How to Compare Real Estate and Stock Returns?

Question

Hi everyone,

I am a small STR investor and in the past few years I have been investing in both stocks and real estate

with COC returns of about 20% for the past 3 years.

I am considering diversifying my portfolio with LTR and I know that returns there are going to be a lot smaller.

So I was curious to know if there was a rough formula that could include mortgage paydown, tax advantages, and estimated appreciation

to be able to compare apples with apples.

I am only familiar with Cashflow, CoC, Cap Ex, and IRR.

Frank Huang · Answer

This is a great question, something we often see in the institutional LP world. Basically, you want to split your real estate investment metrics into two main categories: 1) pre-tax returns, which cover unlevered IRR and levered IRR, and 2) after-tax returns. Pre-tax returns are more about the nitty-gritty of the asset itself and will change depending on whether you’re investing all cash or using a lot of leverage. After-tax returns focus on how your cash flow looks once taxes kick in, like depreciation, 1031 exchanges, and capital gains.

Dario De Pasquale · Answer

I found a good answer to my question in a video by Coach Carson about How to Calculate the IRR.

The MIRR formula works even better because the cash flow from the rental property is not automatically reinvested into the property.

I think that building a spreadsheet with both scenarios, stocks, and rental property would answer this question. His spreadsheet template is pretty good as well.