Compounding Stock Market Returns VS Real Estate Returns

1 Reply

I read the Introduction to Real Estate Investment Deal Analysis featured on BiggerPockets, which I found to be an insightful read, but left me with some unanswered questions, which I was hoping you gurus here could help answer.  

Link: http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/[1]

In the author's example, the total return on investment (after tax benefits, appreciation, and equity) = 23.71%/year, which sounds amazing. However, it looks like this % is only based off of the initial investment basis:  the down payment.

On the other hand, even though the stock market only returns 8%/year on average  in the long run, that 8% you earn is then re-invested into your investment basis each year.  Therefore, your returns from previous years contribute cumulatively toward your investment basis, which the 8%/year for the subsequent years is based off of.  This illustrates the power of compounding.

It is compounding like this that I didn't see him touch on in his real estate investment deal analysis. Am I missing something here, does compounding exist in real estate? And if not, why is real estate investing superior?

@Mark L. It does, but not the way you would think.  In real estate, to experience compound growth, you would do is take your "dividends," your cash flow, and re-invest them in another property.  

This requires a little more than investing in the stock market where you could just put money in and never do another thing.  But the returns over the long run will definitely outstrip the returns from the stock market over the long run.

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