Real Estate vs. Stocks

Real estate investment is similar to owning your own company. It requires active management. Stocks investing can be relatively passive. The two aren't really comparable. Real estate investments depends a lot on location. You can buy stocks from anywhere.

"Will Trice" wrote

I think a historical study in the vein of Robert Shiller's recent one on real estate would demonstrate that things are not as all as black-and-white as the letter author indicates. What the author says above is certainly no bottom line from my study of these two investment categories. I would wager the letter author is actually a fairly young person still drunk with the outcome of the recent housing bubble.

So to simplify, A puts $10K into mutuals, and B puts $10K down on "a house", then rents it out or whatever such that there are no additional out of pocket expenses ... and after 30 years they meet ... A's choice of mutuals was not the best and they've tanked; B's choice of property management was not the best, the house has to be bulldozed ... but B still owns the property which is now worth ... a lot. Seems to me it could go either way.

What's the difference between Investor A who buys a house and spends weekends and evenings doing renovations and landscaping and Investor B who buys stocks and spends weekends and evenings working a second job?

Unless Investor A's time has no value, the reader writing in above is comparing apples and oranges.

Give an example (without resorting to the ridiculous or to comparing apples-to-oranges) of coming up with numbers like those.

Suppose, say, an average long-term equity return of, say, 8%, after paying 1% management fees to the fund company. (not sure why you'd lump "taxes" in with "them" - the fund companies don't earn anything on your taxes).

For each $1000 you invest, the fund company collects $10 and your investment goes up by $80 in the first year (on average). The fund company collects $10.80 and your investment goes up by 86.40 in that second year. After two years, that's $20.80 for them and 166.40 for you.

There's a quote from Bogle which gets passed around (and was misused, unsurprisingly, by Kiyosaki) wherein there's a bogus calculation which claims that mutual funds complexes keep 80% of the profit generated by an investor's capital. We've shot holes in that very quote (and in K's columns) here before. Perhaps that's the piece you're thinking of?

will tell you exactly how much you are going to give the MF company. You can choose the fund (loaded or not), the return, the initial investment amount, and the investment time horizon (up to 20 years) and it will output the expenses paid to the MF company.

Overall a good tool to have in general.

You're absolutely right. But I think the reader's point was that you can invest sweat into real estate, but not in a mutual fund. Or whatever. You're right that this could make it equivalent to a job, a point also made in the original Money article.

-Will

No they don't ... I'm saying that tax is part of the debt associated with equity (Investopedia). In order to put any proceeds from the market (excluding my tax sheltered profits which stay I leave in the tax shelter) in my pocket over a given year, at years end I am obliged to add 50% of those profits (equities taxed at 50%, dividends differently, and so on) to my day job income, and pay the tax man.

Once that is done, that equity (my original investment plus profit after tax) is all mine ... all debts have been paid..

So in year 2 the fund takes 12.5% of the profit (20.80/20.80+166.40) ... not bad.

They get 1% of assets under management. Regardless of "profit" (where by "profit" you seem to mean "investment appreciation"). Comparing it the way you did makes no sense - it's, again, apples-and-oranges. Suppose it's an equity fund and it loses 5% on year. Guess what - the management company still gets their

1% because you are not paying them a percentage of the "profits". You are paying them a percentage of the assets. If you want to make your questionable calculation now, well, the percentage of "profits" looks pretty silly.

Its a valueless measure. If that exact same mutual fund had a 100% return both years, the MF company would only get 1% ($30 on $3000 "profit"), not 12.5%.

In the above scenario the Fund Co. would PREFER to have the 1% profit than the 12.5% profit.

Sure, funds are "for profit" ... we are in complete agreement ... except ... as an investor I'm not interested in apples, or oranges, ... I am interested one thing only, and that is net return. I understand that funds are less expensive in the US than up here but here is a typical balanced fund I looked up that the average person might select up here. Return over 3 years was 7.8% and the MER is

2.4%.

Using $1000 and 7.8% over 1 year. Return is $78, fund net return is $25.87, holders net return is $52.13

Now consider this. ($52/$1000)*100 is ... 5.2%. There are GICs to be had that return better than that, and with much less risk.

bowgus writes: [BWS said:]

Then stop with the apples-to-oranges comparisons and talk about your net return.

MER (Canadian for "Expense Ratio") of 2.4% is criminally absurd. Find another fund. Or buy ETFs. In about 10 sec. of looking, I found Barclay's iShares ETFs with MERs of 35bp or less.

The two biggest difference between stocks and real estates is the start up cost and the carrying cost, both more expensive for real estates. In you example, I don't know where a person can put 10K down for a house. But everyone can start with 5K on a MF.

You mean in "the example" ... I wasn't the OP.

But let's see ... my home currently costs $1200/month operational ... including HDTV and high speed internet :-). Over ten years the resale value has increased from $200K (my cost) to $600K. Now, the way I look at it, we have to live somewhere ... e.g., $1200/month would currently get me a "nice" 2 bedroom apartment here (hardly big enough for me and my blended family). Ok, so, if I sell right now, I pocket the $600K (less legal fees ... 2%? ... I'm a DIY seller, done it before, no problem) ... let's say $590K ... since it's my prime residence, no tax!!! ... or, net return of $590K - $200K ... about $390K.

Using that 8% average on the $200K over the same 10 years if invested is $432K - $200K = $232K and if equities, take half the return ($116K) and tax that at my current 24%. So net return on $200K invested would be ... about $230K.

So, I live in my home for 10 years and then sell with net return of $390K ... or ... I invest at 8% (average) over 10 years with net return of $230K ... but geez, I gotta live somwhere. Assuming an average of $8K over those 10 years, that's $80K. Leaving about $150K.

My opinion ... the home is low risk, the market is high risk. And did I mention I take in borders (=$$s)?

During the biggest bull run for residential real estate in history.

During your holding period, the return has been approx 11%/yr annualized, during a period when inflation averaged 2.5% annualized.

Historically, real estate has appreciated at between 1% and 2% per year above inflation. Had your 10 year period been more like the norm, your $200,000 house would now be worth something between $282,000 and $310,000.

Good luck believing that real estate is going to keep going up at 11%/yr. You're going to need it.

None of which is to say that investing in the business of running small scale real estate is necessarily a bad idea, though it is very risky, somewhat capital- and moreso labor- intensive.

But do be realistic.

I put together an analysis on this topic at

show that all appreciation from 1981 to 2005 can be accounted for in the drop in rates from 14%/yr to 6%/yr and inflation. The 'hours worked per month' to buy the median home dropped slightly over that period. I don't suspect anyone is anticipating that rates drop 8% from current levels. JOE

"joetaxpayer" wrote

Can you outline how you computed the hourly wages used?

Seems like your figures of $7.43/hour for 1981 and $16.11/hour for 2005 are averages that do not take into account an occasionally dangerously large gap in wages between blue collar and white collar. E.g. over some time periods white collar wages might shoot up by a factor of five, while blue collar wages go up by a factor of two. Yet most folks are blue collar, right? (Roughly speaking for purposes of posting, and since only about 21% of the age eligible population have a bachelor's degree.) So housing affordability measures must weight the high presence of blue collar wages accordingly.

at

I show that all appreciation from 1981 to 2005 can be accounted for in> the drop in rates from 14%/yr to 6%/yr and inflation. The 'hours worked> per month' to buy the median home dropped slightly over that period. I> don't suspect anyone is anticipating that rates drop 8% from current levels. How does this reconcile with the link below?