Multi-fam real estate vs Stocks for 20 years?

Question

If you had the opportunity to buy a building for $850,000 at 50% down versus putting the same amount of money into the stock market and just letting it ride (assume VTSAX as the vehicle) which would you choose? And why?
More details:
I've got the opportunity to buy a multifamily building for $850,000.
Rents will be $9,300/mo first year, $10,500 second year (two units need to be finished)
$100,000 buildout construction loan built into mortgage
Commercial mortgage at 9% first year and 7.5% interest permanent loan, amortized for 20 years with a 5 year balloon. It's in Philadelphia and I am assuming a 5% appreciation rate and 1.5% yearly rent increase.

Eric Greenberg · Answer

For me it really matters what area of Philly we are talking for a buy and hold.

Jonathan Bock · Answer

@David Schiman

Explain the 50% down ?

Of course, I do not know any real details but $126,000 projected gross for a $850,000 purchase price would be appetizing for a lot of investors currently.

Assumptions well you can pick anything you want no one knows what will happen isn't financial modeling fun.  You're projections will be wrong and that's okay.

Scott Mac · Answer

Stocks only have one thing they can do to create wealth for you and that is go up in value.

With real estate investing, we have the ability in certain deals to do what is called forced appreciation.

We also have the ability to tailor our activities to the current market cycle.

Stocks are a gamble- real estate- if you know what you're doing- is an investment.

If you look at an owner operator of apartment buildings you will get an idea of the amount of work that needs to go along with investing.

You can pay someone to do this work or you can do it yourself if you are so inclined.

So you have real estate which is more like owning a 7 eleven, and you have stocks which you purchase and have to sit around and hopefully they go up in value to make money.

These two things do not seem like a good comparison.

Maybe compare real estate to owning a restaurant, or a 7 eleven, or a public washing machine place.

Maybe compare stocks to commodities or European stocks or Japanese stocks- something that is more similar in risk and in payout method.

And there is never a time when I am sitting in Burger King having lunch after having walked to property and I'm discussing it with someone--that I think I would rather put that money into stock certificates on this stock exchange versus getting a hold of the property and doing what I want with it.

Good Luck!

Rob Gifford · Answer

You have to do the math and figure out what your long term ROI is going to be and then discount for risk and the level of effort involved in real estate.

In terms of ROI- the stock market averages around 10%- with possibility for significantly higher returns in the future due to multiple new technology developing that will increase productivity (look what's happening with the NASDAQ recently).

Risk - in this scenario, I'd say the property is more risky than the stock market because you are completely consolidating your capital into one asset. Every investor has stories of running into significant unforeseen issues, having repairs go significantly over budget or having a nightmare tenant. This building may not be one of those lemons but there is a chance. In the stock market you're not exposed in this way as you'll be invested in all the publicly traded companies out there across different sectors, which often move in non-correlated ways. You could de-risk your approach by diversifying and purchases 3-4 smaller properties.

Level of effort and stress - you have to compare apples to apples in terms of the personal bandwidth each investment is going to take up. There is almost 0 effort in purchasing an index fund and 0 effort in maintaining it for the next 20 years. With real estate, even if you have a great property manager, you will spend time purchasing the property, coordinating construction, responding to issues your PM escalates and organizing your taxes etc...

The main benefit to real estate, when it comes down to it is leverage. If you were financing more you might see a higher ROI (not sure what it looks like at 50%). Additionally, if you have specific plans for how you're going to leverage equity in this property to make more purchases that could be something to think about.

David Schiman · Answer

Thanks, @Scott Mac, I guess what I was comparing to was RE VS an index fund like VTSAX that's gained 12% a year in the past.

David Schiman · Answer

@Jonathan Bock The 50% down is not exactly right... It looks like this:

BUT, the actual purchase price I will offer is $675,000 not $850,000.  $850,000 is asking.  I'd still take out a $100,000 construction loan and do a build out for a commercial tenant TBD.

I've flipped 15 houses, built (as a carpenter 15 different units) and am very handy in general.  I have remotely managed a property in DC for 10+ years without major issues.  AND, this deal would require me to deal with tenants of lesser means than DC as well as commercial tenants and I have no experience with those two aspects of landlording.  My rental in DC had squarely upper middle class tenants and this place will be lower economic class tenants.

Chris K. · Answer

@David Schiman

I think it mostly depends on your level of expertise in real estate. For example, do you have any experience handling a construction project? There are many benefits to getting into real estate. But in my experience, most of the successful folks end up becoming an expert in some kind of vertical within real estate. Or you have to make some lifestyle changes to take full advantage of it (e.g. real estate professional tax status).

Assuming you do not want to take those steps, I believe investing in something like VTSAX yields better returns and is "safer." Of course, this assumes a long-term hold.

Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Alan Asriants · Answer

Roxborough is pretty solid. Lots of new construction there that might make renting a bit more of a challenge in the future, but still plenty of demand. I like that area and has been strong for quite some time.

David Schiman · Answer

Roxborough

Ned J. · Answer

Real estate will likely pay more but obviously takes WAY more involvement on your end to yield that benefit.

So do you want to be in control, involved, a decision maker..... or set and forget? For some the extra time and commitment isnt worth the extra rate of return. Thats up to you

Multi-fam real estate vs Stocks for 20 years?

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