key advantages of property over shares however, is that with property you have the ability to add value to the property through your own personal efforts, i.e. you can do a rehab. Yo cannot add value to a publicly listed company's share price, unless of course you can buy volumes as large as Mr Buffett can buy. So, for us mere mortals, buying property where you can add value is the best road to take. If the property is also undervalued to start with even better.
Good luck on your journey!
- Real Estate Agent · Houston, TX · Member since 2018 · 65 posts · 49 votes7y
One word: LEVERAGE
I don't think an ordinary person will find many lenders that will give them money to go invest in the stock market.
- Lewisville, TX · Member since 2015 · 344 posts · 264 votes7y
As a former stock market investor, I’m now all syndication real estate deals. I like the higher passive returns, illiquidity & less volatility. I will never go back. If you’re invested in mobile home parks & silver, recessions can be your friend not foe!
- Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes7y
@Mike Griffin as the person who spend most of his day on the trading floor I could tell you that you should invest in both. If you are looking at stock market as passive investment, you should diversify and invest some of the money in stocks and some in funds and some in real estate (syndication deals are the most passive you can get from that perspective).
As tome passes you could adjust the percentage in each category as you feel comfortable.
- 7yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
@Oleg Shalumov, to answer that question, you actually need to compare 3 things, rather than 2.
There’s the public stock market and then there is real estate in which you can invest directly in properties (active investment). Or you can invest passively via syndications/crowdfunding.
I invest in all 3 of these in my portfolio. In my opinion, no single choice is 100% superior to the rest, and they all have their pros and cons. I also feel that the best diversified portfolios have all of these.
Public stock markets get you access to instant liquidity and a very quick way to access the growth of businesses. On the other hand, since the markets are very efficient, it’s very difficult to get an edge over the millions of other people who are doing the exact same thing. Also, you pay a price for the instant liquidity, because it’s not free. And many people have funds that they are not going to be used for a long time and it’s a waste to pay this, if this is the case.
Private real estate requires you to lock up your money for a certain period of time. This is inconvenient, but if you are OK with this for part of your portfolio, you can pocket the liquidity premium as additional profit for yourself. Also real estate is inefficient so it’s possible to make money off of doing the same strategy as everyone else (like value added). Another person doing the same thing on their property generally doesn’t suck all the value out of you doing it on yours (unlike the stock market).
You can choose to invest in private real estate either directly/actively or passively through syndications in real estate. Going active has the advantage of full control. Also if you are cash poor and time rich, you can put in sweat equity to enhance your returns. On the other hand, if you are new to real estate investing, you may make expensive mistakes.
Passive investing allows you to invest in a manager that has years more experience than you can ever hope to gain on your own. It also allows you to diversify a single investment into many more different properties, geographies, asset classes and strategies than a direct investment. But it requires you to give up control to a manager, and you have to also feel comfortable with the vetting them. This is an something that everyone is able to do.
Hope this helps
The Real Estate Crowdfunding Review - Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes7y
I agree with some of the posts here, it is essential to diversify. The important component of diversification is to understand what you're investing in first prior to taking action.
More on the topic in this article: https://www.biggerpockets.com/member-blogs/10850/8...
- Investor · Parrish, FL · Member since 2014 · 120 posts · 115 votes7y
@Austin Smither Langley great point! This one word, along with many other benefits is why I transferred most of my stocks and Wall Street money to real estate. Best decision I've ever made.
Real estate has tax benefits, tenant paying your mortgage, long term appreciation, helocs which you can borrow to buy more, inflation hedging, and LEVERAGE!
I'm glad I figured this out at a relatively young age. To each their own but in my opinion, real estate has many more advantages than the stock market.
@Mike Griffin a real test would be to take $10,000 to the bank and ask for a $90,000 loan so you can buy a stock portfolio. Why would the bank give you a loan on a $100,000 piece of property and not on a stock portfolio?
I have never lost money on a piece of RE and I am not lying @Sue HoughI have been at it for a good while. I have lost plenty in the stock market. I do have some Bank of America stock I bought in 2003 that is still selling for less today than my 2003 purchase price.
- Real Estate Agent · Austin · Member since 2019 · 100 posts · 28 votes7y
@Mike Griffin real estate is not passive investment. Doing a flip you contribute your time.
- Real Estate Agent · Austin · Member since 2019 · 100 posts · 28 votes7y
@Austin Smither Langley why? Cant you buy stocks on margin?
- Real Estate Agent · Houston, TX · Member since 2018 · 65 posts · 49 votes7y
@Mike Griffin in the grand scheme of things, real estate and stocks are actually not the safest investments. There are other investments that can create a diverse investment portfolio to lower the risk of losing money. If you are looking for the safest investment, invest in government bonds. If you want to make money, you'll need to take some risk. I'm no financial advisor, so I follow some of the best.
Below is the makeup of Ray Dalio's All-Weather Fund to mitigate risk. My personal goal is to have an investment portfolio where 50% of it looks like the pie chart below and 50% of it is real estate.
- Real Estate Agent · Houston, TX · Member since 2018 · 65 posts · 49 votes7y
Originally posted by @Account Closed:
@Austin Smither Langley why? Cant you buy stocks on margin?
You are correct. Someone can buy stock (and property) on margin, but they technically need to put at least 50% in to buy stocks on margin and you can potentially put 0% down for real estate.
Is anyone aware of another asset class where you can potentially leverage debt to fund 100% of it?
- Member since 2018 · 44 posts · 26 votes7y
@Mike Griffin
Mike,
I do both, but like the sense of control over real estate. Also the ability to write off expenses in my LLC, plus depreciation, 1031 options etc. make real estate attractive.
That said, I believe in a balanced and diversified portfolio...so there is real estate, index funds, alternative investments etc. and diversification within each asset class.
Hope that helps,
Adam
- 7yJoseph ODonovanPro MemberProperty Manager · Ridley, PA · Member since 2017 · 427 posts · 449 votes
@Mike Griffin Do you prefer chocolate or vanilla ice cream? Same concept, no wrong answer. It's whatever suits your taste and whatever your stomach can handle.
i work with an 80 year old man with cancer who planned to retire 17 years ago but almost lost half his money after the towers fell . He’s stuck working till he’s dead . No thanks . I never met a banker who would give me money to play the stock market and I never saw the tax advantages I get from real estate in stocks so I’ll keep on doing what I know . Best advise I was given is stock to your knitting don’t get involved in things you don’t understand
- 7yJohn WilliamsBusiness MemberProperty Manager · Clarksville, TN · Member since 2018 · 443 posts · 210 votes
@Mike Griffin
I highly recommend The Millionaire Real Estate Investor by Gary Keller.
There are definitely some passive ways to invest in real estate. However, if you're willing to put in the work and conduct the necessary research you can probably get a higher ROI in real estate than you can in the stock market!
Rent My Home - Property Management4.8209 Reviews If we could have my wife and her employer contribute 401k funds into rentals instead of into 401k, I’d be thrilled!
Buy right and you’ll do much better in real estate. My opinion..
Her 401k could tank tomorrow, but our houses will still show us the $!
- Rental Property Investor · Toronto, Canada · Member since 2012 · 102 posts · 95 votes7y
@Mike Griffin I’ve done both successfully, and it’s as similar to eating tasty meal or watching a great movie
Send me a PM and we can chat
The short answer is that they both have pros and cons when it comes to type/strategy, temperament, funding, maintenance/monitoring, cash flow, returns, financing, exit, etc.
Be Successful
- Rental Property Investor · San Francisco, CA · Member since 2015 · 18 posts · 31 votes7y
I worked as a financial advisor at a major Wall Street bank for years, and am now involved in venture capital + real estate (on my own) so have thought a lot on this question. I was once an equity research analyst and so there was a time I believed unfailingly in the superiority of stock investments, and then through meeting ultra-wealthy investors as an advisor came to see that many held a LOT of real estate and had done extremely well, which eventually led to something of a conversion on the matter. Here are my thoughts, and they're worth precisely what you're paying to read 'em:
As others have already said, the real question is what exactly are you trying to achieve. If you want to achieve "market-like" returns with the stock market over the next 30 years and not focus on investing, then I'd just buy the S&P 500 and call it a day. Take your money today, and assume average stock market returns (8-10% annualized) and see what that looks like in 30 years time and I think you'd be impressed. Compounding is an impressive force. And, I think, unless something goes really wrong with the West / Capitalism, you can in general rest assured that inflation will continue, and businesses will continue to grow, and therefore a stock portfolio should make money (with enough time).
However, there's a saying we often used in the advisory business - it takes concentration to create wealth, and diversification to preserve it (which again goes back to goals - if you just want a decent retirement, investing in the S&P 500 at an early age is fine. If you want to build wealth, then I think real estate can be a solid way to go, but there are risks.)
I think it must be stated that real estate is riskier in many ways (and also less risky in some ways - you own the asset, people need a place to live, etc.). Take a diversified stock portfolio (SPY) versus a single building. You have the POTENTIAL to make more money on that building, but also the POTENTIAL to lose a lot based on "idiosyncratic risks - a fancy term for one-off things that might not affect the economy at large", i.e. an earthquake, a riot, a flood, a fire in that building specifically, mold, etc. So from this perspective, it's much riskier than owning the US economy. What are other significant risks that get people?
- You make mistakes estimating costs, or have overly optimistic assumptions that will get you out of a bad opening situation (if your model depends on significant rent increases from prevailing rent rates [i.e. it's already market rent in the building] then I think it's more akin to speculation) then that could fail, and you could end up feeding cash into your project, which leads to ...
- Not maintaining sufficient reserves. If things do go south (which they do) and you can't keep alive during the lean times, you'll get your face ripped off
- And lastly, I think, taking on undo interest rate risk / refinance risk. Ask anybody whose balloon payments hit in 2008/2009 and couldn't refinance their building or who have to refinance into a much worse interest rate environment
So it must be stated that you don't face many of these above with the stock market (assuming you aren't investing "short-term" money with the intention of "making a quick buck" and then get crushed if the market goes into a correction). Anyway, all the major risks aside, why do I personally like real estate more?
- Emotionally, I like it - it feels like I'm running my own business. This is entirely my own thing, and nothing to do with the broader question here
- Generally more simple: I think it has been well proven that the vast majority of humanity cannot pick individual stocks, while it seems (SEEMS) to me that more people are able to find deals in real estate. Why? The reasons you can find a deal in RE abound - older owner is tired of managing the building, couple got divorced, somebody in financial distress, etc etc. These are all opportunities to create value. The business also seems to reward hustle and creativity. Hustle and creativity in stock market investing is sometimes referred to as "insider trading".
- Easier modeling: if you understand the fundamentals of real estate valuation, and are conservative (i.e. estimating a higher cap rate exit than when you entered, for instance, higher expenses than you estimate, lower rent increases than you think you could get, and still like the deal) then it's an easier job to estimate the potential return for an investment. Personally, I think doing this with stocks is more of a guessing game than with R/E. And if you're really conservative and the numbers STILL look really good, you can feel pretty confident you found a strong deal
- Leverage: it's a double edged sword, and I noticed in the comments people mentioning borrowing on margin to buy stocks. All true, but find me a margin borrower that doesn't issue margin calls. What's unique I believe in RE is that you can get fixed rate financing (with multi-family perhaps only for a set time, but if you set it long enough you can mitigate interest rate risk) and have no risk of an early margin call on your investment. What this means is that you can hold a leveraged position through bad times (assuming your loan doesn't balloon pay in the middle, which is a big if) and benefit from leverage over the lifetime of your holding. On this note, it was common in my experience to poo-poo real estate returns as "inflated" because of leverage, and oh to make them "risk-adjusted" one should just "leverage" stock returns too. But this is missing the point of margin calls entirely, which makes them in no way an apple to apple comparison
- Value-Add Potential: comes back to control, but you can directly influence the value of your investment in some way which you can't do - again, rewards hustle and creativity.
- Tax benefit: I've worked with a lot of people who had built incredible wealth through founding and taking companies public. The universal issue? big capital gains taxes at the end to actually use their money (or they could borrow against the money - fair enough). In RE you have interest rate shielding, plus depreciation shielding, plus you don't necessarily have to pay capital gains taxes.
So, in total, if you take the leverage factor in real estate and couple it with depreciation protection for income PLUS the fact that you don't necessarily have to pay capital gains taxes on your gains in order to recycle them into the next property, and determine the annualized return on real estate ASSUMING YOU PAID TAXES as you might have in a stock portfolio, I think the numbers will end up speaking for themselves (assuming you find the right deals - BIG assumption).
Buffet was quoted in this chain somewhere. Berkshire's annualized performance is around 20.8%. I doubt most of us can replicate that. Baupost (less well known, but look up Seth Klarman and his book - Margin of Safety -one of the most impressive books I've ever read, and he's known as the Oracle of Boston) posted maybe 19.1% annualized returns. Those are two of the most impressive investors of all times. I think achieving these returns for most of us is way out of reach. Yes, an individual project might do that, but you have to maintain that with "the capital under your control" for an extended period of time. That is not easy, in the slightest. However, there's a realm between stock market returns of 8-10% annualized (pre-tax) and Berkshire (20.8%) which is still a lot. If you invested $100k today in the S&P and earned a 10% annualized return in 30 years you'd have $1.74mm. If you invested $100k in RE and earned a "yes, levered, but not counting tax benefits" annualized return of 15% in real estate then you'd end in year 30 with ~ $6.61mm.
One final anecdote for this "numbers" section, which is extremely simplified but I think demonstrates my point. Let's assume you have a 10 unit building, and you have a 75% LTV loan on the building. The building is valued at 5% cap rate (I live int he West Coast, so bear with me). You bought it for $1mm and so the NOI is $50k. Total gross rent is $100k. You increase rents by 2%. Total gross rent = $102k, and assuming (big assumption) expenses stay the same your NOI is now $52k. at a 5% cap rate, your building is theoretically now worth $1.04mm, which is a $40k gain on your initial investment of $250k, which is a 16% return for that year (on equity). There are a lot of ways to pick this apart, but a 2% increase in rent being magnified through to the value of the building (without considering tax benefits, equity paydown, etc.) I think demonstrates that the numbers (if done right) can be significantly better.
Given I'm on a real estate website I doubt there'll be many detractors, but the biggest detraction to what I just said is this - everybody talks about their good deals and not their bad deals. The "average" return of all investments is what matters, and the inability to "find" the right deal while you're sitting on cash also hurts your return. But sitting in the stock market for the long term means you're always invested, you're not searching for that deal, and so real estate working out right depends on probably even better returns because unless you have a VERY robust pipeline of deals you probably have a lot of dead-time, and we all eventually have deals that don't work out for us (and therefor hurt our "overall" return). Somebody could probably use what I just said to make a very strong argument for the stock market.
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