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Updated over 7 years ago, 04/11/2017
Real Estate vs. Stocks
I'm new here and analyzing the economics of buy and hold real estate here in the bay area. In most of my calculations, the best return I can achieve is about 6-9% annualized return for a 10-30 year period which is quite similiar to the S&P 500 return. Please let me know if I missed anything in my analysis.
Real Estate Assumptions:
1) 25% down - most banks seem like they will not loan more than 75% on investment properties I am finding - since appreciation, not cash flow is key in the bay area, the more leverage you can get, the better your return. Unfortunately, 25% down will limit the return then
2) 1.04% annual appreciation
3) 1.02% rental rate increase
4) 1.02% expense increase (property tax, maintenance, insurance, vacancy)
In one bay area city I am looking at, these are the numbers I am seeing:
Property cost: $1.1M
Down: 25% = $275K + $16K closing = $292K investment
30 year fixed rate @ 4.5%
per month costs : $3K interest, $1K principle, $1.8K other (insurance ($500/yr), HOA($250/month), maintenance ($1000/yr), vacancy ($2400/yr) = $6k per month in costs
rent: ~$4.8K
Based on the above numbers and expected appreciation/rental increase/cost increase, after 10 years, this is the return if you sell the place, pay off the loan:
Total Return | 584840.5236 |
% Return | 2.008036133 |
Annualized Return | 7.2203332% |
After 15 year:
Total Return | 1041521.509 |
% Return | 3.576039515 |
Annualized Return | 8.8663061% |
After 30 years:
Yearly Appreciation | 1.04138 |
Total Return | 3326151.581 |
% Return | 11.42026294 |
Annualized Return | 8.4565711% |
As you can see, unless you can get more than $4800 rent today, or leverage up, or get a better price, real estate is not returning any more than the historical average of the S&P 500. Just wondering whether it is better to invest in real estate in the bay area or the S&P 500. Please let me know what you think of the analysis.
The home in question is a 4 bedroom town house in the bay area.