Stocks beat real estate over time?
I've been running the numbers and although real estate has been very attractive to me with leverage (I own 3 properties), running the numbers even with leverage real estate is not as attractive in the long run, because although you are earning higher CoC returns on leveraged real estate, the reality is the asset itself is eventually deleveraged once paid off, and it didn't appreciate in value as much as stocks would have over the same period. Over time, the advantage of leverage is removed, and you're left with an asset that barely kept pace with inflation. Even Seattle has been at 3-4% over the last 20+ years when averaged.
If I buy a 100K house that appreciates 3% over the long run (per study by famed economist who called the last crash, Robert Shiller), in 30 years I have 242,726.25 dollars. Not only is this a petty return, since it just keeps up with inflation, I got to pay for all kinds of repairs during that time.
Even if I Buy the house with leverage, due to the low appreciation rate, I'm still not earning that much. When you compare it with stocks:
100K invested in an index fund that earns 10% a year over 30 years, gives me: 1,744,940.22
To make it even worse, a 4% safe withdrawal rate for the actual value of what my assets would be in these two scenarios, I'm making about 900K a year in SWR eligible funds, compared to a paltry fraction of that with my real estate, which is ultimately a job. Even if we continue with the numbers for the above two scenarios, you are making $20,391 a year in profits after expenses (all rents and expenses adjusted for inflation of 3%) from the house being rented out, compared to what I could be making with the stocks $69,797
Am I wrong here? Was initially thinking real estate was the way to go, and it has certainly been good to me buying during the downturn, but I think I may be better off cashing out and putting 500+K to use in the market. Maybe not now, with the run up, but DCA over time.
Most Popular Reply
Yes you are missing a key point. Income producing Real estate does just that - produces income which you have not figured into your equation.
No your tenants and the cash flow pay for the repairs.
Real estate can, and I believe should, cash flow over 10% net after leverage. AND it also appreciates. The total IRR of real estate I think pretty easily beats stocks. How much it beasts stocks depends on many factors.
However real estate is very risky. That greater return comes with substantial risk to those that do not know and understand real estate.