SFR Turnkey vs. S&P 500 - case study

[Chad Daniel]

We've long wondered how to compare returns of the stock market against single family buy and hold real estate. We now have an answer.

Based on the performance of properties in our investment group's portfolio, we've taken 50 property-years (each blue bar is a single property for a single year) and compared returns to the S&P 500 for 50 stock-years (each orange bar is S&P 500 performance for 1 year of each of the last 50). 

Conclusions:

• If you need these investment funds for life's essentials, you may struggle if you invest in S&P for a short duration, or only own a few properties.
• The distribution of positive and negative returns is quite similar, except that real estate had 2-3 big looser years and S&P had 6-8.
• Average real estate return of this portfolio (excluding appreciation) is 10%, S&P 500 6%. Real estate is 18% if 2% appreciation with 75% leverage is assumed.
• S&P 500 is WAY more liquid, and the barrier to entry is lower.

More background:

• No buying and selling of stocks or homes during the year. These years were 100% 'hold'.
• The portfolio of properties is in Des Moines, Iowa. All single family. These have a fair amount of deferred maintenance, as the strategy with this portfolio was to get in with low cash on the front end, then pay out major repairs along the way (e.g. roof, HVAC, etc). This tends to increase the repair costs, decrease the leverage, and decrease the returns - but increases # of units.
• Assumes 1 house is $25,000 to purchase w/ leverage so $25,000 goes into 1 house or $25,000 in S&P 500 stock.
• S&P 500 values taken Jan 1st of every year for the last 50 and year-by-year returns calculated. Source Yahoo Finance.
• Real estate is leveraged. This portfolio, around 75% overall.
• Real estate returns do NOT include appreciation. If you assume 2% appreciation,and 75% leverage, this would boost returns (2%*4x leverage=8%).
• Transaction costs NOT included. Much higher for real estate vs. stocks if owning for short periods of time.
• S&P 500 management costs NOT included, real estate management costs included
• I wish we'd owned our portfolio for 50 years, then we would have much better date - and would have amassed a fortune :-)

What are your questions and conclusions from the comparison?

Have you seen similar comparisons? Where?

[Mike Dymski]

Originally posted by @Chad Daniel:

@Mike Dymski - thanks for the reply. Yes, personally owning real estate is more active than buy and hold an index funds. I personally, and have talked to many, who are looking for real-world comparisons between the two to make better decisions about where to invest money. And certainly, If buy and hold real estate w/ property manager takes 1 hour a month and holding an index fund takes 0, then that defiantly needs to be considered along with personal goals, return, diversification, versatility, etc.

If buy and hold real estate with a property manager only took 1 hour per month but earned mid to high teens in returns, all invest-able funds in the world would be in it.