Real estate vs stock market

Cornflakes

Active member
Just read somewhere that Home price index was 100 in Year 2000, and it stands at 225 as of now. That would mean a  US home (sample) purchased in 2000 for $100k would be worth $225k today. If a borrower put 20k down, and 80k loan, that 20k is now worth 225k-40k balance on mortgage = 185k.

One could say that the 20 years of interest, taxes etc. were paid in lieu of rent and hence considered housing costs.

In contrast, if one had put $20k in S&P 500 and just took stock of the value today, that would be worth $77k.

Did real estate kick butt of stock market over last 20 years period?

It is a believable analysis based on what I have seen but it sounds too good to be true.
 
Cornflakes said:
Just read somewhere that Home price index was 100 in Year 2000, and it stands at 225 as of now. That would mean a  US home (sample) purchased in 2000 for $100k would be worth $225k today. If a borrower put 20k down, and 80k loan, that 20k is now worth 225k-40k balance on mortgage = 185k.

One could say that the 20 years of interest, taxes etc. were paid in lieu of rent and hence considered housing costs.

In contrast, if one had put $20k in S&P 500 and just took stock of the value today, that would be worth $77k.

Did real estate kick butt of stock market over last 20 years period?

It is a believable analysis based on what I have seen but it sounds too good to be true.

Using your numbers, if I put $100k in the stock market (SPY) it would now be worth $285k.  ($20k to $77k is 285% increase).

Doesn?t that beat the real estate investment numbers?  Also don?t forget all the expenses on the investment property over 20 years.
 
No it does not.

In 2000, both Jane and Joe had $20k each to invest. Jane bought a house with 20k down pmt and 80 k loan. Joe put 20k in stock market and rented the house from Jane.

Over 20 years, the rent collected more or less paid for the interest, taxes, repairs etc making Jane breakeven. Joe never had to service his 20k investment in stock market.

Today, jane is sitting on a 225k asset with 40k owed to bank. Joe is sitting on a 77k in his brokerage acct.
 
That?s why I own several properties and why I tell clients that many people have built their wealth with real estate over time. No one knows what prices will do in the short term but if you own real estate for the longer term the value will be higher. 
 
Cornflakes said:
No it does not.

In 2000, both Jane and Joe had $20k each to invest. Jane bought a house with 20k down pmt and 80 k loan. Joe put 20k in stock market and rented the house from Jane.

Over 20 years, the rent collected more or less paid for the interest, taxes, repairs etc making Jane breakeven. Joe never had to service his 20k investment in stock market.

Today, jane is sitting on a 225k asset with 40k owed to bank. Joe is sitting on a 77k in his brokerage acct.

Granted you will never truly get an apples to apples comparison, but what you are using to compare is highly inaccurate.

You are comparing a highly leveraged play in real estate (5x) to a non-leveraged play in equity. The inherent risk level is not even close, especially when you are talking about a buy and hold for 20 years.

Buy and hold also heavily favors RE because you get to ignore the biggest downside of a leveraged RE investment, which is the high % of transaction cost.

You should compare a leveraged RE investment to an leveraged ETF if you want to talk about a 20 year buy and hold comparison.

A 10 year return for a 3x leveraged ETF mirroring SPY, like UPRO, is over 1250%.

 
You are right. It is not quite the same asset class comparison. Merely the two most common investment choices available to us small fish.

It does have an interesting tradeoff though. High volatility no leverage asset class vs low volatility 4x leverage.

If we compare real estate to leveraged equity product, we will have to compare it to something that has similar beta. Bonds?
 
Kenkoko said:
Cornflakes said:
No it does not.

In 2000, both Jane and Joe had $20k each to invest. Jane bought a house with 20k down pmt and 80 k loan. Joe put 20k in stock market and rented the house from Jane.

Over 20 years, the rent collected more or less paid for the interest, taxes, repairs etc making Jane breakeven. Joe never had to service his 20k investment in stock market.

Today, jane is sitting on a 225k asset with 40k owed to bank. Joe is sitting on a 77k in his brokerage acct.

Granted you will never truly get an apples to apples comparison, but what you are using to compare is highly inaccurate.

You are comparing a highly leveraged play in real estate (5x) to a non-leveraged play in equity. The inherent risk level is not even close, especially when you are talking about a buy and hold for 20 years.

Buy and hold also heavily favors RE because you get to ignore the biggest downside of a leveraged RE investment, which is the high % of transaction cost.

You should compare a leveraged RE investment to an leveraged ETF if you want to talk about a 20 year buy and hold comparison.

A 10 year return for a 3x leveraged ETF mirroring SPY, like UPRO, is over 1250%.

You can use margin when buying most stocks (30% cash equity) so you can lever up without using those 2x/3x leveraged ETFs. 
 
USCTrojanCPA said:
You can use margin when buying most stocks (30% cash equity) so you can lever up without using those 2x/3x leveraged ETFs.

You can, but it is probably not the smartest thing to do in a 20 year buy and hold.

The average yearly expense ratio for ETFs is about 0.5%. Leveraged ETFs expenses are a bit higher than average. UPRO, a 3x ETF, has just under 1% yearly expense ration.

But margin rates are easily several times that.

Buying leveraged ETFs without tapping into margin is much more cost efficient. The aggregate savings over a 20 year buy and hold will be very significant.

 
Kenkoko said:
USCTrojanCPA said:
You can use margin when buying most stocks (30% cash equity) so you can lever up without using those 2x/3x leveraged ETFs.

You can, but it is probably not the smartest thing to do in a 20 year buy and hold.

The average yearly expense ratio for ETFs is about 0.5%. Leveraged ETFs expenses are a bit higher than average. UPRO, a 3x ETF, has just under 1% yearly expense ration.

But margin rates are easily several times that.

Buying leveraged ETFs without tapping into margin is much more cost efficient. The aggregate savings over a 20 year buy and hold will be very significant.

The problem with those leveraged ETFs is that they also have decay because they have to buy options/futures to get those 2-3x returns.  You can see with UPRO that it's still below the peak in Feb even though the S&P is higher now.  The best thing to do is to have a diversified asset portfolio...stocks, bonds, real estate, commodities, cypto currency, collectibles, etc.
 
USCTrojanCPA said:
The problem with those leveraged ETFs is that they also have decay because they have to buy options/futures to get those 2-3x returns.  You can see with UPRO that it's still below the peak in Feb even though the S&P is higher now.  The best thing to do is to have a diversified asset portfolio...stocks, bonds, real estate, commodities, cypto currency, collectibles, etc.

Sure, every investment vehicle has pros and cons. But IMO leveraged ETF is still superior to using margins, especially for investors who aren't true seasoned vets. Unlike using margins, losing money on leveraged ETF is still cash loss. Won't lose your house / car on cash loss  ;D

I agree very much with having a diversified asset portfolio. Which is why I am vehemently against "small fish everyday people" stretching to their max to buy, using their primary home as an investment is putting all their eggs into one basket.
 
Kenkoko said:
I agree very much with having a diversified asset portfolio. Which is why I am vehemently against "small fish everyday people" stretching to their max to buy, using their primary home as an investment is putting all their eggs into one basket.

Eh... maybe I got lucky. "Stretching" allowed us to move up to a bigger home and diversify in both stocks and real estate... so I'm good. :)
 
Kenkoko said:
USCTrojanCPA said:
The problem with those leveraged ETFs is that they also have decay because they have to buy options/futures to get those 2-3x returns.  You can see with UPRO that it's still below the peak in Feb even though the S&P is higher now.  The best thing to do is to have a diversified asset portfolio...stocks, bonds, real estate, commodities, cypto currency, collectibles, etc.

Sure, every investment vehicle has pros and cons. But IMO leveraged ETF is still superior to using margins, especially for investors who aren't true seasoned vets. Unlike using margins, losing money on leveraged ETF is still cash loss. Won't lose your house / car on cash loss  ;D

I agree very much with having a diversified asset portfolio. Which is why I am vehemently against "small fish everyday people" stretching to their max to buy, using their primary home as an investment is putting all their eggs into one basket.

It really depends on what the buyer's risk tolerance is and what their expectations are about their future earning power. I always advise my clients to buy a property that's a bit bigger than what they think that they need if they can afford to do so and are comfortable doing so. The thought behind it is that they can always grow into the extra space or buy a detached condo vs an attached condo or buy a single family home vs a detached condo when the monthly may be slightly higher.  Every buyer's situation is different and I just try to give them as much information as possible to make the best decision.
 
Has crypto replaced metals like gold, etc for stable value holdings?

USCTrojanCPA said:
The best thing to do is to have a diversified asset portfolio...stocks, bonds, real estate, commodities, cypto currency, collectibles, etc.
 
freedomcm said:
Has crypto replaced metals like gold, etc for stable value holdings?

USCTrojanCPA said:
The best thing to do is to have a diversified asset portfolio...stocks, bonds, real estate, commodities, cypto currency, collectibles, etc.

Not sure as I don't own either but the experts all seem to say to put some small % of your assets into both.
 
freedomcm said:
Has crypto replaced metals like gold, etc for stable value holdings?

USCTrojanCPA said:
The best thing to do is to have a diversified asset portfolio...stocks, bonds, real estate, commodities, cypto currency, collectibles, etc.

I would argue one does not replace another.  I have owned both for several years and feel gold is the "stable value holding" that you refer whereas cryptos seem to be much more risky, albeit much more profitable. 
 
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