How Real Estate Beats The Stock Market (and it's not even close)

Have you ever wondered if the return on investment (ROI) would be higher with real estate, specifically income producing property vs. the stock market over a long period of time, say 30 years?With the “magic” of compounding interest over time which the stock market delivers, I wasn’t sure if a real estate investment over the same duration could challenge it or even beat it.I am going to share with you a prime example of a property that my real estate partner and I purchased in July of 1988 and still have to this day which not only challenged the stock market’s return but beat it by a wide margin.

First, let’s see how our investment would have done had we invested it in the stock market. The market, using the S&P 500 to measure it’s performance, has averaged about 10.25% per year compounded annually from July of 1988 through June of 2017 (30 years), so our investment of $12,796 (the amount we used for the down payment on our property) would have grown to approximately $240,000; not too shabby. (Let’s assume for the sake of discussion that this was invested in a retirement account, so no taxes would have been paid).

Now let’s look at what we actually did.We purchased a 5-unit apartment building, all one bedroom/one bath units.The rents at the time averaged right at $200/month for each unit or $1000/month gross.We paid $127,500 for the property in one of Atlanta, Georgia’s old in-town neighborhoods.We did an 80/10/10 loan whereby we put 10% down, had an 80%1st mortgage and a 10% second mortgage with the seller (Two years later we refinanced and paid off the 2nd mortgage).Today the gross monthly rents total $6,510 and the value is approx. $700k to $725k.So, using the lower figure of $700K vs the $240K one from the stock market, our real estate investment beat the stock market by $460K or 290% but wait a minute, we’ve had a positive cash flow for many years and I’m also not including any tax benefits.(Our current NOI or net operating income is about $48,000/per year.)

Now, a couple of points.The first point is that we did not get a “steal” of a deal when we bought the property in 1988, only a fair to good one.If we had paid $10K or even $20K more for the property and our down payment of $12,796 went up to $13,796 or even $14,796, we still would have beat the stock market by a huge margin.The lesson here is that you don’t need to get a “great” deal in order to obtain a good return on your investment over the long term, inflation and location are a real estate investor’s best friend, just make sure you follow the Location, Location, Location rule and buy in a growing city and a “good” neighborhood.(Most one- bedroom apartments in Atlanta rent for $1300/month or more in good neighborhoods).This also illustrates that it is better to go ahead and buy now and lock in the price vs. waiting

and probably having to pay more down the road (including locking in one of the lower interest rate loans that we are enjoying today).

The second point is the use of leverage which is basically controlling a relatively large asset with little money.The property’s value only went up from $127,500 to $700,000, a 549% increase over the 30-year period but our down payment, the amount we actually invested, went from $12,796 to $700,000, a 5,490% increase which is 10 times greater than the building’s increase because we were leveraged 10 to 1.Now, that 5,490% increase would be accurate if we had just achieved a break-even cash flow over the 30-year period but we did much better than that.In the early years we re-invested the positive cash flow back into the property with new decks, roof, etc. and did not pull out any money but as the rents started climbing, particularly the past five to ten years, our cash flow greatly increased.Now, back in 1988, if we had had twice the amount of money and had to choose between whether to buy two properties just like this one, putting 10% down for each vs. buying this one property and putting 20% down, (5 to 1 leverage), it would have been far better to buy the two properties with a smaller positive flow rather than the one property with the slightly higher cash flow and the reason is simple; leverage.

In conclusion, income producing real estate can beat the stock market over a long period of time, even by a huge margin, if you use leverage, buy in a growing city and in a good neighborhood; keeping in mind, however that real estate is a business which requires time and effort and sometimes, a lot of both.

Note*:This is just one example, residential multi-family income property, of using real estate to beat the market.Obviously there are other real estate investing methods that could also be used including house or apartment building flips, real estate options, condo conversions, commercial development, single family investing, etc..

Note**: Anything bigger than a 4-unit building is considered a commercial property, usually requiring a larger down payment.Also, commercial loans are usually fixed for shorter periods of time, normally only 3 to 10 years. In order to acquire a residential loan, we put an opening in one of the shared walls between two of the units thereby temporarily making it a 4-unit vs a 5-unit property but later we converted it back to a 5-unit building (it is zoned as a legal, non-conforming 5-unit building since it resides in a predominantly single family neighborhood).Today, one could “house hack” and buy it with 10% down, with a 30-year fixed rate loan as an owner-occupant, instead of what we did with the 80/10/10 loan, as long as it was a 4-unit building at the time of sale.One may even be able to get in for 5% down or less, so imagine the ROI with that kind of leveraging!