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  • #46
    Man, there is a lot to respond to in this thread, but here are the main comments I have that jump out at me perusing the thread...

    1. There is a clear disconnect that you see with the two camps of RE investment.  The truth is superior returns can be attained through real estate investment, however, to realize those returns, one must spend time and effort in both learning the nuances and developing the skills required to execute what's learned.  So the disconnect is that for those who have a desire to put in the time (and quite frankly many people who are active in this arena have a passion for it, even if it's not their main source of income), RE is an area where an enormous amount of wealth creation can be had.  However, for those who don't wish to dedicate the time or effort and are seeking something completely passive, have no desire to learn about the nuances, etc. - those folks will do one of two things - either delegate to a third party (syndicator, crowdfunding, etc.), which eats into the returns as those people have to be compensated for filling that role that's been vacated, OR they will simply jump into an investment without the proper knowledge, background, insight, and skills, and typically those deals are a coin flip on how they ultimately turn out.  In short, direct RE investment is a hybrid of a business and an investment.  If you are unable or unwilling to do or learn the business side of it, then other assets are probably better suited for your capital.

    2.  Vacant land speculation is the worst way to invest in RE.  Buying vacant land that produces zero income, while at the same time bleeding you annually for property taxes (and worse interest if you've financed it) is a recipe for disaster.  Unless you have a clear, concise purpose in mind for the property (i.e. you're going to develop it in the near future), you're simply banking on someone, someday, coming along to pay you significantly more than what you paid for it originally.  You've done nothing with the property, and therefore have created no value.  Can you get lucky and have the area around it explode with new development that drives the value of your parcel up significantly?  Sure, but you're relying on outside forces that you have no control over, that may or may not happen.  Honestly most land speculation deals aren't even great investments if they do appreciate in value.  Your property taxes are going to eat up 5% a year or more in most places, so you need 5% in appreciation just to break even.  The real killer is that all that capital you have sitting around in the dirt, producing zero income for a long period of time (I think the poster who mentioned this had a 20 year timeline!).  That's just crazy.  Your true break even on a 20 year timeline on a vacant parcel is going to be somewhere around a 250% gain, based on 5% property tax, and a modest 4% cost of capital, and that's before you take into account the time value of those property tax payments.  That's not to say nobody makes money on vacant land.  Everyone has heard a story of someone who bought a chunk of land for next to nothing and someone comes along with a big project and pays them top dollar for it, but those stories are the needle in the haystack of land speculators that would have been far better off shoving the money under their mattress.

     

    3.  One thing that's often never mentioned in the RE discussion is control.  If you own a piece of property, you can do whatever you want with it (within the bounds of zoning, lease constraints, etc.).  See a property that's being underutilized?  Buy it, unlock it's potential and reap the rewards.  See a stock that's undervalued, perhaps because their execution on the operations side is lackluster?  You can buy it, but unless you're a majority shareholder, you're just along for the ride.  Your hope is that they correct those inefficiencies and it's ultimately reflected in the share price, but you have zero control or say in those actions.

    4.  The biggest wild card in the discussion of RE however, is the tax advantages.  Anyone who fails to take these into account when analyzing RE shouldn't be taken seriously.  Can anyone else please point me to the investment that allows you to write off significant non-cash expenses against income?  More importantly, can anyone point me to the other investments that allow you to defer any tax liabilities on the sale of the investment if the proceeds are transferred into a similar vehicle?  Depreciation and the 1031 exchange are the tools that really drive significant returns to direct RE investment.  The depreciation allows you to shelter large portions of your income from the property annually.  There's no depreciation fairy that you're writing a check to.  In most cases the property is actually appreciating.  Now on it's own, depreciation is simply a slight deferment of tax liability, as eventually if you sell the property, you have to recapture all that depreciation and pay Uncle Sam his share.  However, then we get into the 1031 exchange.  Sell that property that you've depreciated for a huge gain?  Go ahead and roll it over into another property (bigger? better? different location? more secure? more passive?) and there goes that tax liability on the capital gains, the depreciation recapture.  You don't owe one cent to Uncle Sam, and you get to keep that money working for you and in your "pocket".  Then it gets even better.  Just keep doing that until the day you die and you can pass it on to your heirs, they get a step up in basis, and you NEVER pay Uncle Sam his cut.  Again, if anyone can point me in the direction of other investments that can claim these same tax advantages and provide the same returns available in RE, I'm all ears...  These advantages don't mean that direct RE is the end all be all for everyone.  Obviously if you're the latter person in section 1, the tax advantages may not be enough to overcome the added work, poor returns due to lack of experience/knowledge, etc.  Even with the tax advantages, most of the time those folks are going to be better off putting their money elsewhere.

    At the end of the day, like everything, it all comes down to personal circumstances.  There is no one size fits all when it comes to allocating capital.  For one person, index ETFs make the most sense and will provide them with the best returns.  For another perhaps a heavier allocation to direct RE makes more sense.  In the end, we must all decide what makes the most sense for our own personal circumstances.  Everyone should keep this in mind when having discussions such as this one.  Speaking in absolutes for either side can be misleading.

    Comment


    • #47





      What good is definition is what I’m saying. You are correct, but practically its little difference for a disciplined investor. Lets do an experiment: Behind a black box is an asset class that goes up by 8% (lets go with AlexxTT return numbers) – what is it? RE or Mutual funds?       Answer: Either. 
      Click to expand…


      What does that have to do with liquidity? Liquidity happens to matter, at least to most people, and should be a consideration when investing.
      Click to expand...


      Please tell me how it practically matters in terms of long term, boglehead style investing where you buy and hold.

      Comment


      • #48




        If I had 1m, I think buying a vacant property and holding that would be less risk than buying it and putting another 2M in to build a building. To me the less risky thing is to sell the land to a guy who wants to build a hotel than to buy the land and build a hotel. The holding period for buy and hold land is longer but the ROI is higher, without the risk of much debt. You have to be able to identify real opportunity though and if you buy something on a single rationale like the example you citied, it might well be wrong. if it doesn’t work out you can always use it for storage or a cucumber farm or just sell it. I haven’t had a dud yet that I had to sell at a loss. It could be that I’ve just been lucky.
        Click to expand...


        It looks like you have specialized in this strategy and been disciplined and lucky.

        I don't think I have that much luck predicting with 90% certainty the future use and value of land. So the only option is to use it to generate an income. No one will buy a land + hotel from you unless you show a 3 year plus negative to positive returns ( most new ones don't become profitable until end of year 2 of operations).

        But buying land alone does not make it a certainty. A land next to a highway was held for 5+ years by a person but he could not continue to pay the loan's "interest only" repayments and it went to foreclosure. The bank was left holding the land and they do not want to be a empty land owner. It does not generate any income and they hate it. By chance the VP knew my boss and mentioned it. We were willing to buy it at discount only if they finance the loan for building a hotel. They had no other choice and agreed if we could get the agreements in place. We have done that and the land closed a month ago and the hotel loan will close in the next 3 months. Luck certainly plays a part, but so does knowledge and shrewdness and a game plan to see it through.

        Comment


        • #49


          Please tell me how it practically matters in terms of long term, boglehead style investing where you buy and hold.
          Click to expand...


          That wasn't what we were discussing. I don't think either of us are making much progress on liquidity - let's just agree to disagree. And part friends  .
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #50




            Please tell me how it practically matters in terms of long term, boglehead style investing where you buy and hold.
            Click to expand...


            Actually, liquidity matters because with index funds you can get as much or as little cash flow as you wish.  If I want no cash flow, I reinvest the dividends.  If I want more, I sell some shares.  This is important in retirement, when I will probably be selling shares.  With real estate your cash flow is more or less fixed, dependent on your expenses and rent.  If I need more money than I'm getting in rent, I either sell an entire property or have to use a line of credit or mortgage.




            Can anyone else please point me to the investment that allows you to write off significant non-cash expenses against income?  More importantly, can anyone point me to the other investments that allow you to defer any tax liabilities on the sale of the investment if the proceeds are transferred into a similar vehicle?
            Click to expand...


            True, but index funds have no expenses, so no need for a deduction.  As for the deferral of liabilities, index funds don't have any tax liability until they are sold, ( except for capital gains rate on the dividends, amounting to about 0.6% a year for the total market fund )  and I have no reason to sell them until the step-up at death.  Correct me if I'm wrong, but the only reason you would want to do a 1031 exchange is to keep getting the depreciation allowance after the 26.5 years have gone by. But with index funds, I have no depreciation, so no allowance.  Also, no repairs, no maintenance, and no property taxes.  Plus, they can also provide tax deductions through  tax loss harvesting.

            But none of that is important.  What's important is the bottom line.  So  I would appreciate it if the real estate investors in this thread could tell me what their actual overall ROI is, including appreciation, both before and after the depreciation deduction, if you know it.   I would be curious to see how that total  return compares to the total return of the S&P 500.  I realize that this can vary widely, but if you know yours, and are willing to share, I would love to see some hard numbers.

            Comment


            • #51





              Please tell me how it practically matters in terms of long term, boglehead style investing where you buy and hold. 
              Click to expand…


              Actually, liquidity matters because with index funds you can get as much or as little cash flow as you wish.  If I want no cash flow, I reinvest the dividends.  If I want more, I sell some shares.  This is important in retirement, when I will probably be selling shares.  With real estate your cash flow is more or less fixed, dependent on your expenses and rent.  If I need more money than I’m getting in rent, I either sell an entire property or have to use a line of credit or mortgage.


              Can anyone else please point me to the investment that allows you to write off significant non-cash expenses against income?  More importantly, can anyone point me to the other investments that allow you to defer any tax liabilities on the sale of the investment if the proceeds are transferred into a similar vehicle? 
              Click to expand…


              True, but index funds have no expenses, so no need for a deduction.  As for the deferral of liabilities, index funds don’t have any tax liability until they are sold, and I have no reason to sell them until the step-up at death.  Correct me if I’m wrong, but the only reason you would want to do a 1031 exchange is to keep getting the depreciation allowance after the 26.5 years have gone by. But with index funds, I have no depreciation, so no allowance.  Also, no repairs, no maintenance, and no property taxes.  Plus, they can also provide tax deductions through  tax loss harvesting.

              But none of that is important.  What’s important is the bottom line.  So  I would appreciate it if the real estate investors in this thread could tell me what their actual overall ROI is, including appreciation, both before and after the depreciation deduction, if you know it.   I would be curious to see how that total  return compares to the total return of the S&P 500.  I realize that this can vary widely, but if you know yours, and are willing to share, I would love to see some hard numbers.
              Click to expand...


              I think you missed the mark on the expenses.  First, the returns we're talking about on real estate is the return net of expenses, so the fact that an index fund has none is neither a positive nor a negative in terms of this discussion, as both options' returns are being stated after taking into account expenses.  My point about depreciation is that it is a non-cash expense.  So on a 1M property that means that the first $25,461 of income each year is going to be tax free, because you're writing off that much on your tax return, but it's not ACTUALLY an expense.  You aren't writing anyone a check for that amount, and in the vast majority of cases the property is actually APPRECIATING in value rather than DEPRECIATING.  If you receive a dividend from an index fund, you're going to be taxed on 100% of that income.

               

              As for the 1031 there are many different reasons you would do this.  First typically people don't hold the same property in perpetuity.  Secondly, on commercial assets the depreciation is spread over 39 years, so to your point, you would have to hold something for 40 years before that even became a consideration.  More often 1031s come about simply because someone has chosen to sell an asset for another reason (an offer too good to refuse, a doc retiring who sells his building and practice, sometimes just because someone wants to cash out of an investment and move to another).  Let's just say that you bought that $1M property, held it for 20 years (for ease of the example), and it's appreciated in value to $2M over that time frame.  In the meantime, you've paid off the original mortgage.  So now you could sell the property for $2M and go pay cash for two $1M properties which perhaps gives you some more diversification, maybe a more passive investment (going from Multifamily to a NNN lease for instance), maybe you just want to purchase a property you think is a better value or investment at that point.  Maybe you just want to sell your Bay Area apartment complex at record cap rates and move that to another area of the country where a similar property with a similar underlying risk profile nets you twice as much in NOI because cap rates aren't insane.

              The other point of consideration (which is probably more relevant), let's assume on the original property you had a NOI of $200k (again just using simple numbers here for the example).  You could continue to hold that property and collect 200k per year.  Alternatively, you could sell the property, take the $2M in proceeds and buy another property with a higher valuation of up to $10M (depending on how much leverage/risk you want to take).  Assuming you're getting the same cap rate (again for ease of the example), now you're collecting $1M per year in NOI.  Obviously you still need to account for the cost of the financing of the additional funds, so you're not clearing $800k more, but you will be making significantly more than if you had just left all that equity in the original property.

               

              As you can see there are all kinds of reasons why one might sell a property and do a 1031 to another property.  And again comparing that to an index fund, there isn't any oversight needed, as S&P (or whatever index you're tracking) is making the decision of what underlying securities you're holding in your index fund.  It's much less work, less oversight, etc.  Which again if you're ultimate goal is to invest as passively as possible, then direct RE investment is probably not for you.  Even in the most passive investments (an absolute net lease with a long term stable tenant) at a minimum you have to have extra accounting and tax prep work completed, and eventually you'll have to deal with a renewal or a vacancy.  A better comparison for direct RE investment is probably investing in individual securities.  If you have any individual securities, you may not frequently trade them, but you do at least need to monitor them.  You can't just buy $100k in Facebook, ignore it for the next 35 years, then revisit it at that time.  That could work for you, but most likely you need to spend time on a regular basis monitoring your positions and deciding if the investment still makes sense, or if there are better opportunities elsewhere.  The same applies for direct RE investment.

              Comment


              • #52





                Please tell me how it practically matters in terms of long term, boglehead style investing where you buy and hold. 
                Click to expand…


                That wasn’t what we were discussing. I don’t think either of us are making much progress on liquidity – let’s just agree to disagree. And part friends ? .
                Click to expand...


                I am your e-friend. Your input is highly appreciated actually and I've learnt a ton - for free! Can't beat that. Actually I told one friend about you so he may or may not contact you.







                Please tell me how it practically matters in terms of long term, boglehead style investing where you buy and hold.
                Click to expand…


                Actually, liquidity matters because with index funds you can get as much or as little cash flow as you wish.  If I want no cash flow, I reinvest the dividends.  If I want more, I sell some shares.  This is important in retirement, when I will probably be selling shares.  With real estate your cash flow is more or less fixed, dependent on your expenses and rent.  If I need more money than I’m getting in rent, I either sell an entire property or have to use a line of credit or mortgage.




                Can anyone else please point me to the investment that allows you to write off significant non-cash expenses against income?  More importantly, can anyone point me to the other investments that allow you to defer any tax liabilities on the sale of the investment if the proceeds are transferred into a similar vehicle?
                Click to expand…


                True, but index funds have no expenses, so no need for a deduction.  As for the deferral of liabilities, index funds don’t have any tax liability until they are sold, ( except for capital gains rate on the dividends, amounting to about 0.6% a year for the total market fund )  and I have no reason to sell them until the step-up at death.  Correct me if I’m wrong, but the only reason you would want to do a 1031 exchange is to keep getting the depreciation allowance after the 26.5 years have gone by. But with index funds, I have no depreciation, so no allowance.  Also, no repairs, no maintenance, and no property taxes.  Plus, they can also provide tax deductions through  tax loss harvesting.

                But none of that is important.  What’s important is the bottom line.  So  I would appreciate it if the real estate investors in this thread could tell me what their actual overall ROI is, including appreciation, both before and after the depreciation deduction, if you know it.   I would be curious to see how that total  return compares to the total return of the S&P 500.  I realize that this can vary widely, but if you know yours, and are willing to share, I would love to see some hard numbers.
                Click to expand...


                Yep in retirement I totally agree. I was just saying in accumulation phase you hold both for a while. As CRE mentions, it is work to extract that extra return. Index funds though have been pretty set it forget it option which has been great. I'll try running some analysis AlexxT once I get some time. I am curious as well.

                Since its not uniform and depends on type of RE, and type of investment (equity/debt). Roughly, I base on IRR. One of the deals I was in was bought on 8 cap rate and we sold it at 6 cap and I insta made 200k. In two years wait time. I initially invested 187500. So...ROI on top of my head was 110% annualized to 50+%. I am not including any deductions.

                Anyways, just one example and my best one.

                Comment


                • #53
                  Have to adjust for leverage with real estate gains. You can get higher gains (losses) with leverage in the market just like with real estate. People dont because while irrationally afraid of leverage in the market, are then also irrationally comfortable with it in the real estate markets.

                  Comment


                  • #54


                    Have to adjust for leverage with real estate gains. You can get higher gains (losses) with leverage in the market just like with real estate. People dont because while irrationally afraid of leverage in the market, are then also irrationally comfortable with it in the real estate markets.
                    Click to expand...


                    I agree.  I was just about to comment on this, although I'm not quite sure how to think about calculating cash on cash returns.  I think that's something people are more likely to do with real estate, for the aforementioned reason, along with easier access to a loan.  So calling that example a 50% return on capital per year is not unreasonable.  But my problem with that concept is that I don't consider a mortgage to be a loan against a particular property.  It's a loan against your entire net worth.  In other words, we shouldn't compartmentalize our debt.

                    Still, if you can keep doing deals like that, you'll be alright.  But few people can.  I still wonder what the typical real estate investor earns long term.  I know lots of people who think that real estate is great because their house has quadrupled in value, but they never did the math to find out that they earned 2% a year.

                    I'm not averse to RE investments.   I just haven't found a deal that's been worth the risk.  Where I live houses are so expensive that there's too much at stake on each deal.

                    Comment


                    • #55




                      Have to adjust for leverage with real estate gains. You can get higher gains (losses) with leverage in the market just like with real estate. People dont because while irrationally afraid of leverage in the market, are then also irrationally comfortable with it in the real estate markets.
                      Click to expand...


                      It's hard to get to apples to apples on leverage between the two though.  On RE, you have regular cash flows that make up the majority of your returns and are for the most part very predictable.  That makes it very easy to service the debt.  You also don't get capital calls where you're forced to pay off the note based on a short term fluctuation.

                      Contrast that to using leverage to invest with stocks where you're relying pretty much solely on appreciation of the stock for your returns (with unpredictable cash inflows and sometimes non-existent) to cover the debt service, and at the drop of a dime you can be forced to liquidate your position at unfavorable terms to satisfy the debt.

                      Pretty hard to draw parallels between the two IMO...

                      Comment


                      • #56


                        Contrast that to using leverage to invest with stocks where you’re relying pretty much solely on appreciation of the stock for your returns (with unpredictable cash inflows and sometimes non-existent) to cover the debt service, and at the drop of a dime you can be forced to liquidate your position at unfavorable terms to satisfy the debt.
                        Click to expand...


                        But you can mortgage your house and invest the money in stocks.  Then there's no margin call.

                        However,  I agree that it's hard to compare the two.

                        Comment


                        • #57





                          Contrast that to using leverage to invest with stocks where you’re relying pretty much solely on appreciation of the stock for your returns (with unpredictable cash inflows and sometimes non-existent) to cover the debt service, and at the drop of a dime you can be forced to liquidate your position at unfavorable terms to satisfy the debt. 
                          Click to expand…


                          But you can mortgage your house and invest the money in stocks.  Then there’s no margin call.

                          However,  I agree that it’s hard to compare the two.
                          Click to expand...


                          This is true, that would eliminate the margin call, but it still doesn't fix the problem that the ~2% cash flow you're getting from your equities is significantly less than the amount required to service your debt on a monthly basis.  Now if we were talking about borrowing money to invest in bonds?  Well then we'd be getting closer to apples to apples...

                          Comment


                          • #58










                            Contrast that to using leverage to invest with stocks where you’re relying pretty much solely on appreciation of the stock for your returns (with unpredictable cash inflows and sometimes non-existent) to cover the debt service, and at the drop of a dime you can be forced to liquidate your position at unfavorable terms to satisfy the debt.
                            Click to expand…


                            But you can mortgage your house and invest the money in stocks.  Then there’s no margin call.

                            However,  I agree that it’s hard to compare the two.
                            Click to expand…


                            This is true, that would eliminate the margin call, but it still doesn’t fix the problem that the ~2% cash flow you’re getting from your equities is significantly less than the amount required to service your debt on a monthly basis.  Now if we were talking about borrowing money to invest in bonds?  Well then we’d be getting closer to apples to apples…
                            Click to expand...


                            The particulars of the scenarios are different, making leverage far more attractive and easier to profit from in RE than equities. However, it doesnt make the comparison and equally it out based on leverage wrong. It just means its easier to use leverage in RE.

                            What people are saying when they say RE offers higher returns, is that leverage comes with less drawbacks day/day with RE than stocks. Left tails are exactly the same except you're not as likely to be forced out for a blip as can happen in equities.

                            Maybe difficult to be able to set up exactly similar scenarios its 100% correct as far as the drivers of said returns. Its more appropriate to say its much harder to find as safe a manner to leverage in the stock market (though risk parity uses bonds for this reason).

                            Its just really important to realize where the return comes from. Its not because its real estate. Buy all cash and your returns are more pedestrian in aggregate. Lose sight of this and you lose sight of the actual risk you're taking.

                            Whether or not the cash flow services the debt isnt always known, and for the most part irrelevant, that kind of move would never be judged on a month to month/servicing hurdle, it would be on a longer time frame where inflation and other powers accrued to your longer term equity position. Given the obvious volatility anything other than a long holding period would be less than foolish.

                            Comment


                            • #59













                              Contrast that to using leverage to invest with stocks where you’re relying pretty much solely on appreciation of the stock for your returns (with unpredictable cash inflows and sometimes non-existent) to cover the debt service, and at the drop of a dime you can be forced to liquidate your position at unfavorable terms to satisfy the debt.
                              Click to expand…


                              But you can mortgage your house and invest the money in stocks.  Then there’s no margin call.

                              However,  I agree that it’s hard to compare the two.
                              Click to expand…


                              This is true, that would eliminate the margin call, but it still doesn’t fix the problem that the ~2% cash flow you’re getting from your equities is significantly less than the amount required to service your debt on a monthly basis.  Now if we were talking about borrowing money to invest in bonds?  Well then we’d be getting closer to apples to apples…
                              Click to expand…


                              The particulars of the scenarios are different, making leverage far more attractive and easier to profit from in RE than equities. However, it doesnt make the comparison and equally it out based on leverage wrong. It just means its easier to use leverage in RE.

                              What people are saying when they say RE offers higher returns, is that leverage comes with less drawbacks day/day with RE than stocks. Left tails are exactly the same except you’re not as likely to be forced out for a blip as can happen in equities.

                              Maybe difficult to be able to set up exactly similar scenarios its 100% correct as far as the drivers of said returns. Its more appropriate to say its much harder to find as safe a manner to leverage in the stock market (though risk parity uses bonds for this reason).

                              Its just really important to realize where the return comes from. Its not because its real estate. Buy all cash and your returns are more pedestrian in aggregate. Lose sight of this and you lose sight of the actual risk you’re taking.

                              Whether or not the cash flow services the debt isnt always known, and for the most part irrelevant, that kind of move would never be judged on a month to month/servicing hurdle, it would be on a longer time frame where inflation and other powers accrued to your longer term equity position. Given the obvious volatility anything other than a long holding period would be less than foolish.
                              Click to expand...


                              1. It is not because it is real estate...:

                              Disagree. It is because it is RE, as I demonstrated above. Average returns may be equal ( I am doubtful based on my experience but will search for empirical evidence) but it is rent based/appreciation based/location based, not something stocks have in common.

                              2. Whether or not cash flow services the debt isn't always known...:

                              A bank would never finance a property if expected cash flow is not known to the best of the ability. Infact, I'd consider any RE investor NOT an investor if he/she didn't know what the stable cash flow would be and what the NOI would be.

                              Leverage play is not easy in stocks, may be it is for you but in RE it is the norm, well research, well supported (by banks), well used (mostly...2008 eh...), and necessary for cash flow and the type of deals there are (can you buy a shopping center with 3 million in cash? suppose you can but that'd be idiotic). In stocks there is margin call, and that level of sophistication is realm of funds. In contrast, leverage in RE can be had with minimal effort.

                              Comment


                              • #60
















                                Contrast that to using leverage to invest with stocks where you’re relying pretty much solely on appreciation of the stock for your returns (with unpredictable cash inflows and sometimes non-existent) to cover the debt service, and at the drop of a dime you can be forced to liquidate your position at unfavorable terms to satisfy the debt.
                                Click to expand…


                                But you can mortgage your house and invest the money in stocks.  Then there’s no margin call.

                                However,  I agree that it’s hard to compare the two.
                                Click to expand…


                                This is true, that would eliminate the margin call, but it still doesn’t fix the problem that the ~2% cash flow you’re getting from your equities is significantly less than the amount required to service your debt on a monthly basis.  Now if we were talking about borrowing money to invest in bonds?  Well then we’d be getting closer to apples to apples…
                                Click to expand…


                                The particulars of the scenarios are different, making leverage far more attractive and easier to profit from in RE than equities. However, it doesnt make the comparison and equally it out based on leverage wrong. It just means its easier to use leverage in RE.

                                What people are saying when they say RE offers higher returns, is that leverage comes with less drawbacks day/day with RE than stocks. Left tails are exactly the same except you’re not as likely to be forced out for a blip as can happen in equities.

                                Maybe difficult to be able to set up exactly similar scenarios its 100% correct as far as the drivers of said returns. Its more appropriate to say its much harder to find as safe a manner to leverage in the stock market (though risk parity uses bonds for this reason).

                                Its just really important to realize where the return comes from. Its not because its real estate. Buy all cash and your returns are more pedestrian in aggregate. Lose sight of this and you lose sight of the actual risk you’re taking.

                                Whether or not the cash flow services the debt isnt always known, and for the most part irrelevant, that kind of move would never be judged on a month to month/servicing hurdle, it would be on a longer time frame where inflation and other powers accrued to your longer term equity position. Given the obvious volatility anything other than a long holding period would be less than foolish.
                                Click to expand…


                                1. It is not because it is real estate…:

                                Disagree. It is because it is RE, as I demonstrated above. Average returns may be equal but it is rent based/appreciation based/location based, not something stocks have in common.

                                2. Whether or not cash flow services the debt isn’t always known…:

                                A bank would never finance a property if it is is not known to the best of the ability. Infact, I’d consider any RE investor NOT an investor if he/she didn’t know what the stable cash flow would be and what the NOI would be.

                                Leverage play is not easy in stocks, may be it is for you but in RE it is the norm, well research, well supported (by banks), well used (mostly…2008 eh…), and necessary for cash flow and the type of deals there are (can you buy a shopping center with 3 million in cash? suppose you can but that’d be idiotic). In stocks there is margin call, and that level of sophistication is realm of funds. In contrast, leverage in RE can be had with minimal effort.
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                                1. Stock pickers would argue the same thing applies for individual stocks. The market is indeed more inefficient, which leads to more edge for those who can put in the work.

                                2. For investment properties sure, but banks only care if you pass the underwriting phase. Do that and you get the loan. A bank doesnt care beyond that, and given its a secured type of loan they have different recourses than simply being SOL like a brokerage can if a client irresonsibly over leverages and they cant liquidate the position without it going underwater.

                                Its these latter differences that are key. But no mistake leverage is allowing for high profit percentage return. Thats all Im saying. Own it without a note and the same transaction yields far less profit in % terms even with everything else the same.

                                The difficulties in applying similar leverage to the market make it safely impossible to leverage yourself in the same way in stocks. You can get leverage, but its usually less and your ability to recover is much different. These are just structural differences based more on historical things than anything concrete (and the types of assets).

                                As with any kind of leverage play, it works great until it doesnt. Often we consider "safe" to mean profitable and without complication, but thats not the same as truly being safe, its just lucky. Let the the time line trend toward infinity and being leveraged too far in any market will always end poorly. Its all about finding the safer plays and best times and tidying up when that changes. RE obviously has some very big benefits in this regard and even better in some states vs. others (foreclosure laws).

                                 

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