Real Estate vs. Stocks
I'm new here and analyzing the economics of buy and hold real estate here in the bay area. In most of my calculations, the best return I can achieve is about 6-9% annualized return for a 10-30 year period which is quite similiar to the S&P 500 return. Please let me know if I missed anything in my analysis.
Real Estate Assumptions:
1) 25% down - most banks seem like they will not loan more than 75% on investment properties I am finding - since appreciation, not cash flow is key in the bay area, the more leverage you can get, the better your return. Unfortunately, 25% down will limit the return then
2) 1.04% annual appreciation
3) 1.02% rental rate increase
4) 1.02% expense increase (property tax, maintenance, insurance, vacancy)
In one bay area city I am looking at, these are the numbers I am seeing:
Property cost: $1.1M
Down: 25% = $275K + $16K closing = $292K investment
30 year fixed rate @ 4.5%
per month costs : $3K interest, $1K principle, $1.8K other (insurance ($500/yr), HOA($250/month), maintenance ($1000/yr), vacancy ($2400/yr) = $6k per month in costs
rent: ~$4.8K
Based on the above numbers and expected appreciation/rental increase/cost increase, after 10 years, this is the return if you sell the place, pay off the loan:
| Total Return | 584840.5236 |
| % Return | 2.008036133 |
| Annualized Return | 7.2203332% |
After 15 year:
| Total Return | 1041521.509 |
| % Return | 3.576039515 |
| Annualized Return | 8.8663061% |
After 30 years:
| Yearly Appreciation | 1.04138 |
| Total Return | 3326151.581 |
| % Return | 11.42026294 |
| Annualized Return | 8.4565711% |
As you can see, unless you can get more than $4800 rent today, or leverage up, or get a better price, real estate is not returning any more than the historical average of the S&P 500. Just wondering whether it is better to invest in real estate in the bay area or the S&P 500. Please let me know what you think of the analysis.
The home in question is a 4 bedroom town house in the bay area.