Did Your Retirement Account Do This in 2015?

[Mike D'Arrigo]

The DJIA closed at $17,833 on January 2, 2015. It closed the year out on December 31, 2015 at $17,425--down 2.2%. If you're IRA or 401K followed the performance of the DOW, you had no gain for the year. Furthermore, the average dividend yield of all DOW Jones stocks averaged only 2.87%. 2015 was a pretty dismal year for stocks. Although real estate returns have been compressed due to increasing prices in many markets, real estate is still producing 15-20% COC returns on cash flow alone. Factor in equity gain through mortgage pay down and price appreciation plus tax advantages of depreciation, real estate is still a great investment in my opinion.

[Adam Hershman]

Originally posted by @Mike D'Arrigo:

The DJIA closed at $17,833 on January 2, 2015. It closed the year out on December 31, 2015 at $17,425--down 2.2%. If you're IRA or 401K followed the performance of the DOW, you had no gain for the year. Furthermore, the average dividend yield of all DOW Jones stocks averaged only 2.87%. 2015 was a pretty dismal year for stocks. Although real estate returns have been compressed due to increasing prices in many markets, real estate is still producing 15-20% COC returns on cash flow alone. Factor in equity gain through mortgage pay down and price appreciation plus tax advantages of depreciation, real estate is still a great investment in my opinion.

Well...I suppose. But only using completely flawed logic.

By your logic, you only made 3.9% appreciation on housing, as that was the average nationwide in 2015. Not really sure how you can say RE is providing 20% COC returns, just because you made 20% COC returns. That would be the same situation as if I had said the stock market is providing 34% annual gain, just because that is what my ROTH IRA posted. I know it can be easy to see numbers, and not understand them, and use those numbers to justify or assure yourself of your current investing strategy. But let me do the same to prove a point.

Median Home Price 2015 - $220,300 (Source NAR)

Median Single Family Dwelling Rent 2015 - $1182 ( Source RealtyTrac)

Well even at a 3.92% rate, for 30 years, with 20% down, your mortgage is approx $833 a month. Pretty simple to see that you're losing money if you subscribe to the 50% rule. In fact your net outflows of $242 a month ($2904 for the year) actually cut your property appreciation by around 1/3. So your total gain on the property would be approx $5,867. That's about a 2.5% return.

Now if you compare that to the DOW (which most financially savvy people wouldn't, because it's about 50 times more likely that your portfolio more closely followed the S&P500 than the DJIA) you might have a lower return, but if you compare it to the S&P500, which ended the year at 2043 (12/31/2015) and started the year (1/2/2015) at 2058 with a median dividend yield of 4.4% your return is a little over 4%.

The reason your portfolio would more closely follow the S&P than the DJIA is the S&P is 500 large cap companies, where as the DJIA is 30. 

So by my extremely general scenario (which is only based on averages, as your scenario was) your RE investment returned 2.5% while my "stock market investment" returned a little over 4%. This not taking into account tax (or more pointedly tax avoidance) strategies that are available with securities, or the fact that you pay property tax on RE. 

Essentially what I'm trying to say, is you can't make the assertion that one asset performs better than another unless you're prepared for an apples to apples comparison. Unfortunately, as you said, most people understand RE better than how to invest in securities. They come to this false conclusion based on limited information and really no investigation. If you looked at the averages, the stock market would win. Now I'm sure there is going to be a big hubub about how people wouldn't buy houses that don't cash flow, or buy properties in poor condition and then rehab, you can cash our refi and have 5 houses with people paying down the mtgs, etc. All of those have counterpart advantages to investing in securities, the difference being that you need to be pretty intelligent, and extremely analytical to know what those advantages are. With RE, you can hop on BP and find the 2% rule, the 50% rule, etc. that will generally keep you out of trouble. 

The bottom line is, your investment performance will be driven primarily by your ability level to invest. If you are a RE genius, then RE will probably post a great return for you. If you understand financial markets and how they work, your securities investments will probably post a great return for you. Saying one performs better than the other because you understand one and not the other is just plain silly. 

Don't believe everything you read! Think analytically for yourself!