Are we making the most money?

Question

I’m a total newbie but I have ran the numbers on a bunch of properties, and over a 30 year period I calculate how much my net worth will grow from that investment property, so cash flow and equity built in the home. Then I take my original downpayment (around 30k) and put it in an investment calculator for 30 years with dividends reinvested and usually the stock market at 8% using compound interest is actually ahead of the realestate! Am I doing something wrong? Thanks everyone

Will Fraser · Answer

Hi @Jake Conrad; welcome to the BiggerPockets community!

The short answer is, "probably not!"  There are a lot of of nuances to properly evaluating this, but let's simplify it like this.

Stocks:

• - Day 1 - Buy $30k in broad market index funds
• - Day Z (30 years months later) having reinvested all funds @ 8% RoR = $384,706 MOL (more or less)

Real estate

• - Day 1 - Buy a $150,000 @ 20% down = $30k
• - Day Z (30 years months later) asset is worth at least $292,400 (a 2.25% appreciation rate)
• - Along the way you earned cashflow
• - Along the way you had tax benefits
• - Less "sequence of returns" risks

A linear calculation may lead to a conclusion that real estate is a lower rate of return than the equities market (and it truly may be), but there are aspects to real estate as an investment class that make it quite favorable, especially in a non-tax-advantaged bucket.

Jake Conrad · Answer

@Will Fraser thank you!

I wasn’t sure how to calculate appreciation on the property. If it would be around 300% that would definitely make it well worth it, but that’s where nuances in markets and a little risk comes into play. Thank you for your time you helped me out!